Home bias in EU public procurement

The difference between intra EU trade and direct cross-border procurement levels has puzzled me for year. Whereas the first hovers at around 15% (speaking of memory here), the second is stuck at around 3.7%,* a figure 5 times smaller. Why? Should they not be at least in the same league? If business-to-business transactions account for such amount of intra EU trade, why are we not seeing something similar in procurement?

Over the years I heard a few explanations for the difference: language(s), legal framework(s), country size, geography or assorted "Acts of God". None was entirely convincing on its own and it took me to come across a paper from economics to find a more plausible umbrella explanation: good old fashioned home bias. Plus, apparently there is a whole body of literature in economics around this topic. Another example that it pays to read outside our discipline as a matter of good practice. Home bias is also known by another technical term: protectionism.

Home bias and EU procurement rules

Let's not forget why we have EU public procurement rules. They exist precisely to bring down barriers to trade between Member States when it comes to public purchasing. That's pretty much their raison d'etre, notwithstanding recent forays into other policy areas. To find out today that home bias is probably a major cause in the abysmal direct cross-border procurement values is like finding out we are all living inside the Matrix.

Over the last 40-50 years, most of the regulation has focused on transparency and in the procedurelisation of public procurement. Nothing wrong with that, other than it has not really worked insignificantly improving cross-border competition. By now we should have brought down those trade barriers which were identified back in the 60s and that are behind the home bias issue. In other words, we have lost the internal market forest for the procedural trees.

The paper I refer to above is by Zornitsa Kutlina-Dimitrova from the European Commission and Csilla Lakatos from the World Bank. The findings are based on a statistical analysis of contract information available in the TED database published between 2008 and 2012. This is a more complete and recent dataset than previous attempts. The whole paper is well worth a detailed reading, with some interesting points about public enterprises, local authorities (where cross-border procurement is even more dire) or the fact cross-border success rates go up with contract value and down when number of bids is increased. Plus the conclusions are spot on:

In terms of policy implications brought along by the findings in this paper, we
highlight the importance of product market regulations affecting the scope of public
enterprises, regulatory protection of incumbents and barriers to FDI as factors that
have a significant (negative) influence on the propensity of governments to award
public procurement contracts cross-border.

No surprises then why Member States are not in favour of reducing the public procurement thesholds and why we may see an actual increase in their nominal values in the next few years. Even bearing in mind that around 82% of procurement spend is currently below thresholds and by and large exempt from EU rules.

* Data from Kutlina-Dimitrova & Lakatos for 2012. Bear in mind that it is 3.7% of 18% - the value of public procurement spend included in contracts above thresholds - and not 3.7% of the total public procurement spend. The other 82% are even more likely to stay home.