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There is no trade-off between quality and efficiency in public procurement

Summary:
A trade-off between quality and speed/cost in public procurement regulation is often seen as a challenge for legislators (Coviello et al. 2018). However, when tested on the data, the trade-off disappears and many countries are found to produce goods, services or other works both efficiently and with high quality. Yet, examples abound of countries not being able achieve high quality even with delays and overruns in fulfilling their procurement contracts. In Bulgaria, the poor quality of a road caused an accident in which 20 people lost their lives in 2018 when a bus fell into a ravine.1 In Kenya, a bridge crumbled down in 2017 due to an unequal distribution of concrete across the support pillars, which weighed down the side that collapsed.2 Both countries are rated below average

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A trade-off between quality and speed/cost in public procurement regulation is often seen as a challenge for legislators (Coviello et al. 2018). However, when tested on the data, the trade-off disappears and many countries are found to produce goods, services or other works both efficiently and with high quality. Yet, examples abound of countries not being able achieve high quality even with delays and overruns in fulfilling their procurement contracts. In Bulgaria, the poor quality of a road caused an accident in which 20 people lost their lives in 2018 when a bus fell into a ravine.1 In Kenya, a bridge crumbled down in 2017 due to an unequal distribution of concrete across the support pillars, which weighed down the side that collapsed.2 Both countries are rated below average in terms of the speed and cost of building or rebuilding roads and other road infrastructure, according to a new study. 

These examples are illustrative of a broader relation. In Bosio et al. (2020), we analyse a global sample of 187 economies where we document a strong positive correlation between quality and efficiency (Figure 1). 

Figure 1 Correlation between quality of product and efficiency of process

There is no trade-off between quality and efficiency in public procurement

Note: correlation between the quality of product and the efficiency of process is 0.597***.
Source: Bosio et al. (2020)

The quality of the product measure consists of the time to complete the procurement process, overruns (measured by project delivery within the original budget), and the quality of the actual works. Similarly, the efficiency of process is proxied by four variables: occurrences of favouritism such as when selection criteria are interpreted in a way that favours a specific bidder, collusion between procuring entities, contractors that prevent market entry of competitors, and the absence of competition when non-competitive procurement methods prevail.

Singapore scores highest on quality, followed by Korea and Australia, while economies with the lowest scores are Venezuela, Haiti, and Timor-Leste. Germany, Denmark, and Norway are most efficient, while Niger, Laos, and Myanmar are the least efficient in a sample of 187 economies. In Cameroon and Malawi, more than 90% of road works projects are delivered with lower than expected quality. 

The high correlation – a coefficient of 0.60 – between efficiency and quality in public procurement suggests that certain features of governments produce good results across different services. Previous literature attributes the quality of government services to high levels of human capital (Barro 1999, La Porta et al. 1999, Milligan et al. 2004, Barro and McCleary, 2005, Glaeser et al. 2007, Pande 2011, Barro 2013, Botero et al. 2013, Decarolis et al. 2019), to efficient institutions, proxied by legal origins (La Porta et al. 2008), or to transparency in running government (Islam 2003). 

The main question is how a country can move from a low-level equilibrium (poor quality and low efficiency) to a high-level equilibrium (good quality and high efficiency). Since our data only cover a limited number of years, they do not allow for such analysis. An anecdotal look, however, identifies several countries that have undergone significant transformation in their procurement rules and practices: Egypt, Germany, Italy, Morocco, and Romania to name a few. Studying the experience of these countries in the years after the change will yield useful knowledge about the effects of reform. 

Several countries that are part of the EU – or candidates for membership to the EU – have recently introduced reforms to their procurement rules to harmonise their laws with the 2014 EU Directive on Public Procurement. Luxembourg and Austria were the last to do so in 2018 and 2019, respectively. Macedonia did too. Other countries, such as Germany, had already adjusted to EU Directives and are now implementing new rules increasing discretion3 of procuring entities for contracts below European thresholds. Similarly, Italy is moving to increase discretion in its procurement procedures.

A push for fiscal transparency motivated the introduction of new procurement rules in Egypt in 2019, while the introduction of e-procurement systems drove changes in Kuwait, Hong Kong, Hungary, Rwanda, and Ukraine.

A further question, beyond the study of public procurement, is whether a government can start by transforming one area of regulation and succeed in achieving good outcomes, or whether reform has to happen across a large number of related areas. This question is particularly relevant during the current economic downturn when the intensity of reform increases (Arezki et al 2020).

References 

Arezki, R, S Djankov, H Nguyen and I Yotzov (2020), “Reform chatter and democracy”, VoxEU.org, 24 August.

Barro, R J (1999), “Determinants of Democracy”, Journal of Political Economy 107(S6): 158-183.

Barro, R J (2013), “Education and Economic Growth”, Annals of Economics and Finance 14(2): 301-328.

Barro, R J and R M McCleary (2005), “Which Countries Have State Religions?”, The Quarterly Journal of Economics 120(4): 1331-1370.

Bosio, E, S Djankov, E Glaeser, A Shleifer (2020), “Public Procurement in Law and Practice”, NBER Working Paper No. 27188. 

Bosio, E (2020), “Rules vs. Discretion in public procurement”, World Bank.

Botero, J, A Ponce and A Shleifer (2013), “Education, Complaints, and Accountability”, Journal of Law and Economics 56(4): 959-996.

Business Daily (2019), “Court lifts suspension of engineers blamed for Sirigi Bridge collapse,” Business Daily website, accessed 15 September.

Coviello, D, A Guglielmo and G Spagnolo (2018), “The Effect of Discretion on Procurement Performance,” Management Science 64(2):715-738.

Darik News (2019), “Another seven people charged with the accident near Svoge,” Darik News website (in Bulgarian language), accessed 15 September.

Decarolis, F, L M Giuffrida, E Iossa, V Mollisi and G Spagnolo (2019), “Bureaucratic Competence and Procurement Outcomes”, NBER Working Paper No. 24201.

Glaeser, E L, G AM Ponzetto and A Shleifer (2007), “Why Does Democracy Need Education?”, Journal of Economic Growth 12(2): 77-99.

Islam, R (2003), “Do More Transparent Governments Govern Better?”, World Bank Policy Research Working Paper 3077.

La Porta, R, F Lopez-De-Silanes and A Shleifer (1999), “The Quality of Government”, The Journal of Law Economics, and Organization 15(1): 222-279.

La Porta, R, F Lopez-de-Silanes and A Shleifer (2008), “The Economic Consequences of Legal Origins”, Journal of Economic Literature 46(2): 285–332.

Milligan, K, E Moretti and P Oreopoulus (2004), “Does Education Improve Citizenship? Evidence from the United States and the United Kingdom”, Journal of Public Economics 88: 1667-95.

Pande, R (2011), “Can Informed Voters Enforce Better Governance? Experiments in Low-Income Democracies”, Annual Review of Economics 3: 215-237.

Endnotes

https://dariknews.bg/novini/bylgariia/oshte-7-dushi-s-obvineniia-zaradi-katastrofata-kraj-svoge-2160703

https://www.businessdailyafrica.com/news/counties/Court-lifts-suspension-of-engineers/4003142-4980418-qm7ji0/index.html

https://blogs.worldbank.org/developmenttalk/rules-vs-discretion-public-procurement

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