Integrity Pacts: A Contractual Approach to Facilitate Civic Monitoring of Public Procurement

Public procurement is one of the highest risk areas for corruption. A public project contaminated with corruption is a recipe for disaster: ordinary citizens suffer from substandard facilities and services; competitive companies lose out when the bidding is rigged; and government money vanishes without making a difference. To rein in procurement corruption in, improving transparency and civic monitoring is vital. That’s why an “integrity pact” (IP)—a legally-binding contractual provision that commits all parties to comply with anticorruption best practices from the time the tender is designed to the completion of the project—can be such a useful tool.

An IP is more than a demonstration of commitment to avoid corruption practices on the part of its signatories. An IP contains obligations for bidders and government authorities, among other things, to refrain from offering or accepting bribes and to disclose all contract expenses and commissions; the IP also sets out sanctions for non-compliance, such as termination of the contract, liability for damages, or debarment from future public contracts. Perhaps most importantly, an IP creates a monitoring process where an Independent External Monitor—which can be an individual, a civil society organization, or a group with combined expertise and technical support—independently scrutinizes the deal for any anomaly or violation of the IP, and ensures proper implementation of the contract and the satisfaction of all stakeholders’ obligations. To execute these functions, the monitor is entrusted to examine government tender documents, bidders’ proposals, and evaluator’ assessment reports of the bids, to visit construction sites and contractor offices, and to facilitate exchange with the local communities and public hearings.

IPs have previously been used in public procurement projects in many countries, including Romania, Bulgaria, the Czech Republic, Slovenia, Portugal, Hungary, Latvia, Poland, Greece, Italy, India, and many others. It’s notable that many of the states that have embraced IPs are countries where governments have a long track record of corruption and abuse of power. IPs have at least three roles to play to help facilitate transparency and civic monitoring so as to safeguard the competitiveness and fairness of the procurement process:

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Best Practices for a “Database of Deals”

Last month, Joseph Percoco, former aide to New York Governor Andrew Cuomo, was found guilty of conspiracy to commit fraud and soliciting bribes for nearly $300,000 in connection to several multimillion-dollar economic development contracts in upstate New York. Next month, Alain Kaloyeros, the former President of the State University of New York Polytechnic Institute, will similarly go to trial on federal bid rigging, fraud, and bribery charges related to the upstate economic development project the “Buffalo Billion.” As I previously wrote, these are two of six high-profile corruption trials in New York this year—cases that have already generated calls for ethics reform (see here, here, and here). While similar calls for reform after the high-profile convictions of former New York state legislators Sheldon Silver and Dean Skelos were largely ignored, one modest proposal seems particularly promising: creating a public database of businesses and organizations that are awarded state economic development contracts and grants.

New York state and local governments spend over $8 billion on economic development programs each year, the most of any state in the country. However, little clarity exists about which companies receive subsidies, the value or amount of these subsidies, the employment and investment commitments tied to these subsidies, and whether these commitments are being met. This opacity not only makes it difficult to assess the successes and failures of development programs, but also creates opportunities for the type of corruption that ensnarled Mr. Percoco and Mr. Kaloyeros. Creating a database of all public economic development benefits (including grants, loans, or tax abatements) would increase transparency and accountability. Such a “Database of Deals” would provide a central source for authorities to monitor and flag irregularities, increasing public confidence in the procurement process, and deterring corruption by individuals who know that the public can assess the return on investment for each economic development project.

The recently passed 2019 New York State Budget included billions of dollars in new appropriations for economic development, yet bi-partisan legislation creating a “Database of Deals” was dropped from the budget the day before it passed. However, the New York state legislature still has several months to pass similar legislation. Moreover, six other states—including Florida, Maryland, Indiana, Illinois, and Wisconsin—have created and implemented similar searchable databases after calls for greater transparency and accountability. If and when New York, and other states, create similar databases, there are certain “best practices” that they ought to follow, to maximize the effectiveness of these databases in deterring corruption.

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India’s 2G Spectrum Case: The Scam That Wasn’t?

It all started in May 2009 with a report filed by an NGO, Telecom Watchdog, with India’s Central Vigilance Commission. The NGO claimed that there were gross irregularities, likely due to corruption, in the allocation of licenses to operators for the 2nd Generation mobile communication standard spectrum (2G spectrum for short). By October 2009, India’s premier investigating agency, the Central Bureau of Investigation (CBI), had opened an investigation into the allegations, and in November 2010, the Comptroller and Auditor General of India estimated the losses to the government from the alleged misconduct at a whopping US$29 billion. Indian media called it the “biggest scam in the history of Independent India.” Time Magazine put it just behind Watergate as the second worst case of abusing executive power.

Petitions were filed in the Supreme Court of India pressing for cancelling the allocation and making sure that those behind the corruption would be held responsible. In 2012, the Supreme Court obliged, canceling all 122 licenses and imposing huge fines. The Court declared that the then-Minister for Communications and Information Technology, A. Raja, had used an inappropriate allocation procedure (first-come-first-served rather than an auction) to “favor some of the applicants … at the cost of the exchequer.” In an unprecedented move, the Court also ordered the creation of a “Special Court” to try the cases, and modified regular criminal procedure by curbing intermediate challenges, in order to ensure a speedy trial. The first case was instituted against the former Minister, senior bureaucrats, and prominent businessmen for conspiring to rig the allocation process and cheat the government of revenue.

On December 21, 2017, the Special Court announced its verdict—and it was not what many had expected: The Special Court acquitted all the accused, declaring that “a huge scam was seen by everyone when there was none,” and that “some people created [the perception of] a scam by artfully arranging a few selected facts and exaggerating things beyond recognition to astronomical levels.” The Court also found that, notwithstanding the earlier 2010 report (which others had already suggested was methodologically problematic), the actual losses to the government were marginal at most.

Many commentators were stunned and dismayed by the Special Court’s decision, denouncing it as “shocking” and “flawed.” But after reading the Special Court’s decision, I find myself in agreement with the Special Court’s reasoning. While it’s impossible, in a short blog post, to wade through the merits of the Special Court’s analysis for each of its conclusions, here I want highlight some of the most important arguments in support of the Special Court’s controversial decision. Continue reading

Guest Post: Did the London Summit Make a Difference to Open Contracting? Does Open Contracting Make a Difference for Tackling Procurement Corruption?

Gavin Hayman, Executive Director of the Open Contracting Partnership, provides today’s guest post:

Anyone remember the London Anti-Corruption Summit last May? It seems like a long, long time ago now, but it was a big deal for us when 14 countries stepped forward at the Summit to implement the Open Contracting Data Standard to open, share, and track all data and documents coming from the billions of dollars that they are spending on public contracting and procurement each year.

One year later, how well have these countries have followed through on their commitments, and how much of a difference open contracting has made in combating corruption in public procurement? After all, it is government’s number one corruption risk; it’s where money, opacity, and government discretion collide.

The news is generally positive: the Summit commitments appear to have promoted genuine progress toward more open contracting in many of those countries, and the preliminary evidence indicates that such moves help reduce procurement corruption. Continue reading

Guest Post: An Exercise in Underachievement–The UK’s Half-Hearted Half-Measures To Exclude Corrupt Bidders from Public Procurement

GAB is delighted to welcome back Susan Hawley, policy director of Corruption Watch, to contribute today’s guest post:

A year ago, in May 2016, the UK government gathered 43 nations around the world together at the London Anti-Corruption Summit to show their commitment to fighting corruption. The resulting declaration made a number of bold promises. One of the most important—though not one that grabbed a lot of headlines—was the announcement that corrupt bidders should not be allowed to bid for government contracts, and the associated pledge by the declaration’s signatories that they would commit to ensuring that information about final convictions would be made available to procurement bodies across borders. Seventeen signatories went further, making specific commitments to exclude corrupt bidders, while six countries pledged to establish a centralized database of convicted companies as a way of ensuring procurement bodies could access relevant information. (Three other countries committed to exploring that possibility.)

The London Anti-Corruption Summit was right to be ambitious about focus on this issue in its declaration. Research shows that the risk of losing business opportunities such as through debarment from public contracts ranks has a powerful deterrent effect—equal to that associated with individual executives facing imprisonment, and much greater than one-off penalties such as fines. Yet debarment of corrupt companies for public contracting is quite rare. The OECD Foreign Bribery report found that while 57% of the 427 foreign bribery cases it looked at spanning 15 years involved bribes to obtain government procurement contracts, only two resulted in debarment. Even the US which has a relatively advanced debarment regime and which debars or suspends around 5000 entities a year from public procurement, appears to debar very few for foreign bribery and corruption. And the UK does not appear to have ever excluded a company from public procurement, despite laws in place since 2006 that require companies convicted of corruption and other serious crimes to be excluded from public contracts.

Did the London Anti-Corruption Summit mark significant turning point in the UK’s approach to this issue? Having persuaded 43 countries to sign a declaration that included a commitment to exclude corrupt bidders, did the UK have its own bold new vision to implement that commitment domestically? Unfortunately, the answer is no. Continue reading

The Opportunity to Address Kenya’s Corruption Problem

With the Kenyan Presidential elections on the horizon in 2017, incumbent President Uhuru Kenyatta, who hopes to continue his regime, has spoken out against corruption, emphasizing that combating this widespread problem requires effort on the part of every Kenyan. In his first term, President Kenyatta had shown promising signs of staying true to his philosophy of holding everyone accountable by actually getting rid of members of the Cabinet. Yet Kenya’s recent history makes many skeptical. For over a decade, Kenyan presidents have been pledging to get corruption under control. In 2003, newly-elected President Kibaki promised to stamp out corruption in Kenya. He proceeded to enact two important pieces of legislation in his first year: the Anti-Corruption and Economic Crimes Act, which established the Kenya Anti-Corruption Commission (KACC) to investigate corruption and educate the public, and the Public Officer Act, which required all public officers to declare their wealth. Yet at the end of President Kibaki’s decade-long regime, the situation remained bleak, with corruption running rampant. Kenya’s education sector offers a particularly troublesome glimpse into the continued prevalence of the problem. A 2010 forensic audit of Kenya’s Education Sector Support Programme found that misappropriation of funds and leakages in transfer of cash and materials from the Ministry of Education to schools, as well as other types of private embezzling and mis-accounting of funds, had led to the loss of 4.2 Billion Kenya Shillings (US$55 million) that was originally intended for education. Furthermore, most of the suspected actors went unpunished; even when caught, the culprits were either transferred to new departments or at most suspended from their role.

As for President Kenyatta’s more recent efforts, the President claims that he has done his part in the anticorruption fight and is frustrated by the lack of complementary efforts by others. Yet many critics claim that President Kenyatta has not demonstrated the political will necessary to fight corruption. And some have gone further, accusing the president of suspect and excessive awarding of government contracts to companies like Safaricom without an open bidding process. Safaricom have been involved in multiple corruption scandals already, leading to suspicions of bribery. Critics have also been highlighting the fact that those close to Kenyatta seem immune from serious scrutiny for corrupt acts.

Even if we put those concerns to one side, and assume that both President Kenyatta and President Kibaki before him were acting in good faith, the numerous anticorruption initiatives undertaken by both administrations do not seem to have had much of an impact. There are a few things that Kenya’s next president—whether it is Kenyatta or someone else—could do that would go further in making progress against the corruption problem than the measures that have been adopted so far: Continue reading

Guest Post: Is Sunlight Really the Best Disinfectant? Evidence on Procurement Transparency from Europe

GAB is delighted to welcome back Mihály Fazekas, of the University of Cambridge and the Government Transparency Institute, who contributes the following guest post:

Public procurement, which accounts for roughly one-third of government spending in OECD countries and up to 50% in developing economies, is well-known as an area associated with high corruption risk. Hence, it is hardly a surprise that a range of policy recommendations from international organizations (such as the OECD), civil society networks (such as the Open Contracting Data Standard), and research projects (e.g. Digiwhist) have emerged to promote anticorruption in public procurement. And one of the most popular prescriptions for achieving this goal is increased transparency. Transparency, of course, can mean different things. For purposes of the discussion here, we will follow the OECD and World Bank in defining “public procurement transparency” as entailing the timely, free, and accurate publication of public procurement documents in a central e-procurement portal in a machine-readable format, with this publication requirement applying to every major step of the contracting process, and disclosing all key characteristics of the tender and contract. (For a comprehensive data template see here).

Research suggests that this sort of transparency does make a difference in terms of bidder numbers and composition. Yet it remains an open question whether public procurement transparency is necessary or sufficient for controlling corruption in public procurement. Indeed, if one looks at a sample of European countries’ public procurement transparency and their suspected corruption risks, one finds a surprising result: the best governed countries in Europe have the lowest levels of transparency in public procurement. Continue reading