Continuing his interview series of Public Procurement Podcasts (PPP) Dr Pedro Telles of Swansea University talks to leading academics, researchers and graduates who have an interesting viewpoint on aspects of public sector procurement. He recently interviewed Francesco Decarolis, Associate Professor at Einaudi Institute for Economics and Finance in Italy. Francesco is currently a Research Fellow of the National Bureau of Economic Research. He was recently awarded ERC Starting Grant to investigate reputation and corruption in public procurement, a topic often visited here on Public Spend Forum.
The grant has enabled Francesco to conduct his research in a way that lack of resource previously would not have permitted. He has been able to collaborate closely with contracting authorities and work with them to try out different procurement processes, then carry out the work of collecting the data, analysing it, and having multiple meetings with the contracting authorities and the suppliers.
The premise of his research lies on two things which he notes are unavoidable in a contracting procurement: uncertainty about costs at the time of bidding, unknowns like weather conditions at time of execution, and verifying past and post performance of bidders, to eventually enforce penalty in cases where things have not followed the original contract specification.
What is remarkable about European public procurement, he says, is that use of past performance is strictly limited; until very recently and the latest round of European directives, the use of past performance was forbidden in Europe. (Pedro Telles remarks that while it’s true that you cannot, in EU procurement, use past performance to assess the quality of a tender, you can use it to assess the quality of a tenderer at a previous time, but it varies between restricted and open procedures. The current rules ensure equal access to the markets, not only to companies with a huge trading history, but also to companies that do not have a lot of trading history with the public sector, so analysis of tender is more equal. Francesco responds that this brings up what he believes is the greatest departure in the view between economists and legal scholars, and you can read his very interesting reasoning on this in the trascript.)
However, in this regard, the public sector is very different from the private. It limits what is a great tool to prevent potential problems of poor performance and it puts the European system at odds with other public procurement system, like the US. For example, since 1994 there has been a major reform to the Federal Acquisition Regulation that puts past performance of the contractor at the heart of the US system for selecting suppliers. “Europe is gradually moving towards something similar, but very, very slowly, and we are still far away,” he says.
So his main area of study is to what extent can this US reform, and other reforms, be an effective way to combine improvements in performance with limiting prices. How can we combine the use of past performance within the system of awarding contracts, based on auctions, and how can we change from price-only auctions, or scoring auctions, that do not include reputation, to price plus reputation auctions. The question is how do we measure reputation and how do we include that in the scoring and then quantify how this approach could impact both the performance delivered and the cost of this potential improved performance.
The research is still ongoing, but he does have some preliminary results following an experiment with an Italian large public utility company that provides water and electricity to Rome and central Italy. The company is owned 51% by the municipality of Rome, and so, because of this, it has to follow the public procurement regulations, but also since it’s a public utility company, it is in a group of contracting authorities the Italian public procurement code calls “special sectors,” and special sectors have some degree of freedom in how they design procurement rules. His interesting time with them sheds light on the question about how we construct a measure of past performance and use it in the system – the trials generate some fascinating results, which again you can read or listen to in the podcast.
But one interesting fact that came out of the trials relates to the prices. They observed that prices, in the initial phase, after there was a system change, declined. He believes this was probably because firms were competing very intensively to win contracts, because only by winning a contract could you be monitored and earn a reputation. After that, prices started to increase, because of better performance and delivery of higher quality. But, he reveals, compared to the great increase in quality from 25% to 80% (following the experiment), the increase in cost was only about 7%, relative to the price they were paying before.
To read more fully about the research and the experiment please see the Public Procurement Podcasts.