Study: Firms are not interested in bidding for public procurement contracts

Competitive tendering is used to ensure the efficient use of public funds. However, according to a recent study by researchers at VATT and Aalto university, public procurement in Finland is characterized by a lack of genuine competition with most tenders only attracting 0-2 bids.

Public organizations use public procurement and tendering to ensure that they get high-quality goods and services at reasonable prices. However, competitive tendering does not seem to fulfill this objective. According to a recent study by researchers at the VATT Institute for Economic Research and Aalto University, the reason for this is the lack of genuine competition; more than half of the tenders only attract 0-2 bids.

The study conducted by Jan Jääskeläinen and Janne Tukiainen uses exceptionally comprehensive and rich data on Finnish public procurements to examine bidder behaviour. The data contains information not only on all the actual bidders but also on the companies that registered for the tender but did not submit a bid.

From 2010 to 2017, the median number of bidders in Finnish public procurements was only two. In more than half of the public procurements, only one or two firms, or no firms at all, submitted a bid. Even if the analysis is limited to tenders that received at least one bid, the median is only three. When the number of bidders is higher, the size of the bidders typically varies a lot, which is likely to also limit competition.

The lack of competition is a prevalent across all industries and all kinds of contracting authorities, such as municipalities and government entities.

Contract design and auction rules should be revised

The study found an association between the lack of competition and higher procurement costs. This means that the lack of competition has serious and expected consequences for public procurement.

“The lack of competition results both from the lack of potential bidders in the first place, and more importantly, from the majority of the potential bidders not submitting a bid,” says Associate Research Professor Janne Tukiainen from VATT.

The contracting authorities can try to attract more competition. The contracts can be made simpler, and thus, more attractive to bidders by making it easier for them to calculate their production costs. The auction rules could also be simplified. The study shows that bidders are not eager to enter auctions that use a scoring rule. This rule could be avoided when other means of ensuring adequate quality, such as minimum quality requirements and sanctions for inferior quality, are applicable.

Despite these measures, it can be difficult to increase competition. Therefore, reservation prices should be more frequently applied to competitive tendering of public contracts.

“In future research, it would be interesting to investigate whether contracting authorities always aim to attract many offers, or whether some tenders are designed with to a specific bidder in mind,” doctoral candidate Jan Jääskeläinen from Aalto University says.

The data for the study consists of Cloudia Oy’s database covering public procurement contracts carried out in Finland between June 2010 and September 2017, and of Statistic Finland firm data. Aalto Economic Institute and Yrjö Jahnssonin Foundation supported and funded the gathering of the data.

 

Study:

Jan Jääskeläinen and Janne Tukiainen (2019): Anatomy of Public Procurement, VATT Working papers 118

 

Further information:

Dr. Janne Tukiainen, Ph.D.(econ), Associate Research Professor, VATT Institute for Economic Research,
[email protected], +358 295 519451. 

Jan Jääskeläinen, M.Sc. (Econ), doctoral candidate, Aalto University School of Business, ,
[email protected], +358 50 5423792.