CPB Policy Seminar on Sustainable Public Procurement: welfare implications of minimum requirements in first-price sealed bid auctions of local infrastructure projects

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Arno van der Vlist (RuG)

Discussant: Remco Mocking (CPB)

Language: Dutch

Registration:  Please register by sending an email to polinars@cpb.nl.

Abstract subject: This paper adds to the literature on local infrastructure policy by considering the price of infrastructure works and the welfare implications of minimum requirements in public procurement tender designs. Minimum requirements may relate to experience, financial qualifications and technical qualifications, and limit those firms which are eligible to bid. In the paper, we argue that firms do not randomly bid for work, and that the decision to bid to an extent depends on the procurement design. If this is true, changes in the procurement design will affect participation and hence the outcome of the first-price sealed bid public procurement tender process. Whether setting minimum requirements results in improved welfare depends on both the outcome and the transaction costs. We consider here first-price sealed bid infrastructure procurement tenders with a range of minimum requirements. Using information on firms' bidding behaviour in response to public procurement tenders issued by Dutch municipalities for infrastructure projects, this paper shows empirically that the local procurement design affects a firm's likelihood of participating and that this has implications for the size of the bid. Setting more stringent minimum requirements results in fewer and higher bids. Our analysis indicates that the welfare implications of setting minimum requirements varies with the ex post project size. For small works, a reduction in minimum requirements -by setting minimum requirements equal to the level of the first quartile rather than the median- leads to an average decrease in welfare of 0.7 per cent of the project size. For large works, a similar reduction leads to an increase in welfare of 7.0 per cent of the project size.

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