The Priorities of Public Buyers

Public procurement officials make substantial decisions for public good provision, and their decisions have widespread welfare implications. Yet despite the importance of these decisions, there can be a lot of discretion applied by the individuals awarding public sector contracts.

With this in mind, EconPol network member Sebastian Blesse (ZEW) and co-authors Janne Tukiainen, Albrecht Bohne, Leonardo Giuffrida, Jan Jääskeläinen, Ari Luukinen and Antti Sieppi investigated the decisions made by public procurement officials in contracting bureaus in government offices of various types across states, regions and municipalities in Finland, Germany and Italy to examine the level of discretion they were able to apply. And, they found, while officers are allowed some leeway, they are frustrated by lack of competition and an inability to take past performance into account when assessing tenders.

“In Finland, for example, there were only on average only two bidders for one tendering process,” says Sebastian. “We wanted to disentangle that and see whether it’s the procurement officials that are the source of the problem or the firms that are bidding.”

To find out, the researchers surveyed over 8500 public procurement officials and received around 950 responses. As well as asking about social demographics, job characteristics, the perception of their work and the amount of discretion they had, respondents were also sent fictional tender outcomes. The officials were asked to decide and ‘trade-off’ between pairs of these fictional outcomes which randomly varied the winning bid price, quality, litigation risk, reputation of winner, regionality of winner and the observed degree of competition in the tender process.

“We wanted to know how they make decisions and also a bit about who they are and why they’re making the decisions the way they do in a randomized fashion, so we could identify the priorities procurement officers have,” explains Sebastian. “We didn’t want to look at a specific tendering process, we were more interested in how the officials themselves felt they were able to manage, the amount of discretion they had over their decisions and whether they felt sufficiently supported in making those decisions.

“Our experiment shows that it’s not officials who are keeping out competition – they actually prefer a minimum degree of competition. But at the same time, issues such as environmental regulation or employment requirements from central governments may prevent smaller firms from bidding. Procurement officials often also fear that rigid regulation may cause significant problems along the tendering process.

“The logical conclusion from our survey is that it is not the public procurement officials who are preventing competition, but the problem is rather to be found in regulation and possible entry barriers for firms. From a policy perspective, we should look at encouraging smaller firms to engage and be interested in the tendering processes. Make online forms more readable, encourage consultancy services from small and medium sized firms, make contracts a lot more visible and accessible and generally simplify the process. We know from literature and from tendering data that the firms who are most likely to refrain from bids are small and younger rather than larger firms.”

The survey also found that public procurement officials valued familiarity and good reputation from the firms who were bidding and were less likely to choose firms they had previous bad experience with. However, while there are some ways to account for past performance, procurement officials often rely on informal knowledge.

“Countries account for past performance in different ways, and often there’s no formal knowledge as part of the process,” explains Sebastian. “In Finland, Italy and Germany it is hard to account for the past performance of a firm from the perspective of public procurement officers.

“Until 2014, EU directives essentially forbade the officials from taking past performance into account. Minor changes were introduced in 2014 procurement directives and it is possible to use information about past performance when pre-selecting participants, but never to select bidders.

“However, our experiment shows that while officials place value in avoiding a bidder with previous bad experience, EU legislation may offer (too) little means to account for either good or bad past firm performance records when selecting suppliers for public procurement in the eyes of public buyers.”

Ultimately, says Sebastian, incorporating some degree of relationship management with previous bidders into the tendering process is seen as the biggest priority for officials.

“Price matters, but for procurement officials, cutting the red tape into investigating past performance and bringing that into the process is seen as very much a priority among our surveyed procurement officials,” he concludes.

Sebastian Blesse is the author of “What are the priorities of public buyers? Evidence from a conjoint experiment with bureaucrats in Finland, Germany and Italy” (with Janne Tukiainen, Albrecht Bohne, Leonardo Giuffrida, Jan Jääskeläinen, Ari Luukinen, Antti Sieppi). He will discuss the paper at the EconPol Europe annual conference on 26 November 2020, on the panel Productivity of the Public Sector and Public Procurement, 13:30-15:00.