Impact of E-Auctions on Public Procurement Effectiveness

Transcription

1 2011 Internatonal Conference on Innovaton, Management and Servce IPEDR vol.14(2011) (2011) IACSIT Press, Sngapore Impact of E-Auctons on Publc Procurement Effectveness Jan Pavel 1+ and Rudolf Kubík Unversty of Economcs, Prague, Faculty of Fnance and Accountng, Department of Publc Fnance Abstract. Effects of E-Auctons are n expert lterature often demonstrated on data from the doman of publc procurement. The paper tests for ther mpact on publc procurement effectveness n condtons of the Czech Republc and wthn tenders for constructon works. Usng quanttatve methods are analysed also other factors that may nfluence ts strength (openness of the procedures, types of procurement management, etc.). Keywords: Compettve Effect, Constructon Work, E-Aucton, Publc Procurement 1. Introducton Sgnfcant porton of publc funds s beng allocated under the nsttute of publc procurement. Accordng to OECD (2007), n developed countres the share of publc procurement to GDP ranges between 15 20%. It s therefore clear that effectveness of ths nsttute has a sgnfcant mpact on the overall effectveness of publc expendture. Wthn recent lterature (e.g. Nemec et al. (2005)) there often appears a clam that the way to ncrease effectveness of ths nsttute s va electronc auctons. Although the usually assumed mpact on tendered prces s often rather hgh (20%) t lacks a support by emprcal analyses. Ths paper ams to analyse factors nfluencng effectveness of publc procurement usng data on constructon contracts n the Czech Republc and, n partcular, to test the hypothess of a postve mpact of electronc auctons on tendered prces of publc contracts. 2. The Current Level of Understandng Effectveness of the nsttute of publc procurement depends on exstence of a suffcent level of competton. Ths fndng was dentfed wthn most emprcal studes concernng wth the number of submtted bds. Inversely proportonal relatonshp, known as the compettve effect, s confrmed by many emprcal studes (e.g. Tas et al. (2008) or Bandera et al. (2008)). Most authors (e.g. Kuhlman Johnson (1983) or Im (2006)), however, warn that mpact of compettve effect s lmted and gradually evaporate as the number of tender offers ncreases,.e. the prce s approachng ts cost lmt. Emprcal studes such as Brannman, Klen & Wess (1987) or MacDonald et al. (2002) determne exhauston of the compettve effect at somewhere around 6 submtted bds, wth certan varaton among ndvdual sectors. Increased compettve pressure wth a postve mpact on prce s often expected once the tender s processed through an electronc aucton. Some studes pont to a relatvely hgh mpact on the tendered prces. For example, Croom and Brandon Jones (2005) have ndentfed 16% savngs on such purchases as are food or buldng materals. Case studes carred out n Brazl, Romana and Mexco presented n Aurol (2006) pont to savngs of 20 percent or more. As these fgures seems mpressve and very effcent t also nfluence estmates and expectatons of some nternatonal nsttutons; for example, EC (2004) expects the e-procurement mplementaton to brng 5% savngs on publc expendtures and 50 80% savngs on transacton costs. + Correspondng author. Tel.: ; E-mal address: pavelj@vse.cz. Ths paper was supported by GA ČR under the project No. P403/11/0458 Analyss of Publc Procurement Effectveness. 6

2 The man problem wth these studes and the related savngs estmates s n ther methodology. The studes are mostly based on mscellaneous surveys whose results are negatvely based by the structure of respondents. Prncpally, such questonnares are completed mostly by subjects nterested n the ssue that consder computersaton of publc procurement as a useful way to go. Applcaton of more advanced quanttatve methods s n these studes rather rare. Studes that analyse mpact of computersaton of publc procurement and electronc auctons usng larger data samples are consderably less frequent. In ths respect may be mentoned the work of Snger et al. (2009), where estmated benefts (n terms of a reducton n tendered prces) related to the ntroducton of e- procurement n Chle are slghtly below 3%. Ths number s very smlar to results of the study by Metty et al. (2005) conducted on the Motorola data that put the respectve value at 3.75%. 3. Formulaton of Hypotheses and Ther Theoretcal Dervaton Based on the aforementoned theoretcal examnaton t s possble to formulate the followng hypotheses for a dataset analyss: HP1: Wth an ncrease n the number of submtted tender offers the fnal tendered prce decreases. HP2: Any artfcal restrcton of competton results n hgher prces. HP3: Use of an electronc aucton results n lower tendered prces vs-à-vs "classc paper" procedures. HP4: Advance notce of publc tender announcement reduces tendered prces. The frst of the formulated hypotheses s based on the aforementoned assumpton that an ncrease n the number of bdders has a postve mpact on the offered prce. Two factors may partcpate n the prce reducton: Hgher number of bdders maxmses the probablty that one of them wll turn out to be the most effectve n mplementaton of the gven contract,.e. a company that s able to offer the lowest prce. Growth n the number of bdders reduces lkelhood of a collusve cartel formaton. The second hypothess assumes a negatve mpact on the tendered prce resultng from a selecton of other than open procurement procedures. The reason s that only open procedure represents process that does not lmt the number of bdders whle other types (restrcted procedure, procedural negotaton, etc.) do. Analogous to the arguments stated n the hypothess 1, artfcal reducton n the number of bdders decreases the probablty of dentfyng the most effcent frm for the gven contract and also ncreases the lkelhood of a corrupt or collusve behavour. Moreover, unrestrcted possblty to partcpate n the tender affects the nformaton uncertanty of the bdders, who n turn adjust ther prcng strateges accordngly. Formulaton of the thrd hypothess s based on the assumpton that an electronc aucton ncreases competton by allowng bdders to respond to competng quotatons, elmnatng n the process nformaton uncertanty on the bdders sde. The fourth hypothess operates wth the assumpton that once companes are gven more tme to prepare bds, ther prcng wll go down snce they wll have more tme for detaled calculatons and therefore they wll cut down on asked rsk margn due to the reduced level of uncertanty. 4. Model and Data Source dataset used for the testng of all hypotheses are data on constructon work publc procurements publshed n the nformaton subsystem Informaton system of publc procurement. Contracts were awarded n the perod May 2006 November So-called outlers were adjusted usng methods of Had (1999) and Freedman et al. (1978). Models estmated wthn ths paper consder the followng varables: log(fnal prce) logarthm of the fnal, wnnng prce of the publc tender, log(orgnally est. prce) logarthm of the orgnally estmated prce of the publc tender, number of bds total numbers of bds receved for the gven publc tender, prce rato rato between the fnal prce and the orgnally estmated prce of the publc tender. 7

3 The model further employs addtonal dummy varables to get an addtonal explanaton of the behavour of the fnal prce, respectvely the rato between the fnal and the orgnally estmated prce: restrcted procedure s a dummy varable that takes the value of 1 n the case of a restrcted procedure. open procedure s a dummy varable that takes the value of 1 n the case of an open procedure form. advance notce s a dummy varable that takes the value of 1 n the case of an advance notfcaton of the publc tender. SOE contractor s a dummy varable that takes the value of 1 n case the contractor s a state-owned enterprse (SOE). e-aucton s a dummy varable that takes the value of 1 n the case of an e-aucton mplementaton. prce 1 crteron s a dummy varable that takes the value of 1 n case the only crteron for publc procurement evaluaton s the prce. The model also employs one control varable that should mprove ts valdty: log(popul) logarthm of the populaton of a muncpalty where the publc tender takes a place. In ts general specfcaton, the model can be wrtten n the followng form: y = β X + D + ε, (1) where X captures the vector of potental non-bnary varables affectng the explaned varable and D denotes a vector of bnary dummy varables. Ths general form wll be further appled on two basc models: Model (A) n whch the explaned varable s the prce rato and the man explanatory varable s the number of bds. Model (B) n whch the explaned varable s the number of bds. Model A s used to test the valdty of the above formulated hypotheses of a drect mpact of analysed factors on tendered prces. Model B ams to verfy possble ndrect nfluence of the explanatory varables on the prce va affectng the number of submtted bds. All models were also subject to the so-called Ramsey RESET test that examnes the model s valdty and on a general level thus may reveal ts wrong specfcaton. Both models have been tested by Whte and Breusch Pagan tests for heteroscedastcty whch has been repeatedly confrmed by model A and rejected by model B. Ths problem has been addressed by applcaton of the WLS (weghted least squares) and HC (heteroskedastcty correcton) methods. 5. Emprcal Results Test results of the two estmated models are summarzed n the tables 1 and 2. Table 1 presents outcomes of the model A, where the relatonshp between the prce rato, number of bds and other dummy varables has been addressed. Results repeatedly confrm statstcally sgnfcant negatve correlaton between the number of bds and the rato of orgnally estmated and fnal tendered prces. Each addtonal offer, on average, represents reducton n the prce rato by 2.5% of the expected prce. The dummy varable of e- aucton does not show up to be statstcally sgnfcant. (I) OLS (II) WLS (III) HC (IV) WLS (V) HC const *** *** *** *** (0.040) *** (0.039) number of bds *** *** *** *** *** log(orgnally est. prce) *** (0.002) *** (0.002) e-aucton (0.042) (0.013) restrcted procedure *** (0.007) *** (0.008) open procedure *** (0.005) *** (0.005) advance notce *** ** 8

4 (0.013) (0.011) SOE contractor *** (0.009) *** (0.010) prce 1 crteron *** *** (0.003) log(popul) *** *** F test (p-value) Adj R number of observatons 9,501 9,501 9, ,337 Table 1: Model A dependent varable: prce rato Notes: *** sgnfcance at the 99% level of sgnfcance, ** 95% level of sgnfcance, * 90% level of sgnfcance, Robust (HAC) standard devatons n parentheses. WLS model: data weghted usng number of bds varable. Source: ISVZ, own calculatons. Table 2 concerns wth the model B wth number of bds as the dependent varable. Presented results show that form of procedure and a level of awareness are the most mportant regressors nfluencng the total number of bds. The total number of bds rses once an e-aucton s mplemented, prce s the only evaluaton crteron and an open procedure takes place. On the other hand, pre-announcement surprsngly reduces the total number of bds. Ths result s also strkng n the lght of model A s results where the varable open procedure s dentfed as a negatve regressor of the fnal prce, respectvely of the prce rato. (I) OLS const *** (0.523) log(orgnally est. prce) *** (0.O32) e-aucton *** (0.599) prce 1 crteron *** (0.055) open procedure *** (0.075) restrcted procedure (0.053) advance notce *** (0.178) F test (p-value) Adj R number of observatons 9,501 Table 2: Model B dependent varable: number of bds Notes: *** sgnfcance at the 99% level of sgnfcance, ** 95% level of sgnfcance, * 90% level of sgnfcance, Robust (HAC) standard devatons n parentheses. Source: ISVZ, own calculatons. 6. Conclusons Results of the analyss presented above allow us to confrm the valdty of hypotheses 1 and 2. Exstence of a relatvely strong compettve effect has been verfed when each addtonal bd represents on average a 2 3% reducton n the estmated prce. Furthermore, negatve mpact of competton restrctons on prce has been also confrmed (e.g. ntroducton of restrcted procedures ncreases the prces by ca. 8 9%). The ntroducton of electronc auctons tends to show rather ndrect effect on prces eroson. Nevertheless, the procedure becomes more transparent for bddng subjects and as a result a larger number of partcpants enter the tender. Lkewse, sngle prce crteron appled for the fnal tender evaluaton turns out to have ndrect mpact on the fnal prce. 9

5 We can also confrm the valdty of the hypothess 4 as pre-advancement lowers the tendered prces. On the other hand t also has a negatve mpact on the number of submtted bds. Ths fndng can be explaned due to ts use for large contracts tenders where only a small number of bddng partcpants s expected. Remanng results nclude a negatve relatonshp between the rato of the fnal prce, respectvely prce rato, and a varable of the contractng authorty beng a state-owned enterprse. Based on the results one could nfer that state-own enterprses reach a lower fnal prce. Ths may be due to ther stffer fnancal constrants compared to "tradtonal" publc contractng authortes. Bandera et al. (2008) has reached a smlar concluson for Italy as well. 7. References [1] E. Aurol. Corrupton n Procurement and Publc Purchase. Internatonal Journal of Industral Organzaton. 2006, 24: [2] O. Bandera, A. Prat and T. Vallett. Actve and Passve Waste n Government Spendng: Evdence from a Polcy Experment. 2008, [Onlne]. Avalable at [Retreved Aprl 14, 2008]. [3] L. Brannman, J.D. Klen and L.W. Wess. The Prce Effects of Increased Competton n Aucton Markets. The Revew of Economcs and Statstcs. 1987, 69 (1): [4] S.R. Croom and A. Brandon-Jones. Key Issues on E-procurement: Procurement Implementaton and Operaton n the Publc Sector. Journal of Publc Procurement. 2005, 5 (3): [5] The European Commsson. A report on the functonng of publc procurement markets n the EU: benefts from the applcaton of EU drectves and challenges for the future. 2004, Retreved August 24, 2009, from [6] D. Freedman, R. Psan and R. Purves, Statstcs. New York: W. W. Norton [7] A. S. Had. A new measure of overall potental nfluence n lnear regresson. Computatonal Statstcs and Data Analyss. 1992, 14: [8] A. Im. Aucton Reforms for Effectve Offcal Development Assstance. Revew of Industral Organzaton. 2006, 28: [9] J.R. Kuhlman and S.R. Johnson. The Number of Compettors and Bd Prces. Southern Economc Journal. 1983, 50 (1): [10] J.M. MacDonald, C.R. Handy and G.E. Plato. Competton and Prces n USDA Commodty Procurement. Southern Economc Journal. 2002, 69 (1): [11] J. Nemec, B. Merckova and L. Vtek. Contractng-out at local government level - Theory and selected evdence from the Czech and Slovak Republcs. Publc Management Revew. 2005, 7 (4): [12] Organsaton for Economc Co-Operaton and Development (OECD). Polcy Roundtables: Publc Procurement Retreved August 24, 2009, from [13] M. Snger,G. Konstantnds, E. Roubk and E. Beffermann. Does e-procurement save the state money? Journal of Publc procurement. 2009, 9 (1): [14] B.K.O. Tas, R. Ozcan and I. Onur. Publc Procurement Auctons and Competton n Turkey, TOBB ETU Workng Paper No: Avalable at 10