Discretion and Public Procurement Outcomes in Europe

Non-technical summary

Public procurement regulations aim to ensure that public authorities and state bodies obtain value for taxpayer money by requiring e.g., publication of calls for tender, full transparency as regards the criteria that will be used to evaluate bids, and the use of specific processes such as open competitive bidding, sealed bids and mandatory award to the lowest cost bidder satisfying the technical specifications laid out in the call for tender. These procedural requirements reduce the ability of public entities to exercise discretion in the award of contracts.

Value for money goals may be complemented by ancillary public policy objectives. In practice, public procurement is frequently used as an instrument to pursue noneconomic objectives, such as reducing greenhouse gas emissions, assisting disadvantaged communities, or supporting small and medium sized enterprises (SMEs). This is reflected in specific mandates and processes may be embodied in procurement law and regulation to constrain the ability of government buyers to award contracts to the lowest cost bidder.

There may be a tension between value for money and other policy goals, but in both cases law and regulation has the common feature of constraining discretion. Economic theory suggests procurement regulations constraining the ability to exercise discretion in awarding contracts may increase average procurement costs in countries with public bureaucracies (civil service officials) that are highly competent and effective in implementing their tasks. Conversely, relaxing constraints on the exercise of discretion may undercut the realization of noneconomic objectives insofar as procuring entities become free to pursue the economic goal of minimizing procurement costs.

This paper builds on recent research pointing to a potential tradeoff between regulations requiring the use of procurement processes that are expected to promote the realization of value for money objectives and possibility that the exercise of discretion by knowledgeable officials may result in lower contract prices and higher quality projects. We use data from the European Union’s Tenders Electronic Daily database for 2016-2019. This provides detailed data on public procurement awards for 33 European countries including the UK. This data source provides detailed data on the price of awarded contracts and the identity of the winning bidder. Information is also reported on whether the winning company is a small or medium-sized enterprise. Combined with information characterizing the degree to which discretion is constrained by law and the extent to which procuring entities utilize whatever discretion is permitted, the detailed data on procurement awards provide the basis for an empirical analysis of the relationship between discretion and procurement outcomes (prices).

We find a positive, significant relationship between more restrictive practices as regards the exercise of discretion in procurement awards and average contract prices. This relationship is stronger in countries that have higher levels of government effectiveness. We also show that realizing efficiency benefits from exercising greater discretion where this is permitted by law reduces the probability small firms win contracts and continue to do so. Our finding points to a tradeoff between the potential cost reduction benefits of exercising discretion in countries with high government effectiveness and the noneconomic objective of supporting participation of smaller companies in public procurement.

We also find evidence that estimated contract values in calls for tender are bunched just below the value thresholds established in procurement law. This phenomenon indicates that procuring entities have incentives to seek to exercise discretion and do so in practice. Because EU procurement regulations do not apply to contracts that are less than the minimum value thresholds defined in EU law, procuring entities can obtain greater scope to exercise discretion by setting the estimated value of a call for tender below the threshold. We assess whether such bunching of estimated contract values is associated with the restrictiveness of procurement law and practice towards use of discretion. We find that the probability of bunching behavior is less in countries where discretion is subject to greater restrictions.

Our findings are specific to the 33 European countries in our sample. While these nations are diverse with respect to government effectiveness, they are more like each other in terms of economic and political governance than is the case if the analysis were to span a global cross-section of countries. Our results are unlikely to hold in settings where levels of corruption are much higher and/or government effectiveness indicators are far below those characterizing our European sample.

Read Working Paper 005