Gaborone, Botswana.
The Central Business District in Gaborone, Botswana. (Image: @hubane via Unsplash)

Public procurement as an industrial policy tool

New evidence from Sub-Saharan Africa shows that public procurement policies improve domestic firm performance.

By Bernard Hoekman and Marco Sanfilippo

Governments around the world purchase a wide range of products to provide public goods and services to citizens. Such public procurement often accounts for a significant share of GDP and aggregate demand. In low-income countries, public procurement constitutes 14.4 per cent of GDP on average, with even larger values recorded in some of the poorest regions of the world, including South Asia and Sub-Saharan Africa1. Most national public procurement systems embody procedures to ensure value for money: award of contracts to the lowest cost suppliers able to meet the technical specifications required by a project. Value for money, however, is not the only goal of public procurement systems. Public procurement can also be a tool of industrial policy or be used to attain sustainable development goals2, reflected in “buy national” policies, local content or technology transfer requirements for foreign bidders. As government procurement can represent a meaningful source of demand for firms, a government contract may encourage firms to invest more, expand employment and increase productivity. Despite this, there has been relatively little research on the extent of home bias in public procurement in low-income developing countries or on the relationship between public procurement and firm performance.

Procurement, domestic firms and the role of FDI

In a recent study3, we employed firm-level data from UNIDO’s African Investor Survey (AIS)4 covering roughly 6,700 companies based in 19 countries in Sub-Saharan Africa (SSA). The survey included data on the share of each firm’s total sales to the government and thus the share of foreign-owned as opposed to national firms in total reported sales to the government – a proxy for participation by these two groups of firms in public procurement.

The case of SSA is particularly relevant, given arguments that one factor impeding structural transformation in Africa is weak demand.5 Exploring participation in public procurement in SSA is also of relevance from an international trade cooperation perspective. Governments can source from domestic or foreign firms. Given that public procurement policy is often skewed towards domestic sourcing, governments have negotiated trade agreements that require non-discrimination in procurement. A primary example is the WTO Agreement on Government Procurement (GPA). A distinguishing feature of countries in SSA is that they have not (yet) signed the GPA, nor have they included procurement in their preferential trade agreements. However, inward FDI can be an equally important channel to contest public procurement opportunities. Given that SSA countries tend to be open to FDI, one reason for their lack of participation in the GPA may be that governments already source from foreign firms through this channel.

A strong positive relationship exists between firms’ sales to government and their performance

Our analysis reveals that public procurement represents a significant source of demand for many firms in SSA. For the full sample of firms and countries, government, on average, accounts for about 8.1 per cent of firms’ total sales. More disaggregated descriptive statistics reveal substantial heterogeneity in firm- and industry-specific characteristics that affect the extent to which government plays a role as a source of demand (figure below). Typically, domestic firms sell larger shares of their output to the government than foreign-owned firms. Among foreign-owned firms, those from OECD economies report a higher share of total sales to the state. Although emerging market multinationals (EMNEs) have been successfully investing and contracting in SSA, it appears that such firms are less focused on the local government procurement market. Government contracts account for a larger share of domestic firms’ sales relative to foreign-owned ones, and are more important for larger and older firms.

Average share of sales to Governments (as a % of total sales), by firms’ characteristics

Note: *Family holds more than 50.01%; **Younger/older than 10 years

Source: Authors’ elaboration on AIS.

The results of our empirical analysis point to a strong positive relationship between firms’ sales to government and their performance. Increasing the share of total output sold to the government by 10 percentage points is associated with a higher productivity of 4 per cent. Although there are substantial differences across firms, the correlation between sales to the government and performance is more evident for smaller and domestically owned firms, as well as for firms at the bottom of productivity distribution. Public procurement is also positively related with other dimensions of firm performance and not just productivity, for instance, product innovation by domestic firms.

The correlation between procurement participation and indicators of firm performance is greater in countries that are more open to foreign participation, measured by the share of total sales to the government accounted for by foreign firms (FDI), suggesting that domestic environments that are more open to foreign participation in public procurement are more likely to enhance local competitiveness.

Foreign participation correlation with economic development

Source: World Bank WDI and WGI databases.

Foreign participation (the share of foreign firms in total sales to the government), in turn, correlates positively with levels of economic development (per capita income), negatively with the quality of relevant domestic institutions proxied by perceived levels of corruption, and negatively with a more narrowly defined average indicator of the quality of procurement institutions and processes (figure below).

Foreign participation correlation with degrees of corruption

Notes: The degree of corruption decreases along the horizontal axis.

Source: World Bank WDI and WGI databases.

Higher average quality levels of procurement systems, as measured by the World Bank Benchmarking Public Procurement indicators6, are associated with a lower foreign share of total sales to government. Given that SSA countries have not signed the GPA but are nonetheless relatively open to foreign participation, our results suggest that the benefits of GPA membership may be more closely associated with improvements in procurement institutions than with market access liberalization.

Foreign participation correlation with quality of procurement

Note: The procurement quality indicator is from the Benchmarking Public Procurement dataset (World Bank, 2016) and is the simple average of 6 components of procurement systems as defined and measured by the World Bank. The quality of procurement systems increases along the x-axis.

Source: World Bank. 

Government procurement in SSA is linked to effective industrial development policies

The findings of our work suggest that regardless of the underlying policy objectives guiding the allocation of government contracts in a given country, public procurement activity in our SSA sample countries is associated with outcomes that motivate effective industrial development policies. Our analysis opens up an important, neglected research agenda, one that is highly policy relevant, given both the magnitude of government procurement in most countries and the provisions found in many procurement laws seeking to ensure that SMEs have opportunities to participate in, and benefit from, procurement processes.7 What is needed first and foremost is an extended time dimension of firm-level data on participation in public procurement and to complement the available indicators of procurement system quality with information on whether and how authorities give preference to local firms when awarding government contracts. Better data will allow for a better understanding of foreign firms’ role in procurement markets, the interrelationships between FDI-specific policies and indirect barriers (quality of procurement process; corruption); the channels through which FDI has an impact on domestic productivity performance (e.g. whether there are learning spillovers); the design/role of investment promotion agencies could complement research on the effects of narrowly defined procurement processes.

  • Bernard Hoekman is Professor and Director, Global Economics at the Robert Schuman Centre for Advanced Studies, European University Institute in Florence, Italy.
  • Marco Sanfilippo is Associate Professor of Economic Policy at the University of Torino and Associate Research Fellow in Globalisation and Development at the Institute of Development Policy, University of Antwerp.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

References

  1. Djankov, S., Islam, A. and F. Saliola (2016) How Large Is Public Procurement in Developing Countries? Peterson Institute for International Economics: Washington, DC.
  2. UNIDO (2017) Demand for Manufacturing: Driving Inclusive and Sustainable Industrial Development. Industrial Development Report 2018. Vienna: UNIDO.
  3. Hoekman, B. and Sanfilippo, M. (2020) Foreign participation in public procurement and firm performance: evidence from sub-Saharan Africa. Review of World Economics, 156, 41-73.
  4. UNIDO (2011) Africa Investor Report. Vienna: UNIDO.
  5. McMillan, M., Rodrik, D. and I. Verduzco-Gallo (2014) Globalization, Structural Change, and Productivity Growth, with an Update on Africa. World Development, 63, 11-32; UNIDO (2017) Demand for Manufacturing: Driving Inclusive and Sustainable Industrial Development. Industrial Development Report 2018. Vienna: UNIDO.
  6. World Bank (2016) Benchmarking Public Procurement 2017: Assessing Public Procurement Regulatory Systems in 180 Economies. Washington, DC: World Bank.
  7. Hoekman, B. and Taş, B. (2020) Procurement Policy and SME Participation in Public Purchasing, Small Business Economics.

Read next