THE IMPACT OF CHINESE FISCAL DECENTRALIZATION ON

GOVERNMENT PROCUREMENT PERFORMANCEEVIDENCE FROM

CHINESE GOVERNMENT PROCUREMENT IN 26 PROVINCES
Zhiyuan Bai

Jie Li

ABSTRACT. Most Chinese scholars study government procurement

performance on theoretical level and fiscal decentralization on
basis of traditional western theories, ignoring decisive premise
ensuring its effectiveness. The deep reasons why the scope is too
narrow are not discovered. And how fiscal decentralization affects
performance is rarely studied. This paper argues that fiscal
decentralization determines the scope, scale and cost of
government procurement, which will affect its effectiveness,
efficiency, and economy, namely performance. We select the rate
of saving funds as performance indicator, revenue
decentralization, expenditure decentralization and financial
self-sufficiency as explanatory variables. Through empirical
analysis with panel data, we study the effects of Chinese fiscal
decentralization on government procurement performance. We
conclude that fiscal decentralization has positive effect on
expansion of government procurement, but negative impact on its
performance. Therefore, the reform of fiscal decentralization will
improve Chinese government procurement performance. We put
forward the proposals in the end.
Key words: Fiscal Decentralization; Government Procurement;
Performance

Zhiyuan Bai, PHD, is a professor, Public Finance and Taxation School,

Zhongnan University of Economics and Law, Wuhan Hubei 430073,

China. Her teaching and research interests are in theory and practice of
government procurement.

Jie Li, Master, is an student, Public Finance and Taxation School,

Zhongnan University of Economics and Law, Wuhan Hubei 430073,

China. Her research interests are in government procurement.

1. INTRODUCTION
As China being the world's second-largest economy, China's
fiscal expenditure increases rapidly. And as an important part of
fiscal expenditure, the government procurement is growing fast.
The content of government procurement depends on the scope of
government powers and responsibilities, while procurement funds
originate from the division of fiscal revenue between central and
local government. Therefore, fiscal decentralization should have
impact on government procurement. But the previous studies on
the effects of fiscal decentralization on government procurement
are few. They are based on traditional western theories, ignoring
decisive premise ensuring its effectiveness. In this paper, on the
basis of predecessors' research, we choose panel data of 26
Chinese provinces from 2008 to 2012. We select the rate of
saving funds as the indicator of performance, revenue
decentralization, expenditure decentralization and financial
self-sufficiency as explanatory variables. Through empirical
analysis with panel data, we study the effects of Chinese fiscal
decentralization on government procurement performance. We
conclude that fiscal decentralization has positive effect on
expansion of government procurement, but negative impact on its
performance. This paper mainly tries to find the impact of fiscal
decentralization on government procurement performance, trying
to recognize the necessity of fiscal decentralization reform, so as
to promote reasonable division of powers and financial rights
between the central and local government and improve the
performance of the government procurement.
This paper contains six parts. The first part is introduction.
The second part introducing background of research, indicating
that Chinese government procurement grows rapidly, and the
research is meaningful. The third part introduces the transmission
route of fiscal decentralization influencing the performance of
government procurement from three aspects. The fourth part
establishes a model to study the quantitative relationship
between government procurement and fiscal decentralization
through empirical study. The fifth part analyzes the reasons why

Chinese current fiscal decentralization reduces the performance

of procurement. The sixth part comes to conclusion and puts
forward relevant policy suggestions.
2. THE GROWTH OF AND FOCUS ON PUBLIC PROCUREMEN
In recent years, with the development of financial system
reform, it is obvious that the fiscal expenditure is increasing scale
and standardization. From The Law of Government Procurement
of PRC was issued in 2003, which marks the beginning of new
reform of government procurement, to 2012, the scope and scale
of government procurement in China expand unceasingly during
these ten years. The absolute scale expands more than 10 times,
while the relative scale (government procurement accounts for the
proportion of fiscal expenditure) also increases from 5% to 11.7%.
Figure 1 is the growth rate of fiscal expenditure and government
procurement expenditure from 2004 to 2012.
FIGURE 1
The Growth Rate of Fiscal Expenditure And
Government Procurement Expenditure from 2004 to 2012
40.00%
37.08%

35.00%
30.00%

34.56%
28.70%
25.75%

25.00%

28.54%

25.74%

23.15%

20.00%
15.00%

26.60%

19.11%

23.74%

21.90%

19.13%

21.56%
17.79%

15.57%

23.34%

15.29%

13.61%

10.00%
5.00%
0.00%
2004

2005

2006

2007

2008

2009

2010

2011

The growth rate of government procurement expenditure

The growth rate of fiscal expenditure

2012

years

As shown in the figure, the fiscal expenditure and

government procurement expenditure remain growth in the high
speed. In addition to individual years, the growth rate of
government procurement is faster than the fiscal expenditure. At
the same time, comparing two groups of data, we find that the

proportion of government procurement expenditure in fiscal

expenditure is larger and larger. Figure 2 is the relative size of
government procurement from 2003 to 2012.
FIGURE 2
The Relative Size of Government Procurement from 2003 to 2012
2003
2012
2011

11.10%

2004
6.73%
7.49%
8.63%

10.37%

9.11%

9.37%
2010

2005

9.36%

9.72%

2006

9.57%
2009

2007

2008
the proportion of government procurement expenditure in fiscal expenditure

As shown in the figure, in the fiscal expenditure, the

proportion of government procurement rose from 6.73% in 2003
to 11.1% in 2012. The scale of government procurement
increases and it plays an increasingly important role in the fiscal
expenditure, therefore, the improvement of government
procurement performance will greatly improve the performance of
fiscal expenditure. Government procurement has the important
function of saving financial fund. Therefore, the rate of saving
fundsi is an important indicator of evaluating the government
procurement performance. Figure 3 is the rate of saving fund of
government procurement from 2008 to 2012. We find that the
rate of saving fund is almost 11.5% in China, which shows that
government procurement can actually saves the financial fund
efficiently to a certain extent.

FIGURE 3
The Rate of Saving Funds of Government Procurement from 2008
to 2012
16.00%
14.00%

14.30%

12.00%
10.00%

11.24%

11.50%

2008

2009

12.10%

11.70%

2011

2012

8.00%
6.00%
4.00%
2.00%
0.00%
2010

The rate of saving funds of government procurement

Under the background of the current era of economic

development in China, on one hand, the public demand for public
goods expand constantly. The government has the responsibilities
and obligations to provide quality public product and service.
However, the government financial and the growth of fiscal
revenue are limited. On the other hand, the fund of government
fiscal expenditure comes from the general taxpayers. With the
increasing awareness of taxpayers, there will be higher
requirement for government to provide quality products and
services. This requires the government to strengthen the concept
of fiscal expenditure performance and strengthen performance
management through evaluating the fiscal expenditure
performance. Government procurement as an important part of
fiscal expenditure, it is particularly important to research on its
performance. The fiscal decentralization system in China decide
the scope of local and central government procurement, which
determines the sources and disposition of the tax to some degree.
Therefore, the fiscal decentralization should have impact on
government procurement performance.
At present, most researches of Chinese scholars focus on the
theory and ignore the empirical analysis, which usually build the

evaluation index system simply and rarely do any empirical

analysis. In addition, the analyses of the factors affecting the
performance of government procurement is not enough in-depth,
for example, many scholars have put forward that the scope of
government procurement in China is narrow, but they didn't study
the deep reasons behind. At the same time, most studies of fiscal
decentralization are based on the western traditional theory of
separation of powers, ignoring the decisive premise to ensure its
effective operation, such as the mature system of representative
democracy does not exist in China. As a result, many studies do
not accord with national conditions in China. Although the effects
of fiscal decentralization on government behavior have been
studied, how fiscal decentralization affects the performance of
government procurement is rarely studied. This paper mainly
studies the effects of fiscal decentralization on government
procurement performance.
3. THE TRANSMISSION ROUTE OF FISCAL
DECENTRALIZATION INFLUENCING THE PERFORMANCE OF
GOVERNMENT PROCUREMENT
Since the "performance" is applied to the government
management, according to the explanation of 3e of the British
Audit Commission, Effectiveness refers to make the government
policy reach their goals and provide the right services. Efficiency
refers to use as few resources as possible to provide specified
quality and quantity of services. Economy refers to buy specified
quality and quantity of items with the cost as little as possibleii.
The scope of government procurement influences the government
policy and the realization of the goals, which is effectiveness;
Purchase scale will affect the government procurement efficiency
to a certain extent; Procurement costs influence government
procurement economy. The following specific analysis how fiscal
decentralization affects the scale, scope and the cost of
government procurement, thus affects the effectiveness,
efficiency and economy of the government procurement,
eventually impact on government procurement performance.

3.1 Division of Powers and Responsibilities Affects the

Effectiveness of Procurement Indirectly
The division of powers and responsibilities determine the
tasks and responsibilities of central government and local
governments at all levels in public affairs and services. And it
determines the responsibilities of the fiscal expenditure. As a part
of fiscal expenditure, the scope of government procurement is
influenced by the division of powers. In China, the central
government is responsible for diplomacy and foreign aid spending,
defense and the armed police, the basic construction investment
ruled by the central government, central administrative fee,
technical transformation and new product trial production of
enterprises directly by the central government, the agricultural
expenditure arranged by central, the fund of geological exploration,
the foreign debt servicing costs burdened by central government,
as well as the spending of public security, and culture, education,
health, science, business spending which are in the charge of
central government; Local government is responsible for the
spending of the local public security, administrative management,
the basic construction investment arranged by local government,
the militia operating fees, urban maintenance and construction
funds, local enterprises transformation, and new product trial
production spending on agriculture, local culture, education,
health and other expensesiii. Thus, it determines the scope of all
levels of government procurement, which is the goods,
constructions and services within the centralized purchasing
directory in above fields as well as the goods, constructions and
services above the purchase quota standards.
The scope of procurement determines where those
purchasing funds will be spent to a certain extent, which is closely
related to whether government procurement can achieve its policy
objectives or not. It influences the effectiveness of government
procurement, which refers that governments are able to achieve
the policy goals through procurement, and provide the right
service. Specifically, it includes two aspects, macroeconomic
regulation as well as the provision of public goods. Firstly, the

scope of procurement determines the scope influenced by

macroeconomic regulation. Through the guidance of government
procurement policies, it regulates the economic behavior of
enterprises and individuals. Such as through the policy about the
limitation of government procurement bidding, it can encourage
the development of small and medium-sized enterprises; Secondly,
the scope of government procurement determines the scope of
public goods provided by government. The indicators to measure
the performance of providing public goods through government
procurement are the effective quality and quantity of services for
social economic activity. As a result, the division of powers and
responsibilities decide the scope of procurement, and the scope
of procurement further affects the effectiveness.
3.2 Division of Financial Authorities Affects the Efficiency of
Procurement Indirectly
The division of financial authorities determines the revenue
sources and proportion of the central government and local
government. Through dividing the tax revenues reasonably, it
consists of disposable income of government procurement at all
levels. The central government revenue including consumption tax,
tariffs, value added tax and consumption tax collected by the
customs, corporate income tax of banks, foreign banks and
non-bank financial enterprise, income tax of the central enterprise,
the profit delivered by the central enterprises, business tax,
income tax, urban maintenance and construction tax and profits
of the railway department, bank head office and insurance
company; The revenue of local governments include personal
income tax, profits delivered by local enterprises, property tax,
urban land use tax, vehicle use tax, stamp tax, deed tax,
cultivated land usage tax, business tax, urban construction tax,
land value-added tax and income paid for using state-owned land,
etciv. As a part of fiscal expenditure, the money of government
procurement comes from financial income at all levels. The scale
of the government procurement has the positive correlation with
the fiscal revenue.

In accordance with the "scale" theory, under certain

assumptions, with the enlargement of the scale, the procurement
performance may present the tendency of the inverted U-shaped
trajectory. When the size is smaller than the "balance", with the
scale enlargement of procurement, the degree of specialization
improves and the resource are saved, which improve the
efficiency and create the economies of scale. However, when the
size is more than "balance", with the scale enlargement of
procurement, the efficiency of management, the supervision of
the internal control and the information transmission will drop,
which reduce the procurement efficiency and create the
dis-economies of scale. However, this theory is based on strict
hypothesis, the actual cases of external factors is likely to change
it. All in all, the division of financial authorities affects the scale of
procurement. And the scale of procurement further affects the
efficiency of procurement.
3.3 Fiscal Decentralization
Procurement Indirectly

Affects

the

Economy

of

The fiscal decentralization includes the division of powers

and responsibilities and financial authorities, which determines
the scope and scale of procurement. The high management cost
caused by the wide scope of procurement, the resource intensive
and corruption caused by the large scale of procurement, and the
high recessive cost caused by the mismatch between the powers
and financial authorities, are all have great influence on the cost
of government procurement.
Government procurement cost is the sum of all kinds of
resources in the process of purchasing, in particular, the total
costs of the government procurement mainly include the price
cost of goods and services and the management cost of
procurement. The economy, one of the indicators of evaluating the
procurement performance, refers to buy the goods, construction
and services in ruled quality and quantity with as little cost as
possible. Thus, it mainly reflected the target "save" of government
procurement. Working less and spending more, or high cost will

cause the decline of the authority of the government. It could lead

to government failure to a great extent. The purchasing cost will
affect the economy of government procurement. Therefore, fiscal
decentralization affects the costs of procurement, and
procurement costs further affect procurement economy.
4. THE EMPIRICAL STUDY ON THE IMPACTS OF FISCAL
DECENTRALIZATION ON GOVERNMENT PROCUREMENT
PERFORMANCE
4.1 Model Specification
The paper makes empirical analysis on the relationship
between fiscal decentralization and government procurement
performance using the provincial panel data in China from 2008
to 2012. Reference the paper of Qunli Sun (2009)in order to
study whether the fiscal decentralization has effect on
government procurement, we select some variables to control the
effect of economy, in this paper, we build a model as follows:

Yit ai bt aFDit Controlit it

(1)

Where i represents region; t represents years; Y

represents the explained variable, that is the performance of local
government procurement; FD refers to the degree of fiscal
decentralization; Control refers to a series of explanatory
variables that influence the scale of local government
procurement; ai refers to the fixed effects; while bt refers to
the time period fixed effects; and it is the random error.
4.2 Index for Selection
4.2.1 Explained variable
This paper selects the rate of saving funds (jzlit) as the
explained variables, which is on behalf of the provincial
government procurement performance. The reasons why we
choose the rate of saving funds are that, on one hand, saving the
financial funds is a basic function of government procurement in
China. On the other hand, the data on policy function is rarely, and
there is not an accurate standard between different provinces and

lack of comparability, so that the rate of saving funds can reflect

the performance of government procurement in some extent.
4.2.2 Degree of fiscal decentralization
According to the content of fiscal decentralization, we choose
two indicators to measure the degree of fiscal decentralization:
4.2.2.1 The
FD-income

indicator

of

revenue

decentralization

In measuring the degree of fiscal decentralization, the

FD-income is generally used to measure longitudinal fiscal
decentralization between central and local government. After the
tax reform, there are certain divisions of fiscal authorities between
the central and local government. It is generally believed that if
the financial income of local government account for the higher
proportion of national finance income, the degree of fiscal
decentralization is higher.
FD-income= per capita financial income
government/per capita financial income in China
4.2.2.2
FD-exp

The

indicator of

of

local
(2)

expenditure decentralization

In measuring the degree of fiscal decentralization, the FD-exp

is generally used to measure longitudinal fiscal decentralization
between central and local government. The divisions of powers
and responsibilities between the central and local government
lead to the different scale of fiscal expenditure. It is generally
believed that if the financial expenditure of local government
account for the higher proportion of national finance expenditure,
the degree of fiscal decentralization is higher.
FD-exp=per capita financial expenditure of local government/
per capita financial expenditure in China
(3)
The reason why we choose the per capita above is that there
are regional differences in China. Using the per capita avoid the
effects of different population size in different provinces.
4.2.3 The control variate

In order to make a more robust empirical analysis, this paper

selected the following control variables:
4.2.3.1 Degree of fiscal self-financing
The degree of fiscal self-financing is expected to have
positive influence on the government procurement performance.
spit=corresponding fiscal revenue/ corresponding fiscal
expenditure
(4)
where spit is degree of fiscal self-financing.
4.2.3.2 The level of economic development
The real per capita gross domestic product in China (pgdpit) is
selected to represent the level of economic development. In order
to eliminate the effects of inflation, we adjust the real per capita
gross domestic product using the GDP deflator on the basis of
RPGDP in 2008.
4.2.3.3 The scale of government procurement
The ratio of government procurement amount in GDP (cggmit)
is selected to represent the scale of government procurement.
4.3 Empirical Analysis
In this paper, the statistical data of government procurement
is from China Government Procurement Yearbook in 2009 ~ 2013,
which contains five years data from 2008 to 2012 of government
procurement.
4.3.1 The result of descriptive statistics analysis
The result of descriptive statistics analysis is shown in table1:
TABLE 1
Characteristics Of Variable Statistics
Name of
variable

The
maximum

The
minimum

The
average

The
standard
deviation

jzl

0.2667

0.0117

0.1026

0.0371

FD-inc

2.3860

0.1843

0.5531

0.4605

FD-exp

3.1639

0.5134

0.8408

0.3835

cggm

0.0775

0.0068

0.0213

0.0122

sp

0.9378

0.0640

0.5009

0.6178

pgdp

99686

9855

33986

18388

Legends: jzl = rate of saving funds; FD-inc = ratio of per capita fiscal
revenue of local government in national per capita fiscal revenue;
FD-exp = ratio of per capita fiscal expenditure of local government in
national per capita fiscal expenditure; cggm = ratio of government
procurement amount in GDP; sp = Degree of fiscal self-financing; and
pgdp = real per capita gross domestic product in China (in RMB,
Chinese curency)

Note: The data is from China Government Procurement Yearbook

and China Statistical Yearbook
4.3.2 The result of empirical test
Considering that the explanation variable is restricted, the
paper select Tobit model to do econometric analysis using the
Eviews7.0. Considering the availability of the data, for example,
the absence of the rate of saving funds in Anhui province and
Guangdong province, and the absence of part data in Jiangxi
province, Shanxi Province and Tibet, so in the end, we use the
panel data in 26 provinces from 2008 to 2012 in China to make a
regression analysis. The results are shown in table 2:
TABLE 2
Empirical Test Results Of Influence Of Fiscal Decentralization
Government Procurement Performance

0.1248*

0.1181*

0.1248*

0.1359*

0.0082*

**

**

**

**

**

(16.38)

(16.12)

(11.81)

(10.84)

(7.08)

fdexp

-0.0217*

-0.0443*

-0.0484*

-0.0464*

**

**

**

**

(-3.20)

-5.30

(-5.067)

(-4.86)
-0.0684*
**

fdinc

(-5.57)

pgdp

0.0088*

0.0117*

0.0117*

0.0109*

**

**

**

**

(4.17)

(2.908)

(2.94)

(3.03)

0.0250*

0.0299

(-1.69)

(-1.42)

sp

cggm

0.0695*
**
(2.70)

-0.5499

-0.5889*

(-1.61)

(2.78)

Number of
observa-

156

156

156

156

156

26

26

26

26

26

249.15

251.25

254.79

258.97

263.03

tions
Number of
Sections
Log
likelihood

The t value is in parentheses. * * *, * *, * respectively means

that it is significant at the level of 0.01, 0.05 and 0.1.
The fiscal expenditure decentralization is selected as a
measure of fiscal decentralization in the model from (1) to (4).
Model (1) only has one independent variable, which is fd-exp.
From the model (2) to (4), the control variables, per capita gross
domestic product (pgdp), financial self-sufficiency (sp) and the
ratio of government procurement amount in GDP (cggm), are
added in turn. The regression result shows that the symbol of
fd-exp is negative. As the control variable added, the symbol of

fd-exp keeps unchanged and is significant at the level of 0.01. It

shows that the relationship between fiscal decentralization and
government procurement performance, which is represented by
revenue decentralization, is negative. In the same way, replace
the fd-exp with the fe-inc, and repeat the above process. We find
that the symbol of fd-inc is negative as well. With the added of the
control variable, the symbol of fd-inc also keeps unchanged. This
paper only records the model (5), which contains all control
variables in the table. All above shows that fiscal decentralization
is not conducive to improve the government procurement
performance in China. So only improving the fiscal
decentralization system in China will be conducive to improve
government procurement performance.
The results of SP are positive in the model from (3) to (5),
which is consistent with the above hypothesis. When the fiscal
revenue decentralization is used as the indicator of fiscal
decentralization, the result of sp is significant at the level of 0.01,
which shows that the higher financial self-sufficiency is conducive
to improve government procurement performance.
China covers a large territory and there are great differences
in different region. For example, there are different degree of
fiscal decentralization in different provinces, and eastern financial
self-sufficiency also significantly higher than the middle and the
west. So it is necessary to study the effect of fiscal
decentralization on government procurement performance by
region. Reference the paper of Qunli Sun (2009), the paper
introduces the virtual variables DE, DM, DW representing the
eastern, middle and western regions. The model is as follows:

Yit ai bt DE FDit DW FDit Controlit it

(5)

With reference to the regional division method of National

Bureau of Statistics in China, the 26 provinces will be divided into
eastern, middle and western region v . Use Eviews to do Tobit
regression analysis again, the results are as follows:

TABLE 3
The Regression Results In Tobit Model By Region

DE*fdexp

10

11

0.0801

0.1012

0.1137

0.0689

0.1008

0.1105

***

***

***

***

***

***

(5.94)

(7.63)

(8.23)

(4.84)

(7.61)

(8.71)

-0.032
1***
(-3.57)
0.0085

DM*fdexp

(3.57)
-0.008
DW*fdexp

2*
(-1.86)
-0.045

DE*fdinc

3***
(-4.23)
0.0246

DM*fdinc

*
(1.89)
-0.017

DW*fdinc

2*
(-1.57)
0.0028

0.002*

-0.001

0.005*

-0.002

-0.016

(2.33)

(-1.03)

(1.93)

(1.88)

(-1.32)

0.087*

0.0411

0.0161

0.0095

0.0419

0.0258

**

**

(-2.89)

(1.52)

(2.47)

(3.21)

(2.59)

(1.83)

-0.860

-0.693

-0.633

-0.7771

-0.680

-0.657

4**

4*

8*

**

2*

1*

(-2.45)

(-1.83)

(-1.64)

(-2.25)

(2.47)

(-1.72)

60

30

66

60

pgdp

*
(2.08)

sp

cggm
Number
of
samples

30

66

Number
of

10

11

10

11

249.15

248.38

248.66

249.15

248.50

248.55

Sections
Log likelihood

The t value is in parentheses. * * *, * *, * respectively means

that it is significant at the level of 0.01, 0.05 and 0.1.
It is easy to find that there are obvious regional differences
according to above results. From the results of model (6) to (8), we
find that the results of fd-exp in east and west are negative, which
is the same as the regression analysis result based on the panel
data throughout China and is on the significance at 0.01 and 0.1
level respectively. The result of fd-exp in middle is positive, but it is
not significant. Observing the model from (9) to (11), the results of
fd-inc in east and west are negative, which is the same as the
regression analysis result based on the panel data throughout
China and is on the significance at 0.01 and 0.1level respectively.
While the result of fd-inc in middle is positive, and is significant at
the level of 0.1. It shows that in the situation where fiscal
decentralization has influence on the government procurement
performance, there are regional differences in China.
5. THE REASONS WHY CURRENT FISCAL DECENTRALIZATION
SYSTEM REDUCES THE GOVERNMENT REDUCES THE
GOVERNMENT PROCUREMENT PERFORMANCE
According to the conclusion of above empirical analysis, the
current fiscal decentralization system has negative influence on
the government procurement performance in China. And at this
stage, the expansion of procurement scale is unfavorable to
improve procurement performance. However, from the
government procurement law enacted in China, which marks the
beginning of standard government procurement, to now, it is only
a short span of 15 years. According to the theory of "economies of
scale", China should be at the point before the balance.
Therefore, the expansion of purchasing should be conducive to
reduce the unit cost of purchasing, so as to improve the

government procurement performance. The contradiction

between the empirical results and theoretical analysis, shows that
the characteristics of fiscal decentralization and government
procurement in China is the key to restrict the performance. The
following analyze the contradiction, and explore the reasons why
current fiscal decentralization system reduces the performance of
government procurement in China.
5.1 The Mismatch between Fiscal Decentralization and the
Structure of Government Procurement
5.1.1 The mismatch between the expenditure responsibility
of government procurement and administrative powers and
responsibilities
The basic situation that China is a unitary state determines
its unique methods to classify the powers. The powers are
classified not in accordance with the project, but in accordance
with the element. The constitution in China stipulates that the
central government powers and fiscal responsibility should be
unified in authority. However, there only principle provisions have
been made to divide the powers of governments at all levels.
Specific regulations do not clearly stipulate how to divide the
powers between central and local governments, the division of
procurement expenditure responsibilities between higher and
lower government is not clear. In addition, the powers of local
government is decided by the central government, the powers of
the next level is decided by the government at the higher level,
which lead the powers to stay in change, and make it difficult to
match with the expenditure responsibility of government
procurement. With the speeding up of urbanization and the
increasing of social and public demand, the duties of government
increase quickly. Although the government procurement expands,
dislocation, offside and absence of procurement reduce its
performance.
5.1.2 The mismatch between the ability of procurement
expenditure and powers and responsibilities
After the tax reform, in addition to some powers such as

diplomacy and defense belong to the central government, the

responsibilities of all levels government overlap seriously and do
not have significant difference. The extension or refine of the
central government powers are the powers and responsibilities
owned by local governments. From 1994 to 2014, the central
government occupies about 50% of the financial revenue. But
after "tax returns" and "general transfer payments", in the
composition of fiscal expenditure, the fiscal spending of central
government accounts for roughly 25% ~ 30%, much lower than
the average of developed countries, developing countries and
transitional countries. This shows that the powers and
responsibilities undertaken by the central government is relatively
insufficient, while the local governments whose financial and
administrative ability are limited undertake too much powers and
responsibilities.
Due to the particularity of the administrative system in China,
the local government mainly follows the leadership of the central
government. Therefore, in order to achieve the powers assigned by
central government, even if they lack financial revenue, local
governments will also raise funds by the way of "local debt", "land
finance",etc, and expend the funds, which, of course, include the
money used for government procurement. Large local debt not
only has the very high cost of financing, the hidden costs but also
has hidden danger to the development of society. The land fiscal
deteriorates the current situation of national income distribution,
waste the social resources seriously, which is unable to develop in
the long term apparently. If in order to undertake the duties and
responsibilities, the local government use the funds raised by
"local debt", "land finance". As a result, on one hand, the
dominant costs and recessive costs are huge. On the other hand,
it will also affect the orderly development of the society. And the
effective mechanism of government procurement implementation
has not formed in China, so the result is that the scale of
procurement will be larger and larger, while the performance will
be lower and lower.

5.1.3 The conversion between expenditure responsibility and

procurement power is not smooth
There are complex transformation between fiscal
responsibility and government procurement power. Due to the
specific use of procurement expenditure has not been effective
management, the allocation and the use of financial capital
disconnect with each other, and the extension from value form to
the things form of financial capital is difficult to manage.
Specifically, in terms of subject, the purchasers in the government
procurement, such as certain society, association, are connected
with administration. They need the financial capital to purchase
goods, constructions, and services, while these costs are not
undertaken by the public finance in many countries. It take up the
procurement funds, expand the scale of procurement, but not
improve the performance. In terms of procurement staff, workers
interfere the procurement process by profit-driven, which cause
the waste of funds. The use of the procurement funds is not
transparent, not publicly, optional strongly, which cause the low
performance of government procurement. In terms of purchasing
process, some subjects ignore legal purchase program, citing
"time and task are urgent", purchase at first and tender behind,
inverted procurement procedures; Some subjects set up targeted
"threshold", or interfere the procurement in the stage of accepting
goods and services, create rent and seek rent, which will increase
the time cost and personnel cost in the government procurement
and affect the performance. The existence of similar problems is
connected with that China is in the transition from old system to
new system and the market system is not yet mature. The
conversion between expenditure responsibility and government
purchasing power is not smooth, and the conversion of thinking is
not clear, which lead that the government procurement is not
executed according to the established program, corruption and
waste are serious, thus the performance of government
procurement is low.
5.2 Problems in the Process of Implementing Government
Procurement

5.2.1 The budget of government procurement is not scientific

Whether the rate of saving funds can be a standard to
measure the performance of government procurement in China is
controversial, because the rate of saving funds in China is
calculated according to the budget amount rather than market
prices of government procurement. The budget made by
procurement department is more loosely, humble, which make
the budgeting personnel can't grasp the accurate market prices,
the rate of saving funds is higher. Therefore, the rationality and
scientific of the procurement budgets affect the accuracy of the
rate of saving funds as the indicators for performance evaluation.
At the same time, the scientific procurement budget can
effectively improve the efficiency of procurement funds, which is
also the important measure to protecting from corrosion in the
source.
At present, in the establishment and execution of
procurement budget in China, the scale expands larger while the
performance is lower. In the budgeting, procurement budget
separates from procurement requirements. The governments do
not carry on the scientific and effective authentication and
adequate market research on the procurement demands. The
phenomenon that the budget is unreasonable occurs frequently.
Especially in the budgeting, part of special funds lacks the plan of
project implementation; Procurement standard is not unified. The
projects are not specific and refining enough; Procurement
budgets disconnect with actual purchasing. In the budget
implementation, the implementing management and budgeting
management of procurement disjoint and lack of mutual
coordination and cooperation. Part of units not strictly implement
procurement according to the budget, increasing the standards
and levels optionally. In addition, some units prepare the budgets
as channel of access to financial capital. After receiving the funds,
they do not purchase in accordance with the budget, leading to a
large number of retail procurement and repeat procurement.
Although the scale of procurement expands, it reduces the
performance of government procurement.

5.2.2 Administrative
procurement

power

restrict

the

government

China is a centralized unitary state. The executive powers in

China go through multiple principal-agent, or layers of
authorization. Although the entrusted come from taxpayers, the
administrative culture, subordinate is responsible for the
superior and carry out the order strictly determines the original
power of government procurement activities at all levels. So that
in the practical work, the potential goal of government
procurement is to ensure that government agencies, public
institutions and social organizations at all levels can control their
existing powers and ensure the continuation of their own powers.
This basic national condition decides that the government
procurement will be weakened in front of administrative heads to
some degree, so that the goals and functions of government
procurement cannot be fully realized. Therefore, the
administrative power not only affects the content of government
procurement, but also affects the efficiency of implementation.
5.2.3 The supervision and accountability mechanism of
government procurement is not perfect
Government procurement is a part of fiscal expenditure, and
its money comes from public funds which are paid by taxpayers.
The governments use the public funds to implement public
purposes. At the same time, they rely on the administrative power.
If the powers lack of control and supervision, the government is
extremely easy to corrupt. In government procurement regulation,
on one hand, the supervision of government procurement
stresses on afterwards, lack of post-supervision and interim
monitoring. On the other hand, the transparency of government
procurement information is poor, so that the effective social
supervision can't be made. Because lack of internal supervision
and social supervision, there are many problems during the
procurement, such as agency intervenes the judgment, suppliers
collude in bidding, etc.
In respect of accountability mechanism, the relevant laws

and regulations lacks of detailed implementing rules for

identification of illegal behaviors and responsibilities, which led to
the maneuverability is weak. In terms of accountability object, the
accountability is aimed at directly responsible individual. But for
the decision-making errors, management absence, and evasion
duties of principal, it is difficult to implement accountability.
Supervision mechanism and accountability mechanism are not
perfect, which give the opportunity to the illegal procurement and
reduce the performance of government procurement.
6. CONCLUSIONS AND POLICY RECOMMENDATIONS
6.1 To Explore the Path of Reforming Fiscal Decentralization
The fiscal decentralization has a significant negative
influence on government procurement performance in China. Only
the reasonable distribution of powers and matching financial
authorities can ensure the government procurement performance.
Therefore, in order to improve the government procurement
performance in China, we need to explore the reasonable path of
reforming fiscal decentralization system.
Firstly, we should clear the division of powers between the
central government and local government. The reasonable
division of powers and responsibilities does not mean simply
expanding the powers and responsibilities of local government. So
the clear division of the scope of local government functions will
be able to prevent from the "offside" behavior of the local
government. Generally speaking, the governments should work in
the field where market fails, should be restricted to avoid
interfering local government too much. Otherwise, if only
expanding the powers and responsibilities of local governments,
the scale of government procurement will be increased, but the
procurement performance will be reduced.
Secondly, the financial and taxation authorities of
governments at all levels should be stipulated clearly. On the
basis of reasonable division of powers and responsibilities, the
reasonable financial authorities will make more reasonable fiscal
relations between the governments at all levels. Tax is the main

source of public finance income. In the background of current

reform of taxation system in China, especially replace the
business tax with a value-added tax, we can consider to give local
government some tax legislative powers, improve the tax
distribution between the central and local governments effectively,
or improve the existing transfer payment system in China,
complete the standard of distribution based on the formula rather
than the consultation system, promote the equalization, which will
help to solve the problem of lacking of financial capital in local
governments, and avoid local governments raising financial
capital through the "local debt" "land finance" and purchasing the
goods and services with these high cost capital, which affects the
government procurement performance.
Thirdly, we need to try our best to ensure the match between
the financial authorities and the taxation authorities. Only in this
way can local government use financial fund effectively to provide
public products and services needed for local residents, which
take advantage of the "scale economy" effectively, and improve
government procurement performance while enlarging the scale
of procurement.
6.2 To Optimize the Implementation System of Government
Procurement
In order to optimize the implementation system of
government procurement, first of all, we should speed up the
change of government functions. Above empirical analysis shows
that economic development has significant positive impact on the
performance of government procurement, suggesting that
promoting the economic development improve the government
procurement performance. If government intervenes excessively
into the field which should be decided by the market and
intervenes the government procurement with administration
willing, it will have adverse impact on economic development and
procurement performance. At present, there are many prominent
problems in the operation of economy in China, such as industrial
isomorphism, overcapacity of industry structure, and repeated

construction. Especially in some industries, the absence of market

supervision leads to poor effect of macroeconomic regulation and
control. These problems are largely caused by the fact that a
change of government function does not reach the designated
position. Therefore, the government must transform government
functions practically and effectively, give full play to the role of the
market to configure resources. As a result, it will promote the
transformation of economic development patterns, and promote
economic development, which could further improve the
performance of government procurement.
In addition, the implementation system of government
procurement should also be optimized in the view of the budget.
In the stage of budgeting procurement, the government should
understand configuration standard, demand, the source and
amount of capital, try to refine the budget content, in accordance
with the principle of expenditure according to revenue. The
budget should be truthful, accurate and complete. In the stage of
implementing the procurement budget, the funds for government
procurement shall strictly be used in a way as specified in the
budget. Except emergency spending in the annual budget
execution, the government cannot change the budget items
without authorization generally. The government should purchase
in strict accordance with the procurement budget, project
schedule, plan and related procedures stipulated in the contract.
In the final stage, the government should promote the all-round
performance management of budget, improve the consciousness
of efficiency and expenditure responsibility, implement the policy
of publishing procurement information, and provide adequate
information for social supervision.
6.3 To Improve the Law and Supervision Mechanism of
Government Procurement
The laws and regulations of government procurement should
be feasible, effective and operable. At present, we need to
straighten out the relevant laws and regulations in China,
implement the cohesion and form a complete set of all kinds of

law. We should complement the laws through detailed regulations.

At the same time, we should modify the government procurement
law in accordance with the present stage of economic and social
development, based on the new concept of government
procurement, and perfect the legislation system of government
procurement and regulate the procurement policy goals through
the form of laws. On one hand, define the objects, means,
measures and standard of government procurement policy clearly.
On the other hand, the government procurement should
implement the social policies such as environmental protection,
protection of national industry and supporting small and
medium-sized enterprises, so as to improve the government
procurement performance. In addition, establishing a sound
supervision system is an important way to ensure the
performance of government procurement. China needs a
supervision system of government procurement, which is
all-around and good for anti-corruption and implementing
government procurement functions. The financial department is
the dominant unit, the auditing department audits and supervises
the actions, the supervision department monitors the party
conduct and the political climate. So a good system where
methods are scientific, procedures are rigorous, processes are
transparent and supervisions are effective, will be established. In
addition to the existing afterwards supervision, audit supervision
should establish a new system which is focus on interim
monitoring. Whats more, through publishing procurement
information, expanding the channels of open and transparent
information, China will realize the information construction and
networking of government procurement supervision. Three
aspects of supervision, that is, internal supervision, institutions
supervision and social supervision, will be conducive to control
illegal behavior in the process of procurement and improve the
government procurement performance.

NOTES
iThe

rate of saving funds=( the budget amount of government

procurement -the actual amount of government procurement)/the
budget amount of government procurement
iiThe British Audit Commission made a definition "3e" according
to the local government financial act of 1982.

"Decision on the tax-sharing fiscal management system made

by State council" made the main rules of dividing fiscal
expenditure. The notice of reforming plan on the classification of
government revenue and expenditure issued by the ministry of
finance divide fiscal expenditure into 17 classes according to the
expenditure function, such as diplomacy, defense and general
public services, education and so on, and divide fiscal
expenditure into 12 classes, such as goods and services, transfer
expenditure, salary welfare expenditure according to the
expenditure economy.
iii

"Decision on the tax-sharing fiscal management system made

by State council" made specific provisions for the dividing fiscal
revenue between central and local government.
iv

The eastern region: Beijing, Tianjin, Liaoning, Shanghai,

Jiangsu, Zhejiang, Fujian, Shandong; The central region: Hebei,
Jilin, Heilongjiang, Henan, Hubei, Hunan, Hainan; The western
region: Guangxi, Neimenggu, Chongqing, Sichuan, Guizhou,
Yunnan, Shanxi, Gansu, Qinghai, Ningxia, Xinjiang
v

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