In a piece on this blog last March, Rick highlighted a perverse consequence of requiring transparent bidding in government procurement. Although bid disclosure is intended to prevent public officials from secretly favoring companies that pay bribes, it can facilitate collusion among bidders by making it impossible for cartel members to defect from collusive agreements without getting caught. As a result, the cartel is easily enforced and the public pays an inflated price for the goods or services being supplied, yielding improper profits for the winning firm just as if it had paid a bribe to secure the contract.
Rick’s example reminds us of the importance of considering the collateral consequences of anti-corruption remedies before employing them. Nonetheless, public procurement reform could be an instance in which it is desirable to shift the method of corruption, even if we can’t reduce the total loss to corruption on a dollar-for-dollar basis. Even if the private cartel problem worsens, this could be a cost worth bearing if it leads to less collusion between government procurement officers and favored private firms.
There are three main reasons why private collusion (cartels) may be less harmful than public-private collusion (bribery) in the procurement context:
- First, the concentration of corruption in the private sector may make it easier to detect and punish the bad guys. Because price-fixing requires collusion among many parties, there should be more opportunities for disagreement or amnesty incentives to entice self-reporting than in a two-party briber-bribee relationship. Furthermore, competition and fraud laws punishing private misbehavior may be more developed and offer heightened deterrence relative to public integrity laws. For example, U.S. antitrust law already offers a private right of action with the potential for treble damages, remedies not available under the Foreign Corrupt Practices Act. On the enforcement side, the Department of Justice has demonstrated a willingness to prosecute foreign corporate antitrust offenders and even seek to extradite individuals with limited U.S. contacts.
- Second, we might have greater confidence that an enforcement agency will pursue the investigations even-handedly when the corruption is limited to private entities. If public officials are directly involved in wrongdoing, government leaders or their allies may have a stronger incentive to hide the corrupt activities and block independent enforcement. As a result, the taint of public corruption is more likely to be imputed to the reliability of subsequent enforcement efforts. Of course, this only holds true to the extent the cartel is not viewed as manipulating government through other means, such as political alliances and financing—but this would be equally true if the underlying wrongdoing was quid pro quo bribery of procurement officials rather than private collusion.
- Third, by distancing public officials from direct involvement in corruption, we may bolster confidence in government capacity and fairness in the long term. Though many factors contribute to public confidence in the political system, studies show that endemic public corruption has harmful effects on trust in government, political participation, and the quality of individuals who enter government service. Even if the resulting expenditures are equally wasteful, a tender system that insulates the bureaucrats involved from wrongdoing may boost the reality and perception of neutral decision-making and provide a model for other government functions, such as regulatory adjudication and resource allocation.
None of this is to say that corrupt acts occurring outside of government are less reprehensible. Though public corruption seems especially pernicious, experts have called attention to ways that private corruption can be just as harmful in its effects on third parties, particularly by undermining trust in the marketplace. Furthermore, the influence of the private sector over public activity through lobbying and political giving can render any public/private distinction blurry. But even if procurement reforms (like procurement transparency) only squeeze the balloon of corruption, such reforms can still be a valuable starting point if they create defensible islands of integrity within the larger bureaucracy. There may be little hope for rooting out the deeper causes and mechanisms of corruption unless we can begin with such incremental improvements.
Great post, thanks Daniel. I have been thinking a lot lately about transparent money flows (“open books”) for thinks like NGOs and have had several disappointing moments when I realized, as you say, that such a plan would merely “squeeze the balloon.” Your post has given me many new factors to consider!
Thanks Chris, I’m glad if you found it helpful. Whether in non-profits or government spending, this will be a tough problem because wherever there are rents to be made, people will find a way to make them. But my intuition — and I welcome people to disagree — is that loopholing is a two-way street. If rent-seekers game the system in predictable ways, regulators can design rules that make abuses more conspicuous, complicated, or contingent on other actors.
What would be extremely useful is to find new ways to measure the movement of corrupt activities pre- and post-control – For example, the India road-building study Rick discussed in May and similar study on India’s e-Government kiosks that I hope to discuss in a future post. It’s this potential to turn measurements into forecasts and strategies that makes squeezing the balloon a step forward from playing whack-a-mole.
Dan, thanks for a thought provoking post. A couple of points in reply.
One, part of your argument rests on the ability of competition law enforcement agencies to detect and punish bid rigging. You cite the U.S. as an example but remember that has far and away the most developed enforcement machinery for competition law violations. If you a take a look at the surveys of enforcement around the world, you will see that most countries are still far from effectively enforcing even the most basic laws on price fixing. Maher Dabbah’s 2010 volume, International and Comparative Competition Law, is one example; the peer reviews of competition law enforcement conducted under the sponsorship of the OECD [http://www.oecd.org/brazil/competitionlawandpolicyinbrazilapeerreview.htm] and the papers and conferences UNCTAD sponsors [http://unctad.org/en/Pages/DITC/CompetitionLaw/Competition-Law-and-Policy.aspx] are more recent analyses of the gap between the law on the books and the law in action.
More generally, I think the better solution to the cartel problem in public procurement in countries unable to enforce anti-cartel legislation is a rethink of the requirement that contracts be let competitively. Why should the state allow a private group to decide who gets what public contracts? Particularly if the result of the decision will be an inflated price?
George Martin, a procurement officer for the U.S. military in South Korea in the 1970s explains how the U.S. coped with apparently unbreakable cartels there in his 1983 monograph And Never the Twain Shall Meet: Cross-Cultural Conflict in the Administrative Process, U.S. Military Procurement in Korea ( Bloomington: International Development Institute, Indiana University).
The military regularly tendered for goods and services from Korean firms and its rules required that all but the very smallest contracts be let competitively. Procurement officers encountered the same problems evident in the many developing countries today, that is collusion coupled with corruption underpinned by a culture that eschewed competition.
At first procurement officials sought to overcome these problems through stricter enforcement of the Republic’s competition laws. Cartels were infiltrated and evidence of collusion was turned over to South Korean prosecutors. Local procurement staff caught furthering cartel activities were prosecuted. Although a few cartels were broken up, the results were disappointing; cartels regrouped and worse, in several cases, informants were murdered.
Frustrated with the lack of progress, senior procurement staff turned to negotiated procurements, similar to the two-stage tendering often used in tight construction markets. The procurement officer chose a firm he believed capable of doing the work and invited it in to negotiate a deal. A fixed price might be negotiated or sometimes, as in the case of two-stage tendering, the firm would work on a cost- plus basis. The results exceeded expectations; prices were 10-15 percent less than those under “competitive” bids, and the kickbacks and violence associated with “competitive” tenders disappeared.
The key to the military’s success was its “clean,” independent procurement personnel. Procurement staff stood outside the network of collusion and corruption that authorities sought to defeat, administering the rules evenhandedly and with integrity, thus acting as a de facto independent procurement agent.
Implementing such a reform in a developing country with weak institutions would be far from easy, but I think it provides a better solution than simply allowing the private sector to continue to collude on public contracts. For after all, where is some of the money reaped from the collusion likely to go? To corrupting public officials.