Interesting paper on International Trade and Regulatory Cooperation in Public Procurement (Hoekman, 2015)

I have just read the recent paper by Prof B Hoekman, 'International Cooperation on Public Procurement Regulation' (November 1, 2015). Robert Schuman Centre for Advanced Studies Research Paper No. RSCAS 2015/88. I found his insights into how to move the development of trade policies through public procurement very suggestive. As his abstract explains,


Most governments have yet to agree to binding disciplines on government procurement regulation, whether in the WTO or a preferential trade agreement. Empirical research suggests that reciprocally-negotiated market access commitments have not been effective in inducing governments to buy more from foreign suppliers. Foreign sourcing by governments has been rising for most countries, however, independent of whether States have made international commitments to this effect – although there is some evidence that this trend was reversed post-2008 in several countries that had the freedom to do so. The stylized facts suggest a reconsideration of the design of international cooperation on procurement regulation, with less emphasis on specific market access reciprocity and greater focus on good procurement practice and principles, efforts to boost transparency, and pursuit of pro-competitive policies more generally (emphasis added).

Hoekman's discussion of the reasons why the current focus on bilateral market access reciprocity 'is unlikely to have much of an effect' is particularly interesting:

One reason why market access reciprocity arguably has limited returns is that many contracts that are issued by procuring entities concern products that are difficult to supply on a cross-border basis. Construction and services of many kinds will generally have to be supplied locally and there may be good reasons for procuring locally even if a good is tradable. If the products procured are intangible (services) or there are problems in monitoring and enforcing contract compliance, discrimination can increase the likelihood of performance by suppliers. The best (economic) case for discrimination revolves around situations where there is asymmetric information, e.g., difficulties in monitoring the performance of a contractor if buyer and provider are located far from each other, or there is a need to offer a firm quasi-rents in order to increase the probability of contract compliance through the threat of losing repeat business (Evenett and Hoekman, 2013). Moreover, geographic proximity may be a precondition for effectively contesting procurement markets—making some products, in particular services, in essence non-tradable. Problems of asymmetric information and contract compliance may imply that entities can economize on monitoring costs by choosing suppliers that are located within their jurisdictions. In turn, this will make it more difficult for foreign firms to successfully bid for contracts, even if the goods or services involved are tradable and in the absence of formal discrimination. Such rationales have been explored extensively by Laffont and Tirole (1993); many of the underlying technical arguments are summarized and synthesized in Breton and Salmon (1995). The policy issue that arises in such situations is whether there are barriers against establishment (FDI) by foreign suppliers, as this is a precondition for them to bid for/supply contracts (Evenett and Hoekman, 2005) (pp. 16-17, emphasis added, for complete references, see bibliography in his paper).

This passage is particularly relevant in the context of EU public procurement, not least because it spells out in very clear economic terms the reasons why an 'obsession' with cross-border trade as a metric of good procurement is highly unlikely to actually result in better (economic) procurement results [for discussion of the current policy, see here, A Sanchez-Graells, 'Are the Procurement Rules a Barrier for Cross-Border Trade within the European Market? — A View on Proposals to Lower that Barrier and Spur Growth', in C Tvarnø, GS Ølykke & C Risvig Hansen, EU Public Procurement: Modernisation, Growth and Innovation (Copenhagen, DJØF, 2012) 107-133.; and ibid, 'Collaborative Cross-Border Procurement in the EU: Future or Utopia?' (2016) Upphandlingsrättslig Tidskrift (Procurement Law Journal),  forthcoming].

I also found very interesting that Hoekman presents in very straightforward terms the economic view that, put simply, procurement is not a 'magic wand' with which to implement all sort of secondary policies. In his clear exposition:

The pursuit of non-economic objectives by governments can have very different implications for economic efficiency. In principle, policy should target directly the source of problem at hand: lack of economic opportunities for minority groups; regional economic wealth differentials; market failures, and so forth. For example, take the case where a government awards a tender to an SME instead of a large company that submitted a lower cost bid because of an SME preference policy. It may be more effective and efficient if instead the government were to address the factors that impede the ability of SMEs to compete with larger firms. This can of course be due to different factors, ranging from financial market imperfections to excessively burdensome administrative requirements that are too costly for SMEs to meet. Dealing with these constraints directly as opposed to using a SME preference policy will be more efficient (Evenett and Hoekman, 2013) (p. 17, emphasis added, full references in his paper).

In the end, Hoekman recommends that the best way of ensuring good procurement outcomes is to 'promote a pro-competitive environment' (p. 21). I could not agree more and, once again, turning to the situation in the EU, this is what I have suggested is the best way forward in order to achieve the Europe2020 goals [see A 'Truly competitive public procurement as a Europe 2020 lever: what role for the principle of competition in moderating horizontal policies?' (2016) 22(2) European Public Law Journal, forthcoming]. I hope policy makers will start taking economic insight into account, particularly when it is presented in such clear and persuasive terms as Prof Hoekman does.