This past Monday, April 28, U.S. federal trial court judge George B. Daniels sentenced three persons at the center of a corrupt scheme that cost New York City some $600 million to 20 years each in prison. Despite the massive loss and the large number of firms and individuals that participated, the scheme was quite simple. Its simplicity, and the vulnerability of a government as large and sophisticated as that of New York City to it, is a stark reminder of how critical contract administration — one of the more prosaic-sounding responsibilities of government — is to controlling corruption.
The New York scam arose from a $63 million contract to modernize its payroll system. Software contracts, like construction contracts, can take months if not years to perform and may need to be modified as the contractor runs into issues not anticipated when the contract was drafted. More computer code than initially foreseen may be required to capture the way employees in some departments record their hours; a road may have to be re-routed because the ground along the original route turns out to be unstable. But it may also be that more code isn’t needed or that the original routing of the road is fine. Instead, it may simply be that the contractor is looking for a way to squeeze more money out of government.
To deal with this concern, governments typically rely on expert professionals to evaluate a contractor’s requests for change orders. Often these professionals also decide whether the completed project meets contract specifications. They thus serve as guardians of project quality and integrity. What happened in New York was simple: the guards deserted their post, conspiring with the contractor to bilk the city of out hundreds of millions of dollars. Where the city erred was its failure to heed the famous question attributed to the Roman satirist Juvenal: Who guards the guardians?
Heeding that question and coming up with a satisfactory answer are, of course, two different things. What can a government do to avoid the sort of collusion that cost New York City so much money?
A first answer is to hire a second guardian to guard the first, a solution the European Union adopted in a road construction project it financed in Tanzania; it retained an engineer to check up on the work of the engineer the government had employed to monitor construction. But as commentators since Juvenal’s time have observed, this can lead to infinite regress: What guarantee is there that the second guardian will not be drawn into the corrupt scheme? And the third?
An answer suggested by the World Bank is to enlist civil society as the second guardian. The purpose of all government contracts is to further citizen welfare — through better roads, a more efficient payroll system, and so forth. Who better to watch over the execution of a contract than its beneficiaries? The problem is that civil society groups may not have the technical expertise to judge whether, for example, more software coding is needed or the road must be re-routed. That need for technical expertise, after all, is why New York City (and other governments) rely on professional monitors in the first place.
Beyond searching for the ideal guardian, there are other ways to reduce the risks of corruption in contract administration, from tinkering with the guardians’ incentives to reduce the risk they will leave their posts to restructuring contracts so as to give contractors stronger incentives to complete the job honestly. These and other areas are the subject of discussion and experimentation by some practitioners and a few in the academic community. What is surprising is that contract administration is not accorded higher priority by the anticorruption community when, as the New York City case demonstrates, the failure to pay attention to it can be so costly.