Governments around the world purchase goods and services from private firms by awarding public procurement contracts. This is likely one of the main channels through which public goods are supplied to the economy and an important source of potential revenues for firms. However, little has been written thus far on the subject. In BSE Working Paper Nº 1321, “Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications,” Julian di Giovanni, Manuel García-Santana, Priit Jeenas, Enrique Moral-Benito, and Josep Pijoan-Mas dig into Spanish administrative data to extract empirical regularities for firms that are awarded public procurements and write a model to quantify the effects of procurement policies widely discussed in public policy circles.
How different are firms that get awarded public procurement contracts?
Using data from the Agencia Estatal Boletín Oficial del Estado and Central de Información de Riesgos of Spain, the authors find that only a small fraction of firms in the economy participate in procurement. These firms tend to be larger and older than those that do not. Moreover, procurement firms rely less on collateralized credit.
Figure 1. Dynamic effects of being awarded a public procurement contract
Note: The figure shows the estimated cumulative impact for different time horizons h = 0; 1; 2; 3; 4.
What comes first? Better conditions for the firms or the contract?
Being awarded a public procurement contract translates into an increase of credit of about 2.4% in annual terms. Importantly, these results come from winning the bid, and not from other differences among competing bidding firms.
To see whether these differences in credit growth come from an easing in credit conditions for awarded firms, the authors exploit data on loan applications: The probability of getting a loan from a bank increases after a firm receives a public procurement contract, without the need of putting more collateral.
The dynamic effects of this easing in credit constraints are depicted in Figure 1. After winning a procurement contract, firms’ total sales increase. More credit means more capital for the firm and ultimately higher output. Interestingly, firms in procurement need to reduce sales to private firms at first. This effect lasts for the duration of the contract, after which the increased earnings from the firms being more profitable relax their financial constraints allowing them to serve the private sector more easily.
Get a contract, be relaxed
These results motivate a model in which firms can divide their production by supplying the private or public sector. This is conditional on firms having decided to invest in procurement, otherwise, they can just supply to private firms. Importantly, firms are assumed to be financially constrained by their earnings, something that is consistent with the data.
In Figure 2 we see the net worth accumulation and the probability of participating in procurement for firms with high productivity (red line) and low productivity (blue). Since profits are higher for firms in procurement, they can save more than firms that are not in procurement. Moreover, the investment in the probability of participating in procurement increases with net worth, since the expected profits of being awarded the contract are higher for a project of a bigger size, which high net worth firms can supply. This is consistent with smaller firms not participating in procurement.
Figure 2. Investment in procurement and net worth accumulation by firms
Policies trying to favor smaller firms might backfire
With their model being able to replicate many of the findings in the data, the authors seek to simulate a series of counterfactual scenarios consistent with policies that have been proposed to reform public procurement procedures. Overall, policies that target small firms help them to overcome financial constraints and to grow larger in the long run. However, the aggregate effects of procurement allocation policies are ambiguous.
They find that policies that reduce the size of the contracts, trying to make it more likely for smaller firms to participate in public procurement, result in a fall in GDP. However, in this scenario, the government can increase its supply of public goods without spending more.
On the other hand, a policy that directly facilitates competition for procurement contracts by reducing the required investment to participate in them will likely have a positive impact on GDP. Here, about a third of this increase is explained by higher total factor productivity, whereas the rest is explained by higher capital accumulation.
