Impact of Corruption on Public Procurement

By Alex Taremwa

Corruption and corruption risks can take place along the entire cycle of public procurement. The cycle includes the following most common phases:

 
 
The ultimate goal of public procurement is to satisfy the public interest. Like any government action should be. In this sense, good procurement should satisfy the needs of the people, should be fair to businesses, should save and avoid wastage of public funds. Good public procurement is a good tool to implement public policy in all areas, and should be an instrument for good governance and therefore good government. In this sense, good procurement will contribute to the government’s legitimacy and credibility. On the contrary, corrupt (bad) public procurement will increase poverty and inequality by diverting funds away from the attention of social needs; it will engender bad choices, encouraging competition in bribery rather than in quality or price. For companies, corrupt procurement will provide an unfair, unstable and risky competitive advantage and will create a sort of market-entry cost or non-tariff barrier, at least for those companies who do not wish, or cannot afford to bribe their way in. Some of the key impacts of corruption on procurement listed out by Transparency International are listed below.

  1. Financial Impact:      Financial impact or damage can consist of unnecessarily high cost of purchases, burdening a government with financial obligations for purchases      or investments that are not needed and early repair costs to repair and      maintain investments.
  2. Economic Impact:  Economic impact can consist in burdening a government with operational,  maintenance and debt servicing liability for investments/purchases and when capital investment levels decrease because of corruption costs and      threats to business operators.
  3. Environmental Impact: It includes bad choices made that have adverse environmental impact. Non-compliance with the country’s (or international) environmental standards, can have environmental or health risks or long-term adverse      impact on the environment.
  4. Impact on Health and Human Safety: Damage can consist in human health and safety risks due  to quality defects, environmentally unacceptable investments or  noncompliance with environmental or health standards.
  5. Impact on Innovation: Corruption inducted lack of competition leads to the      neglect of innovation. Corrupt companies will not spend resources on      innovation and non-corrupt companies will feel less inclined to make the      necessary investments if they cannot access markets due to corruption.
  6. Erosion of Values: When  people observe lack of concern for integrity, common good and corrupt  behaviour is not being sanctioned; officials in the government and economic operators easily reduce their own integrity standards, out of      need and often out of greed.
  7. Erosion of Trust in Government: When people observe that corrupt behaviour among government officials is not being sanctioned, they conclude quickly that      government in general is not to be trusted and that cheating government is      morally acceptable. 
  8. Damage to Honest Competitors: Corruption by corrupt bidders, if successful and not  sanctioned, damages and possibly destroys the honest competitor and may      well lead to job losses on the part of an economic operator who is better      and more innovative.
  9. Serious Danger to Economic Development: If a government commonly allows corruption in the  context of purchases and investments, often projects are selected not on merit but by the amount of bribe payments made. Due to this a country may soon end up squandering investment opportunities and external development assistance and thus seriously retard the country’s economic development.

 

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.

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.

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:

Decision to contract: Identification of need;

Identification/definition of contract characteristics: what to buy/sell/do and description of goods and      services. These are the technical requirements.

Contracting process opens following a particular type of process (open bid, restricted bid, shortlists, direct contracting, single source, etc);

Contract award ending with a decision to select the winning bidder;

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:

Stage A: Decision to contract ( identification of need)

Description

Main risks (examples)

The government decides to purchase   or sell goods or services, or to outsource the management of a unit.

The decision does not follow a   policy rational or an existing need but rather the desire to channel benefits   to an individual or and organisation. For example, demand is created for a   good no one buys simply to benefit the company’s owner.

Stage B: Identification/definition   of contract characteristics   (technical requirements, characteristics of goods and services, etc.)

Description

Main risks (examples)

The government determines what   it needs to buy or sell or privatise (technical requirements, specific   characteristics) and how it will go about it (contracting method,   agency responsible, etc)

Characteristics (technical or not) are made to favour a special supplier   or contractor and not to properly address the need identified;
  
Exceptions
to an open bidding process are abused, leading to single   source processes);
  
Participation
of relevant stakeholders is limited, making it   difficult to assess the need and relevance of the characteristics as they are   being defined;

Evaluation criteria are not set from the start or are not objective,   thereby making them prone to abuse

Stage C: Contracting process

Description

Main risks (examples)

A contracting process opens. It   should take place according to what method the law determines be used to   receive proposals (e.g. open bidding system) or evaluate contractors (e.g.   single source)

Invitation to tender (an open bid) is not publicised, thereby restricting the   number of bidders that participate;
  
When short-lists
are used, companies bribe to be included or to   gain access to them;
  
Invitation to tender is publicised
but very little time is given to   present offers, making it difficult for bidders without prior knowledge of   the contract to present bids;
  
Abuse of confidentiality
or lack of publicity creates unequal playing   field for bidders;
In single-source processes, lack of publicity or transparency leads to   unjustifiable decisions;
Bidders or contractors collude to influence prices or to share the   market by artificially losing bids, or not presenting offers.

Stage D: Contract award

Description

Main risks (examples)

Contract process ends and a  decision is made in order to select the winning bidder (in open bids) or the   contractor (in single-source processes).

Evaluation criteria are not   clearly stated in tender documents, leaving no   grounds to justify the decision; 
  
Evaluation of bids is subjective
or leaves room for  manipulation and   biased assessments;
  
Contract awards are not publicised
(nor the grounds for  the decision).

Stage E: Contract implementation   and supervision

Description

Main risks (examples)

The contract is signed with the  selected bidder or contractor

Contract changes and   renegotiations after the award are of a nature   that changes the substance of the contract itself;
  
Supervising
agencies/individuals are unduly influenced to alter the   contents of their reports so changes in quality, performance, equipment and   characteristics go unnoticed;
  
Contractor’s
claims are false or inaccurate and are protected by   those in charge of revising them;
  
Subcontractors
and partners are chosen in a non-transparent way, are   unaccountable or are used to channel bribes.

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:

Size
Bribes are often calculated as percentages of the total sum, representing a proportional relationship. Hence, the more money involved the more reason to demand a bribe.

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

Added   Risks of Corruption in Emergency Situations

See the following resources:

Corruption in emergency   procurement.pdf (U4 Issue 7:2006)
 

  And this 4-pager based on the above issue paper:
 Corruption in emergency   procurement.pdf (U4 Brief 5:2006)

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.

Corruption, inefficiency or lack   of expertise? A case study from Ghana
 
A 2002 internal audit report   revealed significant procurement irregularities at Korle-Bu, Ghana’s premier   teaching hospital. The largest discrepancies were found in the procurement   processes of the Supplies Department, the director of which allegedly ordered   a 17-year supply of ‘Post Operative Charts’. The quantity was said to last   until 2019, but this type of chart was globally banned in 1989, at least 10   years before the purchase took place. In 1999, 190,000 of these charts were   ordered, and despite the excess supply and the obsolete nature of the charts,   a further 50,000 were ordered the following year. Additional obsolete items   were also said to be purchased in excessive quantities. In the report, it   further emerged that purchase requisitions were not used as a part of the   procurement process and no maximum or minimum levels of stock were   identified, meaning that stocks were purchased arbitrarily. Meanwhile a   severe shortage of essential medicines prevailed.

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.

 

Control is necessary, but it may   come too late: Corruption in health care procurement in Thailand

In Thailand, investigations by the   National Counter Corruption Commission (NCCC) into allegations of systemic   corruption in the procurement of pharmaceuticals and medical supplies found   several cases involving all levels of employees at the Ministry of Public   Health and their associations with politicians in schemes to gain kickbacks   through large-scale contracting.

Community hospitals were being   induced to purchase overpriced medicine and medical supplies from a certain   company using the Baht 1.4 billion supplemental budget. The supplemental   budget was intended to be distributed to provincial and district hospitals in   order that they may repay their pharmaceutical debts and/or to purchase   medicine; later the Ministry added ‘medical supplies’ to the proposal as   well.

In 1997, the Ministry had retained   control of the funding coming from this supplemental budget, centralised   medicine procurement and cancelled the use of ceiling prices for medicine;   this enabled political office holders at the Ministry to induce their   deputies in the provinces to purchase highly overpriced medical supplies, up   to a 1220-fold increase, from five dealers with alleged political connections   involving kickbacks that could range from 5% to 50% of the purchase price.   Later, an investigation into the role of the Government Pharmaceuticals   Organization (GPO) took place, and it was found that the wider scandal   spanned to 34 provinces and had cost the public more than Baht 105 million.

Following the release of the NCCC   investigation, two ministers resigned; two ministerial advisers were criminally   charged, found guilty, and are currently serving six-year prison sentences;   seven high-ranking officials were dismissed; and 23 were reprimanded. Civil   society groups played a key role in helping to highlight this case and lobby   for sanctioning those responsible.

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.

 

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