Special issue: Corruption in public contracting

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The below text begins with a brief overview of how corruption affects public contracting and what can be done about it.

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 engenders bad choices, 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?

Contracts are the means by which public money is spent and public policy is implemented. Examples include a government vaccination programme, 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:

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;

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 synthesises some of the corruption related risks at each stage of the process.

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.

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 (Mop) 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.

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.

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.

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. 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.

Corruption in education sector procurement

Types of contracting in this sector vary depending on the type of education policy (public/private schooling or school management, education oversight system, provision of school texts and supplies and infrastructure arrangements).

What can be done?

Textbook procurement in the Philippines: monitoring is important
Getting the textbooks right: case study from Argentina
Learning the wrong lessons in Malawi schools
Corruption in procurement can occur in the provision of educational material, of school supplies and equipment, meals and also in the construction of educational facilities.

Risks of corruption in contracting in the education sector are similar to those that appear in contracting processes in other sectors, and therefore should be treated in a similar way. However, some special characteristics create particular challenges, including the following:

Service provision can imply long term contracts (such as management and operation of school facilities) while procurement of textbooks gets implemented immediately. Service contracts can therefore present more monitoring challenges in order to asses the quality of the service provided.

The nature of the textbook industry is such that in some areas it is almost monopolistic, and in others not, creating strong incentives to bribe to secure sales or creating confusion about the availability of providers.

National beliefs about the content of textbooks encourage non-transparent, closed bids.

Difficulties in managing conflicts of interest arising from authors and teachers in textbook selection committees where their expertise is needed.
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What can be done?
For all types of contracts, it is important to avoid seeing the contracting process in isolation. For example, the provision of school supplies involves three related activities that entangle different risks:

1. the selection of the textbooks to be procured;

2. the procurement of the textbooks;

3. the delivery of the textbooks to students.

Textbook procurement in the Philippines: monitoring is important

In 1998, suppliers to the Department of Education (DepEd) in the Philippines claimed that bribes in the provision of learning materials ranged from 20-65% of the value of the contract. Some suppliers even got legislators to sign requisition issue vouchers, which was against existing auditing rules. The Commission on Audit (COA) found that the DepEd bought P17.9 million (US$320,000) worth of idle, unused textbooks, without consulting principals and superintendents.A regional director of the DepEd also bought 1,000 copies of an unendorsed dictionary for P1.89 million (US$33,000).

Investigative journalists revealed that, although the reforms implemented by the DepEd in 1999 were far-reaching, they had mixed results. The clean-up was conducted at the top, as the reform clipped the powers of regional directors, but corruption remained pervasive in local school boards, as the boards received greater autonomy and discretion. Hence, it became difficult for the DepEd to monitor what its field offices were buying, especially as the reform allowed for superintendents to choose titles themselves.

Despite the reform, bribery remained the norm and decisions were made based on payoffs, not needs. However, while payoffs remain substantial - between 15-30% - they have been significantly reduced. Furthermore, textbook prices decreased by 40% due to the fact that publishers no longer sold their goods to legislators. NGO monitoring was also incorporated into the procurement process. In 2001, the DepEd posted the biggest audit suspension totalling P6.9 billion (US$123.5 million), or one quarter of all audit suspensions. The COA regularly uncovered new examples of irregular textbook purchasing.

Like in any contracting process, the identification of the texts needed face risks of requirements being tailored for a specific provider, and conflicts of interest or plain private interest may be a source of corruption. It can also be that due to a small market size, the selection of texts needed automatically implies the selection of a particular supplier. In other cases, appropriate publicity may enable other providers to present offers opening up the process. Whether this is the case or not, the process needs to be transparent from the start. Even if for nationalistic reasons a national supply is preferred, it can be performed transparently. Moreover, once the texts have been acquired and the contract implemented, care needs to be taken to make sure that the purpose of the contract is fulfilled and the textbooks reach the students. Distribution may or may not be a feature of the text procurement contract, but even if it is not, monitoring and transparency will facilitate delivery and accountability. Facilitating civil society participation can enable monitoring and promote accountability, especially in contract implementation. The use of good rules and guidelines for contracting is always necessary.

Getting the textbooks right: case study from Argentina

One recent example of a successful strategy was a consultation procedure, implemented by Poder Ciudadano, Transparency International's national chapter in Argentina, on the procurement of 3,315,000 books for use nationwide. An initial textbook selection phase was halted by objections to the textbook selection criteria, to the jurors that intervened in the selection and to the local management procedures. The Ministry of Education, Science and Technology then invited Poder Ciudadano to participate in the second attempt and to help them to develop a transparent process. The TI chapter introduced three strategies.

Firstly they organised participatory discussions on the criteria to select the textbooks to be procured and of the tender documents to procure them. These discussions involved representatives of the Ministry and textbook publishers and were mediated by Poder Ciudadano.

Secondly, they implemented a no-bribes TI Integrity Pact, which was subscribed to by both the bidders and the Ministry to create common and clear ground rules for the procurement process.

Finally, they set up mechanisms to prevent and manage conflicts of interest among the advisory committee in charge of pre- selecting the texts. This, in addition to transparency and publicity measures during the contracting procedure, resulted in a transparent process with no objections and a broader diversity of textbooks and publishing houses (56 publishers participated and 48.3% of those were awarded with at least one contract).

Corruption is rampant in construction and construction of education facilities is no exception. Preventive measures that apply to general contracting problems also apply here.

Learning the wrong lessons in Malawi schools

In 2000, serious fraud amounting to K187 million (US$2.3 million) was exposed at Malawi's Ministry of Education relating to the issuing of contracts to build schools.

Following the government's decision to introduce free primary education, the education ministry embarked on projects to build schools. Contracts were not awarded by way of fair tender, but in many cases to members of the United Democratic Front (UDF) - the party of then President Muluzi - who registered as building contractors. The 'contractors' were paid for the projects, but these so-called 'ghost' schools were never constructed.

It is alleged that the contract money was used by the president's party loyalists in campaigning in the 2000 general elections. Eleven parliamentarians were named and three cabinet ministers lost their jobs. Two cabinet ministers were charged and taken to court, but later acquitted.

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