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  • 1. 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
  • 2. 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).
  • 3. 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
  • 4. 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)
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. Price reduction at the biddings 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 2.68*** -0.213 Credence goods 2.59* -4.46* Type of procured good – 2 Goods Reference category Reference category Works 0.327 -2.03* Services 2.93*** 1.49 Method of procurement RFQ Reference category Reference category 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 Number of observations 1239 1239 929 929
  • 16. Delays in contracts execution 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 1.15 -0.418 Credence goods 1.10 1.04 Type of procured good – 2 Goods Reference category Reference category Works 20.67 *** 0.988 Services -0.489 1.92* Method of procurement RFQ Reference category Reference category 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 Number of observations 1415 1415 1313 1313
  • 17. 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?