The effects of mafia infiltration on public procurement performance

Ravenda D., Giuranno M. G., Valencia-Silva M. M., Argiles-Bosch, J. M, García Blandon J., 2020 – European Journal of Political Economy

When looking at public procurement, a main concern regards the infiltration of organized crime and the consequences in terms of distortion of competition in the markets, costs incurred by the community and efficiency in the execution of public contracts.

The issue is becoming increasingly relevant due not only to the vulnerability of procurement to corruption, but also, and above all, to the current increase in public procurement related to the implementation of the National Recovery and Resilience Plan (PNRR). To understand the importance of the phenomenon, consider that, according to the European Commission, before Covid, public procurement represented approximately 13.1% of the EU GDP, and 29% of general government expenditure according to OECD estimates.

In a recent article published in the European Journal of Political Economy, entitled The effects of mafia infiltration on public procurement performance, Diego Ravenda, Michele Giuseppe Giuranno, Maika Valencia-Silva, Josep García-Blandon, and Josep Argiles-Bosch examined the effects of Mafia infiltration on public procurement performance, based on a sample of 68,063 public work contracts (PWC) awarded by Italian municipalities over the period 2012–2017, of which 687 are identified as Mafia-infiltrated, either because of being awarded by municipal councils subsequently dissolved due to Mafia infiltration, or because of being won by Mafia-owned firms. In their analysis, the authors try to find empirical evidence of inefficiencies linked to embezzlement and rent seeking in favor of the Mafia.

Some central hypotheses are empirically tested through a set of regression models on the basis of a detailed analysis of the existing economic literature. Indeed, a number of contributions point to a plethora of   relationships among crime, corruption, and public procurement. These include strategic behaviors adopted by criminals that cause disruption to competition and adverse selection. Relevant are the strategies of aggressive bidding, collusion among bidders, discouraging the participation of efficient companies leading to self-exclusion mechanisms through the use of violence and intimidation, money laundering, hiding behind a veil of legitimization and so on. Political infiltration and corruption aim at disrupting tenders through, for instance, document falsification and alteration of the procedures, strategic tailoring of tender requirements to favor mafia-connected firms, favoritism, and competition restriction.

In order to measure the effects of mafia infiltration on public procurement, the authors identified the following hypotheses:

Hypothesis 1: Mafia infiltration is associated with higher awarding rebates for public work contracts.

Hypothesis 2: Mafia infiltration is associated with higher execution cost overruns.

Hypothesis 3: Mafia infiltration does not significantly influence delivery delays for public work contracts.

The regression model considers as dependent variables winning rebate, cost overrun and delivery delay and as independent variable a binary variable taking a value of 1 for Mafia infiltrated contracts and 0 otherwise. Furthermore, the study considers a number of control variables describing public work contract characteristics, municipality characteristics, winning firm characteristics, socio-institutional characteristics, social capital variables, and a number of other variables also used in prior studies.

Results reveal that Mafia infiltration is positively associated with the number of submitted bids, awarding rebates and execution cost overruns, whereas it is negatively associated with delivery delays for public work contracts. The effect of Mafia infiltration on execution cost overruns and the probability of their occurrence is weaker for larger public work contracts.

The analysis highlights the existence of sophisticated methods to disguise crime behind a veil of legitimization. These findings suggest the presence of collusive schemes among bidding firms within the Mafia network and provide new insights for the implementation of more sound policies to tackle practices associated with Mafia infiltration in public procurement. These should take into account that infiltrated contracts give the appearance of making significant cost savings in the tender awarding stage. Actually, the initial savings translate into substantial cost increases in the execution phase of the work, nullifying the initial savings. It is interesting to note how, paradoxically, mafia infiltration produces greater efficiency in the execution times of works. Evidently, the reduction in the execution times also reduces the risk of being intercepted and blocked by the control and prevention authorities.

Interesting policy implications also arise from the consequences on procurement after the election of the new municipal councils, after the dissolution of the previous ones. The results obtained do not show significant improvements in the management of new public procurement. This, in turn, seems to suggest that in order to eradicate Mafia from public administration actions should target public officials as well as political bodies.

From a PNRR perspective, in order to limit the presence of Mafia infiltrations, the policy maker could also resort to more stringent requirements and larger transparency in public work contract implementation and renegotiations, stricter reliability assessments of abnormally low bids, the adoption of more qualitative parameters, including social and environmental criteria, to determine tender winners, the enhancement of the social capital of the local context as well as of the integrity and accountability of public officials. In many cases, it could also be useful the centralization of the management of public procurement at local level.

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