• A
  • A
  • A
  • ABC
  • ABC
  • ABC
  • А
  • А
  • А
  • А
  • А
Regular version of the site
vision

High Competition Decreases the Efficiency of State Procurement

Contrary to expectations, a growing number of open auction participants doesn’t decrease the price of the contract. On the contrary, the price is lower when the bidding involves only one player – usually, the market leader. Anna Balsevich presented her paper ‘Interregional Comparison of State Procurement Efficiency in Russia’ at the international seminar ‘Sustainable state procurement: development trends and challenges’

The issue of state procurement efficiency has often been raised in Russian media over recent years. They usually discuss reasonability of certain procurements, give examples of unreasonably high prices, low product quality and violation of contract terms. Another problem is interregional differences in prices for the same product. Anna Balsevich, Svetlana Pivovarova and Elena Podkolzina, researchers from the HSE Center for Institutional Studies, attempted to reveal the reasons of these differences.

Mechanisms of efficiency

There are unified rules of state procurement in Russia, they are uniform for all Russian regions and defined by federal law. This law provides for several mechanisms of state procurement placement:

  • From a single supplier (executor, subcontractor);
  • Through a closed auction (for sums of less than 500,000 roubles);
  • Through an open auction (or e-auction);
  • Through an open competition (limited number of cases).

It makes sense to compare the efficiency of these mechanisms by comparing the level of price set and the number of competition participants as a result of applying different tools.

One might assume that prices for the same product would be equal, and high competition among participants would help in setting a lower price. This scenario has a theoretical background. The American economist J. Stigler in his study Economics of Information (1961), dedicated to general economic theory, as well as researchers in later studies specifically on the mechanisms of state procurement (Bulow, Klemperer, 1996) proved that completeness of information guarantees less expense in the search for a supplier and leads to a lower and more uniform price. In the case of state procurement, higher transparency leads to a higher number of sellers and a lower price. Nevertheless, later, Stigler, describing the specifics of oligopolistic market (Stigler A Theory of Oligopoly, 1964), and J.Robinson (1985) – one of the few prominent women economists who analyzed the specifics of the mechanism of state procurement, came to the conclusion that completeness of information and transparency can lead to the opposite effect. Under these conditions, insufficient means can be assigned for checking the order execution, which leads to collusion and price growth.

Petrol will reveal the price transparency

So what does influence transparency of prices set as part of a state procurement contract in Russia? In order to answer this question, state procurement of petrol was chosen as an object for analysis, since this product has standardized quality parameters, which makes interregional comparisons possible. In addition to this, it is bought everywhere in all regions by private companies and state bodies and has a relatively predictable demand. State procurement is conducted for social services – hospitals, schools and other objects, by means of regional budgets, as well as to support the work of the administration itself. Official information was used in the study, including statistics and state procurement website information. All state procurement contractsfor petrol in ten Russian regions from 2009 to 2010 were studied. The following data was taken from these sources:

  • Contract price as a dependent variable;
  • Number of participants and information transparency (the authors’ own index) as independent variables;
  • Data on the type of procedure, contract terms and the volume of deliver, data of contract signature (June/December), turnover of all transportation in the region, the level of corruption (unfair competition) as control variables;
  • Density of roads, variety of types of fuel in the contract as instrumental variables.

The road density correlates with the volume of petrol delivered, with the number of suppliers, and as a result, with the number of auction participants. The types of fuel used correlates with the number of sellers who have the required products, which also influences the number of bidders. Regression analysis was conducted on the basis of this data.

Surprising results

As a result, the authors came to some surprising conclusions. First, contract prices are lower when the bidding includes only one player – and usually it’s the market leader. Most probably, the other market players in this case simply refuse to participate in the competition. It is likely that the market leader’s activity in these cases is more efficient. A lower price is also reached by such factors as availability and transparency of information, as well as high volumes of contracts.

Second, another interesting result was the inefficiency of open auctions, which, while giving a higher number of bidders, leads to a higher price contract as a result. Growing competition in this case doesn’t cause growing efficiency. In addition, a higher price is promoted by organizing bidding at the end of a report period – in June or December, when a considerable share of budget means is spent. Longer contract terms also lead to higher purchase prices.

 

October 31, 2013