POLITICAL CONNECTIONS AND PUBLIC PROCUREMENT IN TURKEY:EVIDENCE FROM CONSTRUCTION WORK CONTRACTS

Esra Çeviker Gürakar & Tuba Bircan

The Political Economy of the Private Sector Dynamism in the Middle EastMarrakech, December 20-22, 2016

•Every year more than 100 thousand public procurement contracts are awarded to more than 50 thousand firms that are mainly the small and medium enterprises (SMEs).

•Only in 2015▫127,924 public procurement auctions ▫with a total contract value reaching $ 50

billion

Economic Significance of Public Procurement in Turkey

Background

•EU-IMF-WB nexus Competitiveness, efficiency, transparency de-politicization

•The new public procurement law was passed in January, 2002 to be enacted in January, 2003

Background• AKP won a majority in the parliament in November,

2002.

• Recep Tayyip Erdogan:

▫ “The public procurement law serves the interests of 50-60 firms only. I will not leave the construction work of 15 thousand kilometers of highways to 60 contractors.”

• Under the AKP majority government 35 different laws that made more than 150 amendments to the reformed PPL have been passed in the parliament▫ July, 2016 coup attempt – state of emergency –

amendment to the PPL!

• Legal amendments that increase the less transparent and less competitive procurement methods

▫The 2008 Amendment: “Restricted procedure can be used in procurement of construction works where estimated costs exceed the half of the threshold value”

▫The monetary limit for 2009 for instance was TL 11,116,324. The monetary limit for 2016 is TL 17,902,001.

• Legal arrangements that exempt the procurements of specific institutions such as TOKI from the scope of the PPL as well as from the audit of the PPA and the Court of Accounts

Number and Value of Public Works Construction Contracts Restricted Procedure

2004 2005 2006 2007 2008 2009 2010 2011 0%

4%

8%

12%

16%

20%

24%

% in Total Value % in Number of Contracts

Number and Value of Public Work Construction Contracts - Open Procedure

2004 2005 2006 2007 2008 2009 2010 2011 50%

60%

70%

80%

90%

100%

% in Total Value % in Number of Contracts

Growing concerns over corruption in the allocation process of the procurement contracts• Transparency International (2012): “public

procurement is singled out as one of the sectors most susceptible to corruption, with many cases involving high-level figures, relatives or persons closed to senior AKP figures”

• several procurement officials and politically affiliated firms prosecuted for rigging auctions (Hürriyet Daily News, February 20th, 2012)

• winners of procurement contracts donate 10-20 % of contract price to organizations affiliated with Erdoğan (Washington Post, March 13, 2015)

Main Questions

•Why has the PPL been severely amended in a way that has increased state discretion in allocation of procurement contracts?

•Has the allocation of contracts shifted toward those firms connected to AKP?

•Has increased state discretion led to higher costs to the public (higher contract prices)?

What we do:•through an analysis of 17,948 high value

(total: TL 137 billion) public work procurement contracts awarded to 5944 firms between 2004 and 2011▫provide systematic evidence of favoritism▫reveal that increased discretion is

associated with higher contract prices▫the use of public procurement for rent

creation and distribution is particularly extensive for some particular procuring entities (e.g. TOKİ, Municipalities)

Three types of data:

•a unique public procurement dataset

•firms’ business association memberships lists, MÜSİAD, TUSKON TÜMSİAD, ASKON vs. TÜSİAD and TÜRKONFED

•a manually constructed firms’ direct political connections dataset (Trade Registry Gazette).

1. Public Procurement Dataset• 17,948 high value public works procurements

• Has detailed information on▫procuring institutions (e.g. Ministries and the

Municipalities), ▫firm names that are awarded with a public

procurement contract, ▫auction types(goods, services, construction), ▫auction methods (open tender, negotiated procedure,

restricted procedure, procurements made under exemptions)

▫the economic details of procurements (e.g. estimated cost, lowest bid, highest bid, winning bid, the contract price).

2. Politically Affiliated Firms Dataset

•The members of MUSIAD, TUSKON, ASKON, TUMSIAD that explicitly provide political support to the government are coded ‘politically affiliated firms’ (PAFs)

•TUSIAD and TURKONFED that either went through some conflicts with the government or at least not known to have as “harmonic” relations with the government as the PAFs do.

3. Politically Connected Firms (PCF) Dataset (Firms with Direct Connections with AKP - cAKP)

• A firm is coded as ‘connected to AKP’ (cAKP) if one or more of its shareholders is/are:▫i) a Member of the Parliament from the ruling AKP; ▫ ii) an AKP official at the local level such as a

provincial head or a member of the provincial party organization;

▫ iii) first degree relative of the ruling party officials indicated in (i) and (ii)

▫ iv) Ideological Kinship (AKABE, ENSAR, board members of the politically connected media channels etc.)

▫17-25 December graft investigation

All in all:• 5944 contract awarded firms

▫ 29 foreign firms▫ 110 TÜSİAD TÜRKONFED member firms▫ 134 cOPP firms▫ 682 PAFs▫ 597 cAKP firms

40% AKP MP, AKP Official (national and local level) 20% First degree relatives of Tayyip Erdogan, AKP Ministers, AKP MPs and

AKP Officials 40% Ideological Kinship

• There are some overlaps: for instance, a PAF can be cAKP as well.

▫ In the 22nd 23rd and 24th terms of the TGNA the number of MÜSİAD-affiliated MPs was 11, 7, and 10 respectively. Other RN members less in number. No TÜSİAD member.

• Different procurement characteristics and the probability of a PCF winning the auction• Do closed auctions shift the allocation of

contracts to the PCFs?

• Different procurement characteristics, the type of the winner and the final contract price• Do closed auctions make procurements more

expensive for the government (higher final price, lower rebate values)

• The 2008 legal amendment and the final contract price

Different procurement characteristics and the probability of a PCF winning the auction - The Logit Model

DEPENDENT = If a contract is awarded to a Politically Connected Firm (PCF)

LOGIT

MARGINAL EFFECTS

Distribution of cAKP Firms’ Average and Total Value of Contracts by the Foundation Year

be-fore 1960

1961-1970

1971-1980

1981-1990

1991-2000

after 2001

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

0

50

100

150

200

250

300

350

Average Value of Contracts No of cAKP Firms

Aver

age

Cont

ract

Val

ue (

Mill

ions

)

be-fore 1960

1961-1970

1971-1980

1981-1990

1991-2000

after 2001

0

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

35,000,000,000

40,000,000,000

0

500

1000

1500

2000

2500

Total Value of Contracts No of Contracts

Tota

l Con

trac

t Va

lue

(Bill

ions

)

Different procurement characteristics, the type of the winner and the effect of the legal amendment on the final contract valueDEPENDENT REBATE =

Diff-in-Diff Model

Diff-in-Diff Estimates

Can the assignments around the monetary limits be assumed to be locally random?

Conclusion• Politically connected firms are awarded with higher

numbers of contracts and with contracts greater in value

• The probability of a politically connected firm winning a procurement contract increases, among other things, when less competitive award procedures are used.

• The legal amendment of 2008 has not led to higher costs to public

• However, the clusters just above the monetary limits raise doubts on miscalculation of the estimated costs

• Although favoritism is centralized, exists and prevails through making highly debated, notorious new laws and regulations there is also some sort of redistribution through relatively low cost projects.