Over the weekend Albert published an awesome post on the competition-related downsides of public contract registers. By and large I stand on the other side of the argument, but genuinely welcome my views (and any orthodoxy) to be challenged. Contrary to some colleagues or proponents of specific policies (social policies supporters I am looking at you...) I really want to know the downsides of whatever policy I think its best.
All policies are made of tradeoffs and it is fundamental to know what those tradeoffs are. When someone tells you a certain policy has no cost or any implications (as I have been told and in public, by a well known proponent of social policies...) it usually means one of two things: either they have not looked hard enough or they do not want you to know about the downsides.
Albert and I have discussed issues surrounding transparency and competition for years. His view is pretty much the standard view of competition lawyers: extra transparency comes at a cost for competition and public procurement is a market prone to collusion in the first place. Although I have slowly come to be more nuanced in what concerns transparency during the procedure (read, my view is slowly moving on his direction), I remain bullish on the beneficial tradeoff from having more ex-post contract transparency. The crux of our difference is precisely that: I think contract registers will leave us better off, Albert probably thinks we will not. In reality there is only one way to sort this and that is by looking at data (but more on that later).
Public contract registries (post award)
On his post Albert suggests that the logic behind post award contracts registries is based on reducing the perceived shortcomings of public governance and complementing traditional public audit and oversight mechanisms by enabling citizens to monitor contract data. He is right on both counts and is the fault of proponents for public contracts registries like myself to come up with other justifications for the registries. In my view, there are valid economic reasons to push for post award contract registries, mostly connected with the reduction of price arbitrage.
On the plus side: Reduced arbitrage
One of the iceberg type problems in public procurement is information asymmetry and arbitrage. It is well known that the same supplier will charge different prices to different contracting authorities without batting an eye lid. Can we imagine this happening in other sectors? A couple of years ago Amazon tried precisely that and people went absolutely bananas. Somehow, we accept that this should be the norm in public procurement. Having said that, there are other sectors where price discrimination is an accepted practice, like airlines.
But the arbitrage arising from the lack of price information is crucial in another way. How many sectors do we perceive to be efficient if the price is not public? How would the oil market work for example? Or the stock market? Can you imagine buying houses without knowing the price paid recently in the area?
Price transparency brings efficiency into a system by reducing the scope for arbitrage. And in my view this is the strongest argument in favour of public contract registries: by and large they will make the public procurement market more efficient. How? Via two mechanisms.
First, it will allow contracting authorities to have access to more reliable information...if they are so inclined and willing to invest the time. They can more easily know what their peers paid for a similar item/service. (I am assuming here the contracts register works well and is fully searchable, which may not be the case).
Second, it provides every potential supplier in the market with granular pricing data. How much are your competitors charging for the equivalent service/good? Are we pricing ourselves out of the market? How can we be more competitive? By knowing the average pricing on a public procurement market you can easily make a decision to invest in that area (because there is arbitrage) or to stay away.
Again, let's go back to the oil example. When price of oil is high, companies invest in exploration. When it is low, they do not and hoard their supplies (that is why there is so much oil sitting in tanks at the moment). How could suppliers make those decisions if price transparency did not exist? The oil market is an excellent example where the attitudes of a strong cartel (OPEC) which supported high oil prices for years enabled lower cost suppliers to come into the market and eat that profit margin.
Once more participants in that market do not bat an eyelid to making the pricing public. And yes, I am talking about a commodity, but then a lot of public procurement is made around commodities, including oil.
There is no fundamental reason why price has to be a private piece of information. If it was always made public, it could be factored in into the decision-making of economic operators to take part or not in that market. It would be akin to patents to a certain extent. For an economic operator to be granted a patent, it needs to tell the world (by and large) how the patented invention works. That protection is time limited, so it forces economic operators to make an informed decision on going or not for it. And they still go for it in droves. They have no problem with that trade off...
To a certain extent a public contract is similar to a patent monopoly: it gives you exclusive access to a market for a set period of time. Why should we treat price differently from the crucial information that goes into patents?
A similar problem with lack of price transparency happens in the developing world where farmers have limited access to price information. Guess what happened once they start buying mobile phones...
On the downside...
The downside of the above is that price transparency makes it possible for collusion agreements to flourish. The more transparent you are, the easier it is for cartel members to police one another. Albert makes a bunch of very strong arguments along the traditional competition law line: more transparency = more and better cartels.
Albert argues that 20% of contract value are due to anticompetitive overcharging arising from cartels operating in public procurement. One of the perennial problems when talking about public procurement is the poor quality of data, particularly of "ground truth" data. By and large, we simply do not know exactly what is happening on the day to day operations of contracting authorities (another argument in favour of contract registries!) But let's assume the value is right.
If we increase post award transparency of public contracts what would happen then?
The answer is, it depends on the market. If the situation is really that bad already, there is not a lot of scope for it to get worse. However, the numbers can be wrong by an order of magnitude and in either direction. In any event, I think three things would happen:
In markets where cartels traditionally operate, things will get worse as the extra pricing information makes the policing easier. But I would limit this downside to those markets where cartels are already prevalent and no new entrants to the market are expected due to the extra transparency. The latter is possible if it becomes evident to an economic operator that a specific market is inefficient.
In markets where cartels do not currently operate, but numbers are limited, things may get worse. Yes, it is possible (as argued by Albert) that the extra pricing information may make cartels more likely. Have you ever noticed as on highway's the petrol prices tend to be more or less identical and always higher than in smaller roads? That may be a good example of where price transparency may be leading to tacit collusion.
In all other markets, competition will be enhanced at least until we reach a new equilibrium and weaker suppliers are driven out. And this is why that by and large the new equilibrium will leave us better off. This would not be valid if competition was compromised in the majority of markets, most of the time.
Albert does not address potential upsides of having more data available in terms of cartel fighting. What can be done when reams and reams of contract data are available? You can spot odd behaviours. For example, you can corroborate a whistleblower account and you can then check if certain collusive practice/tactic is happening in other sectors as well.
Small example: years and years ago I was doing a due diligence on a supposedly very competitive sector. I had access to hundreds of contracts and saw no evidence of litigation and was surprised to see that the competitiveness of companies fluctuated a lot on different procedures. I was very puzzled with the pattern, was not convinced by the company's explanation and wrote something along those lines on my report to the (foreign) client. Interesting enough, the client did not quizz me for further information...
There is another analogy that could make my argument easier to understand here and that is the debate between open and closed source software. Open source software effectively means all code is available for any one to see, peruse (and mostly) to do whatever they want with it. When it comes down to bugs and security vulnerabilities it means anyone (good or bad) can spot weaknesses in the code either for exploit purposes (bad) or to patch them (good). It also means that every new release indicates clearly what bugs were patched. Again, there are pluses and minuses here: on the one hand, everyone knows what bugs were patched, on the other hand attackers now what bugs were on the previous version and have an attack vector to use on unpatched systems. It cuts both ways.
On the closed source model, only the owner of the intellectual property knows the code and has access to it. In what concerns security this is known as "security through obscurity", ie believing that by withholding certain information companies and users are better off when it comes down to security. We have seen how well this has played out for Windows over the years and more recently for routers (more here), cars and virtually anything classified as part of the Internet of Things. Not having access to the source code has not really stopped attackers from finding vulnerabilities on various closed sourced systems.
So at the root of the discussion we have two opposite camps: one is proposing that we are better off by hiding information (security by obscurity); the other suggesting we will be better off by putting all that information out in the open (security by transparency), even though in specific case we will be worse off. Life is made of tradeoffs.
Can we minimise the competition impact of the contract information?
Personally, I still believe we will come ahead by releasing that information as soon as possible. But here are a couple of suggestions to mitigate the competition impact of post award transparency.
1. Delay the release of data
What would happen if we time delayed the release of the contract data? Say for a year or 18 months, so that by the time it came out it would no longer be of immediate use or value for cartels? This would provide an indication of the prior practice but not the current one, thus limiting the benefits for cartels but also for the market to operate more efficiently.
2. Release only aggregate data
In addition to delaying the release of data, perhaps we could aggregate data by CPV code for example. This would imply that no individual contract information is released and makes it difficult to find a balance between what type of information gets released when, but it already exists (at least in the UK) under the form of spend data.
The downside of both options is that the data exists in the first place and is kept private for a set period of time (back to the security by obscurity). In consequence, anyone invested in that market has an incentive to get access to that data before the market has, like a public procurement "insider dealing". Again, life is made of trade offs.