World Bank Procurement Rules and Chinese Contractors

In a city increasingly disenchanted with international market-based competition, one block on H Street in Washington DC remains committed to the cause. The World Bank’s procurement rules, which apply to its investment project financing, still mandate international competitive bidding for nearly all large contracts under those projects. And research I’ve just published with Zack Gehan and Songtao Duan suggests that’s a good thing, because the rules work to deliver quality outcomes wherever the supplier firms are based.

Back in 2003, I was a new-minted World Bank Task Team Leader managing an emergency telecommunications project in Afghanistan. Unusually for the World Bank (which was largely out of investing in telecoms infrastructure), the project supported the construction of a government communications network linking ministries and provincial capitals. When we reviewed the bids to build the network, the clear winner was a US firm. That, too, was increasingly unusual for the World Bank contract, especially in a fragile state. Between 2001 and 2016, US firms and individuals won about 4 percent of the total value of Bank-financed contracts in Afghanistan, and two thirds of that involved consultancies.

But by the mid-2000s, the same contractor had provided communications for the US Embassy in Kabul as well as the US military in Afghanistan and the Afghan Army, part of a close relationship with the US Defense Department. Perhaps there were economies of scope. Regardless, the contractor rapidly built out a functioning network to the satisfaction of both the Afghan authorities and World Bank telecoms engineers. Whatever the source of the firm’s competitive advantage, the contracting process apparently worked to help deliver the results the project aimed to achieve.

There are concerns, however, that World Bank-financed contracting processes are not working as well as they might do—or used to—in guaranteeing outcomes. In particular, that Chinese firms are winning ever more Bank-financed contracts but delivering substandard products. That fits with a broader narrative around Chinese engagement in developing countries linked to poor quality and allegations of corruption.

It is true Chinese firms are wining an ever-larger share of World Bank contracts awarded internationally—more than any other country. And there are instances of both bid-rigging involving Chinese firms and World Bank-financed contracts as well as Chinese-backed development projects delivering low returns. But the idea that Chinese contracting is particularly problematic in this regard is open to debate. Existing analysis of World Bank-financed transportation contracts in Africa, for example, suggests Chinese and OECD contractors produced similar results.

With Zack and Songtao, I looked at more than 2,000 recent World Bank projects across all sectors in the last two decades to examine if the share of project contract values won by firms from different supplier countries was associated with better or worse project outcomes as measured by the Bank’s Independent Evaluation Group. The figure below takes one cut at the data: projects where firms from a particular country were the main suppliers (accounting for the largest percentage of contract values) and the project outcomes from highly unsatisfactory to highly satisfactory. As can be seen, for all supplier countries the mean on projects where their firms are the major suppliers is somewhere in the ‘moderately satisfactory’ category, and China looks very similar to the US, UK, and Germany on that measure (and better than France). Using regression analysis that picture is confirmed: the share of contract values won by Chinese firms has no significant relationship with project outcomes (and the share of contract values won by French firms is associated with somewhat worse outcomes).

To be sure, many Chinese contractors bidding on World Bank contracts are state-owned and may benefit from subsidies. Of the World Bank’s top 10 Chinese contractors in 2020, accounting for nearly 60 percent of the contracts won, eight were owned or controlled by the Chinese state. But that apparently translates into better value for money for World Bank-client countries, not worse outcomes. It looks like the World Bank’s procurement system is still working to deliver results based on international competition, whatever the source of competitive advantage.

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