Corruption in public procurement

General overview

CONTENT ON THIS PAGE:

•  Public contracting and procurement - a general introduction
•  What is public contracting?
•  How corruption operates in public contracting
•  Additional risks
•  What can be done?

Public contracting and procurement - a general introduction

Experts identify procurement as one of the areas most prone to corruption in the health and education sectors. Corruption in procurement affects the efficiency of public spending and donors' resources, creates waste and, ultimately, affects the quality of health and education services and the opportunities they present to improve quality of life. Corruption also harms companies that produce goods and services in this area as it increases operation costs, reduces competitiveness and, in the medium term, is not good business.

Contracting is the main way a government operates and public money is spent. In this sense, contracts are the vehicles for implementing public policy. A significant portion of health and education expenditure goes to procurement or contracts for goods and services. It is estimated that between 20-50% of the government health budget is used to procure drugs. Preventing and controlling corruption in procurement is, therefore, a determining factor in policy and project efficiency.

[top]

What is public contracting?

A contract is a binding agreement or business arrangement for the supply of goods or services at a fixed price. Examples include the privatisation of a government-owned telecommunications company, the purchase of office supplies for a governmental office and the contracting for the design of a complex concession system for an airport. These contracts are meant to buy or produce goods or services that benefit citizens directly, for example the construction of a road or a sewage system. Others benefit citizens indirectly, such as the contracting out of consulting services to redesign the customs agency.

Public contracting occurs at different government levels: in municipalities, provinces or states, and in national or federal governments. While federal or national level contracting can be bigger in terms of value per contract, local government contracting is significant in terms of the number of processes and their impact.

The term procurement is often used in this field. Procurement refers to the acquisition of goods and services by any individual or organisation (public, private, international, etc). However, it is more accurate to refer to the term contracting, as it includes other activities that, in the shape of a contract, channel government expenditure. Examples include privatisations, licenses, concessions and other types of contracts, which also affect the budget.

[top]

How corruption operates in public contracting

Corruption in public contracting can take many forms, including bribery, deception (fraud) or simple abuse. The risks of corruption in public contracting can be more easily understood in relation to each stage of a contracting process. Most contracting processes broadly follow the same steps:

1. Decision to contract: identification of need;
   
   
2. Identification/definition of contract characteristics: what to buy/sell/do and description of goods and services. These are the technical requirements.
   
   
3. Contracting process opens following a particular type of process (open bid, restricted bid, shortlists, direct contracting, single source, etc);
   
   
4. Contract award ending with a decision to select the winning bidder;
   
   
5. Contract implementation and supervision

It is generally believed that the risk of corruption is especially high during the evaluation phase of a contracting process, when offers are studied in order to select the contractor. But the risks are not limited to this phase. Corruption can occur even before a contracting process starts, when decisions are taken about what to contract. Some projects start off ear-marked for award to a particular party. There is also room for abuse once the contracting process has finished and the contractor has been selected. Underperformance, contract renegotiation, change orders, over-billing, and non compliance are just some of the forms of abuse.

The table below synthesises some of the corruption related risks at each stage of the process:

Additional risks

Additional risks are created by confusing or contradictory legislation. In some cases, for example, donor and credit agencies require their procurement procedures to be used instead of national procedures. In some cases, this has been helpful; but in others, requirements for transparency are higher under national legislation. In this case, an important tool to prevent corruption is lost. An additional burden is created if the local implementation agency is not familiarised with the donor or credit agency's guidelines, or if it has to simultaneously handle several processes under different regulations.

Research has told us that corruption in procurement takes place because of - and is worsened by - the following factors:

Mystification
The more high technology involved, or seemingly involved, the more attractive the project will be to the potential beneficiaries. This kind of "mystification" reduces the risk of being criticised for paying too much. (For example: How many people can say whether a particular fighter aircraft should have cost $21million rather than $23million?)

Immediacy
The term of office may be brief to many politicians, but also to officials. From this it follows that the most attractive projects are those in which the full purchase price, or at least a very substantial deposit, is payable at an early stage.

Discretion
The discretionary authority of public officials often represents a golden opportunity to obtain bribes. Discretionary power is at its greatest when the public demand and the public preferences are delegated to the public agent and defined during a bilateral bargaining process. Then the civil servant is choosing the private part, while price and other contract conditions are the result of the negotiation process. The discretionary authority includes

• The power of invitation
• The power of short-listing or pre-qualification
• The choice of technology
• Confidential information
• Modifications of the contract
• Bilateral negotiation of governmental contracts

[top]

[top]

What can be done?

It is important to distinguish between instances of corruption and cases of inefficiency or lack of capacity. While these problems sometimes go hand-in-hand, and some solutions are helpful in all areas, there are also trade-offs. For example, choosing to speed up a contracting process might reduce its transparency, making it very efficient but more prone to corruption. Moreover, it is important to realise that there is no single solution to the problem. Contracting processes need to be permanently monitored. Supervision and control play a key role since good rules are necessary but not always enough to curb corruption. It is also important to have clear and publicly available procedures and to have regular audits by external parties.

It is possible to combat and prevent corruption in public contracting. There is now a global consensus on the need to curb corruption that encompasses companies, governments, donors and credit agencies and civil society organisations around the world.

For many years, it was believed that the only way to fight corruption in public contracting was through law enforcement and control. While this is clearly necessary, it often comes too late, after the damage has been caused. More importantly, corrupt behaviour should be prevented by giving those involved in contracting the opportunity to avoid it and the pressure to do so.

[top]

Good rules, transparency and monitoring are three elements that help to prevent corruption in this area.

• In the case of absent rules or rules which can be manipulated to one's advantage, donors should assist governments in elaborating and enforcing procurement laws and procedural guidelines which comply with international standards.
  
  
• These procurement rules should at least minimise confidentiality, state open bidding from pre-qualified suppliers as a principle, guarantee access to information, and make sure bidding documents, procedures, evaluations and awards are publicly and timely available. They should also establish administrative review systems, foster objective evaluation criteria and provide structures for it. These rules should ensure that the different procurement functions and responsibilities (selection, quantification, product specification, pre-selection of suppliers and adjudication on suppliers) are divided among different offices, committees and individuals, each with the appropriate expertise and resources for the specific function.
  
  
• Access to information can be provided through documentation and communication systems, including online systems, where information can be shared with auditors, complainants and the general public. Tools for improving electronic procurement systems are supported by the World Bank and other donors.
  
  
• Efficient management is one of the most effective preventive mechanisms. It promotes transparency and accountability, facilitates oversight and citizen participation, and brings legitimacy to governmental decisions. Rules that follow these principles also provide a good basis to prevent corruption.
  Written procurement procedures should outline the whole process, using explicit criteria to award contracts.
  
  
• Rules are not enough, however, and law enforcement mechanisms are often weak. Monitoring by local experts and independent oversight agencies can help make existing norms effective. Civil society also has an important role to play in monitoring. Transparency International has developed and implemented a number of monitoring tools to increase transparency and access to information that involve cooperation between governments, companies, donors and civil society. Monitoring should also include an annual external audit.
  
  
• Donors can also promote integrity in the private sector, e.g. through information campaigns for small and medium sized businesses. It is the latter who lose out in corrupt procurement deals as larger firms can more easily afford to position themselves vis-à-vis decision-makers.

Some contracting or procurement problems stem from inefficiencies in the contracting system. Some tools that help to correct these inefficiencies may also prevent corruption and vice versa. But this is not always the case. For example, speeding up the procurement process may increase the risks of corruption if transparency and accountability are not assured. Conversely, a strategy to prevent corruption, if not implemented appropriately, may introduce unnecessary delays. This means that a careful consideration of impact and implementation should be performed. Adequate training of procurement officers, the establishment of multidisciplinary and multi-party evaluation committees, rotation principles for procurement officials and the establishment of accountability and report procedures, are key in fighting corruption. Incentives promoting 'good behaviour' for individuals are also needed, such as the performance-based staff incentive structures. Systems usually plan punishment for 'bad behaviour', but experience proves that rewards for good behaviour can motivate individuals. The development of codes of conduct for staff is also extremely important.

[top]