In this chapter, we quantitatively analyze the role of network membership in the performance of firms within the public procurement market in Turkey. We use a unique public procurement dataset of all high-value public procurement contracts—those with a contract value worth over TL 1,000,000—awarded between 2005 and 2010. We consider two types of networks: (1) Internet-based procurement-specific networks and (2) business networks established through business associations. Internet-based procurement-specific business networks provide their members with a wide range of procurement related services, access to critical resources, and timely information. Business associations help member firms establish a strong and unified presence, effectively protect their shared interests, and thus collectively influence governmental economic policies. The findings suggest that both types of network memberships are effective in winning public procurement contracts. There is also an overlap among network memberships, with 8.4% of contracts awarded to the firms that have membership in both networks.
TopIntroduction
Public procurement comprises a substantial part of government spending in Turkey, where one-fourth of annual public spending goes to public procurement whose share in GDP is around 8.5%. Every year around 140,000 public procurement contracts are awarded to mainly small and medium enterprises (SMEs)1 that make up 99.9% of total enterprises and 77.9% of total employment in the country2. Public procurement thus serves as a major tool in supporting the relatively fragile private sector firms, whose well-being is associated with the welfare of this considerable part of the society. Therefore, one major factor in analyzing the dynamics of the public procurement market, which is among the most important areas where the state and the private sector interact, is the mechanisms that affect the performance of firms in winning government procurement contracts.
With the emergence and spread of electronic-government reform plans and practices, information and communication technologies have appeared to be an important instrument used by the firms operating in the public procurement market in Turkey. For instance, the Turkish Public Procurement Law mandates advertising tender notices and requirements for auctions in the Public Procurement Bulletin, the official internet-based source of tender notices in Turkey. Moreover, several private, profit-seeking, internet-based establishments have been formed to provide the members with more opportunities through various services that help them in their task of winning procurement auctions. Firms in the public procurement market, which compete for higher shares in the market, pay an annual fee to these establishments in order to benefit from a wide range of services that provide them with up to date and detailed information about the market. The internet-based procurement-related establishments collect all information about legal changes and tender notices and make it available for their members. They classify the tender notices by city, sector and procuring entity. Moreover, they provide search engines where the member firms can search for certain tender notices. A subscriber, when logged in, can see the tender notices published after its last visit to the website. Email newsletters are also sent to network members according to their interests. In addition, they collect information on procurements, which are in progress and have not yet officially been published. They also provide 24/7 online-support. Finally, the network members interact with each other through the website for collaboration (e.g. forming consortiums to bid in specific auctions of high value procurements).
Yet, despite the fact that IT-based procurement-specific networks serve as an important tool for the member firms, a large number of firms in Turkey lack the necessary skills and infrastructure to follow all the developments in the procurement market. The reason is that adoption of the improvements in the information and communication technologies by Turkey’s firms, 99.9% of which are SMEs, is not at desired levels. A substantial portion of SMEs either does not have the necessary information technology infrastructure or do not have enough trained employees to conduct IT based activities. Moreover, 9% of SMEs do not have internet access.3 Therefore a significant number of firms typically suffer from a lack of timely information.
Nevertheless, in Turkey, one-quarter of the high-value public procurement contracts are awarded to members of IT-based procurement-specific networks. These results indicate a positive relationship between increased ability to reach timely procurement-specific information and the performance of member firms in auction winning. Yet, the fact that the remaining three-quarters of contracts are awarded to the firms that do not invest in IT-based procurement-specific network activities raises the question of whether there are additional mechanisms that affect the public procurement auction outcomes in Turkey. To answer this question, we expand our analysis and examine the effect of business association membership on firms’ performances in the public procurement market. On this stage of the study, we build our analysis on the relatively new literature on ‘politically-connected firms’ (PCF) that reveals various dynamics of state private sector relations. The literature on firms’ political connections generally takes into account direct connections in which a firm’s board member or shareholder is a former/current politician or has kinship/friendship with incumbent politicians.