Government Procurement Policies and International Trade: Economic Considerations Simon J. Evenett www.evenett.com Contents and summary of this presentation 1. Motivation and Preliminaries. 2. Factors influencing national procurement reform. 3. Size of national procurement markets. 4. Economic analysis of procurement policy in markets. 5. Economic analysis of procurement policy in auctions. 6. Is there a logic for international collective action on public procurement policy? 7. Empirical analysis of the effects of procurement provisions in trade agreements. 8. Summary and implications for policymaking. This presentation is accompanied by teaching materials circulated earlier. 2 Motivation and Preliminaries Why should trade experts know about procurement policy? • National procurement policies have many objectives and some of them result in measures that affect market access. • Discrimination against foreign firms is thought to be rife in many nation‘s procurement policies. – Procurement policies are one of few tools left to governments to shape national industries. – Procurement is sensitive because of links to corruption, governance, and the funding of national political parties. • Some trade agreements include provisions on public procurement: – The wisdom of doing so is debated. – No multilateral agreement as of yet on procurement. 4 National procurement policies can cause controversy in trade circles Countries mentioned in the United States’ Annual Report on Discrimination in Foreign Government Date or year Procurement. the report “Identified” cases of discrimination. “Issues of Particular Concern That Do Not Meet the Criteria for was Identification.” published. 1992. European Union: government-owned telecommunications in selected member states. 30 April 1996. Germany: Heavy electrical Japan: Public works. equipment. Japan: Supercomputers. Japan: Computers. Australia: Pre-selection criteria for bidders. Brazil: Expanded discriminatory procedures in 1994. China: Non-transparent, closed, and uncompetitive procedures. 30 April 1999. None. Korea: Construction of Inchon International Airport. Japan: Computer products and services. Japan: Design and consulting and construction services. 30 April 2000. None. Japan: Public works. Taiwan (China): General procurement procedures. Canada: Provincial price preferences. Mexico: Implementation of New Procurement Laws and NAFTA- related tendering periods. Korea: Airport construction. Germany: “Sect Filters” (to ensure that the principles of Scientology are not used or spread in fulfilment of a contract.) 30 April 2001. None. None in addition to prior years. 5 Analysis of policies: Tinbergen’s approach • Identify the ―targets‖ and ―instruments‖ of a policy. • General rule: assign a single instrument to each target—the instrument that has the least (ideally no) adverse knock-on effects for other policy goals. • Example: government goal is for a given industry to meet a certain production target. – Why would a per-unit production subsidy be preferable to a tariff? – What metric can be used to establish a ranking of policy measures? – Why do rankings matter? • Don‘t forget these points as this discussion goes forward. 6 The many targets of national procurement policy • Value for money – Minimising procurement costs – Is there a tension between efficiency and procurement cost? • Macroeconomic management. • National security. • Redistributive goals. • Industrial and regional development. • Promote SMEs. • Support state-owned enterprises. • Governance-related targets. 7 The principal instruments of national procurement policy 1. Procedures to identify, specify, and announce goods to be purchased by the state. 2. Procedures to determine which suppliers are eligible to bid for state contracts. 3. Tendering procedures: open, restrictive, and selective. 4. Evaluation and award procedures. 5. Bid-challenge procedures. • Can you identify ways in which discrimination against classes of bidding firms can enter into these five instruments? 8 Additional considerations on procurement policy in developing countries • Presence of budgetary aid. • Tied aid: implications for spending patterns. • HIPIC initiative: commitments made by recipient governments with respect to expenditure policy. • Resource constraints and implications for implementation of certain procurement policy measures. • Size of national procurement markets (more on this later.) 9 The forms of discrimination in national procurement policy 1. . 2. . 3. . 4. . 5. . 10 Lack of transparency creeps in many ways in procurement policy Measure. Potential sources of non-transparency. Announcements. •No central public journal for announcements. •Imprecise specifications. •No bulk purchases. Eligibility to bid. •Imprecise criteria. •Inability to demonstrate track record. Tendering. •Unpublished or imprecise procedures for each type of tendering and for choice of tendering. Evaluation/Award. •Role of intangible factors. •Variable preferences. Bid challenge. •Time for redress. 11 •Uncertain legal standards. Summary on national procurement policies • There are many many objectives for national procurement policy. – What questions does this raise? • Procurement regimes are complex—certainly a lot more complex that tariffs and quotas. – Opens the possibility for outright discrimination and lack of transparency in national procurement policy. – What are the immediate implications for procurement reform initiatives, including those involving trade agreements? • The answers to these questions give an indication of the challenges to come in devising procurement disciplines in 12trade agreements. Factors influencing national procurement reform Principles of Good Procurement Policy • What? 1. Efficiency (―value for money‖) 2. Equality of opportunity to compete for state contracts (―non-discrimination‖) 3. Transparency (―control corruption‖ and ensure accountability). 4. Encouraging investments and partnerships (―public-private partnerships, etc). • Espoused by whom? • Leading development agencies. • Embodied in UNCITRAL too. 14 Cost-benefit analysis of improving transparency • Costs: Establishing, operating, and enforcing clear rules requires resources. • Benefit 1: Improving transparency reduces uncertainty for potential bidders (both domestic and foreign) that encourages them to compete for government contracts and lowers prices paid by state. – Research shows SMEs are especially responsive to reductions in uncertainty. 15 Cost-benefit analysis of improving transparency • Benefit 2: Clearer procedures mean that firms need to spend less time and money being sure they have complied with specified bidding requirements. So, existing bidders have lower costs. • In sum: • No one denies improving transparency involves outlays—but the benefits include a broader set of suppliers and lower prices paid by the state. • More bidders for state contracts, lower bidding costs, and lower prices paid by the state. 16 Importance of competitive tendering • A strong finding of research on public procurement practices is that increasing the number of bidders substantially reduces the price paid by the state— especially when initially 5 or fewer firms bid. • If value for money is the objective, then the participation of the largest number of qualified bidders should be encouraged. • Open competitive bidding places no a priori restrictions on who can bid—unlike other tendering processes. 17 Small improvements in procurement policy would have large aid-equivalent payoffs Figure: What percentage of aid received would a 10 percent increase in procurement efficiency yield? 100 Percentage of aid received 75 50 25 0 0 3 6 9 12 15 18 21 24 27 30 33 36 39 Number of developing countries (out of a maximum of 39 in sample) 18 Different epochs in procurement policy and their rationales • Immediate post-WWII: closed national procurement markets 1. Keynesian demand management (reduce marginal propensity to import). 2. Activist industrial policies and ISI policies in developing countries. 3. Outright protectionism and nationalism. • Later movement towards reform: liberalisation (albeit slowly). 1. Budget squeezes from the 1970s in rich countries. 2. Widespread privatisation of state-owned enterprises. 3. ―Export politics‖ and reciprocal trade reform. 19 Table: Business people's perceptions of procurement practices in developing countries, 2001 Government decisions When deciding upon How commonly do The composition of on the procurement of policies and contracts, New governments firms in your industry government spending advanced technology government officials honor the contractual give irregular extra in your country (1=is products are based on (1=usually favor well- commitments and payments or bribes Non-OECD economy wasteful, 7=provides (1=price alone, connected firms and obligations of previous connected with public necessary goods and 7=technology and individuals, 7=are regimes (1=not true, contracts/investment services not provided encouraging neutral among firms 7=true) projects (1=common, by the market) innovation) and individuals) 7=never) Argentina 2.2 2.9 2.7 5.0 3.1 Bangladesh 2.7 3.0 2.1 4.1 2.1 Bolivia 2.5 2.4 1.9 2.9 2.8 Brazil 2.7 3.9 3.0 4.2 4.0 Bulgaria 3.2 3.5 2.8 4.3 4.4 Chile 3.9 3.8 4.0 5.3 5.3 China 3.3 4.6 3.4 5.1 3.9 Colombia 2.3 3.4 2.3 3.9 3.7 Costa Rica 2.9 3.8 3.3 4.5 4.2 Dominican Republic 2.7 3.4 1.9 3.2 3.9 Ecuador 2.0 2.6 1.9 3.3 3.2 Egypt 3.9 3.6 3.8 4.9 4.4 El Salvador 3.5 3.1 2.8 4.0 3.7 Estonia 3.6 4.5 3.3 4.8 4.4 Guatemala 2.2 2.7 1.7 2.2 3.1 Honduras 2.2 2.4 1.8 3.6 3.2 Hong Kong SAR 5.5 4.4 4.5 6.3 6.1 India 3.2 3.8 3.4 5.1 3.4 Indonesia 3.1 4.0 2.6 3.8 3.0 Israel 3.7 4.5 4.1 6.1 5.9 Jamaica 3.2 3.9 2.6 4.6 4.4 Jordan 4.3 3.9 3.8 5.4 4.8 Latvia 3.2 4.0 2.9 3.7 3.8 Lithuania 2.6 3.4 3.3 3.5 5.7 Malaysia 4.2 4.4 3.0 4.6 3.5 Mauritius 4.1 3.4 3.4 5.4 3.4 Nicaragua 2.3 3.1 2.2 3.2 3.2 Nigeria 2.7 3.7 2.0 3.7 2.3 Panama 3.2 3.3 2.3 3.7 3.4 Paraguay 1.7 2.7 2.6 2.9 2.6 20 Government decisions When deciding upon How commonly do The composition of on the procurement of policies and contracts, New governments firms in your industry government spending advanced technology government officials honor the contractual give irregular extra in your country (1=is products are based on (1=usually favor well- commitments and payments or bribes Non-OECD economy wasteful, 7=provides (1=price alone, connected firms and obligations of previous connected with public necessary goods and 7=technology and individuals, 7=are regimes (1=not true, contracts/investment services not provided encouraging neutral among firms 7=true) projects (1=common, by the market) innovation) and individuals) 7=never) Peru 2.8 2.7 2.9 3.9 4.2 Philippines 2.8 3.4 2.7 4.8 3.0 Romania 2.5 3.3 3.7 3.2 4.1 Russia 2.5 3.6 3.7 4.0 3.8 Singapore 5.9 5.7 5.1 6.3 6.4 Slovenia 3.3 4.2 3.5 4.5 4.1 South Africa 3.8 3.9 3.1 5.6 4.4 Sri Lanka 2.6 3.5 2.7 4.1 4.3 Taiwan 4.3 5.1 3.9 3.6 5.6 Thailand 4.3 4.0 3.5 4.9 3.7 Trinidad and Tobago 4.1 4.0 2.7 4.8 4.2 Ukraine 2.1 3.9 2.1 2.5 2.9 Uruguay 2.9 3.8 3.6 5.4 4.4 Venezuela 2.2 3.1 2.6 3.9 3.5 Vietnam 3.1 4.0 3.0 3.7 3.5 Zimbabwe 1.4 3.3 1.9 4.1 2.5 Mean for these developing countries 3.1 3.6 3.0 4.3 3.9 Mean for the OECD economies 4.0 4.4 4.2 5.5 5.3 Source: The Global Competititiveness Report, 2001-2002. Interview responses to questions above by business people familiar with a given economy. Notes: signifies the reported value is less than the average for those developing countries reported here number in italics signifies the reported value is more than the average for the OECD countries surveyed 21 Factors said to impede procurement reform in developing countries • Source: Hunja (2003). 1. Deep vested interests and lack of political will to overcome them. 2. Paucity of technical knowledge and capacity. 3. Complexity of the substantive issues involved. • Relationship between procurement reform and across- the-board governance reform. • Role of IT and computerisation. • Necessity of support of highest political leaders. 22 Size of national procurement markets What goods and services do states buy? • Goods: major item is office machines; telecom equipment; transport equipment. • Services: construction; leasing; maintenance; health; education. – 70% of GDP, large share of total public demand. • Distinction becoming blurred—government outsourcing—so part of what is wages = potential procurement. • Share of services imports << goods. • Technology that makes services tradable: e.g., call centers; diagnostics; BPO. 24 Determinants of size of national procurement markets • Underlying societal preferences that manifest themselves in: • Constitutional structure. • Role and size of the state. • Share of public sector enterprises in GNP. • Extent of tied aid. • Government propensity to buy: – Services. – Defence expenditure. 25 Estimates of total size • 2004: ‗Contestable market‘ in OECD some US $1.8 trillion (Excludes military and wages) – EU estimates = 10-15% of GDP or €1 to 1.5 trillion • 10% of this sourced from another country, i.e., imported • But another 30% involves FDI – ―indirect cross-border trade‖ • US: +/- $700 billion. • 25-35% of spending is by central governments • Non-OECD: assume +/- 5% GDP = $400+ billion – NB: underestimate—often procurement is higher share of total expenditure in developing countries (30-40%) • Is all this ‗available‘ for competition? No. – Thresholds, de jure or de facto; Policies; Politics 26 Gov’t outlays, % of GDP (excluding wages and defence) General Central Central as Gov‘t Gov‘t % General outlays outlays outlays OECD, 7.6 1.8 23 without intermediates OECD, with 8.2 2.8 34 intermediates EU without 8.0 2.5 32 intermediates. 27 The skewed size of procurement markets in 106 Non-OECD nations 1000 Billions of dollars, 1998 100 10 1 0 20 40 60 80 100 0.1 0.01 Final Consumption Expenditure (FCE) FCE excluding compensation and defense 28 Non-OECD procurement markets exceeding US$5 billion in 1998. More than US$5 billion and less than US$10 billion: Egypt, Morocco, Chile, Peru, Puerto Rica, Bangladesh, India, Israel, Kuwait, Malaysia, Singapore, Syria, United Arab Emirates. More than US$10 billion: South Africa, Brazil, China, Indonesia, Saudi Arabia, Russia. Source: OECD (2002a). 29 Economic analysis of procurement policy in markets Introductory notes • Analysis of discriminatory procurement policy started by Baldwin and Richardson (1972). • Considered a partial equilibrium perfectly competitive market where – a government buys a homogenous good that is traded on world markets and – importantly, consumers can buy the same good as well – no tariffs or transportation costs (free trade assumption). • Baldwin and Richardson showed that used certain circumstances there would be no effect of banning foreign firms from supplying the government. • What are the implications for trade policy of this finding? 31 Procurement ban: government demand less than domestic supply INDUSTRY FIRM Price Price SH (P) MC ATC PW=PG=PC LSH (P) C* DT (P) DG (P) O O Quantity Quantity Figure 1 32 Procurement ban: government demand exceeds domestic supply INDUSTRY FIRM SH (P) Price MC Price SH2 (P) ATC PG D C* LSH (P) PW A B C DT (P) DG (P) G O O F Quantity Quantity Figure 2 33 The effect on long-run equilibrium outcomes of a procurement ban At initial free trade prices, Pw DG (pw)< DG (pw)> SH(pw) Variable: SH(pw) No free Free entry entry Price 0 + 0 Domestic 0 + + industry output Quantity of 0 - - imports Key: 0: no change from initial pre-ban long run equilibrium; 34 — : Decline; + : Increase. Price preferences: government demand less than supply FIRM INDUSTRY MC Price Price SH ATC (1+ P) PW C* PW = PG DT DG O O Quantity Quantity Figure 3 35 Price preferences: government demand exceeds supply (case 1) FIRM INDUSTRY MC Price SH SH2 Price ATC PG Pw (1+) PG D PW Pw = C* A B C DT DG O O Quantity Quantity Figure 4 36 Price preferences: government demand exceeds supply (case 2) FIRM INDUSTRY Price MC Price SH ATC P* PW (1+) D E C* LSH PW A B C DT DG O O Quantity Quantity Figure 5 37 The effect of price preferences on short run and long run equilibrium outcomes At Initial Free Trade Prices DG < SH DG >SH Variable: Short & Short Run Long Run Impact Long Run Impact No entry Free Impact Entry Price 0 + + 0 Domestic industry 0 + + + output Quantity 0 - - - imported Key: 0: no change from the initial long run equilibrium without price preferences; — : Decline; + : Increase. 38 Nontradables: a ban on purchases from foreign-owned firms when demand is less than domestic supply FIRM INDUSTRY Price Price SH (P) MC ATC SF (P) C* LSH C* DT (P) DH (P) DG (P) O O Quantity Quantity Figure 6 39 Nontradables: a ban on purchases from foreign-owned firms when demand exceeds domestic supply FIRM INDUSTRY SH (P) Price Price SF (P) MC ATC PI C* C* D C LSH DT (P) DG (P) PII B DH (P) O Quantity O Quantity Figure 7 40 The effect on long-run equilibrium outcomes of a procurement ban on foreign- supplied non-tradeables At Initial Free Trade Prices, C* DG (C*) > SH (C*) Variable: Short Run and Long Run DG (C*) < SH (C*) Long Run with Long Run with entry and without entry exit exit or exit only Price paid by home 0 consumer 0 - 0 Price paid by 0 government 0 + + Home Firm‘s output 0 + + + Foreign Subsidiaries‘ 0 - - - output 41 Key: 0: no change from initial pre-ban long run equilibrium; — : Decline; + : Increase. Impact of greater transparency: demand effects S Dg Dg1 P2 PW Q1 Q3 Q2 QF 42 Figure 8 Impact of greater transparency: supply effects Dg S S1 P2 PW Q1 Q2 Q4 QF Figure 9 43 Summary of main findings (1) • Impact of procurement discrimination (and reform) depend on: – relative size of demand. – barriers to entry and exit (including policies towards foreign investment). • Distinction between short and long run effects. • Conditional nature of effects complicates policy recommendations. • Unlike tariff cutting there is no reason to expect that it will lead to simultaneous improvements in market access and national welfare. 44 Summary of main findings (2) • Improving transparency in procurement policies can have an ambiguous effect on market access. – Export interests may be less interested in supporting this reform. – Implications for propensity to bring dispute settlement cases on transparency matters. • Relationship of findings to the debate in the WTO between 1996 and 2004 on the merits of multilateral rules on the transparency of government procurement. • Caveats to this analysis. 45 Economic analysis of procurement policy in auctions Theoretical analyses and simulations of price preferences in auctions • There are few analyses of these matters. • Recall auctions are analysed using game theory tools that take into account the strategic interaction between bidders. • Each bidder‘s bid depends in principle on others‘ choices. • Models are complicated and are normally simulated to establish findings for given parameters. • In what follows we will discuss: – McAfee and McMillan (1989). – Deltas and Evenett (1997). • As will become clear there is an analogy to the literature on strategic trade policy and the ―monopoly tariff‖ finding. 47 McAfee and McMillan (1989) • Consider an optimal auction where there a finite number of bidders. • Each bidder knows their own marginal cost of supply, but not that of any other bidder. • Each bidder knows the distribution from which it can assume the other bidders‘ costs are independently drawn. • There are two types of firm: home and foreign. Each type has its own different cost distribution. – Generates an asymmetric auction. • The government purchasing the good knows about the asymmetry too. 48 McAfee and McMillan (2) • The government decides to buy one (or more) unit of the good. Sets up an auction. • Consider the case where the home firm and foreign firm‘s cost distributions are the same except that the mean of the latter is lower than for the former. • They show that if the government wants to minimise the expected cost it will pay then it will discriminate against the foreign firms using a price preference policy. • What logic underlies this finding? • Why is it similar to what you have learned about the ―monopoly power‖ and the ―strategic trade policy‖ case for protectionism? 49 McAfee and McMillan (3) • The authors caution the reader: ―It should be stressed that our argument is purely normative. It does not explain the existence of price preference policies; their existence is more likely to be due to the political power of certain interest groups…procurement preferences have unexpected, and sometimes beneficial, side effects.‖ • ―Discriminatory preferences are not as costly as they appear…the zero preference is not the appropriate benchmark for evaluating the effects of these preferences.‖ • What is meant by this last remark? 50 McAfee and McMillan (4) • Second finding: Irrespective of any international differences in the bidder‘s cost distributions, if the government values domestic firms‘ expected profits as well as expected procurement costs, then the government will discriminate against the foreign bidders using price preferences. • This is the classic profit shifting argument found in many models with imperfect competition between firms. • How would you interpret this finding? 51 Simulating the effects of discrimination in auctions • McAfee and McMillan conduct a large number of simulations of the effects of discrimination in their optimal auction. Their simulations demonstrate that: – The maximum reduction in expected cost that discrimination can bring about is 2.5%. – Very small errors in the computation of price preferences can eliminate all of the benefits of this form of discrimination—and errors can readily raise expected procurement costs. • Evenett and Deltas (1997) simulate the effects of raising price preferences in first price sealed bid auctions with only one domestic bidder and one foreign bidder—a setting where the profit-shifting motive should be strongest. 52 Simulating the effects of discrimination in auctions (2) • Evenett and Deltas (1997) found that increasing price preferences: – yielded at most a 2.5% reduction in expected profits. – resulted in substantial effects on the bids submitted by both firms – raised the expected profits of domestic bidders a lot—but not the expected probability of the domestic bidder winning. – errors in choosing the optimal price preferences very soon generate increases in expected procurement costs. • Interpretation: Price preference policies generate the same political economy dilemmas that confront tariffs: concentrated benefits and diffuse costs. 53 Comparing price preferences to other forms of discriminatory measures • Governments use measures other than price preferences to discriminate against foreign firms in auctions including: – import content restrictions/domestic content requirements. – stronger de facto regulation of national regulations for foreign firms. – restrictions on ability to bid through a variety of selective or limited tendering procedures. • First two of the above measures raises the costs of the foreign firm or bidder; last measure affects their ability to contest the auction in the first place. • Can a ranking of the impact of these policies on expected procurement costs be established? 54 Comparing price preferences to other forms of discriminatory measures (2) • Deltas and Evenett (1997) show in their simulations that measures to raise the costs of foreign bidders cause the latter to raise their bids, in so doing raising both expected procurement costs (somewhat) and the expected profits of the domestic bidder (a lot). • McAfee and McMillan (1989) show that increasing the number of foreign (or domestic for that matter) bidders from two to four reduce expected procurement costs by a lot. – Contestability of procurement matters. • Simulations suggest the following ranking of policy measures in terms of increasing effects on expected costs: price preferences, cost increasing measures/discrimination, and selected or limited tendering. 55 Cost over-runs • Occur when the actual cost of a project‘s implementation exceed its contracted or planned cost. – Much energy is spent by procurement officials to avoid this outcome, still… • If cost over-runs by domestic firms are more likely to be bailed out by the domestic government, then domestic firms are provided with an incentive to lower their bids when seeking the state contract. • Problem arises because a government may not be able to commit to a symmetric policy towards bail-outs, including potentially a policy of no bail-outs. • See Mattoo (1997) for further discussion. 56 Summary of policy implications • Although departures from free trade can be theoretically justified, the use of price preferences does not seem to deliver much in terms of expected cost reductions. • Worse, no government will have the information to choose price preferences optimally and there are big costs to making mistakes. • Free trade (zero price preferences) then may still be a useful rule of thumb. • The impact of price preferences on domestic bidder expected profitability strongly suggests that interest group considerations are likely to be very important in determining procurement policy. • A clear ranking of the harm done by different procurement 57 policies can be established; could guide trade negotiators. Is there a logic for international collective action on procurement policy? Rationales for international collective action • Market access based arguments: traditional reciprocity. • How does the political economy of reciprocal procurement reform differ from that of tariffs? – Unilateral reform in both will probably garner less support than reciprocal reform. – Different conditioning variables (demand side, barriers to entry and exit, FDI policy). – Same potential for substitutability between discriminatory instruments. – Need to combine transparency reform with market access measures: to preserve the ―original bargain‖. 59 Rationales for international collective action (2) • What is the political economy of international collective action on transparency in procurement practices? – Recall such reform may cause more of domestic and foreign firms to bid. – Domestic exporters may support these measures if other barriers do not entirely block their access to foreign markets. – Points to the value of combining transparency and market access provisions in a multilateral initiative. – Casts the Doha Ministerial mandate on government procurement in a poor light: could be valuable (is half a loaf better than no loaf?) but more expansive mandates are better. 60 Empirical analysis of the effects of procurement provisions in trade agreements Evenett/Shingal analysis of Japan’s UR GPA membership • Japan‘s economy stagnated throughout the 1990s. • How effective has the UR‘s Agreement of Government Procurement been? • Metrics: – Improved resource allocation/welfare. – Improved market access. – Preserved market access under pressure. • Using Japanese submissions to the WTO procurement patterns in late 1980s were compared with those in late 1990s. 62 Finding 1: Snap shot of 1998-9 • Annual reported procurement: 36 bn SDRs • 65.9% below GPA-specified thresholds. • 25.0% above thresholds and not subject to limited tendering—measure of market size available to foreign competition. • Contracts awarded to foreigners: – 1.39% services. – 13.41% goods. 63 Finding 2: More below threshold contracts 1997 to 1999 • Percentage of contracts above threshold and not using limited tendering: – 1997: 26.6%. – 1999: 24.4%. • Is this peanuts? Not in dollar terms. • Amounts to 0.8bn SDRs—or over a billion US dollars. 64 Finding 3: Fewer contracts are awarded to foreigners • Proportion of contracts awarded to foreigners (by number): – 1990-1 26%. – 1998-9 24%. • Proportion of contracts that are available for international competition: – 1990-1 91%. – 1998-9 86%. 65 Finding 4: Market access would have been 25% larger • Reported foreign contracts 1998-9: 769m. • Additional contracts in absence of: – Falling share of above threshold contracts: 131.6m – Falling probability of foreigners winning a contract: 61.1m • Total reduction: 192.7m. • 25% of reported foreign contracts. 66 Econometric analysis • Observe the following two dependent variables in 19 sectors for 7 years: – Proportion sourced from abroad. – Proportion of contracts not using limited tendering. • Years: 1990-3; 1997-2000. • What factors determine these dependent variables and is there a break post UR? • Answer: having controlled for other determinants, there is a statistically significant reduction in the share of procurement sourced abroad. • Possible explanations for this finding. 67 Evenett (1998) study of eliminating procurement biases in APEC • Studied likely impact on bilateral trade volumes of eliminating the following two distortions created by discriminatory procurement policy: 1. Reduced demand for foreign produced goods. 2. Increases demand for domestic goods and so reduces goods available to export. • Results: 1. Only first channel is statistically significant. 2. The expansion in trade volumes from eliminating discrimination is higher in the nations where the ratio of state demand to private sector demand for tradeables is higher. 68 Summary and implications for policymaking Main findings • The very fact that there are many types of procurement policy objectives and instruments complicates matters. • Effects of procurement reform are contingent on other policies and state actions. • Effects of a single procurement reform are typically contingent on the other procurement policies a government employs. • Both of these points imply that: 1. The political economy of procurement reform may differ from that of tariffs. 2. There is a stronger case for trade initiatives that include more disciplines on procurement policies rather than less. 70
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