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

Guest Post: Behavioral Economics, Punishment, and Faith in the Fight Against Corruption

The following guest post, by Roberto de Michele, Principal Specialist in the Institutional Capacity of the State Division at the Inter-American Development Bank (IDB), is a translated and slightly modified version of a post that Mr. de Michele originally published in Spanish on the IDB’s governance blog on August 29, 2016:

Last August, Hugo Alconada Mon, one of Argentina’s most prestigious investigative journalists, published an article (in Spanish) describing how road construction firms in Argentina created a cartel to fix public work contracts. Members of the cartel would meet in the board room of the sector chamber to conduct their business. The room has a statue of Our Lady of Luján, patroness of Argentina. Before commencing negotiations to fix contracts, assign “winners,” and distribute earnings, members of the cartel would turn around the image of Our Lady of Luján to face the wall, with her back to those gathered there. It was, as one of the sources candidly put it, “so that she doesn’t see what we were about to do.” This remark got me thinking about two possible explanations on why we break the law, cheat, and lie both to the government and to others. Continue reading

Shedding Sunlight on Procurement

In a previous post, I extolled the virtues of Big Data in the fight against corruption, including in the important realm of government procurement. From the UK to Georgia to the Czech Republic, government procurement agencies have been collaborating with civil society groups to analyze their data, uncovering inefficiencies that range from the mundane to the outright corrupt. Governments are not alone: international development agencies like the World Bank are embarking on similar projects.

But there’s a problem. Big Data needs lots of data to work, entailing a high degree of government transparency and massive disclosures — sometimes called Open Government — that are sometimes at odds with the goals of anticorruption. In the case of government procurement, public data watchers need to know which firms bid for the project, at what price, and who won on what terms before they can play a useful watchdog role. However, as Rick has pointed out on this blog, public disclosure rules in procurement has the perverse effect of enabling private collusion. Cartels of contractors can agree amongst themselves to inflate their prices and select which among them will receive the contract, and are able to enforce their shady agreement because, of course, all offers are public.

Rick’s concerns seem to be directly implicated by the newly-proposed Open Contracting Data Standard, a push to “enhance and promote disclosure and participation in public contracting.” The project essentially asks every procurement agency in the world to upload their contracting documents onto the internet in a standardized manner that would encourage public oversight, including through the use of Big Data tools. So, is the push for open government procurement data doomed to backfire, creating collusion where perhaps it did not even exist before? Fortunately not. The increased risk of collusion is completely outweighed by the potential for the use of Big Data and other civil society monitoring techniques. Continue reading