Governments spend vast sums to buy goods and services for public projects. Such procurement accounts for more than 30% of GDP in developing countries. However, contracts to suppliers can be awarded in secrecy – without oversight or fair competition. This enables companies with political connections to rig their bids and win contracts – while public decision-makers also receive money or favours for facilitating the process. Increased costs and reduced quality of public sector goods and services are the results. Bridges and buildings collapse and medicines are fake, causing unnecessary deaths. Extensive corruption in public procurement can also scare off much-needed and honest investors, erode public trust in governments, increase economic inequalities, and fuel conflicts.

The nature of corruption in public procurement

Getting rid of competition

Companies longing for monopoly by eliminating or reducing competition is a recognised problem. They aim for higher profits than what is possible under true and open competition, or rent-seeking. Company managers can therefore be willing to engage in corrupt practices to ensure that their company wins contracts. They can for example be the only one invited to bid. The terms may be tailored so they are the only providers who can meet them – discouraging other companies to bid. Companies can engineer such situations through collusion, cartels, price-fixing, mergers, bribes, intimidation, etc.

Subverting competitive processes

Business managers with low regard for fair competition can try to subvert competitive procurement processes in several ways. They may try to influence the public servants in charge of the procurement process (the procurers) through bribes. The may seek advantage over other bidders by actively seeking inside-information on requirements and conditions that other bidders do not get. They may influence procurers to tailor-make elements of the process that fits their company, and find ways to create unfair biases when procurers evaluate bids.

Deceitful practices during delivery

Even when a process is competitive and transparent a fraudulent company can thwart the further process. It can seek overly-generous contract terms, get the public body to ignore specific contract terms, and call for extensions or changes without competition. During delivery, company staff can over-bill, seek false payments, and deliver sub-standard and sub-quantity goods and services.

Collusion

Corrupt procurement processes will always involve some form of collusion between the buyer and the supplier (see, Lambert-Mogiliansky & Sonin: Corruption and collusion in procurement tenders). It can be that they agree on the terms, conditions or payments that makes the procurement less than competitive and provide some unfair advantage to the deceiving company.

Conflict of interest

Another corruption problem in procurement is conflict of interest – a conflict between an entrusted duty on the one hand, and the private interest of the duty-bearer on the other hand. Procurers can ask for bribes to in return for shaping tender rules that favour one bidder or to evaluate one company more favourably than another – including businesses where they themselves have a private interest. For example, they can publish tenders where outsiders do not discover it.

State capture and kleptocracy

In extreme cases, corrupt company strategies can lead to state capture. This is when government decisions are significantly influenced and manipulated by big business. The other side of the coin is kleptocracy –government leaders abusing their power for personal enrichment. Kleptocrats have little interest in serving citizens.

Lack of political will

Power-holders’ willingness to reduce corruption in procurement (and other areas) will be close to zero in situations of either state capture or kleptocracy. There are many examples of anti-corruption efforts failing because ruling elites avoid implementing them (see, for instance, Brinkerhoff 2010: Unpacking the concept of political will to confront corruption (PDF)). Technical solutions alone cannot counter this problem.

Theoretical approaches

Principal-agent theory

Corruption in procurement has usually been understood and studied using principal-agent theory. Procurement normally involves a government (the principal) budgeting funds for goods and services and implementing procurement policies and guidelines. The process then involves lower-level state agencies responsible for the actual procurement activities (the agents). Room for corruption appears when the principal lacks information to monitor the agent’s performance.

According to this theory, a conflict exists between principals on the one hand and the agents on the other. The principals are in a government assumed to embody the public interest. The agents are assumed to have a preference for corrupt transactions when opportunities arise. With this understanding of corruption, most counter-efforts in procurement have looked to reduce agents’ discretion and alter their individual incentives and motivations. However, the assumption that “principals are principled” – that governments by nature want to hold agents to account control corruption – cannot be taken for granted.

Collective action

In highly corrupt environments members of government – elected or not – are often as corrupt as public servants. Many countries lack basic institutional checks and balances as well as democratic oversight and control. In these contexts corruption is often systemic, and best understood as a collective action problem.

The collective action perspective sees all stakeholders – government, bureaucrats and citizens – as self-maximisers. For individuals, corruption is the expected behaviour. They opt for it because the costs of acting in a principled manner outweighs the benefits. This perspective understands the root cause of corruption to be corrupt government actors pursuing narrow, individual ambitions against the interests of society.

Collective action strategies will usually take the form of multi-stakeholder initiatives at the national level. This is referred to as elite forms of collective action – bringing together public and private sector representatives as well as civil society. Common barriers to elite collective action include the lack of political will and incentivising relevant stakeholders. Collective action can also take place at the local- or community-level. Such initiatives would seek to empower citizens to collectively participate and be heard in governance processes. Public procurement system reforms should therefore be embedded in broader governance reform efforts to strengthen democratic participation, control and oversight. Collective action strategies must deal with a set of challenges like mobilisation, representation, information, capacity, and sustainability.

Overarching procurement principles

One condition stands out as essential to curb corruption in procurement: a political will to see it implemented. Unfortunately, the inclination by public officials and politicians to generate rents for private benefit is as real as the inclination of private companies to seek to eliminate or reduce competition. Only governments that are not dependent on procurement fraud and other forms of corruption to stay in power will have the will to curb it. No government will want to kill the ‘golden goose’ if it is dependent on it to stay in power – unless they are under internal and/or external pressure.

If there is a political will to curb corruption in procurement, three principles stand out as essential for reforms to be successful: competition, transparency, and objective criteria in decision-making.

Competition

There should be competitive bidding for all public contracts of any significant value. Bidders should be allowed sufficient time for bid-preparation and pre-qualification requirements when these apply.

Transparency

Any procurement agency should adhere to credible transparency and disclosure standards. All bidders – and preferably also the general public – should have easy access to information about all phases of the contracting process. This includes the selection and evaluation processes, the terms and conditions of the contracts, and any amendments. One should actively identify, support and promote the highest levels of disclosure around procurement processes. Only in exceptional circumstances – and only when based on legitimate needs for confidentiality – can exemptions be justified.

Objective criteria

Before a project is selected – triggering a procurement process – it has to be justified according to objective criteria, agreed policies, and needs assessments. Strictly objective criteria should also steer bid evaluations and contracting processes. No bidder should be given any pre-bidding preferences or access to privileged information at any stage. The chosen provider of goods or services should be obliged to deliver according to the contracts.

Detailed principles

To reduce corruption in procurement several additional principles should be adhered to:

Open contracting

Procurers should apply Open Contracting Global Principles for improving disclosure, data and engagement across the chain of public procurement. These principles reflect the belief that increased disclosure and participation in public contracting will make contracting more competitive and fair. It should also help improve contract performance – promoting positive development outcomes. All countries should practice open contracting to make data and documentation clearer and easier to analyse. Procurers should adopt the Open Contracting Data Standard and promote related best practice.

Price benchmarking

Procurers who buy off-the shelf products in the open market – e.g. cars, medicines, etc. – should pay the lowest price available and seek discounts for bulk-buying. The World Bank report, Procurement Reforms in Amazonas, outlines this.

Integrity pacts

There should be integrity pacts that bind contracting authorities and bidding companies into a no-bribes commitment. Such pacts should require all contracts between the authority and its contractors, suppliers, and service providers to complying with strict anti-corruption policies.

Specialisation

Staff should be well trained and paid. Key functions should be separated to ensure that responsibility for demand assessment, preparation, selection, contracting, supervision, and control of a project is assigned to separate bodies.

Standardised contracts

Compulsory standardised contracts should apply at the contract execution stage. However, this comes at a cost: less room for local or specific information in the agreements. It may therefore be advisable to use an intermediate approach: standard contracts where procurers may introduce changes as long as they justify and record them. There are a number of standardised contracts by the International Organization for Standardization, European Union, United Nations Commission on International Trade Law, World Trade Organization, and others.

E-procurement

Information and communication technologies in public procurement can increase transparency and facilitate access to public tenders. By reducing the direct interaction between procurers and companies e-procurement can improve outreach and competition.

Digitised procurement simplifies information exchange and transactions through streamlined online communication systems. It facilitates internal anti-corruption controls – making it easier to detect integrity breaches. Such systems give auditors trails to follow in investigations. KONEPS – a Korean integrated e-procurement system – is a good example, which facilitates timely and equitable access to tenders. Kenya and Uganda, among others, are moving to implement e-procurement in their national procurement systems.

Codes of conduct for procurers

Procurers should be bound by codes of conduct with strict anti-corruption policies. Codes of conduct must include procedures for possible conflicts of interest, reporting corruption, and protecting whistleblowers. Furthermore, standard office safeguards should apply such as using committees for decision-making, and rotating staff in sensitive positions.

Codes of conduct for providers

All bidders in tenders should be required to abide by codes of conduct.

Shared responsibilities

All actors involved in project finance should share responsibility for safeguarding projects against corruption. This includes banks, export-credit agencies, and international financial institutions – including the World Bank and regional development banks.

Debarment

Procurement authorities should maintain a blacklist of companies for which there is sufficient evidence of their involvement in corrupt activities, and debar them from public tenders for a specified period. Procurers should thoroughly vet bidders to exclude shell companies and private companies with secret owners who may facilitate criminal activities and money-laundering.

Auditing

Auditing bodies should be in place to extern external and internal control. These have to be independent, effective, and produce publicly accessible reports.

Supervision

Implementing contracts – especially complex contracts with contract consortiums – requires careful supervision.

Civil society engagement

The public – the ultimate beneficiary of public investments – should always be consulted and supported to engage during procurement processes. Civil society organisations should be promoted to independently monitor tenders and project execution.