In a recent post Matthew spotlighted a handful of academics that are in denial about the extent of corruption in developing countries. As bad as it is for armchair analysts to ignore the facts about corruption, it is far worse when a leading development policy maker does. Yet that is what the World Bank is on the verge of doing as it puts the finishing touches on its new procurement policy.
It is now beyond debate that markets for the construction of highways, power plants, and other types of infrastructure in developing countries are laced with corruption. Studies (click here, here, and here for representative examples), reports by Transparency International, enforcement actions, and media stories confirm what procurement professionals and market participants have long known: tight-knit cartels, sometimes with the connivance of government officials, control many of these markets. It is these cartels, rather than impersonal market forces, who decide which firm will win what contract at what price. Unlike market forces, the cartels will also determine who gets paid off when.
In the face of this evidence one would expect to find two things in the World Bank’s new procurement policy: 1) a frank acknowledgement of the problem and 2) expert guidance to its own procurement staff and procurement professionals in borrower countries on what to do about bid rigging cartels. But the October 2013 draft policy framework now in the final stages of approval does neither. As with the policy it will replace, the proposed framework pretends there is no such problem. It assumes throughout the document that infrastructure markets in developing countries are blossoming with competition. Collusion is mentioned precisely once: in the abbreviation section at the front where it is noted that the Bank treats collusion as a form of corruption.
In half the cases where a cartel rigs the price, the project costs 25% or more than what it would have cost had the market been competitive, and overcharges as high as 50% and even 100% are not unknown. The World Bank lends some $20 billion annually for infrastructure construction, and pretending bids aren’t rigged on these projects could mean Bank clients are losing millions, perhaps even billions, to corruption annually.
Whatever that number, the total cost to developing countries of the Bank’s failure to address collusion in the procurement of infrastructure will surely be much greater, for, as the Bank proudly notes in its new policy framework, it is the standard setter for procurement policy in the developing world. The regional development banks in Africa, Asia, and Latin America, bilateral aid agencies, and the governments of most developing nations follow the Bank’s lead on major procurement issues. Developing countries are projected to spend in the neighborhood of $300 – $400 billion on infrastructure over the next decade, and if the Bank’s new procurement policy ignores bid rigging, the rest of the development community is likely too as well.
It seems inexplicable that almost 20 years after then World Bank President James Wolfensohn decried the effect on development of the “cancer of corruption,” and almost a decade after the World Bank’s Board of Directors committed the institution to helping client countries eradicate it, the Bank would be close to adopting a policy that closes its eyes to one of the most serious forms of corruption infecting the developing world. If I had to guess what’s behind the deliberate oversight, I would put my chips on a combination of stovepipes, mice, and elephants. But that is a subject for a future post.
An aside, possibly off-topic, is the issue of credit worthiness and debt. Many countries borrowed from the bank, did not pay off the loan and the debt was written off. In ordinary life such a thing would render the borrower unworthy of future credit. This means he would be on a credit register somewhere as not credit worthy. But this history is ignored when it comes to governments. They can repeat the same thing: inflate tenders and put the interest payments on the government accounts. Eventually they won’t be able to pay back so they will need a further write off. In the meantime the country does not develop because the government is spending the money on over inflated interest rate repayments made so by corruption. I don’t know what stats are available on the highly indebted poor countries who had their debt written off and their current debt position. Are any near the need for a second write-off.
How interesting is the difference in the Chinese way. Give people money to tender for a road. No, we will do it ourselves and you will pay us back.
The post also beggars the question that someone in this chain of tendering in the World Bank itself is on kick backs. Send for the feds.