Yesterday Matthew commended the work of Mihály Fazekas, István János Tóth, and their colleagues to those concerned with corruption in public procurement. I second that recommendation. In their July 2013, slyly-named “Corruption Manual for Beginners”, the authors describe better than anyone yet how a government buyer can connive to steer a contract to a particular seller — from skewing the contract specifications so that only the favored firm can meet them, to failing to notify others about the procurement, to disqualifying on specious grounds firms that submit bids lower than the favored firm’s bid.
Yet despite the value of the contribution, the authors have not (yet) provided a similarly penetrating analysis of another form of public procurement corruption: that which results not from a conspiracy between a government buyer and one seller but that between the buyer and a group of sellers organized into an industry cartel. Judging from the results of investigations in settings as different as the American states, the Netherlands, the Philippines, Nepal, France, Columbia, Uganda, Slovakia, and India, this type of corruption maybe be at least as common as the single seller form. Costly too. More than half the time, the price a buyer pays in a cartelized market is 25 percent or more higher than what it would have been had there been no collusion among the sellers.
The distinction between these two types of collusion–one involving a single favored seller, the other involving a cartel of sellers–is important, because the appropriate policy response is quite different. When the procurement process is corrupted by a cartel, the standard prescription for combating corruption–transparency–is not only ineffective but self-defeating.
Cartels are the result of secret, usually illegal agreements specifying who among the members will win which contract at what price. Adherence to the agreement depends upon each member voluntarily observing it, but cartel members are constantly tempted to deviate from the agreement if they can do so without being found out by the other members. One of the best ways for cartels to prevent such cheating (which could ultimately result in the collapse of the cartel) is to require each member to disclose to the others the contracts on which it bids and the terms and prices it is offering. Members can thus immediately identify and sanction “cheats.” This method is, as the leading student of cartels observed many years ago, “the ideal instrument” for keeping the cartel intact.
It is also mandated by most if not all public procurement laws. To prevent a procurement official from awarding a contract to any but the lowest bidder, most public procurement laws require that all offers received in response to a tender be opened in public and, in recent years, posted on a public website as well. This is an effective response to corruption resulting from a conspiracy between a government purchaser and a single firm. But where corruption takes the form of a cartel, the public opening of bids makes the maintenance of the cartel easy.
Tackling cartel corruption thus requires something besides introducing ever greater transparency into the procurement process. Fortunately, recognition of cartel corruption is growing as is innovative thinking on how to defeat it. The OECD has been in the lead, issuing a series of reports on it, and other contributions are beginning to appear. A Dutch scholar has just published a book on the issue and Messrs. Fazekas, Tóth and colleagues have research on it underway. In future posts I will review this work and its implications for procurement reform.