THE IMPACT OF CENTRAL-LOCAL POLITICAL ALIGNMENT ON PROCUREMENT INTEGRITY
Equalisation policies pursued through intergovernmental transfers can only achieve their ostensible objectives if the recipient local governments spend in a way that ensures value for money. When local purchasing and investment is compromised, the inequity of preferential intergovernmental transfers to local allies of the central government is compounded by the channelling of public money to local business cronies.
Public procurement integrity at local level
In SEE, public procurement is the government activity with one of the highest corruption risks, due to the large amounts distributed through procurement procedures. The types of public irregularities identified in the region include favouritism and clientelism, overpricing of contracts, tailored tender specifications, conflict of interest in the tendering process, high share of non- open procedures, short advertisement periods, contract modification and delivering sub-standard service in the implementation phase.75
A substantial concern is that malpractices in national procurement affects purchasing at the local level. Local level units (municipalities, cantons) receive politically biased transfers from the central level in exchange of party loyalty and favours, and in turn they use part of the received funds for awarding tenders to specific companies. Even though the financial loss perpetrated by each municipal actor is on a smaller scale, its multiplication effect across the countries might cause significant damage to the state budget. The corrupt relationship between national and local actors could be abused to such an extent that state capture takes place also at the subnational level. Public procurement can then be transformed into a tool for political interference within the central-local fiscal relations, which exacerbates the inequalities among regions/municipalities, as well as at intra-municipal level (among districts or neighbourhoods).76,77
Figure 4. Negative cumulative effect of compromised procurement integrity at all levels
Source: Center for the Study of Democracy
Each of the SEE countries’ strategic anticorruption and integrity promoting documents points to particular mechanisms for avoiding conflict of interest and abuse in public procurement.78 Still, the strategies often lack efficient implementation. In Serbia, for example, the Law on Public Procurement does not apply when public procurement contracts are signed with other countries, international organisations and financial institutions.
The lack of public procurement integrity systems at the municipal level and mechanisms not tailored to local needs render the existing national ones ineffective. For instance, in Bulgaria, conflict of interest requirements at the municipal level do not prevent explicitly conflict of interest when municipal councils approve their budgets allowing the municipal actors substantial discretion, as long as they fit the legal framework.79 Despite that municipal councils have set up standing anticorruption committees,80 which receive alerts and complaints about conflict of interest and corruption, these bodies have only the power of referral.
Achieving transparency in public procurement
Risks to public procurement integrity can be identified by utilising big data to focus checks and audits on the riskiest buyers, suppliers, and sectors, and ensuring transparency and civil society oversight.
The transparency of procurement contracts is usually ensured through the launch of dedicated procurement online portals. Still, the quality and extent of information differs across SEE countries. For example, in Bulgaria, all information on the awarding process of public contracts is made public, but there is little follow-up information on their execution and on whether contractors are adhering to the quality standards set in the contract.81 In Bosnia and Herzegovina, Montenegro, and Serbia municipalities publish scarce information on only few steps from the procedure. Transparency requirements are rather optional, and there is no follow up sanction in the case the local administration does not comply. Hungary also lacks effective sanctioning for the non-compliance with disclosure regulations related to contracts signed by the central and local level units, as well as received national and EU budgetary support.82
Evaluation of the public procurement processes
The evaluation and assessment of the public procurement procedures and the effectiveness of prevention measures usually rely on self-assessment using descriptive and qualitative methods. There is a lack of clear indicators and quantitative evidence-based instruments which can evaluate results. Procurement and anti-corruption authorities mostly look into input indicators (regulations, procedures, resources), rather than outputs, i.e., actual impact.83 In Romania, for example, evaluation is typically conducted through a combination of self-evaluation and external evaluation mechanisms, performed by specialised institutions and bodies, including the Ministry of Public Finance, the National Agency for Public Procurement, the Court of Auditors, and the National Anticorruption Directorate. Indicators include the number of corruption cases detected, penalties imposed, increased competition in bidding processes, enhanced transparency, and improved efficiency in public procurement.
Political favouritism in local public procurement – statistical analysis and case studies
The degree and modes of political favouritism in public procurement at the local level are best understood on the basis of empirical evidence. In order to find out whether – and if so how – local procurement follows partisan interests, leading to contract allocation according to political loyalty and electoral considerations, this section examines the presence of politically motivated factors in the distribution of public procurement contracts. It analyses the statistical relationship between public procurement contract values, political party of local leadership and election results in nine countries in the SEE region (for two countries, only descriptive analysis was possible due to data gaps).
The first type of data used for the analysis is public procurement data aggregated by municipality – year level with additional aggregation to NUTS-2 or NUTS-3 regions for descriptive analysis. The aggregated variable needed for the analysis is the bid price summed for municipality–year, which is the dependent variable in the regression analysis. In addition, supply and procedure type share and market share were calculated at the municipality- year level or at the NUTS-2/3 region-year level, depending on the number of municipalities in the country. The second type of data used is the elections data which describes mayors and municipal assemblies and their electoral performance. The data includes the name of the municipality, the year of the election, information about the winning candidate or party, and information about the non-winning candidates and parties, where available. In addition, the data also covers the coalition of national parties that form the government and municipal coalitions where such data is available. For a more detailed overview of the available electoral data per country see the table below.
Table 5. Description of available electoral data
The methodology of this section includes both descriptive analysis (e.g. frequency distributions) and fixed effects panel regression models84. The regressions were run with several predictors, with two variables of particular interest from the perspective of political favouritism: political alignment between the municipal and the national governments and winning margin per electoral cycle. First, the political alignment variable was generated using the party affiliation of the mayor or the party forming the municipal government and that of the national government. If the mayor‘s party is part of the coalition that forms the municipal government (where such data are available), or if the municipal assembly parties, including the winning party, are also represented in the national assembly coalition, we consider that municipality to be politically aligned. Second, the winning margin was calculated as the difference in vote share between the winning candidate or party and the second-best candidate or party.85 The distribution of winning margins for seven countries is shown in Figure 5.86 As can be seen in the figure, the distribution is predictably mainly skewed to the right, with the majority of observations between 0 and 50, which tends to signal a higher average level of competition observed in the region. However, Albania and Croatia show a further peak in the distribution in the 75-90% range. This either signals a very low level of competition in some exceptional municipalities, or could be a sign of a high level of polarization.
Figure 5. Frequency distribution of winning margin (municipality-year)
Total public procurement spending per municipality-year is the main dependent variable used in the models.87 The distribution in frequencies of the logged dependent variable is shown in Figure 6.88 With some variation in the distributions, the average range varies from 15 to 22-25 with the peak in number of observations around 17-20. Since each country has its own currency, the logarithmic transformation also ensures the standardization of the values. The majority of observations around 17-20 with a total variation between 10 and 25 implies a central tendency of the original data, with actual values ranging from approximately exp^17 -1 to exp^20 -1. While some countries have peaks further to the right on the continuum (Bulgaria, Albania, Serbia), others have smaller average values (Hungary, Croatia, North Macedonia, Romania). And while for some countries this difference could be caused by economic reasons, in the case of Croatia the comparative value of contracts is actually higher due to the Euro currency.
Figure 6. Frequency distribution of logged public procurement spending (municipality-year)
Central-local political alignment and public procurement allocation
The figure below shows the results for political alignment country by country for seven countries. Apart from Albania, the alignment predictor has a significant coefficient in all countries. We can see that in Bulgaria, Hungary and Romania the predictor is positive and significant, and for North Macedonia, Croatia and Serbia it is significant and negative. To interpret these coefficients, we should first consider the logarithmic transformation. Since we are working with log-transformed data, effects can be interpreted as a percentage changes.89 For example, the Bulgarian coefficient = 0.485, so the percentage change in price associated with the adjustment compared to no adjustment would be = (e^0.485 – 1) * 100 ≈ 62.33%. Hence, when the mayor is from the same political party as the one forming the ruling coalition on the national level the value of public procurement contracts increases by approximately 62% in Bulgaria, 56% in Hungary and 32% in Romania90, holding all other variables constant. For three other countries with statistically significant coefficients – North Macedonia, Croatia and Serbia – the coefficients have a negative sign, meaning that politically aligned municipalities are associated with a decrease in public procurement spending of 38%, 46% and 54% respectively, holding all other variables constant.
Figure 7. Analysis results for alignment predictor
Note: Bars indicate the 95% confidence interval. Dependent variable is logged.
A number of policy-relevant insights can be drawn from these empirical results. First, the fact that all countries, except Albania91, have a significant coefficient means that party-politically motivated distribution of public procurement funds is widespread in the region with profound impacts on the degree to which public spending follows development needs. Second, in Bulgaria, Hungary, and Romania, the statistically significant and positive coefficients suggest that municipalities that are political allies of the national government receive more funds and hence can spend more on public procurement. Bringing in the qualitative evidence, a likely explanation follows a political favouritism logic: localities which vote with the central government get rewarded for their loyalty while localities going with the opposition get punished, irrespective of local needs. Nevertheless, the observed empirical patterns could also be explained by benign administrative or bureaucratic reasons: it is easier to coordinate and agree on projects within the same party. Third, the statistically significant and negative coefficients for North Macedonia, Croatia and Serbia suggest a different type of mechanism. One of the possible explanations is currying favours with voters: by investing in high profile local projects the governing party(s) at the national level tries to make sure that voters in opposition municipalities attribute these to the national government and governing party(s), rather than local governing party(s).
Electoral competition and public procurement allocation
The effect of electoral competition should now also be added to the above findings of the results for central-local co-partisan alignment. The figure below shows the results for the analysed countries, including the coefficients and the estimation errors around them. The independent variable was divided into three categories based on the quantile distribution of the values, with the “High” category accounting for the highest average winning margin per municipality (lowest political competition) and “Low” for the lowest average winning shares and highest competition, while “Middle”, as a reference category, is what remains between High and Low winning shares.
While many countries do not show significant coefficients, we observe a general trend similar across almost all countries in the region (results are significant at the 95 level in Albania and Hungary; and coefficients are significant at the 90% level in Romania and Serbia). It seems that a higher winning margin and hence less competition are associated with higher public procurement spending. Conversely, a low winning margin, indicating a highly competitive and uncertain political environment, is associated with less procurement spending. These patterns suggest that municipalities with more political turbulence and less certainty of electoral outcome receive less public procurement allocation, at least as it can be inferred from observed contract award values. The only exception from this general pattern is Bulgaria, where the sign and size of the coefficients for low and high winning margins are almost the same, so we see little “directed” public procurement spending reflecting electoral considerations. The insignificant coefficients could be due to data limitations (the electoral data is at the level of provinces, which could potentially blur the coefficients). Alternatively, relative lack of highly competitive local elections and the relative safety of most mayoral and local government party positions could cause absence of significant effect due to low variation.
Figure 8. Analysis results for winning share predictor
Political alignment, electoral competition and public procurement allocation
Given that electoral winning margin and political alignment are likely to both influence politically motivated public funds allocation, the above two factors are best interpreted jointly. Taken together the results from the alignment models and the winning margin models, we can identify different patterns or types of political favouritism in public procurement. First, Hungary and Romania, and to some degree Albania too, show signs of strong political loyalty-driven local public procurement allocation. There is a large effect of allocating money to the most reliable municipalities: both politically aligned with the central government and having the least electoral contestation (i.e. voters most predictably supporting the same party). In addition to the interpretation evoking political favouritism, politicians in reliably aligned municipalities find it easier to organise corrupt schemes (e.g. identifying the privileged companies, devising reliable methods to informally allocate bribes) and thus increase the prices of public contracts.
The case studies also demonstrate this point. In Hungary, since the election of a Fidesz mayor and a Fidesz majority in the local council of Győr, three companies – Strabag, VILL-KORR Kft. and KIFÜ-KAR Zrt. – with political ties to the ruling Fidesz party, won an overwhelming number of tenders. These companies had remarkably high odds of winning contracts, suggesting a pattern of abuse in public procurement that also leads to price gouging in public contracts.92,93,94,95 In Romania, in Gorj County, Senator Ion Iordache’s involvement in a 210 million lei (EUR 42 million) contract with SC Ydail Construct SRL, a company he founded and later transferred to his son, raises concerns about potential corruption and conflicts of interest given his political role in the region. The company has secured numerous public contracts, many of them directly with the authorities in Gorj, where Iordache previously served as mayor, accumulating nearly 300 million lei (EUR 60 million) in revenues96. Similarly, in Olt County, the extensive declaration of interest of the member of parliament Emil Florin Albotă reveals numerous public contracts between him and his mother, through direct procurement and signed by the mayor in the county, totalling over 10 million lei (EUR 2 million)97. The personal ties established at the local level with local actors, which are stable over time, increase the price of public contracts due to corruption.
Second, Croatia, North Macedonia and Serbia tend to have a different type of political favouritism in local public procurement allocation. The non- aligned, i.e. opposition, localities in these countries tend to get more money for public procurement than aligned ones. At the same time, the effect of electoral competitiveness (winning margin), is weak and largely insignificant (coefficients for the categorical winning margin predictor in Serbia are close to significant, while coefficients in Croatia and North Macedonia are insignificant). Nevertheless, public procurement spending may be higher in municipalities with less competitive elections, that is more certain electoral outcomes, particularly in Serbia and Croatia. The results suggest that non- aligned territories where the opposition is almost certain to win (so there is not much unpredictability in it) get more money through public procurement. This could be explained by the central government’s efforts to co-opt consistently opposition municipalities by allocating extra funds to them. Alternatively, it may also be the case that the opposition spends more proactively when it is in a vulnerable position in relation to the national level party. However, such a statement is very much dependent on two factors: how much of the fiscal and administrative power is at the local level, as well as what is the share of public procurement contracts distributed at the local level vs. national level.
This seems to be the case for Croatia. The share of contracts awarded by local and regional government units in the country is 29% and they are the second largest group of public purchasers. They are also the second largest group of public purchasers in terms of volume and value of contracts.98 However, in the case of Serbia, when it comes to the share of public procurement in the total value, the national authorities awarded 21.51% of the total public procurement contracts, while the authorities of autonomous provinces and local self- government units had a share of 27.66% (with the number of contracts at the municipal level being twice as low as at the national level).
On the other hand, the cases of local corruption in public procurement from these countries suggest some systems of cooperation between different local actors. For example, in Croatia, in a case investigated by the Office for the Suppression of Corruption and Organized Crime (USKOK), the Mayor and Deputy Mayor of Požega engaged in corruption by attempting to manipulate a public tender for energy certificates and renovation projects. They tried to favour certain contractors by instructing the utility company to send invitations to select bidders and coordinate their bids, ultimately maximising prices co- financed by the Environmental Protection and Energy Efficiency Fund. Both officials were convicted.99 In addition, USKOK filed charges against two police officers allegedly involved in providing information to the mayor during the investigation.100 Therefore, the predictability of election results could be important not only for sustaining projects, but also for local networks used for corruption. If there is a break in a well-established network, there is less room for manoeuvre to cooperate in corrupt schemes.
Third, Bulgaria displays another pattern of political favouritism in local public procurement. Here, localities aligned with the central government are able to spend considerably more on public procurement while electoral competitiveness appears to have no effect on public procurement allocation whatsoever. This may be due to the relative lack of highly competitive local elections and the relative safety of most mayoral and local government party positions. In such a context, central governments do not differentiate among localities prior to elections, only when results are known and alignment can be established.
The above empirical analysis informs some robust lessons and allow the following conclusions:
- Significant coefficients for political alignment. In most of the countries studied, significant coefficients on the alignment predictor suggest that there is a politically motivated distribution of public procurement spending rather than one based on impartial allocation, reflecting public needs. When municipalities are politically aligned with the ruling party of the national level, they tend to receive larger public procurement contracts.
- Significant coefficient of winning margin. Higher winning margins, which are used as indication of less political competition, are generally associated with a greater chance of winning larger contracts. This suggests that municipalities with predictable electoral outcomes tend to allocate more public procurement spending. This is possibly due to a higher likelihood of corruption or abuse. Case studies from Hungary and Romania provide concrete examples of how political networks can lead to abuse of public procurement processes, including favouring certain firms with political connections and inflating contract prices. These cases highlight the potential for corruption and conflict of interest in local government in these countries.
- Combined effects of political alignment and electoral competition. The directions of the relationships between these two factors vary across countries. Positive coefficients in some countries (e.g., Bulgaria, Hungary, and Romania) may indicate that politically aligned municipalities receive larger contracts, which could be due to political motivations or administrative efficiency. In contrast, negative coefficients in other countries (e.g., North Macedonia, Croatia, and Serbia) suggest that politically aligned municipalities receive smaller contracts, possibly as a strategy to obtain loyalty or support. When it comes to winning margins, Croatia, North Macedonia and Serbia show a different dynamic, where non-aligned territories or territories with less political competition receive more money from public procurement. This may be related to the proactive nature of the opposition in vulnerable positions or to the distribution of fiscal and administrative power at the local level.
- Importance of local networks and context. Corruption in public procurement is often facilitated by well-established local networks. The predictability of election results may affect these networks, and a disruption of such networks may reduce opportunities for corrupt cooperation. It is also important to consider the specific context of each country, including the share of public procurement at the local versus national level and the degree of fiscal and administrative decentralisation.