Abstract
This article deals with the phenomenon of repeated contracts, specifically the effect of trust in public contracts. Our main objective is to identify the factors that influence the concluding of repeated contracts and to verify whether repeated contracts lead to increases in prices. We use a complex dataset of public procurement of municipalities in the Czech Republic for the period of 2014-2017, which covers more than 4,000 public contracts. This range of data allows a larger number of variables to be applied, including specific independent variables concerning municipalities, such as the size of the municipality. The data allow us to study this subject by means of both a general model tested on all public contracts and a partial model applied to public works. The presented results of quantitative econometric models from the data obtained from the awards of public contracts in the municipalities of the Czech Republic show that the fact of whether it was a repeated contract or a contract performed by a new (unknown to a contracting authority) supplier affected the chance of winning a contract.
Introduction
The Czech Republic ranks among the most decentralized Member States of the European Union (EU; cf. Nemec et al., 2017) and has one of the highest levels of municipality fragmentation: there are more than 6,250 municipalities in the Czech Republic. The share of gross domestic product (GDP) allocated through local government expenditure is approximately 10.7% (Eurostat, 2017). This expenditure is allocated mostly for the provision of public goods and services to the population. Under the current legislation, municipalities are obliged to oversee the general development of their territories and provide citizens with public goods and services. They must provide these public goods and services in accordance with the principles of sound and prudent management (Act No. 128/2000 Coll., on Municipalities) (Czech Republic, 2018a).
One significant method of providing such services is contracting out; the volume of the total public procurement market is EUR17.7 billion, with approximately 9.9% being the share awarded by municipalities (Ministry of Regional Development, 2017). The Czech Republic also has other forms of providing public goods and services, for example, privatization, public–private partnership (PPP), and semi PPP projects (Soukopová, Vaceková, & Klimovský, 2017). Public utilities such as water and sewage services are supplied in a noncompetitive environment by legal entities with various ownership structures; energy supply is a regulated service provided by a small number of suppliers using a common infrastructure and competing in the area of price. However, social services such as education and health care have been converted into a public–private civil sector mix of forms of supply (financing is predominantly public; Nemec & Soukopová, 2016).
Contracting out prevails over other forms because it shows better results, for example, in the field of waste management (cf. Soukopová et al., 2017), and due to negative residual effects from the transformation period that are mostly associated with the notion of privatization (Vacekov� et al., 2019) or with failures related to the initial phase of the implementation of PPP projects (Transparency International, 2009).
Our research deals with a specific part of contracting out represented by repeated contracts, that is, situations in which a single supplier repeatedly wins contracts from a contracting authority.
The issue of repeated contracts is addressed in the part of the scientific literature on public procurement that seeks to analyze bidding behavior (Jofre-Bonet & Pesendorfer, 2000) and bid rigging (Ishii, 2009), to define an optimal public procurement process with respect to former experiences with suppliers (Albano, Cesi, & Iozzi, 2017; Cesi & Albano, 2008), and to solve the complexity problem by auction or negotiation (Baldi, Botasso, Conti, & Picardo, 2016).
The empirical part of the literature aims to analyze the effect of repeated contracts on the price of contracts (Tkachenko, Yakovlev, & Kuznetsova, 2017) and to identify the factors that lead to the awarding of such contracts by a contracting authority (Iossa & Waterson, 2019).
Our study follows on from the results of the empirical branch of the research. It focuses on repeated contracts in the environment of municipalities in the Czech Republic. Our main objective is to identify the factors that influence the concluding of repeated contracts and verify whether repeated contracts lead to increases in prices, due to, for example, the monopolistic behavior of a supplier, corruption, or the effects of other contextual variables.
This article expands the current knowledge base because, in contrast to Tkachenko et al. (2017) and Iossa and Waterson (2019), whose research takes, more or less, the form of a case study from one industry (sugar procurement in the first study, and competitive tendering for the provision of bus services in London in the second), we use a complex dataset of public procurement of municipalities in the Czech Republic for the period of 2014-2017, which covers more than 4,000 public contracts. This range of data allows a larger number of variables to be applied, including specific independent variables concerning municipalities, such as the size of the municipality. The data allow us to study this subject by means of both a general model tested on all public contracts and a partial model applied to public works. The main reason for dividing sample data into a general model and a specific model for public works is that public works are long-term incomplete contracts (Bajari & Tadelis, 2006) and raise different theoretical issues because of the major role played by the execution stage, with differences in the relationship between firms and contracting authorities. This approach will help identify the factors specific to the Czech Republic that affect the concluding of repeated contracts and verify whether they have any effect on overpricing.
This article also provides new information about the results of contracting out in countries with specific conditions: the countries burdened with the legacy of communism (Ochrana, Plaček, & Křápek, 2019) in which the public administration contends with issues of limited accountability (Nemec et al., 2018; Plaček et al., 2019) and corruption, which is another significant issue related to contracting (Nemec et al., 2016), (Nemec & De Vries, 2018).
Our article also contributes to focusing the debate about the form of securing public services in countries with these specific conditions on a rational analysis rather than on an ideological bias, as is common in countries with a longer tradition of democracy (Bel, Fageda, & Warner, 2010; Gradus, Dijkgraaf, & Wassenaar, 2014).
This article is structured as follows. After a brief introduction, it defines the theoretical interface and conceptualizes the hypotheses. The hypotheses are conceptualized using contracting out and public procurement papers (Kutlina-Dimitrova & Lakatos, 2016; Locatelli, Mariani, Sainati, & Greco, 2017; McLean, 2017; Meehan, Ludbrook, & Mason, 2016). An empirical strategy is introduced to verify the formulated hypotheses. Logit regression is used to identify the factors having an effect on concluding repeated contracts and the ordinary least squares (OLS) model to analyze overpricing. In the “Results” section, the results of the hypotheses testing are presented. These results are subsequently discussed within the current discourse. This article concludes by offering a conceptual innovation on the issue based on empirical research providing a basis for a viewpoint on trends and imperatives regarding public policy implications.
Theoretical Grounds and Formulated Hypotheses
The present research is based on papers (Iossa & Waterson, 2019; Tkachenko et al., 2017). That clearly show the variances in the research of repeated contracts in different social contexts. Main differences are described in Table 1.
The variances in the research of repeated contracts in different social contexts.
Tkachenko et al. (2017) provided a price analysis of simple homogeneous goods, demonstrating an opportunity to identify corrupt behavior by comparing the prices of repeated contracts with the prices of one-time deals. According to Tkachenko et al. (2017), repeated contracts may lead to lower prices as a result of decreases in transaction costs, mutual exchange of information, trust building, and elimination of uncertainty regarding the supplied quality, provided that the behavior between the buyer and the seller is fair. Unfair behavior, which usually has the nature of corruption, leads to overpricing of contracts. The mechanism of overpricing operates mostly through nontransparent contracts that allow for favoring existing suppliers. Based on this, they hypothesize that where public procurements are performed in more competitive ways (through e-auctions), the price per unit of homogeneous products in repeated contracts would be lower than in one-time deals, and where a more restrictive form of the tendering procedure is applied, the opposite effect would arise.
This article also verifies whether the intensity of such effects increases when the bidder is a state-owned enterprise (Tkachenko et al., 2017, p. 55). According to its conclusions for nontransparent procedures, the prices of suppliers under repeated contracts are 17% to 21% higher than the Russian average. In repeated contracts where the supplier is a state-owned enterprise for nontransparent procedures, the contract prices of suppliers are 16% to 20% higher than the Russian average retail prices of private suppliers. This result can be considered to be an indicator of corruption (Tkachenko et al., 2017). Tkachenko comes to similar conclusions when analyzing gasoline procurements (Yakovlev, Vyglovskiy, Demidova, & Bashlyk, 2016).
In contrast to Tkachenko et al. (2017), Iossa and Waterson (2019) do not assume any unfair behavior in their analysis. They focus on analyzing the evolution of competition in the market for local bus services in London. Using a dataset of more than 400 bus routes tendered at least twice by Transport for London (TfL) under essentially the same rules of competition, they obtained information on all tenders from 2003 to 2015 (Iossa & Waterson, 2019). The authors see the advantages for incumbents in positive learning, in which incumbents can optimize their operational costs through experience obtained during their existing contract and subsequently can submit a more competitive bid in the next tendering procedure. However, this is not necessarily the case when a contract is less open. The resulting impact of the positive learning effect is influenced by two mostly opposing partial effects. The first is “fierce competition” for earlier contracts, in which potential suppliers apply penetration pricing in the beginning, while benefiting from learning economies in the long run, enabling them to keep their prices low. The second effect is the locking in by existing suppliers on later contracts. In the long run, a supplier can use its profits to advantage over other competitors, possibly leading to the extreme situation in which competitors are not able to compete (Iossa & Waterson, 2019).
After positive learning, the second factor is sunk costs. Sunk costs mean that an incumbent will likely be in a privileged bidding position due to its ownership of specific assets already in place (Iossa & Waterson, 2019). The sunk costs are low for a contract holder only for the contract term. If the contract holder loses its market position, the costs grow, which requires corporate activism and attempts to ensure that the contract lasts. Another factor is switching costs, which are the costs incurred by a contracting authority in the event of a change in suppliers. Iossa and Waterson (2019) observe that these costs are typical in particular for such specific industries as information technology (IT). The last factor is capacity constraints (Iossa & Waterson, 2019). If two firms have a symmetric capacity in a period prior to the auction, when the winner is committed, it will be more constrained than the loser, and the higher profits it gains from winning the current auction will lead to lower profits in the future.
Iossa and Waterson (2019) also confirmed these hypotheses in an empirical analysis of bus service contracts, when existing providers won contracts more often. The average price of all contracts was increasing. Nevertheless, the highest increases in comparison with the expected prices were noticed in relation to new entrants. New entrants that won tenders entered with a 4.20% price increase over the expected price; this is even higher than the 3.41% with incumbents. These observations confirm the hypotheses. Alternately, the results may be explained by an increase in the quality of the services being supplied (Iossa & Waterson, 2019).
We carry out a synthesis of these conclusions and add an analysis of further factors characteristic for contracting in the environment of Czech municipalities. We have formulated the following set of hypotheses that we verify with respect to the whole sector of municipality public procurements and the submodel of public works contracts.
In formulating this hypothesis, we follow on from the theory defined above. Several motives that can be classified as positive and negative are expected to play a role here. One motive classified as positive is the effort to meet the objectives of public procurements in the best possible manner. Such objectives may be considered to include the achievement of the “3E”—economy, efficiency, and effectiveness defined by the Act on Financial Control (Czech Republik, 2018b) or more precisely the Ministry of Finance (2016). For this reason, contracting authorities may be motivated to choose bidders with whom they have positive experience or who have proved to be reliable partners.
A negative motive can be seen in the effort to avoid potential risks, which means that officials repeatedly select the bidders they have had positive experiences with. This is the “soft option” allowing the officials to fulfill their assignment in the easiest possible way when they do not want to risk potential complications (Plaček & Ochrana, 2018).
Another negative motive may be corrupt behavior, which is characteristic for the public sector; Fazekas & Toth, 2018; Ochrana & Stehlik, 2015; Owusu & Chan, 2019; Popa, 2018; Stehlík, 2018; Verhelst, 2018).
Plaček, Ochrana, Schmidt, Křápek, and Půček (2017) and Palguta and Pertold (2017) observe that less open tendering procedures are used to give preference to a specific supplier and result in higher final prices. This situation corresponds more with negative motives, when a contracting authority reduces competition by means of a less open tendering procedure with the aim of maximally increasing the chances of the supplier who is connected with the contracting authority in some way. The contracting authority proceeds in this way so as to either eliminate the risk of failure of a public procurement as much as possible or to obtain corrupt benefits.
Overpricing in public contracts is a frequent problem in the Central and Eastern European (CEE) countries (Ochrana & Pavel, 2013; Plaček et al., 2019). The existing research in this area has focused mostly on analyzing the competitive effect (Pavel & Kubík, 2011). According to the classic theory of contracts, a higher level of competition has an impact on the contract price (Halonen, 2016; Pavel & Slavík, 2018; Takano, 2017). We suppose that repeated contracts are more expensive than one-time purchases.
Institutional Context
The Czech Republic is a unitary state. The Constitution from 1993 establishes two levels of local governments: regions and municipalities. Municipalities are the basic territorial self-governing communities, that is, public corporations acting sui juris in legal relations and responsible for the results of these relations (Nemec et al., 2016). There are currently about 6,250 municipalities in the country, and with this, the Czech Republic belongs to the group of countries with very high territorial fragmentation (Nemec et al., 2016).
Table 2 shows that in terms of the number of municipalities and the shares of the population, population has a major role to play in populations of up to 10,000.
Structure of Municipalities in the Czech Republic by Population.
Source. Czech Statistical Office (2016).
Table 3 shows overview of independent variables—probability of winning a contract.
Overview of Independent Variables—Probability of Winning a Contract.
The role of municipalities is defined in the Law on Municipalities (Act No. 128/2000 Coll.; Nemec et al., 2016). Local governments are subject to numerous other acts that either regulate their management, such as Budgetary Rules for Territorial Entities (Act No. 250/2000 Coll.), the Law on Tax Assignment (Act No. 243/2000 Coll.), the Law on Accounting (Act No. 563/1991 Coll.), and the Law on Local Government Audit (Act No. 240/2004 Coll.), or specify their responsibilities, such as the Law on Education (Act No. 561/2004Coll.) and the Law on Roads (Act No. 13/1997 Coll.; Nemec et al., 2016).
Local government revenues in the Czech Republic amounted to 11.5% of GDP in 2017. The EU average is 10.7% of GDP and 9.8% of GDP in the Eurozone (Eurostat, 2017). Local government revenues in the Czech Republic consist mainly of shared taxes. The highest share is the value-added tax.
According to the latest Eurostat data of 2017, local governments spend 10.7% of GDP on public spending. The EU-wide average was 10.6% of GDP in 2017, and the share of the Eurozone countries was 9.6% (Eurostat, 2017).
A municipality must provide certain defined services in the self-administration provision, including elementary schools, kindergartens, children’s homes, nursing homes, social housing, theaters, libraries, museums, free-time activities facilities, water quality and delivery, gas and electricity delivery, public space cleaning, cemeteries, public roads, public lighting, public transport, municipal police, and firefighters (Nemec et al., 2016). The highest share of municipal expenditures is on capital expenditure, administration, transportation, education, environment, housing, and shared services (Nemec et al., 2016).
Contracting out is the prevailing method of public spending execution in this field (Soukopová et al., 2017). Contracting out is regulated by the Public Procurement Act (Act No. 134/2016 Coll.). Table 4 shows the types of procurement procedures applied by municipalities. Table 5 shows overview of independent variables.
The Types of Procurement Procedures Applied by Municipalities.
Source. Oživení (2018).
Overview of Variables—Effect on the Price.
According to the Ministry of Regional Development (2017), public contracts are awarded through open tenders (48.3%), simplified under-the-threshold procedures (37.4%), negotiated procedures without publication (7.5%), restricted procedures (6.0%), negotiated procedures with publication (0.6%), and competitive dialogue procedure (0.1%).
The number of submitted bids for tenders is an interesting indicator. In 2017, unlike in other years, this number reached the minimum (Ministry of Regional Development, 2017). For all public contracts, this indicator reached 2.17 bids; for construction works, this was even more significant, as the average number of bids was 2.03. The number of construction orders awarded on the basis of one bid increased to 80%.
Table 6 shows the frequency of submitted bids by the procurement procedure type for 2014-2017.
The Frequency of Submitted Bids by Procurement Procedure Type for 2014-2017.
Source. Authors.
Data and Method
Data and Sources
We use the data on the public contracts awarded in the Czech Republic in 2014-2017; the data for 2013 were used for the initial setting of parameters. Altogether, these are 4,134 records about the bids submitted to public procurement auctions announced by municipalities. The data originate from individual profiles of contracting authorities (decentralized websites for storing documents and other data during public procurement auctions) and are combined with records in the Journal of Public Procurement (the central website).
Construction contracts are considered to be a good indicator of the efficiency of local government activities, and their “local” dimension is quite relevant when considering the extent of the benefits they provide (Guccio, Pignataro, & Rizzo, 2014).
Method
The formulated hypotheses are verified by means of logistic and linear regression: first on a general model implemented on all public contracts and subsequently on a model focused on public works contracts. Apart from nominal variables used to test the hypotheses, we add to the model other control variables that are typical for the environment of Czech municipalities and the character of the studied issue.
Model to test H1 and H2
Logistic regression (the logit model) is applied for estimating the effects of individual parameters. The dependent variable “winning bid” represents the fact of whether a specific bidder was selected to implement a public contract. This variable is determined by the following factors, which were defined as independent variables (see the model below).
Model to test H3
To verify the formulated hypotheses concerning the effect on the contract prices awarded in public procurement auctions, similarly as with the previous models, we used data on the public contracts awarded in 2014-2017; the data for 2013 were used for the initial setting of parameters. Data directly from the Journal of Public Procurement were used because no records about participation of unselected suppliers are required to monitor the effect of repeated contracts on a price. The model included the total number of 8,831 public contracts or their separate parts awarded in 2014-2017. These are only the contracts awarded by municipalities.
The dependent variable is the contract price of a public contract divided by the anticipated value. An estimate of the effect of individual factors was performed by means of linear regression applying the OLS method (the reason for the occurrence of heteroskedasticity is used to estimate the robust standard error toward heteroskedasticity—variant HC1). Variance inflation factors did not indicate a multicollinearity issue. The presence of endogeneity (e.g., correlation of explanatory variable with the error term) that may cause OLS estimator bias due to simultaneity (reversed causality) was also tested. The Wu–Hausman test did not reject hypothesis of exogeneity of variables that may depend on contract price (i.e., included within dependent variable)—number of bids and anticipated value. Therefore, and because the dependent variable is not the contract price but only its relative price change, we do not consider endogeneity an issue that would have a significant impact on the parameters’ estimates.
Results
In the following section, we present the results of the hypothesis testing.
Verification of H1 and H2
After performing the estimation of parameters, the following effects of factors on the winning of public contracts were obtained; models for all contracts and construction works contracts were performed separately (there was a high proportion of contracts for road maintenance and reconstruction of sewage and water supply systems).
Hypothesis 1: Any previous public contract obtained from the same contracting authority increases the probability of obtaining a repeated contract
The formulated hypothesis was confirmed on the basis of the econometric model (see Table 7). It is clear from the data that both with the aggregate model including all public contracts and with the construction works contracts, there was a demonstrated effect of the number of contracts performed in the past (or the selections of the same supplier made in the past) on whether the supplier would also be selected in the concerned contract. On average, the chance to win is increased by the previous implementation of a public contract for a contracting authority by 147% (the percentage of chances is 2.4). The effect is thus higher than for a contract implemented at a different contracting authority, which also increases the chance to win but only by 4%.
Results of Testing Hypotheses 1 and 2.
Note. Dependent variable—the winning bid.
Statistical significance at a confidence level of 1%. **Statistical significance at a confidence level of 5%.
It is interesting to note that there are very small differences between the general model and the construction works model. Given the theoretical assumptions (Bajari & Tadelis, 2006), it would be assumed that for construction works, given the general public works characteristics, the chances of recovering the contract would be higher. However, this assumption was not confirmed.
Hypothesis 2: Less transparent or open forms of public procurement auctions lead to a higher probability of obtaining a repeated contract
The formulated hypothesis was confirmed for the model of all public procurements. Here, the application of the negotiated procedure without prior publication means nearly a 4 times higher chance of obtaining a contract (the percentage of chances 3.71). This is based on the principle of the negotiated procedure without prior publication, which serves in awarding additional work to the same supplier, among other things.
Even in the evaluation of this hypothesis, we have to state that the share of chances of re-contracting with less transparent forms of management is not greater for public works than for the general model.
The other results are also interesting. The variable of the number of bids, which is an expression of the competitive effect, decreases the probability of winning a contract for both the general model and the construction works model. Furthermore, the size of a municipality as an authorized contractor is worth noting; the chance of winning a public contract is on average lower for larger municipalities/contractors. We attribute this fact to lower competition for contracts awarded by smaller municipalities; typically, they are contracts with a lower value. Repeated contracts occur frequently in monopoly and bilateral monopoly markets. Small municipalities in the Czech Republic frequently face only one supplier willing to provide the service in their area and there is no other choice (water supply and sewage, water cleaning, garbage collection).
Table 8 shows result of testing hypothesis 3.
Result of Testing Hypothesis 3.
Note. Dependent variable—standardized contract price. Verification of Hypothesis 3. The effects of individual factors on the bid price were estimated. After estimating the parameters, the following values were obtained; models for all contracts and the contracts for construction works were performed individually.
Statistical significance at a confidence level of 1%. **Statistical significance at a confidence level of 5%. *Statistical significance at a confidence level of 10%; for the type of public procurement auctions, it is measured against the open procedure, for the public contract category against the supply contracts.
Hypothesis 3: Repeated contracts are more expensive than one-time purchases
The performed econometric models show that for the aggregate model capturing all types of public contracts, the experience of a contracting authority with a specific supplier (a repeated contract) does not have a statistically significant effect on increasing the price. For construction contracts, this factor rather leads to decreasing the price.
The effect on overpricing was proved more for some less open and transparent forms of public procurement auctions. At a general level, the formulated hypothesis was not confirmed.
From the other results, the effect of the size of the municipality is interesting: the number of inhabitants can decrease the bidding price as well as the size of a contract. As with the testing of the previous hypotheses, this result can be attributed to the higher level of competition that exists when awarding contracts to municipalities with larger populations.
Discussion
In this section, we provide a comparison of the achieved results with previously published papers, focusing on Tkachenko et al. (2017) and Iossa and Waterson (2019).
Our results confirmed the assumption (Iossa & Waterson, 2019) about how the learning effect operates on the side of a contractor. The likelihood of obtaining a contract is increased by any contract previously implemented for a given contracting authority and also any public contract previously implemented for the public sector. The potential contractor thereby gains experience enabling the effective preparation of a tender. Regarding the impact of less transparent procedures, the negotiated procedure without prior publication increases the likelihood of obtaining a contract, which confirms the assumptions of both Iossa and Waterson (2019) and Tkachenko et al. (2017).
The issue of motivation remains open. If we assume that such a result is caused by dishonest behavior by a contracting authority, it is surprising that the prices awarded for these repeated contracts do not increase. According to Fazekas, Cingolami, and Tóth (2018), who studied the possibility of using various indicators to identify corruption practices in public procurement, individual indicators such as overpricing or restricted nature of a procedure cannot be applied separately but always in combination to increase measurement reliability and provide a richer picture. Spagnolo (2012) stated that overpricing is often mentioned as an indicator for the initial analysis; however, dishonest behavior can acquire forms that are not detectable by means of this indicator. A classic example of this is increasing a price through supplements, or very poor quality of a delivery. Dishonest behavior can involve a situation in which a contracting authority subsequently fails to claim any contractual sanctions from a contractor. Despite these doubts, Spagnolo (2012) does not assume that repeated contracts are always a result of corruption practices. He considers them to be a result of the reputation mechanism that has a considerable impact on the selection of a contractor.
Another view is based on the analysis of the papers focused on countries with specific conditions (e.g., Nemec et al., 2016; Nemec et al., 2018; Ochrana et al., 2019; Plaček et al., 2018; Spagnolo, 2012); these papers identify a very strong inclination of contracting authorities toward the strategy of eliminating the risk of a failure of a contract or a review by a regulator. This translates into excessive application of the criterion of the lowest price as the main evaluation criterion. This means that there is also pressure on the price for any existing contractors, who have to offer lower prices if they want to win further contracts. Spagnolo et al. (2012) also explained the option of less open procedures as the efforts of the contracting authority to eliminate contractors with poor past performance. The situation when a contracting authority uses a less open tender procedure to eliminate the tenderers who compete through low prices and poor quality can lead to increases in final prices.
When we assess public procurement on the local level, it is impossible not to mention the accountability factor, which is often described as a positive effect connected with decentralization. According to the analysis of the impacts of administrative decentralization on the public procurement in the Czech Republic (Plaček, Schmidt, Ochrana, & Půček, 2016), overpricing at the level of local governments is lower than overpricing at the level of the central government. In our paper, we used the indicator of the number of inhabitants in a municipality. We found that a higher number of inhabitants in a municipality have a negative impact both on the percentage of chances that the same contracting authority will be selected repeatedly and on the overpricing of contracts. In our opinion, this is caused by the number of potential tenderers for public contracts, which is generally higher than in bigger cities.
This article outlines the need for further research (e.g., focus groups and/or other techniques of qualitative research to test the motives and incentives resulting in the observed behavior) and its importance for the development of science, society, or practice (including public policy implications). Our analysis dealt with the phase of the selection of tenderers for a public contract. To obtain a more complex view and prove or disprove the assumptions or motives, it is necessary to study also the other phases of the public procurement procedure, in particular the ex-post evaluation of a contract, which lies in the analysis of the final price of a contract and the quality of a delivery.
From a public policy perspective, we raise an important issue regarding the opportunity to transfer mechanisms that work in the private sector and are based on creating trust between procurers and suppliers. According to Stuart, Verville, and Taskin (2009), Smeltzer (2006), and Crotts, Alderson Coppage, and Andibo (2001), trust between a supplier and a consumer can replace a variety of costly governance mechanisms, including complex legislation, superfluous quality assurance, time-consuming communication, forecasting, and replenishment. For the public sector, the implication of this mechanism implies the need to make changes in social relationship and embedded ties, institutional processes, and economic incentive alignments (Stuart et al., 2009).
Concluding Remarks
This article deals with the phenomenon of repeated contracts, that is, the effect of trust in public contracts. The presented results of quantitative econometric models from the data obtained from the awards of public contracts in the municipalities of the Czech Republic show that the fact of whether it was a repeated contract or a contract performed by a new (unknown to a contracting authority) supplier affected the chance of winning a contract. Taking into account the resulting price of a contract, we can explain a winning bid more by the factors that are defined by Iossa and Waterson (2019), that is, the learning effect, sunk cost risk, and corporate activism. However, it turns out that the openness and transparency of public procurement auctions still has a critical effect on the price in the Czech environment. Regarding public policy implications, it is necessary to strike a balance between the discretionary power of individual contracting authorities and the requirements for transparency and accountability that are part of the EU-wide legislation. For the Czech Republic, it is necessary to bridge the gap between the formal possibility to take into account the indicators of quality and past performance in preparing a public procurement procedure and the application of these indicators in practice by individual contracting authorities.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This contribution was supported by the Czech Science Foundation (GAČR) No. GA19-06020S.
