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Transparency and Integrity inPublic Procurement

David OndráčkaTI- Czech Republic

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Goals of Presentation

I. Public Procurement, corruption risks in all phases

II. Risk factors, problems, actors III. Anti-corruption Strategies IV. International Conventions V. International Case studies – monitoring VI. Monitoring of construction procurement in

big cities („Clientelistic Map“) VII. Research of public funds losses VIII. PPP

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Public Procurement Procurement of goods, works and other

services by public bodies Average between 15% and 30% of

Gross Domestic Product (GDP) Great temptations for corruption in

public sector Damage from corruption is estimated

at normally between 10% and 25%, and in some cases to 50%, of the contract value

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What is public procurement “Procurement” refers to the acquisition of

goods, services and works by public sector.

It can be consumption or investment goods or services, from pencils, bed sheets and aspirin for hospitals,gasoline for government cars, the acquisition of car and truck fleets, equipment for schools and hospitals, machinery for force account use by government departments, other light or heavy equipment or real estate, to construction, advisory and other services (from the construction of a hydroelectric power station or expressway to the hiring of consultants for engineering, fi nancial, legal or other advisory functions).

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Public procurement phases Corruption and corruption risks can

take place along the entire cycle of public procurement.

Risks and forms of corruption may be different in each phase

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Public Procurement Phases

1. Needs assessment/ Demand Determination

2. Preparation/Process design & bid documents preparation

3. Contractor selection and award phase 4. Contract Implementation phase 5. Final Accounting/Audit

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1. Needs assessment/ Demand Determination

The investment or purchase is unnecessary. The investment is economically unjustified or

environmentally damaging. Goods or services that are needed are overestimated to

favour a particular provider. Old political favours or kickbacks are paid by including

in the budget a “tagged” contract (budget for a contract with a “certain”, pre arranged contractor).

Conflicts of interest (revolving doors) are left unmanaged and decision makers decide on the need for contracts that impact their old employers.

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2. Preparation/Process design & bid documents preparation

Bidding documents or terms of reference are designed to favour a particular provider so that in fact, competition is not possible (or restricted).

Goods or services needed are over- or underestimated to favour a particular bidder.

Unnecessary complexity of bidding documents or terms of reference is used to create confusion to hide corrupt behaviour and make monitoring diffi cult.

Design consultants prepare a design that favours a particular bidder.

Grounds for direct contracting are abused.

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3. Contractor selection and award phase

Decision makers are biased (bribes, kickbacks, or conflicts of interest are involved).

Selection criteria are subjective or uneconomical Advantage to a particular bidder is granted through the

exchange of confidential information before bid submission or during the clarifi cation period. Clarifications are not shared with all the bidders.

Confidentiality is abused and extended beyond legally protected information making monitoring and control difficult.

The grounds for the selection of the winner are not made public (transparency of bid evaluation).

Excessive (unnecessarily high) price as a result of limited or non-existent competition.

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4. Contract Implementation phase

Winning bidders/contractors compensate bribes and other extra payments with poor quality, defective or different specifications than those contracted.

Contract renegotiation or “change orders” introduce substantial changes to the contract

Price increases during execution through “change orders” reflecting changes in specifi cations or cost increases, facilitated often by collusion between corrupt contractor and corrupt control official.

False or inexistent claims are filed. Contract supervisors or monitors are “bought” or are

willing to justify false or inexistent claims. Contract renegotiation is allowed or performed

introducing substantial changes that render the bidding process useless.

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5. Final Accounting/Audit

Accountants doing final accounts and Auditors are biased or “bought” and willing to support false certifi cates.

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Actors in Corrupt Deal

• Officials• Politicians• Bidders (Suppliers, Contractors,

Consultants) and Sub-contractors• Agents, other Middlemen,

Consultants,• Joint Venture Partners,

Subsidiaries• Financial Safe Havens• Witnesses

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Risk Factors

• “Urgent Purchases” at End of Fiscal Year

“Emergency” Responses to Natural Disasters and Other Such Events

Inadequate Access to Information

Preferences to Selected Bidders

Participation of Official-Owned Companies

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General perceptions• High level of perceived corruption (CPI, WB)• Political interference into public administration• Conflict of interests, clientelism, misuse of power,

fraud, kickbacks, non transparent party financing• Unenforceable regulation, insufficient control

mechanism

• Public Procurement (17% of GDP) • Perception of State – system works, individual

cases of wrongdoing sometimes happen everywhere

• Perception of Public – system problem, corruption monumental, manipulations immense

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Procurement problems: government side

• Non-partcipatory planning phase (badly designed, undesired projects)

• Specification of technical details favours particular bidders

• Manipulations with choice of tendering procedure (limited procedures prevail)

• Selection criteria (often very subjective)• Selection committees (political pressure)

• Expert commitee ranks bids, govt. often changes ranking without explanation

• Articificial dividing of contracts - to avoid open tenders• Non-transparent allocation of below-threshold

contracts• Contracts are NOT signed in line with tender conditions

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Procurement problems:bidders side

• Shift in power between contractor and bidder - blacklisting and debarment might be solution

• Bidders pressure to discredite unloyal contractors („Kompromat“)

Cartels - Bidders often form a cartel, which then tries to manipulate the award decision in favour of one of their members, with or without the involvement of a corrupt inside official.

• no real competition - subcontracting, silent agreements between bidders)

• Problematic role of middlemen (consulting companies - organizers of procurement)

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Legislative drawbacks

• Modern, but complicated legislation• Focus on modern, but marginal issues

(electronic auctions, …)• Frequent ammendmends of legislation • Focus on large contracts only, no rules

for small - below-thresholds contracts• Exceeding of contracts in costs and

content • Limited disclosure - not legally binding

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Anti-Corruption Strategies

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Principles

• Integrity• Transparency• Impartiality• Efficiency• Fairness• Accountability

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TI Minimum standards on PP

procurement of goods and services supply, construction and service

contracts (including engineering, financial, economic, legal and other consultancies)

privatisations, concessions and licensing

subcontracting processes and the involvement of agents and joint-venture partners

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TI Minimum Standards forPublic Procurement

• Debarment• Integrity Pacts• Control• Whistleblowing protection• Prevention – hotlines,..• E-procurement

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Access to information

• FoI Act - still suppression of information • Very limited disclosure (minimum is to make

contracts and ammendments public)• Stock companies owned by local govt. – no

information provided• Business secrecy clause - abused in

contracting• Bidders do no request information - fear of

worsenning relations with contractors• Monitoring is very difficult

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Control Institutions

• Antimonopoly Office • Formal control of law infrigements only• Office reacts on received complaints only

- bidders do not file complaints • Sanctions are low (no prevention)• No methodical guidance

• Supreme Audit Office• No control of local govt. spending• No enforcement mehanisms

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INTERNATIONAL ANTI-CORRUPTION CONVENTIONS

• OECD• UN (UNCAC)• Regional conventions

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Good Practices – Case studies

• Mexico• Argentina• Colombia• Germany• Czech Republic

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Monitoring of construction procurement in big cities - REPORT

Texts on all 8 cities (4-6 pages) Tables with information from municipalities,

Audit Office and Anti-monopoly Office Table with companies contributions to

political parties BPI (Bribe Payers Index) – as illustration and

comparison

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III. Monitoring of construction procurement in big cities - CONCLUSIONS

Political interference (mayors, councillors, top officials)

Conflict of interests, clientelism, patronage (post-employnment moves, „revolving-door syndrome“

Excessive costs, price increases Individual companies get most of contracts Ologopolistic situation in construction business Weak control (institutional and civic), difficulties

to get information Companies finance political parties (directly or

indirectly) No personal responsibility deduced

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Specific Case study:Defense procurement

• Legal exceptions for hard purchases (including millitary components) is used for all kinds of soft purchases (uniforms, …)

• TIC monitored Ministry of Defense contracts (in 2002-2004)

• only 6% open tenders, 94% no tenders (contracts awarded directly to one company)

• Recent case of planned acquisition of truck cars: armour-plate fronts will be attached (millitary component) - to avoid open tender

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Monitoring conclusions

Monitoring very difficult, but possible Useful method to Illustrate main procurement

manipulations Very desired activity (NGO, consultants, media),

yet very sensitive, time-consuming and complicated

Clientelistic networks become less secure Pressure Initiate reforms and increases disclosure Activates bidders to take more active approach

and to request information

Initiate prosecution (accountability)

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CZECH REPUBLIC – Case study

Research of public funds losses due to corruption and lack of transparency

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Research: public funds losses WHY? WHY: Attracting method to draw

decision-makers attention and set reform political agenda

Need to prove innefficiency with numbers• Lack of numbers (quantification)

• AIM: to quantify amount of unnecessary costs of public contracts due to opacity and corruption

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Research: public funds losses HOW?

Preparation Quantification of procurement market Develop methodology:

I. Assessment of the volume of economic losses at the central level

II. Assessment of the volume of economic losses at the municipal level

III. Total estimate • RESOURCES: Supreme Audit Office, Public

services provided at local level, Ministry of Finance

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Public procurement market OECD*

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2

4

6

8

10

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14

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Hun

gary

Swed

en

Gre

at B

rita

in

Slov

ak

Cze

ch R

epub

lic

Nor

way

Finl

and

Pola

nd

Den

mar

k

Can

ada

Icel

and

Irel

and

Japa

n

Cor

ea

USA

Net

herl

ands

Aus

tria

Switz

erla

nd

Aus

tral

ia

Ital

y

New

Zea

land

Fran

ce

Port

ugal

Spai

n

Ger

man

y

Turk

ey

Gre

ece

Belg

ium

% G

DP

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Research: public funds losses Central Level

To define the total amount of public funds used at the central level of public budgeting for the purchase of goods and services (public procurement).

Data about public funds management. The most reliable data concerning the efficiency of the management of public funds is provided by the Supreme Audit Office. Based on annual reports for the last eleven years, the average inefficiency rate occurring in the public sector can be assessed.

To apply the established inefficiency rate to expenditure for the purchase of goods and services by the public sector at the central level in 2004 and subsequently assess the extent of inefficient management in this part of public funds.

CENTRAL LEVEL: the average inefficiency rate in public funds and property management amounts to 14.7%.

14.7% x 118.3 billion = CZK 17.411 billion. In 2004, out of the total amount of public funds, CZK 17.4 billion was used inefficiently at the central level.

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Research: public funds losses Local Level

Municipal services selected: municipal waste, maintenance of roads, operation of water treatment plants, street lighting, cemeteries

If we assume that approx. 12 % of these funds is used inefficiently, then it is possible to estimate the loss caused by the absence of any type of tendering procedure at CZK 15 billion .

In 2004, out of the total volume of public funds, CZK 15 billion was used inefficiently at the municipal level.

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Research: public funds losses

• Results: • 14.7% losses at central level: 17.4

billion CZK (590 milion EUR) • 12% losses at local and regional level:

15 billion CZK (510 milion EUR)

• Total losses: • 32.4 billion CZK (over 1.1 billion

EUR) per year

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Monitoring of construction procurement in big cities „Clientelistic Map“)

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III. Monitoring of construction procurement in big cities - AIMS

Illustrate main methods how procurement can be manipulated - govt. vs. bidders methods

Identify clientelistic (patronage) networks developed around municipalities

Publish information (as much as possible) Initiate investigation and activitity of control

institutions Show to media and other NGOs in what way

such monitoring can be done

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III. Monitoring of construction procurement in big cities - STEPS Preparation Selection of municipalities (8 largest cities) Selection of criteria Request for information Investigation, local interviews Elaboration of Information (understandable) Presentation, interpretation

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IV. Public Private Partnership (PPP) New challenge

Professionality of public administration• Low ability to divide project risks adequately

and transfer some of them on private investor Length of contracts period realization

• Political accountability for unsuccessfull projects very questionable

Complexity of contracts • Impossibility of public control

Risk of excessive indebtness of public administration in future

• Unrealistic expectations of public sector

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PPP: TIC activities

Evaluation of tender documentation on selection of advisors (consortium) in pilot PPP projects

Economic analysis (to assess PPP system risks)

Comments on proposed legislation (Law on concessions) – no success

Publishing of articles and media comments

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Thank you for attention

www.transparency.cz

David Ondráčkaondracka@transparency.cz