2020 Volume 20 Pages 162-177
This paper explores why Japanese public procurement authorities tend to restrict the number of bids during competitive bidding. It demonstrates that this practice can be explained as a strategy to ease authorities’ search for a satisficing best bid.
In Japan, public procurement reforms have progressed since the 1990s. Authorities have improved the competitiveness of the bidding process for public works. However, the average number of bids per competitive bidding event for public construction works ordered by the Ministry of Land, Infrastructure, Transport and Tourism decreased annually after 2005, which appears that the competitiveness of the bidding process has been kept low. Why do authorities restrict the number of bids even as they attempt to enhance the competitiveness of the bidding process? What, if any, are the positive aspects of restricting the number of bids? This paper considers these points from the perspective of the transaction costs that authorities must bear when they operate public procurement systems; previous studies have often ignored this, focusing instead on the benefits (e.g., the economic efficiency of the winning bid) of increasing the number of bids.
Public procurement can be regarded as a decision-making activity wherein authorities decide which contractor should receive a certain construction contract. In this context, authorities seek low-cost, high-quality work. Considering authorities’ bounded rationality, it is too costly for them to evaluate trade-offs between their values and determine the best balance between them.
However, considering each value separately in a pre-selected order (quality first and price second) reduces the information costs of decision-making. This eases authorities’ search for contractors who offer satisficing low-price and high-quality work; this search usually occurs in the following manner. First, authorities restrict the number of bids by establishing the qualification criteria. These are based on contractors’ past performance or their ability to prevent less skilled contractors from participating in the bidding process. Then, contractors who have passed this first stage submit competitive bids, and authorities accept the most economical bid. This process was tested by regression analysis using publicly available data regarding public construction works ordered by the Ministry of Land, Infrastructure, Transport and Tourism.
Accordingly, restricting the number of bids is a strategy that should reduce the transaction costs that public procurement authorities bear when they operate public procurement systems and pursue both low-cost and high-quality work.
