Public Procurement in Peru: Three Urgent Reforms to Curb Corruption

Peru is in the midst of yet another major corruption scandal, this one involving a cartel of companies called the Construction Club. The Club allegedly operated as a bid-rigging cartel for major public construction works, in which the members of the Club would decide which one of them would win any given public contract and at what price, and the other Club members would deliberately submit higher bids to create the illusion of a competitive process. What started as an antitrust scandal has turned into a corruption scandal, as the Club is also accused of bribing public officials (including former President Vizcarra) to “guarantee the functioning of the cartel”.

The alleged bribery and bid-rigging are shocking but not surprising. This sort of corruption is all too common in the public procurement process in Peru and elsewhere (see here, here, and here). The vulnerability to corruption stems largely from the lack of accountability and transparency in the public procurement process, as well as the lack of professionalism in the public service. Can anything be done to address these longstanding problems? While there is no simple or overnight solution, there are in fact a number of measures that Peru can and should adopt to address the corruption vulnerabilities in its public procurement process and reduce the likelihood of another incident like the Club scandal recurring in the future.

  • First, Peruvian authorities should enact a legal reform that obligates procurement officials to conduct an in-depth investigation of the fair market value of the goods or services to be provided in a public contract, using either outside expert consultation or a review of historical prices within Peru’s e-procurement platform, Sistema Electrónico de Contrataciones del Estado (SEACE). If these sources cannot provide a reliable market price estimate, then the law ought to require procurement officials to use the best available proxy and to provide a written explanation and justification as to why no other reference was available. The law should allow interested parties (such as the General Comptroller’s Office, a competing bidder, or civil society watchdog) to file a complaint with Peru’s Supervising Agency of Government Procurement (OSCE) if there are reasons to believe the procurement officer did not fulfill these obligations or approved a bid that greatly exceeded fair market value. A procurement official found to have filed a false or fraudulent justification should be sanctioned first with a suspension and, in case of repeat offenders, should be dismissed and disqualified from future civil service employment.  Such rules would make it harder for public officials to sign off on rigged bids without getting caught, and this increased risk would have a deterrent effect.
  • Second, OSCE should redesign the SEACE to increase the availability, reliability, and timeliness of the data provided on the platform. For starters, improving the system’s technical capacity and storage will allow public officials and bidders to complete proper documentation, including the justification reports proposed above, through e-forms directly on SEACE, instead of the current system in which forms are filed as paper documents and later uploaded into the system. Shifting to e-forms would reduce the opportunities for public officials to manipulate or enter incomplete information; a fully electronic system would also facilitate the regular update of filings, ensure consistency with current market conditions, and facilitate sharing of information across local, regional, and national public procurement offices. Moreover, an automatic red flag system can and should be embedded within SEACE. For example, if a public official has not completed a justification report for a bid selection in a timely manner, this unusual delay could trigger an alert sent to the General Comptroller’s Office (GCO) for additional review. The system should keep a record of all red flags attributed to each user and alert the GCO when what might otherwise seem like minor incidents suggest a troublesome pattern that warrants further inquiry. After all, in the case of the Club, it appears that it was the same relatively small group of public officials who colluded with the bid riggers. An automated system such as the one proposed here might have flagged these officials’ suspicious behavior earlier.
  • Third, enhancing the professionalism of public procurement officials and placing higher caliber leaders at the head of public procurement offices will help prevent corruption, as well as improving overall performance. Peru’s National Civil Service Authority (SERVIR) —working in collaboration with academic and professional partners, and building on its own 2017 framework—should therefore establish higher standards and more rigorous screening requirements for civil servants working in high level and sensitive positions in public procurement offices. In addition, all public servants should be obliged to take a course on integrity. OSCE should collaborate with SERVIR’s National School of Public Administration and the Secretariat of Public Integrity to design (and regularly update) an integrity training program focused specifically on the public procurement process. Improving integrity training is especially important for the 70% of public servants who work at the regional and local levels, where internal controls are weaker, capacity and knowledge gaps are wider, and the risks of corruption are greater.

Reforms along the lines suggested above would substantially improve the integrity of the public contracting process, making it much harder for cartels like the Club to corrupt the procurement system. While many additional reforms would help as well, the three major reforms outlined have the important advantage of being feasible in the short term, in that they do not require major institutional changes, and can be built upon efforts that Peruvian authorities have already begun to implement. These reforms can therefore serve as the core of a reform program that is both practical and likely to have a substantial impact.

5 thoughts on “Public Procurement in Peru: Three Urgent Reforms to Curb Corruption

  1. Yup

    I live here, too, a decade or so, committed (nacionalizado), and observant.

    You have some nice proposals but I see among the suggestions a lot of examples of the word “should”. This is a bit like someone thinking that to tell a hold-up merchant to give up his gun will get results.

    A number of psychosocial issues here originate in the class mentality particularly in the case of the class of people who have a family background of lots of money and the ability to find those among the legal profession and the judiciary who might be partial to a bit of advancement or a nice “No Cholos Beach” bungalow.

    Equally, many politicians are preselected for the election rolls for their willingness to do deals with construction companies, miners, and of course the famous “La Blanca”. When I say “many” it’s because I’m unwilling to quote a larger more accurate number.

    One rather famous issue in this vein is of course the media treatment of the elected national President to whom very little coverage was given in the earliest months of his tenure. This level of “corruption”, amounting to treason, really, is of course the desperate flaying about of a class imagining it’s in imminent danger of losing everything and, in so flaying about, making more obvious day in day out its unalloyed repulsiveness (racially insulting the President, for example).

    Methinks that your suggestions, well-structured as they are, can do nothing much until somehow there can be instilled in the Heirs to Pizarro something known to human beings as a Conscience.

    Thanks for your space.

    • Estimado Dave,

      I finished reading the author´s blog post about Peru and I couldn´t miss your comment. Many of the assertions you are making, and others you are implying, don´t completely align with the ideas in the blogpost. Conclusions, at least in academic and even consultancy settings, are meant to provide guidance and propose an intended path toward a goal. In this regard, as I understand it, it appears that the author explained her purpose for the piece and then laid out her recommendations, backed up with public information. So, the “lot of examples of the word should” I think are just ways to express her recommendations.
      There are other implicit claims on your comments related to racism, classism, and even you are mentioning our current President, because I am Peruvian born and raised, Mr. Castillo. As far as I can read in the author´s post, there is no reference to any sociological analysis on classism or racism triggering corruption or within public procurement. In addition, there is no single reference on the post to the current president Castillo, the role of the media in relation to his government, or even a word that refers to “conscious”. As I expressed in my comments to the author´s post, institutional change takes time. The process requires not only amending laws and regulations but also convincing citizens and public officials that corruption erodes public value, always.
      I hope that these comments are useful to focus the discussion on the actual recommendations related to this topic: anticorruption.
      Bests, Luis.

      • Gracias, don Luis.

        I don’t apologise for not following academic guidelines.

        I sometimes try to insinuate some “sentido común” into these idealistic discussions. This was the case above. I suppose that challenging “anticorruption” as pure Quijote is unwelcome, couched in whatever paradigm. I do think that anticorruption ideas just will not take off here.

        The reason is that the head of the fish cannot be cured while the country is shackled to a class of society which does not intend in any way to diminish its privilege, and can suborn public representatives and officials with crumbs from the dog’s dinner plate.

        My position is that any attempt to legislate for corruption merely attracts those who can pay for infiltration to the machinery of administration. Rodolfo Orellana, anyone? and the rest.

        In other words, while the conditions remain as in the penultimate paragraph above, any tinkering with the transmission is easily subverted.

        OH! and there was plenty of racism and classism in our Presidential Elections! Still going. Of those among whom I live, a feeling of shame and disgrace was evident, and will not evaporate. Let’s not mention anything specific about the role of the media, then and thereafter.

        Work on combating corruption – and in the public administration, “corruption” is a sweetener word for Treason Against The Public – just won’t work until a wholesale invention of Conscience happens.

        I treasure my compatriots and weep for them. Were it not for Global Pandemonium, we may have advanced…

  2. Dear Ella,

    I find your post absolutely relevant. As you can see in my profile, I am Peruvian (and proud!) and I have been working quiete a bit within the Peruvian Public Administration. Unfortunately, corruption scandals in Peru are not just limited to certain political parties, ideological affiliation, social class, or even religious beliefs. And I say “unfortunately” because it will be easier for all citizens to just know which specific party, or group to avoid from the start.
    In a country with weak institutions and high level of informality, corruption is king. Don’t get me wrong, I am not implying that there is not a pathway to deal with this endemic problem. I am convinced that there is no “canned” or “one-size-fits-all” solution for corruption. And that is exactly what I can read on your post: battling corruption is not only about amending laws, statues or regulations. In my humble opinion, anti-corruption efforts require an institutional framework supporting them. It is pointless to change a bunch of laws if the problem lies mainly in their practical application. Your recommendations on how to improve SEACE and partner with SERVIR show that you are well aware of how institutional arrangements work in reality. As I understand them, they are not just words on a paper called law. They actually came alive when people in charge of enforcing them are not only adequately prepared but also fully aware of their central role in the process of defeating corruption, on the long run. That is, in itself, an example of the institutional change to which Douglass North refers in his research.
    I was tempted to comment on previous blog posts but this one immediately caught my attention because of my personal and professional attachment with Peru . So, please, keep addressing this fascinating topic in relation to my favorite country: Peru. Bests, Luis

    • don Luis, an apology as I missed your “It is pointless to change a bunch of laws if the problem lies mainly in their practical application ” which resonates to some extent with my “analysis”.

      When the Head of State helps himself to a free vaccination under the counter, what is don Pepito to think? etcetera..

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