Tag Archives: contract administration

What the Odebrecht Case Teaches

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The anticorruption community owes the American Economic Association and Nicolás Campos, Eduardo Engel, Ronald D. Fischer, and Alexander Galetovic a debt of gratitude. The AEA for publishing their article “The Ways of Corruption in Infrastructure: Lessons from the Odebrecht Case” and making it available free to non-members (here). The four Chilean scholars for showing how much can be learned when a command of the literature on corruption is coupled with a careful, painstaking study of a single case.

In 2016, the Brazilian engineering and construction company Odebrecht admitted in a settlement with American, Brazilian, and Swiss authorities (here) to bribing 600 officials in 12 states either to secure contracts to build roads, powerplants, and other large infrastructure projects or to agree to raise the contract price during construction of the project. Information the authors pieced together from the settlement documents show the company grossed $3.3 billion in profits from paying $788 million in bribes.  These numbers confirm the obvious: the returns from infrastructure corruption are enormous, and significant resources should be devoted to preventing it.

Digging deeper into the massive amount of paper the several prosecutions of Odebrecht and its executives have generated, the authors report other findings that are not so obvious.

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Contract Administration: A Step-Child of Anticorruption Policy?

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It is hard to imagine a more prosaic-sounding government job title than “contract administration.”  It is equally hard to imagine one more neglected, both by governments and the anticorruption community.  The House of Commons reports that British civil servants consider contract administration “mechanical and unimportant,” and with few exceptions those concerned with controlling corruption have paid the issue little attention.

But for those seeking to curb government corruption, contract administration is anything but prosaic or unimportant.  Once a firm has been awarded a contract to furnish goods, provide services, or build a building there are many ways it can cheat government: by delivering substandard goods, padding invoices or performing unneeded extra work to name but a few.  Zambia’s Auditor General found road construction companies had failed to provide the required cement, concrete, and gravel in all 18 roads projects it audited, meaning the roads will not last as long or carry as much traffic as the government contracted for. An IT firm New York City hired to computerize the city’s payroll system bilked it out of more than $600 million through inflated invoices and phantom extra work.  In India a medical equipment manufacturer supplied neonatal equipment that exposed babies and hospital staff to electrical shocks.

The bad news is that these are just a few examples of the ways government can be cheated during the execution of a public contract.  The good news is there are handful of steps governments can take to reduce if not eliminate corruption during contract performance.  They are: Continue reading →

The Charbonneau Commission’s Underappreciated Contributions to Fighting Corruption in Quebec

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This past November, the four-year saga of the Charbonneau Commission finally drew to a close. Established in 2011, the commission had three main goals: to examine collusion and corruption in Quebec’s construction industry, to identify the ways in which the industry has been infiltrated by organized crime, and to find possible strategies to reduce and prevent corruption and collusion in public contracts. The two thousand page final report (available only in French) was the product of 263 days of testimony from over 300 witnesses, ranging from union bosses to prominent politicians, low-level public servants, and even members of organized criminal syndicates. While the commission had the makings of a potential political bombshell, the final report was met with little acclaim, and commentators have been quick to dismiss the inquiry as an expensive disappointment and a failed mission.

Since the release of the final report, the validity of its findings has even been called into question, with the media seizing on apparent disagreements and infighting between the commissioners. One of the two remaining commissioners (the third had died of lung cancer in 2014), actually dissented from the part of the findings that claimed a link between political party financing and public contracts. Emails subsequently unearthed indicate that the disagreement between the two commissioners on this issue goes beyond simple factual disagreement, with suggestions that the dissenting commissioner had objected to unfavorable portrayals of prominent members of the governing Liberal party. Some sources report that the two commissioners were not even on speaking terms by the conclusion of the inquiry. In light of their fundamental disagreements on such a prominent issue, some critics have called the commission at best dysfunctional, or at worst tainted by political interference.

Given the generally negative coverage of the commission, it would be easy to write off the Charbonneau Commission as yet another failed attempt to stymie corruption. In my view, however, to dismiss the commission entirely would be unreasonable. Certainly, the commission was not perfect, but it did offer meaningful contributions to the promotion of good governance, and there is much that can be learned from it.

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New York City Pays a Steep Price for Failing to Guard a Guardian

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This past Monday, April 28, U.S. federal trial court judge George B. Daniels sentenced three persons at the center of a corrupt scheme that cost New York City some $600 million to 20 years each in prison.  Despite the massive loss and the large number of firms and individuals that participated, the scheme was quite simple.  Its simplicity, and the vulnerability of a government as large and sophisticated as that of New York City to it, is a stark reminder of how critical contract administration — one of the more prosaic-sounding responsibilities of government — is to controlling corruption.

The New York scam arose from a $63 million contract to modernize its payroll system. Software contracts, like construction contracts, can take months if not years to perform and may need to be modified as the contractor runs into issues not anticipated when the contract was drafted.  More computer code than initially foreseen may be required to capture the way employees in some departments record their hours; a road may have to be re-routed because the ground along the original route turns out to be unstable.  But it may also be that more code isn’t needed or that the original routing of the road is fine.  Instead, it may simply be that the contractor is looking for a way to squeeze more money out of government.

To deal with this concern, governments typically rely on expert professionals to evaluate a contractor’s requests for change orders. Often these professionals also decide whether the completed project meets contract specifications.  They thus serve as guardians of project quality and integrity.  What happened in New York was simple: the guards deserted their post, conspiring with the contractor to bilk the city of out hundreds of millions of dollars. Where the city erred was its failure to heed the famous question attributed to the Roman satirist Juvenal:  Who guards the guardians?

Heeding that question and coming up with a satisfactory answer are, of course, two different things.  What can a government do to avoid the sort of collusion that cost New York City so much money? Continue reading →