Last week’s post explained why some Latin American nations’ crackdown on corruption was doing more harm than good. The law in these countries gives government no choice but to terminate a public contract whenever corruption is detected. Canceling a contract just after the winning bidder has been selected, before the winner has started work, is one thing. It is quite another to bring the construction of a power plant or road to a screeching halt mid-way through the project. Mandatory termination in these cases can impose enormous costs on those who had nothing to do with the corruption, not least of which are taxpayers stuck with a half-built project.
The post was based a recent Inter-American Development Bank staff paper. The authors showed how costly mandatory termination laws have been in Peru and Colombia and described how several Latin governments were searching for alternatives to address corruption when it is found to have tainted a public contract now underway. As policymakers do, let’s hope they consider more than just reforming their procurement law. For as Argentine lawyer and law professor Hector Mairal writes in a first-rate analysis of what ails Argentina’s procurement law, law is but one piece of the procurement equation.
Argentine procurement law, Mairal explains, is, like that in many Latin nations, based on French law. Thanks to that heritage, it falls under a special branch of law giving government extraordinary powers to amend or terminate a public contract. In Argentina as in France, the executive can terminate a contract without having to pay lost profits; an order to change a provision in the contract is immediately binding and can only be challenged through a lengthy judicial proceeding, and even if the government is in breach of the contract, the private party must continue to perform. For example, it would have to supply goods or services even though the government was not paying for
Several consequences flow from these provisions. To get around some of the more onerous consequences of public procurement law, contracts between the government and private parties tend to be quite short. This gives the parties room to maneuver by relying on legal doctrines and case law. Traditional contractors, familiar with the law and local practice, thus enjoy an edge over newcomers, thus retarding competition. Furthermore, the almost continuous amendment of government contracts once they are signed defeats rules on public tenders and other measures designed to introduce transparency into the contracting process. For renegotiation is carried on in secret. The sum of all these practices is to raise the risks of contracting with the government, and thus the prices it pays.
Marial’s analysis concludes by stressing a critical factor Latin nations considering procurement law reform should bear in mind. France has a high-quality civil service; its judicial processes are relatively speedy and low-cost, and its civil service and courts reasonably insulated from political pressures. All factors that explain why a government contracting regime that works in France does not work so well in country like Argentina where these conditions are not present.
Procurement law reformers need to look beyond “best practices” found in other nation’s procurement regime or the UNICTRAL model law. Yes, that practice may be “best” in the country where it is found or the model law fine for a model country. But given how our enforcement agencies, civil service, and the other institutions that together create the public contracting regime function, will they work here?