# 1. Introduction

Institutional and governance challenges are key constraints that reduce Bulgaria’s economic potential and private sector productivity. Bulgaria continues to lag most European Union (EU) countries on governance indicators.<sup>1</sup> The gap with the rest of the EU is most pronounced along institutions critical for economic growth such as the rule of law, control of corruption, and government effectiveness.<sup>2</sup> One critical institutional area where governance weaknesses and state capture by private interests are evident is public procurement (European Commission-DG REGIO, 2022, chapter 7). Owing to the digitalization of public procurement data in the EU and the introduction of a comprehensive national e-procurement system, auditors and judicial institutions, government analysts, businesses, and civil society now have access to electronic public procurement data, including the details of individual contracts and tenders (World Bank, 2020). For the first time, these provide tools to work with big data by discovering the cost and beneficiaries of non-competitive public procurement tenders and linking corruption risks in public procurement to state capture and identifying their economic impacts. Among others, the <u>opentender.eu database on public procurement created by the EU-funded DIGIWHIST</u> project allows analysts to identify and validate ‘red flags’ for corruption that may signal competition flaws, misuse of public funds, or outright corruption.

Reducing corruption risk in public procurement has the potential to boost private sector productivity growth (World Bank, 2022). Public procurement amounts to more than 12 percent of gross domestic product (GDP) in Bulgaria. The access to contracts thus has a major impact on the allocation of resources in the economy. It can either achieve value for money out of scarce fiscal resources and support the growth of more productive firms or result in an inefficient use of public money through helping unproductive firms to accumulate scarce physical and human capital and stay in the market. Reducing corruption in public procurement also reflects on the enforcement of competitive market structures in the economy and thus supports a policy environment that encourages competition based on innovation and efficiency instead of lobbying for policy privileges. Competitive public procurement practices can thus boost economic growth in two fundamental ways:

- Increasing the efficiency of resource allocations across firms and raising aggregate productivity growth

- Contributing to a level playing field among all firms in the economy, which encourages innovation and ensures survival and growth of the most competitive enterprises.

Against this background, the main goal of this paper is to provide a comprehensive analysis of corruption risks and state capture in public procurement in Bulgaria during 2011-2019. To measure these risks, this paper develops and validates a range of corruption risk indicators (CRIs) and builds a network-based state capture assessment framework. For measuring corruption risks, the paper calculates a composite score of individual ‘red flags’, called the corruption risk indicator (CRI), as an objective proxy measure of institutionalized corruption in public procurement (Fazekas and Kocsis 2020). For measuring state capture, the clustering of high corruption risk contracting relationships among buyers and suppliers is applied (Fazekas and Tóth 2016). These measurement innovations adapted to the specific Bulgarian context enable us to track the development, distribution, and structure of corruption risks and state capture across years, regions, and sectors, to name a few key analytical dimensions.

> 1 European Commission. Public administration and governance: Bulgaria. 2020. URL: https://commission.europa.eu/system/files/2021-10/bulgaria-ht0321342enn.en_.pdf. 2 The World Bank Worldwide Governance Indicators.

2