Reforming Procurement Processes: It’s About More than Law

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?


4 thoughts on “Reforming Procurement Processes: It’s About More than Law

  1. Everything you say in this post makes sense to me… except for the title and your framing of your thesis (i.e., that fixing these country’s procurement problems requires more than changing the law). It’s not that I disagree with that statement. (Would any sensible person think that one could fix procurement _only_ by fixing law??). Rather, my puzzlement is that the main problem you highlight (drawing on Professor Mairal’s analysis) _IS_ primarily an issue with the law, namely the government’s excessive power to unilaterally alter or amend contracts, and to cancel them without having to pay adequate compensation. Doesn’t that suggest that a big part of addressing the procurement problems in these countries really is about reforms to government contracting law? What am I missing?

    Or is the main point you’re trying to convey, which you get to in your last couple of paragraphs, that there needs to be an appropriate match between a country’s legal rules and its other institutions (e.g. the capacity and independence of its civil service, courts, etc.)? If so, I agree entirely that this point is correct, important, and too-often overlooked, though I suppose the question we’d then need to ask, in each country where your diagnosis is accurate, is whether we’re better off trying to reform the law to better fit the institutions, or better off trying to reform the institutions, or both.

    Oh, BTW, on the subject of the importance of legal-institutional match, another source that may be helpful here (though not one that has much directly to do with corruption) is Brian Levy & Pablo Spiller eds., Regulations, Institutions and Commitment: Comparative Studies in Telecommunications (1996).

    • I am afraid that too many people think all that needs to be done to reform the procurement process is to fix the law. Hence the reason for the post. A common error is thinking that first we fix the law, then we bring the institutions into line. So in Albania, I believe it was, there was well-intentioned effort to reform bankruptcy proceedings to speed the transfer of productive assets from a bankrupt estate, where they were not being used, to a company that would employ them. A first-world bankruptcy law was written which required the existence of a cadre of sophisticated personnel who could manage a bankrupt’s estate. Step one was easy; I understand step two, the development of a cadre of bankruptcy administrators, is still in process — 20+ years after the law was passed.

      Yes, sometimes a legal fix can resolve the problem. But I would bet that amending Argentine procurement law to give the government greater flexibility without more might not be enough. Without a non-corrupt procurement staff to use the flexibility wisely, the amendment might simply provide one more avenue for the corrupt to exploit.

  2. Interesting post Rick, it seems like what you are saying is that a lot of the corruption is simply due to the fact that the government’s unilateral contract-changing ability (1) makes government contract work very risky, and so firms must charge extra high prices (through corruption) in order to compensate, and (2) makes it more difficult for new firms to figure out how to deal with the government, thus restricting competition in bids. Does it seem to you then that simply getting rid of the government’s unilateral contract-changing authority would fix most of the problem?

  3. Certainly the cancellation of the entire project for the new airport in Mexico falls under this area. In that case, contracts were cancelled before having definitively shown that corruption was involved. Still, despite the code law system, it seemed that the government still had to pay off many of the contracts.

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