Public Procurement and Regional Economic Development

The Impact of Local Procurement on the Regional Economy

Awarding regional projects through tenders to local businesses operating in the relevant sectors can contribute to regional economic development in several ways. This is based on a mechanism known as the “multiplier effect” in economics: the more money circulates within a region, the greater the benefits it generates.

1. Keeping Money Within the Region and Circulating It

When an external company wins a contract, most of its profits leave the region. Local businesses, however, spend their earnings on employee wages, materials and raw materials from local suppliers, rent, fuel, transportation and services. This money becomes income for other local businesses, which then spend it in turn. As a result, the same funds circulate through the regional economy multiple times.

2. Increasing Employment

When contracts are awarded to local companies, they tend to recruit workers from the local population. This helps increase household incomes, reduce unemployment and encourage young people to remain in their regions. Companies receiving regular contracts can also create permanent rather than seasonal jobs.

3. Strengthening and Expanding Local Businesses

Government contracts provide businesses with a stable source of income and allow them to plan for the future. Their earnings can be invested in new equipment, machinery and production capacity. As companies gain experience, they can participate in larger projects, improve their access to credit and attract private-sector contracts.

4. Increasing Budget Revenues

Local companies contribute part of their income to public and local budgets through taxes, social insurance contributions and other payments. This creates a mechanism through which a portion of government spending returns to public budgets.

5. Developing Related Sectors

Construction projects stimulate local industries such as building materials, transportation, equipment rental and trade. Agricultural and supply contracts, in turn, support farmers and processing companies. In other words, a contract in one sector can generate a chain reaction across other industries.

6. Reducing Economic Disparities Between Regions

When funds remain in the regions instead of flowing primarily to large companies in Baku and the Absheron Peninsula, economic activity becomes more distributed across the country. This can help reduce regional disparities and slow internal migration.

Risks to Consider

The Benefits of This Approach Can Only Be Fully Realized When It Is Properly Implemented:

There must be genuine competition among local businesses; otherwise, prices may be inflated and quality may decline.

Selection should be based not only on local status but also on price, quality, experience and implementation capacity.

The technical and financial capacity of local companies must match the size of the contract. For this purpose, large projects can be divided into smaller lots where appropriate.

Strong oversight of project implementation is essential, and information must be disclosed transparently.

If a local business outsources part of the work to external companies (subcontracting), the positive effect of keeping money within the region may be reduced.

What Percentage of Tender Funds Stays in the Region?

There is no exact percentage that applies universally. The figure depends on the sector, the nature of the project and where the company spends its earnings. If an official calculation for Azerbaijan is available, it should be examined separately. The figures below are approximate, illustrative estimates.

Example: A 100-manat construction and renovation tender

Expense category

Local company

External company

Workforce (wages)

20–30 manats remain in the region

5–10 manats (workers are often brought from outside)

Materials and raw materials

10–25 manats (the share purchased from local suppliers)

3–8 manats

Equipment, transportation, fuel and rent

5–10 manats

2–4 manats

Profit (business owner's earnings)

5–10 manats (the portion spent locally)

Almost entirely leaves the region

Local services (food, accommodation, utilities)

2–5 manats

1–3 manats

Estimated total

40–70%

10–25%

Taxes and social insurance contributions are paid into the state budget. The extent to which these funds return to the region depends on budget allocation.

Factors That Increase the Percentage

Hiring workers from the local population.

• Purchasing materials and raw materials from local producers.

• Awarding subcontracting work to local companies.

• Reinvesting the generated profits within the region.

Factors That Reduce the Percentage

Purchasing equipment and materials from Baku or abroad.

• Outsourcing most of the work to subcontractors operating outside the region.

• Transferring profits outside the region.

• A company being formally registered locally while its actual operations are based elsewhere.

Differences Across Economic Sectors

Agriculture and Food Supply – 60–80%

A larger share of funds remains in the region due to the extensive use of locally sourced raw materials and labour.

Construction – 40–60%

The outcome largely depends on where construction materials, equipment and labour are sourced.

Technology, Equipment Procurement and Specialized Services – 15–30%

The reliance on products and equipment sourced from outside the region reduces the share of funds retained within the local economy.