Ceiling Prices: A Second Best Method for Attacking Bid Rigging

The procurement laws of all countries provide that with a few, narrowly drawn exceptions public contracts are to be awarded on the basis competition.  As the drafters of the UN model procurement law explain, the reason is straightforward. A competitive procurement gives all those seeking the government’s business an equal chance to win the contract while at the same time maximizing the chance that government will receive quality goods, services, or civil works at the lowest price.

The problem comes when would-be suppliers do not compete for government’s business.  When instead of each one preparing its bid independently, based on what price the firm can charge and still make a reasonable profit, the bidders sit together and agree which one will “win” the contract and at what price, a price that can sometimes be twice what it would have been were there competition.

How can a government reap the benefits of competition when bidders have rigged the bid? The answer is that it cannot.  At least not immediately.  It can, as both the U.S. Department of Justice and the OECD recommend, institute procedures that make it harder for firms to collude, and it can, again as both these agencies regularly urge, vigorously enforce laws that outlaw bid rigging.  But these measures take time to have an effect; in the meantime, a government cannot halt all procurements.  It still needs to buy computers, desks, and other goods, to contract with cleaning, fumigation, and other service providers, and it must continue to build and repair roads, damns, and other civil works.

So in the face of collusion or cartel-like behavior by its suppliers, is government powerless in the short-run?  Must it accept whatever price the bid riggers offer? No matter how high it might be? Continue reading

The Trump Legacy: A Gladstonian Finale?

For a man whose biographer describes him as obsessed “with protecting his image,” President Donald Trump seems oblivious to how flouting conflict of interest norms is blackening that image.  Perhaps he thinks that the criticisms leveled (examples from GAB: here and here, major media: here, here, and here) are just the carpings of Clinton supporters that will fade over time. And that his presidential accomplishments will overshadow whatever he may do to grow the Trump patrimony while holding the office.

He might want to consider how conflict of interest charges have sullied the image of one of Britain’s finest leaders since he left office 123 years ago.  So great has the fuss been that that no biographer, no matter how sympathetic, and no history of 19th century Britain can ignore the charges. Continue reading

The Costs of Procurement Gaming: Evidence from the Czech Republic

Like any complex bureaucratic process, a public procurement system can be “gamed,” its rules manipulated to defeat the system’s purpose.  Procurement systems are particularly susceptible to gaming for they are designed to advance two objectives in conflict.  One is to allow governments to buy what they need when they need it quickly and easily.  The second is to prevent fraud and corruption from infecting the system by imposing elaborate safeguards at every step in the purchasing process – at the cost of making it slow, cumbersome, and costly.  The pressures to privilege the first at the expense of the second are many: the agency needs a replacement part immediately; every day the road is left unrepaired traffic snarls and citizens’ patience tested; overworked staff don’t have time to conduct a full-blown procurement.  The result is that procurement officers are always on the lookout for ways to bypass, or “game,” the rules that slow the process down.

One way is to attach an unrealistically low estimate on what the item to be procured will cost.  If the estimated price is below a certain amount, procurement officers can avoid conducting a full-fledged, open tender.  Below the threshold, in many systems $1 million, procurement officers need not prepare a lengthy, formal tender document, advertise it widely for a several week period, constitute a technical committee to evaluate the bids, and follow the many other rules for open, competitive procurements. They can instead use streamlined procedures — variously termed “shopping” or a “request for” or “invitation to submit” quotes—which allow them to call a few suppliers for a price quotation and take the lowest one offered.

No one with experience in public procurement doubts that threshold gaming sometimes occurs.  The questions are how often and why.  Do procurement staff regularly underestimate the contract price to push it below the threshold and avoid the panoply of procurement rules that would otherwise have to be applied?  Do staff do so to secure desperately needed items faster and cheaper?  For other legitimate ends?   Or to further corrupt deals?

New research now settles these questions – at least for the Czech Republic. Moreover, in answering them the researchers use techniques that others can employ to analyze the same questions in their countries. Continue reading

Exposing Secret Offshore Bank Accounts: American Law

Kleptocrats, drug traffickers, and other big-time crooks face a common problem: How to hide their money from the authorities while retaining easy access to it.  Yesterday former Senate staffer Elise Bean described one common, low-cost, easy solution and how a recent U.S. law has made it far more difficult for American criminals to turn to it. The solution, create a corporation in another country and then open a bank account in that country in the corporation’s name, is now widely known thanks to the Panama Papers.  What Bean offered in her April 26 testimony before a Congressional committee was a step-by-step explanation of how the scheme works and the U.S. law’s success in making it far harder for Americans to take advantage of it.

Committee members peppered her with questions about the law, its effect, and ways to improve its operation.  About the only question they didn’t ask is why more countries don’t have a similar law.  That would be one for anticorruption advocates to put to legislators in countries lacking one.

Continue reading

Three Valuable Additions to the Anticorruption Literature

March was a great month for the anticorruption community: two books and one report appeared that, in contrast to much that is published on corruption and related topics, are useful, insightful, and worthy of a careful read.

1) There is now no better introduction to the field of corruption studies than Ray Fisman and Miriam Golden’s Corruption: What Everyone Needs to Know, published in late March by Oxford University Press in an affordable paperback edition.  In nine readable chapters the authors summarize the main issues – what corruption is, why it is so harmful, the challenge of measurement, the forces behind it, and most importantly what can be done to reduce it.  The only group of readers that the book will disappoint is opportunistic politicians looking for quick and easy fixes.  There are, the authors remind readers at several points, “no easy fixes for a problem that been around for millennia.”

Theirs is not a counsel of despair, however.  Policy reforms can make a difference: higher salaries for public servants, the creation of an independent anticorruption agency, a “big bang” approach like Georgia’s wholesale dismissal of traffic police are three that are featured.  But such reforms can backfire, they warn, without complementary changes in the larger environment.  Wage hikes must be accompanied by more stringent enforcement of antibribery laws else the result may simply be to raise the bribe price. Quoting Gabe Kuris’ ISS study, they caution that anticorruption agencies will succeed only if they have built “alliances with citizens, state institutions, media, civil society, and international actors.”  With perhaps the disastrous results from disbanding the Iraqi army in mind, they discuss what could have befallen Georgia had its traffic police been let go under different circumstances.

Specialists will find nits to pick.  John Githongo never chaired the Kenyan anticorruption agency (he ran a unit in the President’s office); corporate interests are not the only ones that capture government agencies (labor and environmental interests can exercise undue influence over policy too); Switzerland long ago scrapped anonymous, numbered accounts.  But these are quibbles in what otherwise has to rank as the best one volume introduction to corruption and what can be done to fight it.

2) In the decade plus since my former World Bank colleagues Joel Hellman, Geraint Jones, and Daniel Kaufmann first advanced the idea that in some countries the forces of corruption are so powerful that they can be said to have “captured” the state’s policymaking machinery, the notion of “state capture” has been booted around academic and policymaking circles. Unfortunately not always with the greatest definitional or analytical clarity with the result that there is now a confusing mass of writing on what it means for a state to be captured and how it can be freed.  Thanks to the OECD, those looking for a source that makes sense of the welter of material on state capture now have a single volume to consult.  Preventing Policy Capture: Integrity in Public Decision Making, available here (free to read online, $20 to download) continues the high standards one has come to expect from OECD publications on governance, nicely synthesizing the massive literature Hellman and colleagues have inspired.

Just as Fisman and Golden warn that isolated interventions will not reduce corruption, the OECD authors stress that freeing a state from the bonds of corrupt interests requires a set of “actions that complement and reinforce each other.”  If anything, anti-capture policies are even trickier to implement than anticorruption policies, for, as the OECD warns, if not carefully constructed they can compromise fundamental democratic values of free expression and the right to petition government.  One of the volumes many strengths is that it never loses sight of these risks.

3) Perhaps the most salutary result of the international anticorruption movement is the spotlight it has cast on the massive theft of resources from poor countries by corrupt leaders.  There is no better guide to what has been dubbed “kleptocracy” than Cambridge Professor J.C. Sharman’s The Despots Guide to Wealth Management, just out in an inexpensive paperback edition from Cornell University Press.  The author of the leading text why tiny offshore jurisdictions were for so long able to help tax evaders and drug lords hide their money, Professor Sharman explains why kleptocracy — a practice wealthy nations once tolerated and one still facilitated by their banks, lawyers, and accountants — is now widely condemned.

Despite the sea change in attitudes, and accompanying changes in domestic and international law, however, corrupt money still gushes out of developing countries. Wealth Management is laden with pithy summaries explaining why efforts to halt the flow have failed. (Sanctioning international banks in the hopes concerns about a loss of reputation will deter them doesn’t work since “they appear to have little reputation left to lose.”)  Most importantly, Professor Sharman offers realistic recommendations for ending what has now become the most visible, and detestable, consequence of grand corruption.

 

Exposing Procurement Corruption: Ten Questions to Ask

No government activity is more susceptible to corruption than public procurement. The process by which government decides what to buy and from whom is lengthy, technically complex, and riddled with decision points that give procurement officers enormous discretion.  Oversight is thus especially difficult.  Moreover, because so much money is involved, the temptations procurement offers corrupt public servants and their private sector accomplices are particularly great.  Some developed countries spend as much as one-third of their budget on the purchase of public works, goods, and services, and the available data suggests the figure may even be higher in developing countries.

With so much at risk, it is no wonder that there has been an explosion of material on fighting corruption in public procurement.  The OECD, the World Bank, the European Union, and Transparency International have each issued a slew of publications on how to prevent corruption in public procurement, and the latest edition of Matthew’s anticorruption bibliography catalogues more than 100 articles, pamphlets, and books by academics, think tanks, and advocacy organizations on corruption in public procurement. Indeed, the amount of material is so overwhelming that reporters, civil society groups, and even parliamentarians and government auditors may be discouraged from pursuing allegations of procurement corruption.  For how does one know where to start?

Below are ten simple, straightforward questions that provide a starting-point.  They can be asked about any government purchase:  from “off-the-shelf” items like pencils and paper to a new road or bridge to the acquisition of customized IT systems.  The answers will provide a telling first indication of whether the procurement merits further scrutiny.  Continue reading

Reporting Corruption Easily and Safely: Papua New Guinea’s Phones Against Corruption Initiative — UPDATE

Nick Brown, head of Global Distribution for Mobimedia International, contributes the following Guest Post. [Ed. note: Data from UNDP on the project’s operation received June 2022 added at end of post.]

 Persuading corruption victims to complain remains one of the great challenges to combating corruption.  Policymakers can’t prioritize prevention efforts or know where to deploy enforcement resources if they don’t know who is demanding bribes where and from whom. But getting citizens to blow the whistle is no mean feat.  Citizens must be convinced it is worth the effort, that something will happen if they do speak up.  Citizens must also be assured they will be safe if they do, that the corrupters will not harm them or their loved ones, financially or physically.

With its “Phones Against Corruption” initiative, the Government of Papua New Guinea has hit upon a way that citizens can easily and safely report corruption complaints, and since its launch in 2014, with technical support from Mobimedia International and financial backing from UNDP and Australia, it has taken off.  Critical to its success is that it makes no technological or financial demands on PNG’s limited capacity.  It requires no more technological sophistication from citizens than the ability to send a text message, a form of communication widely used throughout the country. How does it work? Continue reading

Course on Anticorruption in Local Government July 10 – 14, 2017

The International Anticorruption Academy will offer a course this July 10 – 14 on combating corruption in local government.  Its purpose is to provide participants an in-depth understanding how corruption arises in local governments and what can be done to fight it.  The course is designed for local elected leaders, regional government administrators, anticorruption agencies’ professionals, experts from ombudsman offices and local anti-corruption organizations as well as governance specialists from development organizations

Former La Paz, Bolivia, Mayor Ronald MacLean-Abaroa will present his widely-praised work on cleaning up the city administration of La Paz. Ana Vasilache, founding President of Partners Foundation for Local Development, a Romanian NGO, will discuss the role of civil society in dealing with corruption in local government.  This writer will offer a series a modules on “Developing and Implementing an Anticorruption Strategy at the Local Level” drawing from the UNODC’s Anti-Corruption Strategies: A Practical Guide for Development and Implementation and case studies of successful anticorruption initiatives at the local level.

The Academy is located Laxenburg, Austria, a small town 12 miles south of Vienna. Details on the course and registration information is available here

A Sad Tale of Corruption in a World Bank Project –UPDATE

(Professor Ensminger’s testimony is here.)

Caltech Professor Jean Ensminger will today tell a Congressional panel a depressing story of corruption in a World Bank project in Kenya.  At a hearing on Bank accountability for its projects’ performance, she will document how money destined for the poorest of Kenya’s poor was siphoned off wholesale into the pockets of influential Kenyans and their cohorts.  At the same time, she will describe how, thanks to vigorous, extensive prevention measures, a similar Bank program in Indonesia brought significant benefits to those in poor communities with minimal “leakage.”

As she explained in a 2014 interview, the research underlying her testimony is the result of fortuitous circumstances.  A long-time student of the Orma, a semi-nomadic community found today in eastern Kenya, Dr. Ensminger was visiting the region shortly after several Orma villages had begun receiving funds from the World Bank’s Arid Lands Project.  Arid Lands is a “community driven development” project, meaning one where monies are distributed directly to local communities for projects they consider priorities.

Her Orma friends recounted hair-raising tales of corruption in the project, prompting her to shift focus to the impact of corruption at the village level. She presented her initial findings to the Bank’s research staff, where to protect her sources she did not reveal sufficient details to identify the project.  Bank staff determined on their own what the project was and opened an investigation.

In a brief interview before testifying Professor Ensimnger stressed that the point of her testimony is not that the Bank should refuse to fund community driven development projects. Rather it should, as was the case in the Indonesian project, provide sufficient oversight to ensure monies aren’t stolen.  And that doesn’t come cheap. While Congressional budget cutters may try to use her testimony to justify sharply reducing U.S. funding for the Bank, the real message of her testimony is that the oversight necessary to curb corruption can’t be had at bargain basement prices.

Her testimony and those of the other witnesses will be broadcast live starting 10:00 AM, US East Coast time, here.  Their written statements will likely be posted here at some point during or shortly after the hearing.  (Full disclosure: while drafting an internal “lessons learned” paper on the Arid Lands project for the World Bank, I came to know and admire Professor Ensminger and her work.)

Lifting the Resource Curse: Beyond Potions, Incantations, and EITI

Thanks to Google those who have had a curse put on them can find numerous ways to lift it: from drinking a special potion on the first night of the waxing moon to repeating a certain incantation 13 times while holding a rabbit’s foot.  (Here, here and here for useful sources.)  But Google is not nearly so helpful for policymakers looking to lift the resource curse: the corruption, violence, and misgovernment that befall a poor country with plentiful quantities of hydrocarbons or other natural resources.

The best Google does for them is tout the Extractive Industry Transparency Initiative, a voluntary compact where the government agrees to disclose the monies it receives from the companies that produce its resource and the companies agree to report the monies they pay government.  As the 300,000 plus “hits” on EITI in Google explain, the theory is that civil society will use the disclosures to hold government and the companies accountable. Unfortunately for the policymaker looking for solutions to the resource curse, Google will also pull up a long list of studies (here and here for examples) showing that so far it has had little to no effect on corruption and governance in resource rich poor countries and that at best the relief it promises is many years away.

With this post I hope to persuade Google’s powers that be to modify the search algorithm so that when a user enters “resource curse – how to lift” something besides “EITI” is returned.  That something is Continue reading