Some 10 days ago, Dr Pedro Telles and I engaged in another of our procurement tennis games. This time, the topic of contention is the impact of public contract registers on competition. I published a first set of arguments (here) and Pedro replied (here) mainly stressing that I had not paid enough attention to the potential upsides of such registers.
Pedro advocated some potential sources of economic benefits derived from the use of public contract registers aimed at full transparency of tender and post-award procurement documentation, of which I would pick: 1) reduced opportunities for price arbitrage and 2) more scope for antitrust intervention by competition authorities possessing better data on what is going on in procurement markets. His arguments are well developed and can be seen as attractive. However, on reflection, there are still reasons why they do not necessarily work. In this post, I address these two issues and explain why I am still sceptical that they can result in any actual economic upsides. I am expecting Pedro to follow up with more arguments, which would be certainly welcome.
1) What about the 'single market theory = law of one price' approach?
The discussion on price arbitrage implicitly rests on the economic 'law of one price' whereby, in simple terms, a specific good should be traded at a single price in all locations. However, that 'economic law' rests on a large number of assumptions, which are particularly fit to commodity markets and ill suited to complex contracts for goods, or most definitely for services.
In fact, even in highly competitive markets for commoditised products, the law of one price does not hold, at least if conceived in strong terms (ie strictly one price for a given good) instead of relaxing it to require a convergence or clustering of prices [for an interesting empirical paper stressing these insights, see K Graddy, 'Testing for Imperfect Competition at the Fulton Fish Market' (1995) 26(1) The RAND Journal of Economics 75-92].
Thus, focussing on arbitrage issues for anything other than very homogeneous commodities traded under standard contract clauses can fall foul of the due recognition of the assumptions underlying the 'law of one price'. Pedro acknowledges this: "yes, I am talking about a commodity, but then a lot of public procurement is made around commodities, including oil". On this point, however, I think data does not support his views.
According to the 2011 PwC-London Economics-Ecorys study for the European Commission 'Public procurement in Europe-Cost and effectiveness', commodities and manufactured goods only account for about 10% in value and 14% in number of procurement procedures subjected to the EU rules (see here page 45). Thus, the issue of price arbitrage is certainly not of first magnitude when the effects of public contract registers are assessed from an economic perspective.
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| (c) Anderson for eQuest |
2) What about more intervention by competition authorities based on better (big) data?
On this point, Pedro and I agree partially. It is beyond doubt that, as he puts it, there are "potential upsides of having more data available in terms of cartel fighting. What can be done when reams and reams of contract data are available? You can spot odd behaviours. For example, you can corroborate a whistleblower account and you can then check if certain collusive practice/tactic is happening in other sectors as well." That is why, on my original post, I advocated for "[o]versight entities, such as the audit court or the competition authority, [to] have full access" to public contract registers.
However, as I also suggested (probably not in the clearest terms), in order to enable competition law enforcement on the basis of better data, there is no need for everyone to have (unlimited) access to that data. The only agent that needs access is the competition authority. More importantly, indiscriminate disclosure is not technically necessary, particularly when public contract registries are electronic and can be designed around technical devices giving differentiated access to information to different stakeholders.
This is an important issue. In a different but comparable context, disclosure obligations in the field of securities and financial regulation have been criticised for failing to address their excessive rigidity in certain multi-audience scenarios, where investors and competitors can access the same information and, consequently, firms have conflicting incentives to disclose and not to disclose specific bits of commercially sensitive information [for a very interesting discussion, see S Gilotta, 'Disclosure in Securities Markets and the Firm's Need for Confidentiality: Theoretical Framework and Regulatory Analysis' (2012) 13(1) European Business Organization Law Review 45-88].
In that setting, selective disclosure of sensitive information has been considered the adequate tool to strike a balance of interest between the different stakeholders wanting access to the information, and this is becoming a worldwide standard with a significant volume of emerging best practices [eg Brynn Gilbertson and Daniel Wong, 'Selective disclosure by listed issuers: recent “best practice” developments', Lexology, 9 Sept 2014].
Therefore, by analogy (if nothing else), I still think that
Generally, what is needed is more granularity in the levels of information that are made accessible to different stakeholders. The current full transparency approach whereby all information is made available to everyone falls very short from the desired balance between transparency and competition goals of public procurement. A system based on enabling or targeted transparency, whereby each stakeholder gets access to the information it needs for a specific purpose, is clearly preferable.