Leveraging Blockchain to Combat Procurement Corruption

Procurement corruption–including things like bid rigging, shadow vendors, and the steering of public contracts to politically connected firms—is an enormous worldwide problem, costing taxpayers up to $2 trillion annually. New technologies, though certainly no panacea, may offer new techniques for combating this sort of corruption. One such technology is blockchain.

Blockchain, most famous as the foundational technology for cryptocurrencies such as Bitcoin, is a “distributed ledger technology” (DLT)—a tamper-proof record of activities that are time-stamped and verified by a distributed network of computers. DLT creates a trail of information which allows for the full traceability of every transaction and stores a chronological list of transactions in an encrypted ledger. Transactions are bundled into a secure and identifiable block and then added to a corresponding chain. The blockchain is maintained and verified by the distributed crowd, eliminating the need for hierarchy and any centralized authority or middleman. And while blockchain is best known for its role in making cryptocurrencies feasible, it also has a range of other applications, including anticorruption applications. For example, Tanzania has utilized the technology to weed out “ghost workers” from the public sector, ending the monthly outflow of 430 billion Tanzanian shillings (approximately US$195.4 million) in salaries to fake employees who exist only on paper. Nigeria’s customs service has also used blockchain technology to store information on financial transactions and share these transactions across multiple computer networks.

Blockchain technology could also be used to combat common forms of procurement corruption, particularly those that involve after-the-fact tampering with submitted bids and supporting documentation. Such a system would work as follows: Continue reading

We Need An Extraterritorial Law To Hold Companies Responsible For Clean Global Supply Chains.

Six years ago, the deadliest garment industry accident in modern history killed more than 1,100 people and injured 2,500 in an apparel manufacturing facility, Rana Plaza, in Bangladesh. Perhaps the worst part is that the tragedy was entirely preventable, and the result of corrupt practices by the politically well-connected owner. The Rana Plaza building violated codes, with the four upper floors having been constructed illegally without permits. The foundation was substandard, and despite safety warnings that led shop owners and a bank branch on lower floors to immediately close, owners of the garment factories on the upper floors instructed employees to work the next day to keep up with customer demand. The customers that the garment factory was trying to satisfy? Mango, Primark, Walmart, the Dutch retailer C & A, Benetton, and Cato Fashions, among other recognizable global brands. And yet none of the US brands accepted responsibility for the problems in their supply chains that enabled this disaster (unlike non-US brands that contributed millions of dollars into a victim support fund).

Years later, not much has changed. Despite some recent encouraging developments, the current legal regime still does not do enough to hold international companies responsible for health and safety violations by their suppliers, and two-thirds of corporations continue to turn a blind eye to supply chain corruption. Such corruption can lower production costs and increase profits by enabling suppliers to engage in a wide range of insidious practices, including cutting critical corners on labor, health and safety. And when an accident does happen, companies can walk away free of any liability for the practices of their subcontractors, as in Rana Plaza. The beneficiaries of these corrupt practices are not only the owners of the supply factories, but also the multinational purchasers and their consumers in rich countries, who get cheaper goods at the expense of the health and safety of disadvantaged workers in low-cost manufacturing hubs.

This is ethically unacceptable.  And because we cannot expect companies to engage in responsible sourcing on their own volition, the right response is more expansive liability on companies that do not take sufficient steps to ensure clean supply chains. While the ideal solution might be some sort of broad international legal regime, that isn’t going to be feasible anytime soon, meaning that countries like the United States should act unilaterally and create a bill focused on bringing about clean supply chains.

The law I advocate here would have the following features:

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Reforming Procurement Processes: It’s About More than Law

Last week’s post explained why some Latin American nations’ crackdown on corruption was doing more harm than good.  The law in these countries gives government no choice but to terminate a public contract whenever corruption is detected. Canceling a contract just after the winning bidder has been selected, before the winner has started work, is one thing.  It is quite another to bring the construction of a power plant or road to a screeching halt mid-way through the project. Mandatory termination in these cases can impose enormous costs on those who had nothing to do with the corruption, not least of which are taxpayers stuck with a half-built project.

The post was based a recent Inter-American Development Bank staff paper. The authors showed how costly mandatory termination laws have been in Peru and Colombia and described how several Latin governments were searching for alternatives to address corruption when it is found to have tainted a public contract now underway.  As policymakers do, let’s hope they consider more than just reforming their procurement law. For as Argentine lawyer and law professor Hector Mairal writes in a first-rate analysis of what ails Argentina’s procurement law, law is but one piece of the procurement equation. Continue reading

Open Contracting and the Withholding of Commercially Sensitive Information: the U.S. Experience

U.S. courts and federal agencies have grappled for more than 40 years with the question of what information in a government contract should be made public and what should be withheld as “commercially sensitive.” The anticorruption community now seeks an answer to that same question.  The Open Contracting Partnership, the leading advocate for the full disclosure of every contract let by every government, acknowledged in July there should be an exemption from disclosure for such information, and a Center for Global Development working group followed in October with draft principles for determining what is commercially sensitive.

Getting the correct answer is critical, particularly for developing nations, precisely the countries where advocates believe open contracting will make the greatest difference and where the push for open contracting laws is felt the most.  Too narrow an exemption, one that would result in the release of genuinely sensitive information, will discourage companies from bidding on public tenders.  On the other hand, if the exemption is too broad, contractors can use commercial sensitivity assertions to hide information showing whether a contract was awarded fairly and honestly and whether the public is getting value for its money.

Though far different than conditions in these countries, the American experience nonetheless offers lessons to those urging developing nations to embrace open contracting. The most important being that it counsels more caution than many open contracting advocates might at first think is warranted. Continue reading

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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Will Mexico’s New President End Procurement Corruption?

 

Mexican President-elect Andres Manuel Lopez Obrador pledged Sunday in his victory speech night to eradicate corruption and to hold his friends and supporters accountable.  The Instituto Mexicano para la Competitividad (IMCO) has an easy way citizens can see whether he keeps his promise.

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An Amazing Database: DIGIWHIST Strikes Again

DIGIWHIST has struck again.  It has just released the latest version of its extraordinary data set covering political financing, disclosure of officials’ finances, conflict of interest, right to information, and public procurement in 34 European states plus the European Union.  With the laws on each subject along with an assessment of how thoroughly they address area, it is a real treat.

At least for the kind of people who read GAB (that means you, dear reader).

The database is part of an EU-funded digital whistleblowing project (DIGIWHIST).  The project’s aim is to improve trust in governments and the efficiency of public spending across Europe by providing civil society, investigative journalists, and civil servants with the information and tools they need to both increase transparency in public spending and enhance the accountability of public officials.  For those working in developing states, it is an invaluable resource, showing how different developed countries and those making the transition to a market economy deal with critical issues involving public integrity and transparency.  Thanks to the EU for supporting such a great project and congratulations to those whose hard work produced such a useful resource.