I took the World Bank to task last week for its failure to tackle bid rigging and other forms of collusion in its new procurement framework. Despite mounting evidence that prices on many Bank-financed projects are jacked up 25%, 50%, or even more thanks to bidder cartels, the new framework does not even mention the problem let alone recommend steps to combat it. The omission is all the worse because developing country governments and other donor agencies generally follow the Bank’s lead on procurement policy. With upwards of $1 trillion likely to be spent on power plants, water works, and other big-ticket items in developing nations over the next decade, if the rest of the development community, like the Bank, remains blind to the risk of collusion, the potential losses could be staggering.
What might the Bank do were it to decide to amend the new framework to confront the risk of collusion in public procurement?
Step one might be an explanation of what bid rigging is and where it is likely to occur. The most accessible source is the set of OECD publications appearing on its suggestively named web page “Fighting bid rigging in public procurement.” The documents there explain how colluders use territorial and market allocation, subcontracting and joint venture agreements, and other schemes to reduce if not eliminate competition on public tenders. In “Detecting Bid Rigging in Public Procurement” the OECD identifies three characteristics that make a market prone to collusion: (1) a small number of firms competing for the tender or a series of related tenders, (2) a standardized or simple product such as a road, an office machine, or transport services, and (3) conditions that make it difficult for new firms to bid, such as distance to the job site, government regulations discouraging non-national firms from bidding, onerous requirements to qualify to bid, etc.
A second step could be to explain the harm bid rigging cartels do. Most obvious and most studied is their effect on price. The standard reference is John M. Connor’s Global Price Fixing. He reports that close to 80 percent of the time cartels inflate the price by at least 10% over what it would be in an unconstrained market and in half the cases the increase exceeds 25%. Evidence for these estimates comes mainly from court cases and economic studies of U.S.-based cartels; what data there is on cartels operating in other countries or across borders suggest even higher overcharges.
Much less information is available on the other effects of bid rigging – its impact on product quality, the pace of innovation, the corrupting effect on the political system. But what is known about these effects (click here, here and here for examples) indicates the damage may be far greater than whatever the overcharge.
As I explained in an earlier post, an estimate of the harm a corrupt act produces is critical for determining how much to spend to combat it. If the best a bid rigging cartel could do would be to inflate prices by 1% on a $1 million contract, it is foolish to spend more than $10,000 trying to prevent bid rigging. Where the evidence shows that 80% of the time cartels hike prices by at least 10%, $100,000 on a $1 million contract, it is just as foolish to devote only $10,000 to defeating a cartel’s attempts to rig prices.
What advice might the Bank offer its procurement staff and those in developing nations to prevent bid rigging on public procurements? Again, it might turn first to the OECD. In July 2012 the 34 member countries plus the European Union issued a series of recommendations to increase competition for public contracts and to make it harder for firms to collude on tenders. Tradition-bound development agency procurement professionals may find it hardest to accept the latter recommendations, for, as I noted in an earlier post, making it more difficult for firms to collude requires making the procurement process more opaque by, for example, keeping the identify of interested bidders secret and restricting if not eliminating conferences where bidders discuss the tender. Such measures do fly in the face of transparency, the one-note mantra many in the procurement profession been taught to repeat whenever the question of corruption is raised. But another favorite mantra of the development community is “one size doesn’t fit all,” and it has now been sixty years since one of the 20th century’s leading economists showed why, in markets prone to collusion, transparency furthers collusion. It is also now two years since the world’s 34 most industrialized nations unreservedly accepted this analysis. Surely it is time for the World Bank, which still considers itself the leading development agency, to incorporate this learning in its procurement policies.
The above may paint the Bank’s procurement specialists in a harsher light than deserved. While the preventive measures the OECD recommends reduce the likelihood that would-be colluders will succeed in rigging bid prices, the experience, first in the U.S. and now Western Europe, teaches that more often than not breaking up bid-rigging cartels also requires stiff fines and substantial prison terms for those caught colluding. Most developing countries have yet to even acknowledge the severity of the problem, let alone begin enforcing anti-collusion laws, so even with if the OECD recommendations are followed to the letter, there is still a good chance prices on public tenders will be fixed.
In those countries where cartels are particularly entrenched, it would not be surprising if procurement staff took an “elephant and mouse” approach to the problem. That approach is often found where one faces two problems simultaneously, say clearing a room containing both an elephant and a mouse. If the only tool the problem solver is given to rid the room of the two is a broom, is it surprising if he or she focuses exclusively on the mouse? Procurement staff face many problems that the brooms they have been issued can address. Why raise a ruckus about an issue for which a broom is only one of the several tools required, particularly when career and institutional incentives reward those content with just sweeping?
The responsibility for tackling the problem of bid rigging cartels in the developing world head on lies with the World Bank’s senior management and its board. Are they willing to assume it?