Esra Çeviker Gürakar - Okan University Tuba Bircan - Okan University ERF Seminar on The Political Economy of the Private Sector in the Middle East Marrakech, Morocco, December 21-22, 2016 www.erf.org.eg

1. POLITICAL CONNECTIONS AND PUBLIC PROCUREMENT IN TURKEY:
EVIDENCE FROM CONSTRUCTION WORK CONTRACTS
Esra Çeviker Gürakar & Tuba Bircan
The Political Economy of the Private Sector Dynamism in the Middle East
Marrakech, December 20-22, 2016

2. • Every year more than 100 thousand public
procurement contracts are awarded to more
than 50 thousand firms that are mainly the small
and medium enterprises (SMEs).
• Only in 2015
▫ 127,924 public procurement auctions
▫ with a total contract value reaching $ 50 billion
Economic Significance of Public
Procurement in Turkey

3. Background
• EU-IMF-WB nexus  Competitiveness,
efficiency, transparency de-politicization
• The new public procurement law was passed in
January, 2002 to be enacted in January, 2003

4. Background
• AKP won a majority in the parliament in November,
2002.
• Recep Tayyip Erdogan:
▫ “The public procurement law serves the interests of 50-60
firms only. I will not leave the construction work of 15
thousand kilometers of highways to 60 contractors.”
• Under the AKP majority government 35 different laws
that made more than 150 amendments to the reformed
PPL have been passed in the parliament
▫ July, 2016 coup attempt – state of emergency –
amendment to the PPL!

5. • Legal amendments that increase the less
transparent and less competitive procurement
methods
▫ The 2008 Amendment: “Restricted procedure can
be used in procurement of construction works
where estimated costs exceed the half of the
threshold value”
▫ The monetary limit for 2009 for instance was TL
11,116,324. The monetary limit for 2016 is TL
17,902,001.
• Legal arrangements that exempt the procurements
of specific institutions such as TOKI from the scope
of the PPL as well as from the audit of the PPA and
the Court of Accounts

6. Number and Value of Public Works Construction Contracts
Restricted Procedure
0%
4%
8%
12%
16%
20%
24%
2004 2005 2006 2007 2008 2009 2010 2011
% in Total Value % in Number of Contracts

7. Number and Value of Public Work Construction Contracts -
Open Procedure
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010 2011
% in Total Value % in Number of Contracts

8. Growing concerns over corruption in the
allocation process of the procurement
contracts
• Transparency International (2012): “public
procurement is singled out as one of the sectors
most susceptible to corruption, with many cases
involving high-level figures, relatives or persons
closed to senior AKP figures”
• several procurement officials and politically
affiliated firms prosecuted for rigging auctions
(Hürriyet Daily News, February 20th, 2012)
• winners of procurement contracts donate 10-20 % of
contract price to organizations affiliated with
Erdoğan (Washington Post, March 13, 2015)

9. Main Questions
• Why has the PPL been severely amended in a
way that has increased state discretion in
allocation of procurement contracts?
• Has the allocation of contracts shifted toward
those firms connected to AKP?
• Has increased state discretion led to higher costs
to the public (higher contract prices)?

10. What we do:
• through an analysis of 17,948 high value (total:
TL 137 billion) public work procurement
contracts awarded to 5944 firms between 2004
and 2011
▫ provide systematic evidence of favoritism
▫ reveal that increased discretion is associated with
higher contract prices
▫ the use of public procurement for rent creation
and distribution is particularly extensive for some
particular procuring entities (e.g. TOKİ,
Municipalities)

11. Three types of data:
• a unique public procurement dataset
• firms’ business association memberships lists,
MÜSİAD, TUSKON TÜMSİAD, ASKON vs.
TÜSİAD and TÜRKONFED
• a manually constructed firms’ direct political
connections dataset (Trade Registry Gazette).

12. 1. Public Procurement Dataset
• 17,948 high value public works procurements
• Has detailed information on
▫ procuring institutions (e.g. Ministries and the
Municipalities),
▫ firm names that are awarded with a public
procurement contract,
▫ auction types(goods, services, construction),
▫ auction methods (open tender, negotiated procedure,
restricted procedure, procurements made under
exemptions)
▫ the economic details of procurements (e.g. estimated
cost, lowest bid, highest bid, winning bid, the contract
price).

13. 2. Politically Affiliated Firms Dataset
• The members of MUSIAD, TUSKON, ASKON,
TUMSIAD that explicitly provide political
support to the government are coded ‘politically
affiliated firms’ (PAFs)
• TUSIAD and TURKONFED that either went
through some conflicts with the government or
at least not known to have as “harmonic”
relations with the government as the PAFs do.

14. 3. Politically Connected Firms (PCF) Dataset
(Firms with Direct Connections with AKP - cAKP)
• A firm is coded as ‘connected to AKP’ (cAKP) if one
or more of its shareholders is/are:
▫ i) a Member of the Parliament from the ruling AKP;
▫ ii) an AKP official at the local level such as a provincial
head or a member of the provincial party organization;
▫ iii) first degree relative of the ruling party officials
indicated in (i) and (ii)
▫ iv) Ideological Kinship (AKABE, ENSAR, board
members of the politically connected media channels
etc.)
▫ 17-25 December graft investigation

15. All in all:
• 5944 contract awarded firms
▫ 29 foreign firms
▫ 110 TÜSİAD TÜRKONFED member firms
▫ 134 cOPP firms
▫ 682 PAFs
▫ 597 cAKP firms
 40% AKP MP, AKP Official (national and local level)
 20% First degree relatives of Tayyip Erdogan, AKP Ministers, AKP MPs
and AKP Officials
 40% Ideological Kinship
• There are some overlaps: for instance, a PAF can be cAKP as well.
▫ In the 22nd 23rd and 24th terms of the TGNA the number of
MÜSİAD-affiliated MPs was 11, 7, and 10 respectively. Other RN
members less in number. No TÜSİAD member.

16. • Different procurement characteristics and the
probability of a PCF winning the auction
• Do closed auctions shift the allocation of contracts
to the PCFs?
• Different procurement characteristics, the type of
the winner and the final contract price
• Do closed auctions make procurements more
expensive for the government (higher final price,
lower rebate values)
• The 2008 legal amendment and the final contract
price

17. Different procurement characteristics and
the probability of a PCF winning the
auction - The Logit Model
DEPENDENT = If a contract is awarded to a Politically Connected Firm (PCF)
LOGIT
MARGINAL EFFECTS

19. Distribution of cAKP Firms’ Average and Total
Value of Contracts by the Foundation Year
0
50
100
150
200
250
300
350
0
50
100
150
200
250
AverageContractValue(Millions)
Average Value of Contracts No of cAKP Firms
0
500
1000
1500
2000
2500
0
5
10
15
20
25
30
35
40
TotalContractValue
(Billions)
Total Value of Contracts No of Contracts

20. Different procurement characteristics, the
type of the winner and the effect of the
legal amendment on the final contract value
DEPENDENT REBATE =
Diff-in-Diff Model
Diff-in-Diff Estimates

22. Can the assignments around the monetary
limits be assumed to be locally random?

23. Conclusion
• Politically connected firms are awarded with higher
numbers of contracts and with contracts greater in value
• The probability of a politically connected firm winning a
procurement contract increases, among other things,
when less competitive award procedures are used.
• The legal amendment of 2008 has not led to higher costs
to public
• However, the clusters just above the monetary limits
raise doubts on miscalculation of the estimated costs
• Although favoritism is centralized, exists and prevails
through making highly debated, notorious new laws and
regulations there is also some sort of redistribution
through relatively low cost projects.