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Factors behind the efficiency in public procurement and in public enterprise

Priority areas of development: economics, state and public administration
2018
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 state-owned enterprises in Russia.

Methods

The analysis of general trends in development of public procurement system, public procurement efficiency indicators and approaches to their studying are based on the methodology of the institutional economic theory and concepts formulated in contracts theory. The analysis of incentives of enterprises is based on the endogenous growth theory, the agency theory and the theory of heterogeneous reaction of firms to competitive incentives. The “list experiment” technique applied in the survey of customers and suppliers revealed the strengths and limitations for further experimenting. The analysis of empirical data is conducted using standard statistical and econometric methods.

Empirical basis of the survey

The first line of research is based on results of an online survey of customers and supplierson problems of operating under regulation of 44-FL. The survey was conducted using a database of customers’ (over 1,400 responses) and suppliers’ (over 850 responses) responses.

The second line of research focus on the analysis of contracts concluded with suppliers of road repair and construction and their dependence on biographical characteristics of governors. Public information sources (the official public procurement website zakupki.gov.ru) were used for gathering data on contracts concluded during 2011-2015 for road construction and repair jobs and forming databases in a format acceptable for econometric analysis.

The third line of research evaluated the impact of auctions with preferences on procurement efficiency of open e-auctions analyzing all contracts on granulated sugar procurement in Russia from 2011 to 2013.

Microdata from Bureau Van Dijk Ruslana database and regional data from ICSID dataset were used as the empirical basis of the fourth line of research evaluating the impact of competition on comparative efficiency of state-owned and private enterprises. Additional work was performed to form a database of state-owned enterprises (20,000 observations during the period from 2008 to 2015).

Results

The research project “factors behind the efficiency in public procurement and in public enterprise” produced the following results.

The analysis of the online survey of customers and suppliers on problems of operating under regulation of 44-FL:

  • The total costs of  public procurement in Russian was about RUB 64 billion in 2016, or about 1% of the aggregate value of contracts concluded during the year.
  • The results of the survey confirmed that the lower is the contract value the most expensive it turns out to be in terms of costs for its implementation and administering.
  • The most expensive procedures are small value purchases – requests for quotations and small purchases up to RUB 100,000. The share of costs of such procurement contracts is 6.6% and more, which exceeds the economy from price decrease and calls for a need to simplify regulation of such procurements.
  • The regression analysis showed that a respondent’s experience with complex procedures is the most significant factor influencing costs assessment. In addition, the respondent’s age, area of the organization’s activity and the organization being a federal/municipal/regional customer turned out to be statistically significant factor for some types of procedures.
  • Despite a significant change in legislation the Russian public procurement system is still confronted with most of the problems that were noted by researchers and practitioners 7–8 years ago remain including price dumping, regulatory collisions and low competition in public bids.
  • The problems characteristic of 94-FL are still challenging under 44-FL regulation and are practically as urgent after transition to the new regulatory regime. Specifically, respondents who had experience with 94-FL gave lower estimates of the current regulatory system compared to those who had experience only with 44-FL.
  • Russian female officials are more sensitive to corruption as a problem of public procurement in Russia than male officials. In addition, analysis of respondents’ positions showed that the effect persists even where women hold high positions.
  • The average share of customers practicing predetermined suppliers contracting in 2014-2016, as assessed by suppliers, was 53%, and in procurers’ estimates, it was 40%.
  • The analysis revealed the suppliers’ inhomogeneity which we consider to be a result of different behaviour patterns on public procurement market depending on the degree of involvement in predetermined supplier choice practices. Different explanations of this practice ("justification", "accusation" or a combination of both reasons) allowed identifying groups of suppliers that differ significantly in their models of behavior in the public procurement market

The analysis of contracts concluded with suppliers of road construction and repair jobs and their dependence on biographical characteristics of governors produced the following results:

  • In regions where governors are “insiders” auctions are characterized with a higher average level of competition. At the same time, the governor’s tenure does not impact competition at auctions and delivery of contracts.
  • In regions with “outsider” governors the level of competition at auctions tends to decrease and delays in contract execution become longer along with increase in the governor’s tenure.

The analysis of efficiency of procurement at specialized auctions involving small businesses produced the following results:

  • Set-aside auctions for small business are equally efficient to ordinary auctions when reserve price is low (up to RUB 2 million).
  • Set-aside auctions with a medium reserve price (from RUB 2 million to RUB 5 million) demonstrate higher price efficiency. However, set-aside auctions with a high reserve price (from RUB 5 million to RUB 15 million) are inefficient.

The research of the impact of competition on comparative efficiency of state-owned and private enterprises produced the following substantive results:

  • The private enterprises demonstrated a small advantage in terms of Technological Efficiency (TE) and a lag in growth paces of Total Factor Productivity (TFP). A change in the lag of state-owned enterprises was revealed depending on the sector and observation period.
  • Further analysis of the factors related to the form of ownership showed that sector-specific competition strongly and significantly increases a company’s efficiency and strengthens private firms’ advantages in terms of Technological Efficiency (TE) level.
  • Soft budget constraints (measured as the sum total of all forms of transfers and public loans in regional dimension per capita of the population), on the contrary, boost the efficiency of state-owned enterprises much more than private firms. Therefore, the concept of dependence of the influence of the form of ownership on efficiency on market structure factors and presence of soft budget constraints has been confirmed.

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:


Tkachenko A., Esaulov D. Autocratic governors in public procurement // European Journal of Political Economy. 2020. Vol. 61. P. 1-18. doi
Detkova P., Podkolzina E., Tkachenko A. Corruption vs. Competition: When Centralization Matters, in: Public Administartion and Policy in Russia. Taylor and Francis, 2019. Ch. 11.