Public Policy Instruments for Procurement: An Empirical Analysis

Policy instruments in procurement are widely used. While the efficiency of the local content policy requirements (LCRs) as one of such instruments has been questioned, it remains a powerful mechanism for the national governments of resource-rich countries. The aim of such LCRs is to extract additional benefits for citizens of these countries, beyond fiscal revenues and enhancing innovation. We analyse the relationship between the LCRs and local procurement using data from 1,326 contracts on extraction and exploration of subsoil in Kazakhstan over the period 2013-2016. We provide empirical evidence that LCRs in this case were not an effective tool in supporting procurement from local suppliers. We argue that firms would prefer to pay fines for non-compliance with LCRs on procurement of goods, works and services rather than use local suppliers. Our findings demonstrate that LCRs are an inefficient policy instrument and require further improvement in Kazakhstan. We offer policy implications for efficient LCRs and highlight the importance of choosing the optimal LCRs to enhance local procurement.