Public Procurement and Corruption: What Have We Learned Thus Far?

1. Public Procurement and Corruption: What Have We LearnedThus Far? Public Financial Management Training Course May 2, 2006 J. Edgardo Campos, PRMPS

2. Potential Leakage from Corruption:The Case of the Philippines Government procurement and tax collection are perceived to be the major sources of corruption: • 4 of the top 5 most corrupt agencies (based on national surveys)featured prominently in government contracting • Approximately 20% of government contracts go to kickbacks/commissions (based on surveys of businessmen) • Equivalent to P21 B in 2001 just for the national government

3. Aid, Governance, andDevelopment Outcomes

4. Donor Financed Rural School

5. Actual School 500 Feet Away

6. What is actually in the school building

7. Anatomy of Corruption in Procurement • Bribes and kickbacks • Front companies • Bid rigging or collusive agreements • Use of “loan brokers”/”commissioners” • Conflicts of interest • Theft from local accounts and abuse of project assets • Fraud/Forgery/Misrepresentation

8. Government Funding Source Contractor Inc. Illicit Relationship Legitimate Relationship Kickback Scheme $ $ $ $ Subcontractors “Broker”/ ”commissioner” $ A.K.A. “local rep”

9. $ $ $ A Government Funding Source “Broker” as Project Advisor Contractor Inc. $ Illicit Relationship Legitimate Relationship Kickback Scheme $

10. Corporate Shield Owners PIU Owners CONTRACTOR INC. Hidden owner-Government official Owners Hidden owner-Government official Front Company -Company appears with no history -Company providing diverse disconnected services -Few records exist on ownership -Extreme interest shown by PIU official in company -Subcontractor who is hired as local agent

11. Bid Rigging • Drafting tailored specifications to exclude “unfavored” bidders • Tipping off the favored bidder that certain components in bid will not actually be called for • Telling bidders to bid low and recover profit later through contract modification • Short notice periods for bidding - “emergencies” • Bidders agree who will win contract • Component of larger corruption scheme

12. Procurement Planning Preparation Advertisement Pre-qualification Bid Evaluation Award of Contract Stages of the Procurement Process Contract Implementation

13. Lack of competition Lack of Transparency Procurement Planning Problem Area Possible Distortion Mis-governance • Purposeful delay of procurement to feign “urgency” and go to direct negotiation • Lack of Plans • misallocation of resources • Unclear Criteria for Project Selection Procurement of goods and civil works

14. Lack of competition Lack of Transparency Preparation Problem Area Possible Distortion Mis-governance • PMO given sole responsibility over the determination of contract packages and preparation of specifications (for civil works) • Contract splitting to allow unqualified bidders to participate or to revert to “simplified” bidding • tailor fitting to favor a preferred bidder • BAC members chosen to stack deck in favor of Head’s choice of contractor • BAC members designated solely by Head of agency Procurement of goods and civil works

15. Lack of Competition Lack of Transparency Advertising Problem Area Possible Distortion Mis-governance • Advertising limited to certain types of print media, e.g. regional papers • collusion between newspapers and cartel of contractors – “early edition” phenomenon • publication in the paper with smallest circulation but still meets minimum requirements Procurement of goods and civil works

16. Lack of Contestability Lack of Transparency Prequalification Problem Area Possible Distortion Mis-governance • Prospective bidders undergo detailed, tedious, and potentially subjective pre-qualification • Requirements set to favor a particular contractor or group of contractors • Lengthy process that creates opportunities for bribe solicitation Procurement of goods and civil works

17. Lack of Transparency Lack of Contestability Dysfunctional Judiciary Bid Evaluation Problem Area Possible Distortion Mis-governance • Wide discretion of BAC • Quality (technical) and Price (financial) aspects “traded off” in bid evaluation • imposition of court restraining orders • Litigious tendencies Procurement of goods and civil works

18. Lack of Transparency Lack of Accountability Contract Award Problem Area Possible Distortion Mis-governance • unclear rules • Refusal of lowest evaluated bidder to accept award of contract; government no recourse but to go to second evaluated bidder • Head of agency delays signing of contract Procurement of goods and civil works

19. poor monitoring • weak penalties for contract violations -- purely administrative, e.g. blacklisting Lack of Accountability Contract Implementation Problem Area Possible Distortion Mis-governance • substitution of materials of inferior quality • ghost deliveries Procurement of goods and civil works

20. Deficiencies… lack of transparency lack of competition/ contestability weak accountability weak capacity • Graft & Corruption • Inefficiency • Poor Quality • High Cost POOR SERVICE DELIVERY

21. Using ICT: Chile Engaging CSOs: Philippines • All supplier companies register, indicating areas of business (e.g., IT, construction, furniture) • Public agencies submit tenders through internet • Automatic e-mail to all companies in selected area • Online information on name, position of official in-charge • Online information on results: who participated, proposals made, scores received, who won bid, historical record of agency’s purchases and contracts • Legal foundation a mess with over 100 laws and regulations • New omnibus law needed for clarity and predictability in the process • New law in 2003 with determined efforts of reform minded public officials allied with strong and unified advocacy efforts of CSOs to offset entrenched vested interests • For credible enforcement: requirement that all bids and awards committees must have at least one observer from a certified CSO • Extensive training of CSOs now under way Public Procurement: Increasing Transparency and Competition

22. “Early Warning” Indicator System: Roads

23. “Early Warning” Indicator System: Roads . . . Cont’d . . .

24. Integrating External Monitoring Phase Indicators External monitoring group Pre-procurement X11, x12, . . . . > University seniors (civil engineering) > Contractors association Procurement X21, x22, . . . . > TI Indonesia cum > Religious organization, e.g. Muhamadhiya, CPCP Post Award/ Implementation X31, x32, . . . . > University seniors (civil engineering, economics, other social science)