Contracting-out Development Aid to Nonprofit and Forprofit Firms: A Case study Preliminary look

1. Contracting-out Development Aid to Nonprofit and Forprofit Firms: A Case study Preliminary look February 28, 2005

2. Contracting-out Development Aid to Nonprofit and Forprofit Firms: A Case study Preliminary look Key Questions Selection procedure and Contract design Data Results 1. Type of Bidders and Success Rates 2. Competitive advantage of nonprofits vs forprofits 3. Acquisition of Contracts and its Determinants

3. Key Questions Many donor agencies are committed to increasing aid flows to speed up progress towards the MDGs in low-income countries.  How are these businesss opportunities currently managed and negotiated?  Selection procedures Blurry division between nonprofit and forprofit sectors (health care, R&D, education)  What do we find when we look at the implementation of aid projects?  Interaction between nonprofits and forprofits We would like to test a number of empirical predications about the nonprofit tenderers and their relative competitive advantage when competing against forprofit candidate consultants.  Comparative institutional behavior in the acquisition of aid contracts

4. Selection procedure and Contract design Contracts are awarded after a tendering process on the basis of projects identified by DfID in conjunction with beneficiary countries.  Focus on DfID as a case study, but same instrument is utilised by EuropeAid; IDA (investment loans and credits); other bilateral aid programmes such as AusAid and USAID. Contract specifies a Financial limit or guaranteed maximum and the Services set out in the Terms of Reference. Residual rights of control rest with with the DfID. Personnel fees and project expenses are reimbursed via invoices. (Second step in this project) Incomplete contracts: Any cost overruns or changes to the project's TOR need to be renegotiated.

5. Why competitive bidding? Achieve efficient and effective use of public monies • Contracting Process • 1.Announcement of Project (tender or business opportunity)/Contract advertised: Terms of reference • 2.(Expressions of Interest -- only for large projects) • 3.Shortlisted candidates are invited to submit a full proposal • 4.Preferred tenderer selected

6. Data Sample of 458 projects,1222 proposals. Selection criteria: (i) competitive, (ii) completed, (iii) target number was 450 (starting in July 2004, worked backwards). Sample spans period 1998-2003. Data specific to each proposal: Name of consultant; proposed total costs, fees, expenses; winner, evaluation scores and weights attached to each score (Archives) + status, sme (Internet) Data specific to each project: Sector type, discipline type, contract type, desk budget.(Paradox database system) ∙

7. 1. Type of Bidders and Success Rates Finding 1.1: Majority of bidders are for-profit firms

8. Finding 1.2: For-profit firms are relatively more successful when bidding for physical infrastructure or industrial development type projects (Commercial, construction, energy, extractive industries). Nonprofits, by contrast, are relatively more successful when bidding for social infrastructure type projects (Education, health, population and social development)

9. Finding 1.3: Overall, bids by nonprofits are less frequent, but relatively more successful. Success rates are higher for all discipline types with the exception of “feasibility study”.

10. Finding 1.4: (i) Since the untying of aid, competition appears to have increased. (ii) The average weight attached to “Methodology score” has gone down, whereas the relative importance of the commercial bid, work experience, country experience, and adherence to TOR scores have gone up. The average importance of the “Quality of personnel” score remains the highest.

11. Finding 1.4 (continued): (iii) Since the untying of aid, the share of contracts won by nonprofits has increased.

12. Finding 1.5: Nearly 90% of the large firms are for-profits. But, overall, large firms represent only one third of all the competitors. Again, bids by both large and small nonprofits are relatively more successful.

13. Overview 1: • Nonprofits are comparatively more successful than forprofits when bidding for social infrastructure projects • These are projects where there exists substantial opportunities for reduction of the quality of output. Consistent with Glaeser and Shleifer’ theory (2001) that nonprofit status acts as a means to commit to soft incentives. Such incentives protect donors, consumers and employees from ex post expropriation of profits by the entrepreneur. • Nonprofits attract employees who are more caring about the output. • (1-γ)b(X, α,i,e)+γ[t-C(X,θ,i)] • Extreme case: nonprofits γ=0 and forprofits γ=1 • (Hart, Shleifer and Vishny, 1997; Besley and Ghatak, 2001)

14. 2. Competitive advantage of nonprofits vis-à-vis forprofits Finding 2.1: Controlling for the type and size of project, nonprofits score relatively worse on the “Quality of personnel” dimension, whereas experienced firms score higher on that dimension. The number of proposals previously submitted is a negative determinant of the weighted Quality of personnel score.

15. Finding 2.2: Controlling for the type and size of project, nonprofits’ bids offer lower average personnel fees. Larger projects score relatively worse on the commercial bid dimension.

16. Finding 2.3: Controlling for the type and size of project, nonprofits score worse on the adherence to TOR dimension. Also, bids for larger projects score worse on this dimension. Nonprofits score relatively higher on the country experience dimension. Again, bids for larger projects score worse on this dimension.

17. Overview 2: Bids of nonprofits display comparatively lower average daily personnel fees. Non-redistribution constraint (Hansmann, 1996); Outcome-oriented motivation (Francois, 2000); Low wages helps select a labour force driven by concerns for the firm’s output (Francois 2004). Voluntary labour contribution (Rose-Ackermann, 1996). Nonprofits score worse on “Adherence to TOR” dimension Nonprofits value the project outcome - Hold-up problem and threat of renegotiating TOR (Guasch, Laffont and Straub, 2002) Nonprofits score worse on “Quality of personnel” dimension. At the same time, this is the dimension that is weighted most heavily in the construal of final score. Private sector’s higher wages attracts higher skilled employees Nonprofits score higher on “Country experience” dimension. At the same time, this is a dimension that on average counts for only 13% of the final score. Nonprofits on average exhibit greater local knowledge

18. 3. Acquisition of Contracts and its Determinants

19. Probit Regressions (a)

20. Probit Regressions (a) Continued

21. Probit Regressions (b)

22. Probit Regressions (b) Continued

23. Probit Regressions (c)

24. Probit Regressions (c) Continued

25. Overview 3: • Reputation matters! At the same time, submitting many proposals lowers the likelihood of winning. • Incomplete contracts and asymmetric information • Fits well with DFID staff’s frustration that consultants are often too little specialised, tend to apply for everything • Overall, submitting bids with low project costs increases the likelihood of winning but submitting bids with below average project costs backfires for nonprofits only! If nonprofits submit the lowest cost bid, they are significantly less likely to win the project. • Trade-off between signalling high quality and exploiting cost advantage