Bulgaria’s Procurement Problem: How Favoritism Limits Growth and Innovation

Political favoritism in public procurement in Bulgaria grants connected firms uncompetitive contracts, stifling productivity growth and inflating costs. Eliminating favoritism could boost annual total factor productivity (TFP) growth by 8% and reduce government overspending.

A new World Bank research paper, produced by the Finance, Competitiveness, and Investment Global Department in collaboration with the Central European University, Government Transparency Institute, and University College London, examines the economic consequences of political favoritism in public procurement in Bulgaria. The study finds that firms with political connections are significantly more likely to win government contracts, particularly through uncompetitive processes. Using a comprehensive dataset covering over four million firm-year observations, 150,000 public procurement contracts, and a newly compiled database on firms’ political affiliations, the research shows how favoritism in awarding government contracts has stifled productivity growth and misallocated resources. The findings indicate that politically connected firms are 18-32% more likely to secure public contracts, and the probability rises to 20-41% for contracts awarded through uncompetitive tenders. This practice not only distorts market dynamics but also leads to inefficient capital allocation, as these firms, despite their privileged access, fail to translate contracts into productivity gains or employment growth. In contrast, companies that secure contracts through competitive means experience tangible improvements in productivity and job creation. The study estimates that if favoritism in public procurement were eradicated, total factor productivity (TFP) growth in Bulgaria could have been 8% higher annually between 2010 and 2019.

How Political Favoritism Corrupts the Procurement Process

The research identifies six key indicators of corruption risk in procurement: single-bid tenders, lack of publicly advertised calls for tenders, non-open procurement methods such as direct contract awards, short advertisement periods that limit competition, unusually fast decision-making processes that favor predetermined winners, and repeated contract awards to the same supplier. These risk indicators reveal how local and central government agencies manipulate procurement to favor specific firms, allowing politically connected businesses to operate in an environment of reduced competition. Data analysis shows that firms connected to local government officials are 41% more likely to be awarded contracts through uncompetitive tenders, while those linked to central government figures see a 37% higher probability of securing such deals. This pattern of favoritism limits opportunities for more efficient firms, reinforcing a cycle where companies invest in political connections rather than innovation and efficiency.

The study also highlights that nearly half of the contracts won by politically connected firms involve a high risk of favoritism, compared to just one-fourth of contracts won by non-connected companies. This systematic bias not only disadvantages more capable firms but also reduces incentives for businesses to improve their services, knowing that success is dictated by connections rather than competitiveness.

Favoritism Undermines Economic Growth and Productivity

While public procurement contracts have the potential to drive economic growth, their impact depends on whether they are awarded through fair competition. The study finds that firms winning contracts through competitive tenders show significant productivity and employment growth, while those securing contracts through uncompetitive means experience stagnation in productivity but an increase in profit margins. This suggests that politically connected firms benefit from rents extracted from inflated contracts rather than from operational efficiency.

The consequences of favoritism extend beyond individual firms. Public procurement accounts for 14% of Bulgaria’s GDP, meaning that inefficiencies in contract allocation have widespread economic repercussions. The study estimates that Bulgaria’s economy could have experienced 8% higher annual TFP growth if procurement were truly competitive. Moreover, the lack of competition results in inflated contract prices, with the research showing that uncompetitive contracts are overpaid by 9-11%. In contrast, firms winning contracts through open and fair competition offer lower prices, generating savings for the government and taxpayers.

How Firms Extract Windfall Profits from Overpaid Contracts

One of the study’s most striking revelations is how politically connected firms profit from public contracts without delivering proportional economic benefits. By analyzing price markups in procurement contracts, researchers found that uncompetitive procurement allows firms to charge significantly higher prices than originally estimated. This suggests that rent-seeking behavior, rather than business efficiency, is the primary driver of profits among politically connected firms.

In contrast, companies that win contracts through competitive procedures often offer discounts, reducing overall costs for public projects. The presence of political favoritism in procurement thus places an unnecessary financial burden on taxpayers, diverting funds that could otherwise be used for critical infrastructure, healthcare, or education.

Reforms Needed to Break the Cycle of Favoritism

The findings make a compelling case for urgent reforms in Bulgaria’s public procurement system. The study suggests several key measures to increase transparency and competition, including:

1. Strengthening digital procurement systems – Ensuring all government contracts are advertised openly with sufficient time for competitive bidding.
2. Enhancing anti-corruption oversight – Independent regulatory bodies should be empowered to investigate single-bid tenders and procurement irregularities.
3. Enforcing conflict-of-interest regulations – Restricting politicians and government officials from directly or indirectly benefiting from procurement contracts.
4. Encouraging private sector competition – Removing barriers for new entrants in government contracting and reducing discretionary powers in procurement decisions.

The case of Bulgaria is not unique. Many emerging economies face similar challenges, where government contracts are used as tools of political favoritism rather than engines of economic development. If Bulgaria were to eliminate favoritism in public procurement, it would unlock stronger productivity growth, reduce wasteful government spending, and create a more competitive business environment.

The study underscores a crucial message: political connections should not dictate economic success. Governments that prioritize fair and transparent procurement processes can foster long-term economic development, encourage private sector innovation, and enhance public trust in institutions. With the right reforms, Bulgaria could set an example for other economies struggling with similar governance issues, proving that economic success should be built on merit, not political privilege.