bergman contract design ippc 2014
DESCRIPTION
IPPC6TRANSCRIPT
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
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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
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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
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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)
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Number of tendered contracts per year
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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
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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
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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
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0
500
1000
1500
2000
2500
2000 2002 2004 2006 2008 2010 2012 2014
Number of bids, bidders
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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
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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
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• 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
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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
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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
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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
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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
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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
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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
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