Research Project Finds Signs of Political Influence in the Hungarian Public Procurement Market

As part of on-going efforts to monitor the Hungarian public procurement market and understand corruption, market shares and contract volumes of public procurement contract winners have been analysed by the research team at the Corruption Research Centre, Corvinus University of Budapest. The goal of the analysis was to determine what impact the change of government in 2010 has had on the public procurement market, and especially to explore whether there is substantive evidence for the common claim that politically connected firms control large parts of the Hungarian public procurement market. The new government implemented large scale personnel changes already in 2010, so if political connections matter for winning public procurement contracts, we should see drastic changes in companies’ market shares after the elections.

Preliminary results indicate that companies with the largest market shares in the public procurement market in 2009, that is, before the change of government, have greatly diminished in their market share by 2011, whereas the market share of the biggest companies in 2011 was insignificant prior to the change in government. Thus, the market share of companies with major public procurement orders before and after the change of government seems to have changed in opposite directions.

Statistical data analysis of all firms with public contracts between 2009 and 2011 also confirmed the significant effect of the change in government on the public procurement market, and thus the potential political influence over market performance of companies. With the help of a standard economic model, changes in the total contract value of almost 4,000 companies in the public procurement market in 2009 and 2011 were estimated. This econometric model takes into account company size, the location of company headquarters, the main public procurement market, and market concentration. The results show that companies with the largest total value of awarded contracts in 2009 performed significantly worse than anticipated by the model, while those with the largest total value of awarded contracts in 2011 performed above prediction. These results strengthen the hypothesis that, aside from the economic logic, political factors also played a role in determining the dynamics of public procurement markets in the period 2009-2011.

Furthermore, the companies performing considerably worse or better than what the standard economic model predicts tend to win public procurement contracts under conditions deemed to carry higher corruption risk than those companies whose performance fits a standard economic logic. They are more likely to have no competitor, tender in a non-open procedure, face extremely short submission periods, and their contracts are more likely to be modified after contract award.

Even though these results are only preliminary and much further research is needed, they have already spurred considerable media attention in Hungary, as they put into context numerous reports criticising individual companies for exploiting their political connections in order to win public procurement contracts.

 

(contributed by Mihály Fazekas, PhD student at University of Cambridge and participant in the public procurement research programme at the Corvinus University of Budapest)