yakovlev et al. presentation at ippc (aug 2014)

An impact of different regulatory regimes on the effectiveness of

public procurement

6th International Public Procurement Conference, Dublin City University, Dublin,

Ireland, August 14-16, 2014

Andrei Yakovlev, Andrey Tkachenko,

Olga Demidova & Olga Balaeva

The problem Risks of corruption higher level of accountability demand for

and introduction of strict regulation (WB 2006, PwC 2011)

But what about effectiveness of procurement?

Two different approaches:

- Higher competition and lower prices as main criteria

- Higher quality of supply and timely contract execution

Less flexible and less efficient procurement design in public sector

comparing to private sector (Tadelis 2012).

Risks of ‘third party opportunism’ (Spiller & Moszoro 2012) – as one

of reasons of regulation rigidity.

Limitation of competition can be conductive for better procurement

outcomes and can create long-term incentives for new suppliers

(Spagnolo, 2012).

Focus and findings of this paper

We try to estimate effects of changes in procurement

regulation – with shift from very rigid to more flexible rules

Research approach – quasi-natural experiment with

procurement outcomes measured by diff-in-diff method.

Empirical base – procurement data of two big public

universities in Russia in 2011-2012: first one introduced new

more flexible rules in July 2011, second one placed orders

according to old rigid rules during all considered time period

Performance indicators: level of competition, initial price

decrease, delays in contract execution

Key findings: decline of competition combined with better

contract execution – in the line with theoretical predictions

Russian institutional context

Overall institutional conditions:

High level of corruption

Declining quality of services in public sector

(education, healthcare etc.) and lack of

incentives to improve it

Two big reforms:

New Federal Law on Public Procurement (94-FL)

adopted in 2005 and implemented in 2006

Reform of public sector entities (2006-2011)

Reform of public procurement: key ideas and expectations

Key target announced for the public – fighting corruption by

limiting discretion opportunities in selection of suppliers at all

levels of public administration

increasing transparency (not only placement of all orders at

special federal web-portal but also obligatory public

announcement of ‘initial price’ for all public buyers)

simplifying access to PP for new suppliers (first of all – SME)

Main expected consequence:

Increase in competition saving of expense for state budget

Reform of public procurement: instruments and consequences

Key instruments of 94-FL:

Obligatory procedures for almost all procurements

Limitation of procurements channels only four options: open

auction (later – e-auction), tender (for R&D and some services),

RFQ (for small procurements), single-sourcing

Selection of suppliers only on price criteria

Starting from 2008-2009 – increasing critics of reform, complaints of

public buyers about opportunistic behavior of suppliers.

In 2010: political decision on elaboration of new law on ‘federal

contract system’ – introducing more flexible regulation. Adopted by

parliament in 2013, became effective on January 1st, 2014.

But some elements of ‘contact system’ were introduced already in

2011-2012 – in framework of reform of public sector entities

Reform of public sector entities

Target announced for public – increase effectiveness of

healthcare and education, provide right incentives for

managers of public sector entities

Main instrument: differentiation of public entities in three

categories

– State-owned entities no autonomy

– Budget-funded entities (BFE) limited autonomy

– Autonomous organizations (AO) broader autonomy

Link of PS reform to PP reform

Legal status Sources of financing Types of

activities

Procurement

regulation

State owned

entity /

enterprise

State budget

(according to

expenditures estimate)

Prisons, some

types of utilities,

entities with

control functions

94-FL

Budget-

funded entity

Mostly state budget

with limited

opportunities to earn

money in the market Schools,

hospitals,

universities,

public libraries,

museums

94-FL

Autonomous

organization

Annual ‘state order’ for

relevant services. No

liability for government

to cover all expenses

of public entity

94-FL – till 2011.

Since 2011 – AO can

avoid 94-FL rules if it

has own Procurement

provision adopted by

its supervisory board

Organizations description and procurement rules

Organization No1 – autonomous organization

Till July 2011 conducted its procurements according to 94-FL, but

afterwards enforced its own Procurement Provision

Conducted 1656 contracts to the total value RUR 4136 million

Organization No2 – budget-funded entity

During the entire period 2011-2012 conducted its procurements according

to 94-FL

Conducted 1335 contracts to the total value RUR 1196 million

Main differences of Procurement Provision in Organization No1 from 94-FL

Extension of the spectrum of the procurement procedures

Increasing reputational requirements for bidders

Substantiation of the initial price by customer department and certain

restrictions on dumping in bidding process

Target to reduce risks of opportunism at the stage of contract execution

Basic procurement characteristics of two universities

Year of contract

conclusion Number Total value

(RUR million) Average value

(RUR thousands)

Organization

No. 1 2011 818 2067.44 2527.43 2012 838 2068.87 2468.82

Organization

No. 2 2011 681 597.81 877.84

2012 654 598.63 915.33

Parameters Search goods Experience goods Credence goods

number % number % number %

Number of contracts concluded

Org. No.1 472 28 1058 64 128 8

Org. No.2 296 22 787 59 252 19

Total value of concluded contracts (procurement budget), RUR million

Org. No.1 375.21 9 2946.24 71 817.60 20

Org. No.2 80.59 7 1091.96 91 23.88 3

Empirical data

Collected procurement information included the following initial data:

procurement method;

contract subject;

type of procured goods (works, services);

procurement budget;

number of bidders filed for competition, admitted to consideration and

participated in auction;

winner’s bid;

contract number;

contract conclusion date and execution period;

information on actual payments under the contract (time and amount).

We introduced additional variables:

delays in contracts execution;

type of procured goods (search / experience / credence goods);

dummy variable reflecting the adoption of Procurement Provision by

Organization No.1

Methodology

In order to compare data of these two universities in 2011-2012 we

applied the difference in differences methodology (Ohashi 2009).

Dependent variables (DV):

1. level of competition (measured by number of bidders)

2. price decrease at the bidding (in percentage of the initial price)

3. problems of contracts execution (measured as a delay in

execution in days)

Main explanatory variable: dummy for introduction of own

procurement provision in Organization No.1

Control variables (CV): type of good, method of procurement,

duration of contract, procurement budget, quarter of delivery – for

DV-1. The same CV + number of bidders for DV-2 and DV-3.

Restricted sample for DV-1 and DV-2 – only competitive procedures

Main Hypotheses

We used data of Organization No. 2 for the control. Therefore

we assumed no influence of adoption of Procurement Provision

in Organization No. 1 on procurement performance of

Organization No. 2

For Organization No. 1 after adoption of its Procurement

Provision we expected

Lower level of competition

Smaller price decrease at the biddings (comparing to initial

price)

Shorter delays in fulfillment of contract obligations

Level of competition

Organization No.1 Organization No.2

Model 1 (Lin.) Model 2 (Lin.) Model 3 (Lin.) Model 4 (Lin.)

Type of procured

good - 1

Search goods Reference category Reference category

Experience goods 0.041 -0.154

Credence goods -0.321*** -0.657***

Type of procured

good - 2

Goods Reference category Reference category

Works 0.392** 0.764**

Services -0.026 -0.188*

Method of

procurement

RFQ Reference category Reference category

Tenders -0.721*** -0.718*** Excluded

Open Auction -0.323*** -0.348*** Absent

Electronic auctions -0.008 -0.048 -0.914*** -0.827***

Simplif. procedures 0.039 0.044 Absent

Duration Contract duration (days) -2.1*10-4 -4*10-4 0.0026*** 0.0025***

Budget Logarithm of the budget 0.117** 0.146*** 0.0043 0.0139

Provision Procurement Provision

enforced in Organization 1 -0.674*** -0.709*** 0.135 0.168

R2 0.1 0.1 0.15 0.13

Number of observations 1239 1239 929 929

Price reduction at the biddings



Type of

procured

good – 1


Experience goods 2.68*** -0.213

Credence goods 2.59* -4.46*

Type of

procured

good – 2


Works 0.327 -2.03*

Services 2.93*** 1.49

Method of

procurement


Tenders 2.34* 2.79** Excluded

Open Auction 2.57** 2.65** Absent

Electronic auctions 3.93** 3.94** -0.28 -1.32

Simplif. procedures -0.48 -0.47 Absent

Number of bidders 6.75*** 6.70*** 4.77*** 4.65***

Duration Contract duration (days) 0.00056 0.0013 0.017** 0.021***

Budget Logarithm of the budget -1.07** -1.212*** -0.810*** -0.811***

Provision Procurement Provision

enforced in Organization 1 -1.39 -1.38 -1.13 -1.38

R2 0.42 0.42 0.34 0.34


Delays in contracts execution



Type of procured

good – 1


Experience goods 1.15 -0.418

Credence goods 1.10 1.04

Type of procured

good – 2


Works 20.67 *** 0.988

Services -0.489 1.92*

Method of

procurement


Tenders 0.8889 -0.267 Excluded

Open Auction -1.671 -0.507 Absent

Electronic auctions 3.372 3.603 -0.531 -0.864

Simplif. procedures -1.430 -1.864 Absent

Single-source 2.569 2.692 -1.44 -1.51

Quarter of delivery is 4-th -3.12 -4.28 -0.167 -0.014

Number of bidders 1.61 2.17 0.739 0.735

Contract duration (days) -0.018*** -0.023*** 0.034** 0.037**

Logarithm of the contract cost 0.896 0.919 0.816* 0.816

Price reduction 0.051 0.025 -0.016 -0.014

Provision enforced in Organization 1 -7.17 *** -7.68 *** 1.14 1.18 R2 0.12 0.08 0.05 0.05


Conclusion

Using empirical data on procurements of two big Russian

universities in 2011-2012 we showed that adoption of more

flexible procurement regulation can reduce the level of

competition but it improves contract execution

Limitations of our results and prospects for future research:

– Only two universities check on broader sample

– In both cases: big universities with diversified procurements

and qualified and competent procurement staff – they could

gain from higher flexibility of new rules. But what about

small organizations?

yakovlev et al. presentation at ippc (aug 2014)

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