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Public Procurement of Homogeneous Goods: an Empirical Study
Jan Soudek & Jiří Skuhrovec, Charles University, 8/2014
Honza.soudek@gmail.com , jskuhrovec@gmail.com
Outline
• Introduction
• Motivation & literature review
• Hypotheses & model
• Data description
• Results & discussion
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INTRODUCTION: SIZE OF THE MARKET & INSTITUTIONAL FRAMEWORK
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Public procurement to GDP (2011)
Source: OECD: Government at glance 2013
In case of CZ, it is app. 16% of GDP (excluding SOE and utilities, then it would be around 25%)
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0%
5%
10%
15%
20%
25%
Institutional framework
• 3 basic procedures of tendering
• Open – The most transparent, everyone can apply for that procurement
• Restricted – Procurer chooses potential suppliers
• Negotiated – Procurer can ask just one firm to supply it‘s demands.
• 2 basic formats
• Sealed bid auction - send an envelope
• Electronic auction - a tool allowing repetitively adjust the bid
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Procurement (auction) theory
• Procurement procedure: • standardized, trading mechanism
• subject of trade is known ex ante
• Thus auction theory is applicable
Evaluation process
Bid 3
Bid 1 Bid 2
Winner
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MOTIVATION & LITERATURE REVIEW 7
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Motivation
• What determines the final price in public procurement? Market price? Sure, but what about:
• Chosen procedure
• Competition
• Auction format
• Our goal: show where institutional and procedural characteristics matter in the public procurement.
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Previous research on matter • Domberger et al (1995): „The Determinants of Price and Quality in Competitively
Tendered Contracts “ EJ 1995 • Model:
• Conclusion:
• While competition reduced price significantly, quality of service was maintained or even enhanced.
• The evidence does not support the hypothesis that efficiency gains are traded off for lower quality.
• Bandeira et al (2008): „Active and passive waste in Government spending: Evidence from a policy experiment“ AER 2009 • Model:
• Conclussion:
• Some public bodies pay systematically more than others for observationally equivalent goods and such price differences are sizeable;
• Differences are correlated with governance structure: the central administration pays at least 22% more than semi-autonomous agencies (local government is at an intermediate level)
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Theoretical background - Auction theory says:
• Assuming standard auction with interdependent signals:
• With # of bidders the price (in average) goes down (Bower (1993), Bulow&Klemperer (1996))
• Open procedure = competition leads to better results than negotiation (Bulow &Klemperer (1996))
• Electronic auction = English auction results are at least as good as first price sealed bid auction - regular „envelope“ procedure (Milgrom&Weber (1982))
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Our research hypotheses
H1: The final unit price of the procurement is affected by the type of procurement procedure.
H2: The final unit price of the procurement is a decreasing function of an number of bidders.
H3: The usage of electronic auction is decreasing the final unit price of the procurement.
H4: The final unit price of the procurement is affected by the type of the contracting authority.
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Model 1. In order get comparable prices, only PP of homogeneous goods is
analyzed – electricity, gas
We can get the unit prices and compare them with actual market price (1 year forward contract)
Moreover, we compare with estimated value per unit – which captures for potential heterogeneity of tendered goods and for procurers willingness to pay
2. We use a natural logarithmic form of final unit price as a dependent variable to capture relative effects
3. To control for possible „wasteful behavior“, we use zIndex; a composite index that rates procurers according to quality and transparency of all their procurement competitions over given period of time.
𝑙𝑜𝑔 𝑓𝑖𝑛𝑎𝑙 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 = 𝛼 + 𝛽1 𝑙𝑜𝑔 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 +
𝛽2 𝑙𝑜𝑔 𝑚𝑎𝑟𝑘𝑒𝑡 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 + 𝛽3𝐷𝑈𝑀𝑀𝑌 𝑝𝑟𝑜𝑐𝑒𝑑𝑢𝑟𝑒 + 𝛽4𝐷𝑈𝑀𝑀𝑌 𝑒𝑙𝑒𝑐𝑡𝑟𝑜𝑛𝑖𝑐 𝑎𝑢𝑐𝑡𝑖𝑜𝑛 +
𝛽5𝐷𝑈𝑀𝑀𝑌 𝑎𝑢𝑡ℎ𝑜𝑟𝑖𝑡𝑦 + 𝛽6𝑏𝑖𝑑𝑑𝑒𝑟𝑠 + 𝛽7𝑧𝐼𝑛𝑑𝑒𝑥 + 𝛽8𝑡𝑖𝑚𝑒 + 𝜖
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DATA DESCRIPTION 13
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Data description
• Source isvzus.cz (Czech TED)
• Tenders above limit of 2mil CZK (80k €)
• Years 2008 – 2013
• 220 Electricity & 57 Gas competitions
• Total worth 10bn CZK (400 mil. €)
• Metric of market price is one year forward price (base CAL) from Prague Exchange
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Electricity auctions in time
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Institutional characteristics
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• 80 % auctions using open procedure
• 49 % auctions using e-auction
• Most frequent contracting authorities are SOE and regional authorities (Municipalities, regional offices etc.)
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RESULTS & DISCUSSION 17
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Results
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Dependent variable:
log(final price/kWh) Electricity Gas
Explanatory variable OLS ß Robust SE OLS ß Robust SE
log (estimated price/kWh) 0.43 (0.09) *** 0.41 (0.11)***
log (market price/kWh) 1.03 (0.19) *** 0.15 (0.09)*
Open procedure -0.07 (0.04)* 0.08 (0.06)
electronic auction -0.12 (0.03)*** -0.15 (0.06)**
number of bidders -0.015 (0.008)* -0.03 (0.01)*
Constant -0.10 (0.07) -0.11 (0.08)
R-squared 0.54 0.52
Table 2: Electricity & gas procurement results, note: dropped dummy is negotiated procedure
Results - regression with insignificant variables
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Dependent variable:
log(final price/kWh)
Electricity Gas
Explanatory variable OLS ß Robust SE OLS ß Robust SE
log (estimated price/kWh) 0.41 0.1*** 0.49 0.11***
log (market price/kWh) 1.01 0.23*** 0.1 0.12
Open procedure -0.08 0.04* -0.03 0.018
electronic auction -0.16 0.04*** -0.13 0.07*
number of bidders -0.016 0.008* 0.09 0.07
zIndex -0.14 0.94 0.27 1.01
Time 0.00003 0.00004 0.00009 0.00010
State owned enterprises -0.016 0.07 0.28 0.17
Public bodies 0.002 0.09 0.19 0.19
Regional auth. 0.06 0.08 0.2 0.18
Constant 0.13 0.17 -0.48 0.25*
R-squared 0.55 0.59
Table A-1: Electricity & gas procurement results – including Procurers, note: dropped dummies are
negotiated procedure and regional authorities
Discussion
• Final price rises by 0.4 % with 1 % rise in estimated price. Signalling?
• Open procedure reduces cost of electricity by 7 % in average, for gas it is insignificant.
• E-auction reduces cost of electricity by 12 % in average (cumulative with Open procedure!), gas by 15 %.
• Additional bidder causes in average a 1 % fall in the final price of the electricity and 1.5 % fall in final price of gas
• We did not find any statistically significant difference in final prices with respect to the various types of contracting authority.
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Policy implications
• Buyer should identify the estimated price well, not overshoot. It signals: • price expectation
• willingness to pay.
• Electronic auction shows to be most efficient. Use it. • 12 % average price reduction
• Low additional procedure costs (10.000 CZK = 400 €)
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Questions? Thanks for attention!
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All details & sources are here: http://ies.fsv.cuni.cz/sci/publication/show/id/4833/lang/en Contact: Jan Soudek, Jiri Skuhrovec Charles University Honza.soudek@gmail.com , jskuhrovec@gmail.com