bergman contract design ippc 2014

Contract Design, Awarding Rules, Bidding Behavior and Contract

Enforcement: Explorative Evidence from Swedish Elderly-Care Procurement

Mats A. Bergman, Södertörn University

Sofia Lundberg, Umeå University

Giancarlo Spagnolo, SITE/Stockholm School of Economics

Ex-ante Contracts and ex-post Performance in Public Procurement: Theory and Evidence from Sweden

Mats A. Bergman, Södertörn University

Sofia Lundberg, Umeå University

Giancarlo Spagnolo, SITE/Stockholm School of Economics

Motivation

• Non-contractible quality is often highly important

• Cannot be handled by standard contractual practices

→ We need to know more about how non-contractible quality can be enforced in Public Procurement

• Procured elderly care in Sweden offers an interesting case • A standard service, procured repeatedly by many municipalities

• Important – so resources for procurement and contract enforcement are available

• Good outcome, according to several independent studies

IPPC Dublin, 15 August 2014 Bergman, Lundberg & Spagnolo 3

The literature • Contract theory says incentives for contractible quality can crowd out non-

contractible quality (under ”multi-tasking”) • Hart & Holmstrom, 1987; Holmstrom & Milgrom, 1991 • This may explain the weak quality incentives often found in practice

• Competition, in combination with well-specified procurement rules (auctions), may reduce quality • Manelli & Vincent, 1995

• Empirical studies of contract design • E.g., venture-capital contracts (Kaplan & Strömberg, 2003), R&D contracts (Lerner &

Malmendier, 2010) and contracts for project subject to change (Bajari & Tadelis, e.g., 2001)

• Few studies on contractual mechanisms for addressing moral hazard in procurement • Calzolari & Spagnolo, 2009; Watson et al, 2013, focus on ”trust” as a mechanism


The market

• Close to 100 000 elderly (1 % of total population) live in nursing homes, at a cost of close to 2 % of GDP

• Municipalities are responsible, bear >95 % of the cost, control entitlement-to-service and have traditionally produced in-house

• Since around 1990 procurement of management services is allowed – today 20 % live in privately managed (mainly for-profit) units

• 65 % of municipalities still rely exclusively on in-house production

• EU-style procurement rules • More stringent since 2008 revision of the Swe Procurement Act • User choice explicitly allowed since 2009


The data

• Procurements of management contracts since 2002 identified in the two dominant procurement tender databases

• 208 procurements of 317 contracts in 81 municipalities (and 1669 bids)

• Average number of flats per unit: about 50

• Average annual value: 3 M euro

• Average contract length: close to 8 years

• Telephone interviews held with 50 managers responsible for quality control (and often for procurement)


Number of tendered contracts per year


0

10

20

30

40

50

60

70

80

90

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ratio of extension period to total contract length


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000 2002 2004 2006 2008 2010 2012 2014

Weight of price in scoring function


0

20

40

60

80

100

120

140

0 10 20 30 40 50 60 70 80 90 100

All years

0

20

40

60

80

100

120

2000 2002 2004 2006 2008 2010 2012 2014

PR

ICE

WEI

GH

T

YEAR

Per year

Price per day


0

500

1000

1500

2000

2500

2000 2002 2004 2006 2008 2010 2012 2014

Number of bids, bidders


0

50

100

150

200

250

300

AttendoCare AB

CaremaCare AB

FörenadeCare

Aleris AB NorlandiaOmsorg

AB

KOSMO HSB Kropp &Själ MedOmtanke

GeriacareAB

Nu

mb

er

of

bid

s

0

10

20

30

40

50

60

70

80

30- 20-29 10-19 5-9 3-4 2 1

Nu

mb

er

of

firm

s

Number of bids

Contractual clauses for enforcing quality – data from call for tenders

• 43 % required to pay buyer’s cost arising due to supplier negligence

• 88 % required to pay buyer’s damages to third parties due to s.n.

• 60 % have monetary penalties for specific quality deficiencies (increasing) • Non-presence of staff category or too low staff count: about 50 % • Other well-defined quality deficiency: about 25 % (of which 1 contract with penalties for

pressure wounds)

• No high-quality bonuses

• Surveys to residents: 80 % but falling (due to national survey)

• Explicit right to make surprise inspections: 37 %

• Explicit right to make scheduled inspections: >90 % • 30 % say that such will be made


Organization of procurement and quality control – data from interviews • More than ¾ procure themselves; for 2/5 of these this is done by the Social

Services Committe (or equivalent), for 3/5 by a specialized city-wide procurement unit

• On average 3 staff members responsible for procurement and quality control • Of these, 60 % are nurses or social workers; 20 % have other univeristy degrees

• For elderly care, about 1 % of total resources are used for needs assessment and procurement/quality controll, respectively

• 1/3 of municipalities have clear division between purchaser and provider organizations

• The remaining 2/3 typically have separate production and control units within the social services administration


• 80 % state routines are the same for internal and external units

• On average, scheduled inspections held once a year (40 % once a year, 40 % less often, 20 % more often)

• Surprise inspections used ”regularly” by 5 %, ”occasionally” by 40 %

• Surveys to elderly (in addition to national survey) used by 16 %, surveys to staff used by 5 %

• Allmost all municipalities wet providers for financial standing; one only required a performance bond or equivalently

• 70 % (and increasing) use check list for scheduled inspections


Mechanisms for enforcing quality – data from interviews

Mechanisms for enforcing quality – data from interviews

• 1/3 say low quality will not reduce future chances of winning; 1/3 say it clearly will; 1/3 say it will ”implicitly” or ”to some extent” do so

• ½ of municipalities state they have contractual right to impose penalties for low quality • Only 2 have well-defined “automatic” triggers for pentalties

• 80 % of contracts are not differentiated according to bids • Surprising, given that only 25 % awarded according to lowest price


Quality outcomes

• Deficiencies are equally common in private and in-house units, according to 60 % of respondents; equal fractions claim private are worse and better


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Minor Significant Serious Very serios

Never

Rarely Sometimes

Often

Exceptional

Very good

Good

Adequate

Not adequate

Poor

Very good

Good

Court processes, use of penalties

• Of municipalities that had the right to impose penalties, 15 % had done so and 90 % would/had negotiate/d before doing so

• For 5 % of contracts penalties had been considered but not imposed; for 2 % it had been imposed • Notice possible conflict

• 40 % had met providers in court for reasons related to procurement process and supplier selection

• 20 % of contracts resulted in a court process related to those issues


Contract extension, termination, renegotiation • 10 % of respondents had experienced that a private provider did not

want to extend the contract, one only had broken a contract prematurely due to bankruptcy

• No municipality had broken a contract prematurely (e.g. due to deficient quality), but ¼ had chosen not to use extension option

• More than 80 % of contracts that could have been extended had been extended; the main reason for not extending was low quality

• Almost 40 % of contracts had to some extent been renegotiated; among these price was increased for more than 15 %-points


Summary of findings

• Extension periods have become longer and beauty contests, the right to impose penalties, the use of surveys and check lists for inspections more common – with big cities leading these trends

• But differences related to city size are small, small cities lead in requiring inspection rights, survey is now national

• Penalties are rarely used, contracts rarely broken and surprise inspections are rare – but sometimes contracts are not extended

• Prices have increased and big cities pay more

• Large cities have higher staffing requirements and receive more bids


Conclusions • Municipalities succeed in obtaining high quality, also in non-verifiable

dimensions

• Multiple instruments are to used safequard quality, including • A national “customer” survey and scheduled inspections • “Discretional” instruments, such as subjective quality assessment and contract

extension clauses

• Municipalities maintain relations to providers and exploit their reputational concerns

• Some commonly prescribed instruments seem not to play a big role, including penalties, check-lists for quality control (although this is used more and more) and court action

• Municipalities maintain in-house production units and increasingly, but from a low level, rely on user choice


bergman contract design ippc 2014

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