Court e ciency and procurement performance

(1)

Court e¢ ciency and procurement performance

work in progress - this version: May 2011

Decio Coviello, Giancarlo Spagnolo, Paola Valbonesi

Paris, Conference on

"Contracts, Procurement, and Public-Private Arrangements"

(2)

THIS PAPER’S AIM:

to study the relation between

the enforcement of ppc & the e¢ ciency of courts of law.

EMPIRICAL EVIDENCE:

# AVCP sample, about 32.000 procurement contracts, 2000-2006: 88% of contracts are delivered with delays

# Consip sample, 4.457 procurement contracts, 2004-2006: 36% of contracts records at least one infringment

- among all these, 82% refers also to delays in delivery - in only 3% of these, penalties have been enforced

Court ine¢ ciency may lead Contracting Authorities to refrain from

applying contractual penalties for late delivery to avoid costly

trials: this, in turn, leads Contractor Firms to strategically delay

the deliver of contract.

(3)

Public Procurement Contracts (ppc

s

)

Explicit contracting

is a crucial governance instrument

- in E.U. ppc

s

, accountability rules and market

integration concerns strongly limit the scope for:

# relational contracting

# reputational forces

==

>

The preeminent role played by explicit contracting

(4)

E¢ ciency of court enforcement

Contract enforcement by courts is often signi…cantly costly

(Djankov et al. 2003, QJE) and mainly related to:

- uncertainty linked to judicial mistakes

-

lenght of the trials

(Cooter&Rubinfeld, 1989, JEL)

High legal costs for ppc

s

enforcement by court may reduce:

- the parties willingness to exercise their contractual rights

- the credibility from the threat of contractual remedies for

…rms’poor performance

(5)

Duration of trials in Italian provinces

Cross-sectional variation - ISTAT (2000-07), average lenght of trials in civil courts: 926 days (min 205; max 2221) 500 1000 1500 500 1000 1500 2000 2007 2000 20072000 2007 North West North East Centre

South Islands Ave rage duratio n o f tria ls, days Year Graphs by macro

(6)

Delays in the execution of Italian ppc

s

AVCP sample, about 32.000 procurement contracts, 2000-2006: 88% of contracts are delivered with delays (average delay: 157 days)

(7)

Empirical model

Average duration of trial as a proxy for the probability of enforcement of time incentives in ppc; we estimate

D

igt

=

α

+

β

₁

T

gt

+

β

₂

T

gt2

+

X

10,it

δ

+

X

20,gt

γ

+

η

g

+

v

t

+

ε

igt

(1)

where,

D

is the number of extra days to complete contract

(

i

)

, in province

(

g

), in year

(

t

)

;

T

represents the average duration of trials in days in the province the work takes place and in the year when the contract is awarded

;

X

1 and

X

2 are works and province speci…c observable characteristics

and include as regressors: population, starting value, competitive auction, private invitation, simpli…ed restricted procedure,

design-and-construct, private negotiation, type of CA; type of work;

(8)

Estimation results

Dependent Variable Delays Delays Delays Delays Delays Delays

Mean outcome 157 157 157 157 157 157 (1) (2) (3) (4) (5) (6) Duration of Trials: T 0.002 0.081** 0.001 0.097*** -0.007 -0.073** (0.007) (0.031) (0.007) (0.030) (0.008) (0.033) Duration of Trials2_:T2 _-0.000*** _-0.000*** _-0.000*** (0.000) (0.000) (0.000) Dur.Trials*Starting Value 0.001** 0.001** (0.001) (0.001) Starting Value 6.743*** 6.744*** 7.400*** 7.403*** 5.536** 5.534*** (0.420) (0.419) (0.178) (0.178) (0.620) (0.614) Restr.Proc. 2.278 2.350 -8.076 -7.863 1.618 1.689 (6.483) (6.461) (4.870) (4.869) (6.484) (6.461) Simpl.Restr.Proc. -23.191*** -23.230*** -13.183*** -13.230*** -23.042*** -23.080*** (5.072) (5.138) (4.59) (4.869) (5.057) (5.123) Design-and-C. 9.500 9.763 8.325 8.405 9.015 9.281 (32.070) (32.120) (31.245) (31.240) (31.512) (31.563) Negotiation -9.307 -9.251 -16.408*** -16.281*** -9.518 -9.461 (7.555) (7.552) (3.604) (3.604) (7.553) (7.550)

Type of CA fe Yes Yes Yes Yes Yes Yes

Cat. of work fe Yes Yes Yes Yes Yes Yes

Province fe Yes Yes No No Yes Yes

CA fe No No Yes Yes No No

Year fe Yes Yes Yes Yes Yes Yes

Obs. 32449 32449 32449 32449 32449 32449

(9)

Violation of contract terms & duration of trials (Consip)

Consip sample, 4.457 procurement contracts, 2004-2006: 36% of contracts records at least one infringment

- among all these, 82% refers also to delays in delivery

-

in only 3% of these, penalties have been enforced

Dependent Variable Prob. of violation Prob. of violation Prob. of violation Prob. of violation

Mean outcome 36.2% 36.2% 36.2% 36.2% (1) (2) (3) (4) Duration of Trials: T 0.0001 0.00044*** 0.0001 0.00041** (0.000) (0.000) (0.000) (0.000) Duration of Trials2_:T2 _-0.00000*** _-0.00000*** (0.000) (0.000) Population 0.01284 0.01341 0.01613 0.01675 (0.013) (0.012) (0.013) (0.013) GDP per capita 0.03653 0.04456 0.02330 0.03121 (0.051) (0.048) (0.052) (0.049) Social capital -0.00151 -0.00121 -0.00163 -0.00132 (0.003) (0.003) (0.003) (0.003)

Type of CA fe Yes Yes No No

Type of CA, detailed, fe No No Yes Yes

Type of good and service fe Yes Yes Yes Yes

Year fe Yes Yes Yes Yes

Obs. 4457 4457 4457 4457

(10)

Summary of the empirical results

AVCP sample:

- An increase of a st.dev. in the lenght of trials is associated with an increase of 3% - 5% in the delays of the execution of ppc.

- Heterogeneous e¤ects when we interact the starting value: an increase of a st.dev. in the lenght of trials is associated with an increase in the delays of the execution of ppc 35% higher for contracts with a starting value of 600,000 euros when compared with projects of 200,000 euros.

- Results are robust to the exclusion of the South.

CONSIP sample:

- An increase of a standard deviation in the lenght of trials is associated with a 12% increase in the probability of violation of the terms of contracts for procurement of goods and services.

(11)

A very simple model (in progress)

CA awards the ppc to F

-

F earns

π

; gains

v

(

d

,

π

)

from

delaying; F pays

p

(

d

,

π

)

as

penalty for delay

-

CA obtains

B

(

π

)

if F does not

delay, su¤ers a loss

s

(

d

,

π

)

if F

delays

-

CA has discretional power in enforcing

p

(

d

,

π

)

- simmetric legal costs

L

CA

(

γ

) +

G

_CA

L

F

(

γ

) +

G

_F

L

(

γ

) +

G

_CA

=

L

(

γ

) +

G

_F -

α

(

γ

)

± F F ± NO Delay Delay Ÿ ±contract CA CA

Doesn t withdraw penalty

Withdraws penalty ± ±

F

FDoesn t open a trial Opens a trial π ( )π π+vd, ( )π s(d,π) B − ( )π B ) , ( ) , ( π π π+vd −pd ( )π s(d,π) p(d,π) B − + F wins F looses ( ) [π+ πvd, −GF] ( ) ( ) (Bπ−s(d,π)−GCA−Lγ) ( ) ( ) (Bπ−s(d,π)+pd,π−GCA) ( ) ( ) ( ) [π+vd,π−pd,π−GF−Lγ] 3

( )

γ α

( )

(

1−αγ

)

1 2 4

Game Tree

(12)

Proposition 1

Parameter Region (A), low

α

(

γ

). Condition (1) is not

satis…ed, F chooses no strategic delay. Parameter Region (B), intermediate

α

(

γ

). Both

(1) and (2) are satis…ed: F delays, CA enforces penalties and F goes to trial

.

Parameter Region (C), high

α

(

γ

). (1) is satis…ed but

(2) is not: penalties are not enforced and F always maximizes strategic delay because

π

+

v

(

d

,

π

)

π

.

(1)

α

(

γ

)

_p₍G_dF_,_π)++L(γ)_L_(γ)

(2)

α

(

γ

)

_pp₍(_dd_,,_π)+π) _LG_(γ)CA

(13)

Where we are ...

Contract enforcement: crucial issue for the ppc’s design

Court e¢ ciency: very important for the ppc’s outcome

OUR RESULTS FROM

- Theoretical Model:

# Parameter Regions: in (C) the …rm will strategically delay and the CA does not enforce the penalty

- Empirical Analysis:

# ine¢ ciency of court & high value ppc: larger probability of F’s delays (AVCP)

# ine¢ ciency of court & number of infringiments in ppc: positive correlation (Consip)

(14)

and where we are going ...

-

Theoretical Model:

- Develop the simple model to investigate reimbursable &

asymmetric legal costs (i.e. asymmetry in F and CA size)

- Empirical Analysis:

- Test further the predictions on F’s and CA’s size and on

contract dimension

- Moving towards causality (higher prob of contract

enfocement):

- exploit the law determining the presence of a court on

the base of population in the municipality

- compare municipalities with similar population, but

di¤erent w.r.t the presence of a court (Litschig and Zamboni,

2011)

(15)

(16)

Related literature

E¢ ciency of Courts: Djankov, La Porta, Lopez-de-Silanes and Shleifer, (2003)

Time incentives in procurement: Bajari & Lewis (2010), D’Alpaos et al. (2010)

Discretional enforcement of contract: Chakravarty & MacLeod (2009), Doornik (2010), Iossa and Spagnolo (2011)

Judicial Enforc. & Credit Market: Jappelli, Pagano, Bianco, (2005) Literatures on private bargaining with contract as threat point and on renegotiation: Aghion, Dewatripont and Rey (1994), etc., Cooter & Rubinfeld, (1989), but renegotiation strongly limited in public procurement

Court as an active player in judicial enforcing: Gennaioli & Shleifer (2006), Gennaioli & Rossi (2009); Anderlini & Felli (2009)

(17)

Institutional setting

ppc in Italy, Jan 2000-Aug 06, governed by:

1) the Law on Public Procurement: No.109/1994;

2) the Public Procurement Code (acknowledging the EU

Directives 2004/17/EC and 2004/18/EC);

3) the Ministerial Decree 145/2000 on General Terms for

Procurement Works Contracts

These rules de…ne:

the adoption of di¤erent awarding procedures (open

procedure, restricted procedure, private negotiation, etc.),

according to the starting value of the contract and some other

technical features.

contractual conditions (i.e.: conditions for subcontract,

disputes, time incentives, etc.)

(18)

Time incentives in Italian ppc

RULES

- penalties for delay should be included in the initial contract, set

in the range 0,03% and 0.1% of the contract value, and calculated

on daily basis

- in total, penalties for delay to be paid by the F should not

execeed the 10% of the contract value.

(19)

Data

AVCP: public procurement data

(15 regions for 2000-2006,

about 32.000 recorded contracts).

-

53% of the sample include municipalities as CAs.

- The starting values (at current prices) of the ppc range from 150,000 to 30,000,000 euro (average: 628,000 euro).

- More than 70% awarded through competitive auctions; 11% through negotiations.

We de…ne delays as the di¤erence between expected end and

actual end of the work.

-

88% of works show delays in the execution, with an average of 157 days (max of 1578 days).

ISTAT: duration of trials.

Our measure of courts’ine¢ ciency is the average duration of

trials at provincial level.

(20)

Robustness checks

Dependent Variable Delays Delays Delays Delays Rebates Rebtes

Mean outcome 146 146 146 146 15.4 15.4 (1) (2) (3) (4) (5) (6) Duration of Trials: T 0.005 0.145** -0.001 0.131* -0.001 -0.002 (0.016) (0.070) (0.015) (0.073) (0.001) (0.002) Duration of Trials2_:T2 _-0.000** _-0.000* _0.000 (0.000) (0.000) (0.000) Dur.Trials*Starting Value 0.001* 0.001* (0.001) (0.001) Starting Value 5.366*** 5.374*** 4.550*** 4.586*** 0.147*** 0.147*** (0.332) (0.332) (0.540) (0.547) (0.012) (0.012) Restr.Proc. 3.294 3.387 3.085 3.180 -1.601*** -1.602*** (11.372) (11.400) (11.394) (11.421) (0.404) (0.404) Simpl.Restr.Proc. -24.850*** -24.894*** -24.626*** -24.676*** -1.441** -1.441** (8.841) (8.845) (8.860) (8.858) (0.673) (0.672) Design-and-C. -9.957 -9.105 -11.864 -10.990 -2.799 -2.804 (38.444) (38.880) (37.843) (38.320) (1.952) (1.949) Negotiation -18.277*** -18.482*** -18.120*** -18.320*** -5.411*** -5.412*** (4.681) (4.727) (4.707) (4.753) (0.596) (0.595)

Type of CA fe Yes Yes Yes Yes Yes Yes

Cat. of work fe Yes Yes Yes Yes Yes Yes

Province fe Yes Yes Yes Yes Yes Yes

Year fe Yes Yes Yes Yes Yes Yes

Obs. 14595 14595 14595 14595 32449 32449

(21)

Dispute between F and CA

Once F delays and CA enforces penalties, F can start a trial

expecting

i)

to convince the court that the delay belongs not to her

fault (in which case penalties should not be levied) and thus

(22)

Dispute and legal costs

F is the plainti¤, CA the defendant

0 γ

1 measures the ine¢ ciency of the local court, it is

observable, and higher court ine¢ ciency means a higher

γ

α

(

γ

)

and

(

1 α

(

γ

))

are the F’s prob of winning and of losing

the trial, respectively, weakly increasing in

γ

DISCUSS HERE

Cost of the trial for F and CA respectively

(

G

F

+

L

F

(

γ

))

and

(

G

CA

+

L

CA

(

γ

))

:

-

G

F and

G

CA are …xed cost

-

L

F

(

γ

)

and

L

CA

(

γ

)

are documented costs that are

recovered in case of a favorable verdict; they are increasing in the ine¢ ciency of the court

γ

,

and we let total recoverable cost be

(23)

Backward materials 1

Rewrite condition (1) and (2) respectively as

C

F

=

α

(

γ

) (

p

(

d

,

π

) +

L

(

γ

))

G

F

L

(

γ

)

0 .

(2)

C

CA

=

α

(

γ

) (

p

(

d

,

π

) +

L

(

γ

))

p

(

d

,

π

) +

G

CA

0 (3)

Corollary

Comparative statics on (2) and on (3) shows that, under mild

assumptions:

∂CF ∂γ

>

0 ,

∂CF ∂π

>

0 ,

∂CF ∂L

0 ,

∂CF ∂GF

<

0 and

∂2CF ∂π∂γ

>

0

∂CCA ∂γ

>

0 ,

∂CCA ∂π

0 ,

∂CCA ∂GCA

>

0 ,

∂CCA ∂L

>

0 and

∂2C_CA ∂π∂γ

>

0

(24)

Predictions from our simple model (in progress)

the higher the ine¢ ciency of the courts, the higher the delays

for la arge value/complex ppc w.r.t. a small value/simple one

for high ine¢ ciency of the courts and large value/complex

ppc, penalty are never enforced

the higher the ine¢ ciency of the courts,

ceteris paribus

, the

higher the legal costs, and the smaller the probability F delays

and goes to trial, as well as the CA enforces the penalty

asymmetry in size of F and CA determines asymmetry in legal

cost, so that:

- small Fs deliver relatively earlier than large ones

- small CAs enforce penalties relatively less than large ones - in a setting where a large F faces a small CA, the probability to have delays in delivering and no enforcement of penalty is higher than in a setting with a small F facing a large CA.