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Efficient Public Procurement and Investment: Incentives and Risks

Priority areas of development: economics
2019
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 identifying risks influencing foreign investors’ decisions.

Methods

Public procurement efficiency indicators and approaches to their studying are based on the contract theory. Analysis of publicly available data on public procurement was conducted by standard statistical and econometric methods. Standard methods of statistical analysis of experiments were used in the study of the survey data. The empirical methodology of the research task “Political Risks Impacting Foreign Investors’ Decisions” is based on the Cox proportional hazards model explaining the length of a firms’ survival period.

Empirical basis of the survey

The line of research aimed at detecting potential opportunistic behavior and factors influencing the frequency of court cases related to public procurement is based on results of the online survey of customers and supplierson problems of functioning under regulation of 44-FL. The effect of responsible officials’ gender on the public procurement performance was analyzed on the basis of data used previously in Detkova, Podkolzina, & Tkachenko (2018): procurement by regional customers in the sphere of public administration in 2011-2013. Those data were supplemented with gender information of officials conducting public procurement. The empirical basis of research task “Political Risks Impacting Foreign Investors’ Decisions” included micro data of companies with foreign ownership in Russia based on accounting reports published in the Ruslana and Amadeus databases and the database of political risks in line of ICRG countries.

Results

The project “Efficient Public Procurement and Investment: Incentives and Risks” produced the following results:

For the task of analysis of the public procurement regulation system in EAEU countries (the Republic of Kazakhstan, Armenia, Belarus), Ukraine, and Eastern European countries (Poland, the Czech Republic, Hungary):

  • Descriptions of the current procurement regulations were made (types of procedures, the order of their conducting, timelines, requirements to participants, possibility of e-auctions, monitoring and audit of procurements), the latest updates to procurement legislation, and the main differences in public procurement regulation in EAEU countries (the Republic of Kazakhstan, Armenia, Belarus), Ukraine, and Eastern European countries (Poland, the Czech Republic, Hungary). National public procurement regulation was also compared to regulation in the Russian Federation and the European Union (Directives 2014/EU).

  • Analytical tools were prepared and contact information of procurement participants (email addresses) for 2017-2019 were formed in order to conduct a survey to emphasize  the existing problems and assess public procurement efficiency in Russia, Ukraine, and the Republic of Kazakhstan.

  • Analysis of the conducted online survey of public customers and suppliers operating under 44-FL:

  • A methodological approach was proposed enabling to detect potential opportunistic behavior of suppliers engaged in regular operations on public procurement market. The presented methodology was tested using data from a large survey of Russian procurers and suppliers.

  • The survey of suppliers revealed that in the event of a conflict with public customers most suppliers prefer to resolve the conflicts out of court through negotiations with the customers, and only 31% of respondents choose court proceedings.

  • It was shown that the procurement-related conflict resolution method depends on the type of supplier behavior. Specifically, suppliers that are actively involved in public procurement and have steady informal engagements with customers rarely apply to court as a formal institution and rarely use negotiations with the customers.

Analysis of publicly available data on public procurement at the bidding and contract execution stages:
  • Approximately 25% of all court proceedings are cases where the claimants are commercial organizations. In addition, organizations at all levels of jurisdiction (federal, regional, municipal) file claims predominantly against commercial organizations although the number of cases and the shares of the contract value differ among them significantly.

  • Analysis of disputes related to construction and repair jobs showed that commercial organizations filing court claims achieve awards in their favor only in 43% of cases, and only 14% of claims are granted in full. Disputes over other products (equipment, goods, services, other works) end up in awards in favor of such organizations only in 40% of cases and merely 20% of the claims are granted in full.

  • Analysis of the gender effect on public procurement efficiency revealed that procurement performed by male officials in regions with high levels of corruption are often associated with a higher frequency of auctions with a single bidder. In addition, the customers’ auctions are also characterized with increased frequency of insignificant price decrease during the auction. However, these effects are no longer valid if the Moscow and St. Petersburg auctions are excluded from the sample, which, according to the literature on connection between gender and corruption, may be the reason for increased regulatory focus on those regions.

  • Analysis of the bias in the value share of the auctions held by different genders revealed decrease in procurement performance in regions with high corruption both for organizations biased toward males and for organizations biased toward females.

The study of influence of political risks on decisions of foreign investors produced the following results:

  • It showed that companies with foreign ownership are extremely sensitive to the level of political risks. The most significant effects are connected with poor democratic subordination, corruption, involvement of the military in politics, and conflicts. Political affinity does not safeguard investments in developing countries: the greater the distance between the country of investments origin and Russia, the less probable is the withdrawal decision.

  • The hypothesis that a favorable investment climate at the regional level lowers the effects of national political risks was not been substantiated. The only exception from this rule is the city of Moscow. Sanctions intensify the effect of political risks of withdrawal. And the size of the firm and its incorporation in the form of a JV (Joint venture) with a Russian participant safeguard the investor against exposure to political risks.

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 applying the methodology of detecting opportunistic behavior and conflict resolution strategies can be used for developing recommendations on mediation of the public procurement system. The resulting empirical assessments of the influence of political risks on foreign investors’ decision to withdraw from the Russian market can be useful for discussion of the volatility of foreign capital in an environment of weak institutions and high political risks in the host country.

Publications:


Gonchar K. R., Kristalova M. How innovation affects performance / Friedrich Schiller University Jena. Series 2019 – 001 "Jena Economic Research Papers". 2019. No. 13.
Yakovlev A. A., Tkachenko A., Rodionova Y. Opportunistic Behavior in Public Procurement, in: Global Encyclopedia of Public Administration, Public Policy, and Governance. Springer, 2020. P. 1-5. doi
Yakovlev A. A., Tkachenko A., Rodionova Y. Who Is Inclined to Hide the Truth: Evidence from Public Procurement // International Journal of Public Administration. 2020. Vol. 43. No. 13. P. 1109-1120. doi