Transparency and Integrity in Public Procurement David Ondráčka TI- Czech Republic

1. Transparency and Integrity in Public Procurement David Ondráčka TI- Czech Republic

2. Goals of Presentation • I. Public Procurement, corruption risks in all phases • II. Risk factors, problems, actors • III. Anti-corruption Strategies • IV. International Conventions • V. International Case studies – monitoring • VI. Monitoring of construction procurement in big cities („Clientelistic Map“) • VII. Research of public funds losses • VIII. PPP

3. Public Procurement • Procurement of goods, works and other services by public bodies • Average between 15% and 30% of Gross Domestic Product (GDP) • Great temptations for corruption in public sector • Damage from corruption is estimated at normally between 10% and 25%, and in some cases to 50%, of the contract value

4. What is public procurement • “Procurement” refers to the acquisition of goods, services and works by public sector. • It can be consumption or investment goods or services, from pencils, bed sheets and aspirin for hospitals,gasoline for government cars, the acquisition of car and truck fleets, equipment for schools and hospitals, machinery for force account use by government departments, other light or heavy equipment or real estate, to construction, advisory and other services (from the construction of a hydroelectric power station or expressway to the hiring of consultants for engineering, fi nancial, legal or other advisory functions).

5. Public procurement phases • Corruption and corruption risks can take place along the entire cycle of public procurement. • Risks and forms of corruption may be different in each phase

6. Public Procurement Phases • 1. Needs assessment/ Demand Determination • 2. Preparation/Process design & bid documents preparation • 3. Contractor selection and award phase • 4. Contract Implementation phase • 5. Final Accounting/Audit

7. 1. Needs assessment/ Demand Determination • The investment or purchase is unnecessary. • The investment is economically unjustified orenvironmentally damaging. • Goods or services that are needed are overestimated tofavour a particular provider. • Old political favours or kickbacks are paid by includingin the budget a “tagged” contract (budget for a contractwith a “certain”, pre arranged contractor). • Conflicts of interest (revolving doors) are left unmanagedand decision makers decide on the need for contractsthat impact their old employers.

8. 2. Preparation/Process design & bid documents preparation • Bidding documents or terms of reference are designed tofavour a particular provider so that in fact, competition isnot possible (or restricted). • Goods or services needed are over- or underestimated tofavour a particular bidder. • Unnecessary complexity of bidding documents or termsof reference is used to create confusion to hide corruptbehaviour and make monitoring diffi cult. • Design consultants prepare a design that favours aparticular bidder. • Grounds for direct contracting are abused.

9. 3. Contractor selection and award phase • Decision makers are biased (bribes, kickbacks, or conflictsof interest are involved). • Selection criteria are subjective or uneconomical • Advantage to a particular bidder is granted throughthe exchange of confidential information before bidsubmission or during the clarifi cation period. Clarificationsare not shared with all the bidders. • Confidentiality is abused and extended beyond legallyprotected information making monitoring and controldifficult. • The grounds for the selection of the winner are not madepublic (transparency of bid evaluation). • Excessive (unnecessarily high) price as a result of limitedor non-existent competition.

10. 4. Contract Implementation phase • Winning bidders/contractors compensate bribes and other extra payments with poor quality, defective or different specifications than those contracted. • Contract renegotiation or “change orders” introduce substantial changes to the contract • Price increases during execution through “change orders” reflecting changes in specifi cations or cost increases, facilitated often by collusion between corrupt contractor and corrupt control official. • False or inexistent claims are filed. • Contract supervisors or monitors are “bought” or are willing to justify false or inexistent claims. • Contract renegotiation is allowed or performed introducing substantial changes that render the bidding process useless.

11. 5. Final Accounting/Audit • Accountants doing final accounts and Auditors are biased or “bought” and willing to support false certifi cates.

12. Actors in Corrupt Deal • Officials • Politicians • Bidders (Suppliers, Contractors, Consultants) and Sub-contractors • Agents, other Middlemen, Consultants, • Joint Venture Partners, Subsidiaries • Financial Safe Havens • Witnesses

13. Risk Factors • “Urgent Purchases” at End of Fiscal Year • “Emergency” Responses to Natural Disasters and Other Such Events • Inadequate Access to Information • Preferences to Selected Bidders • Participation of Official-Owned Companies

14. General perceptions • High level of perceived corruption (CPI, WB) • Political interference into public administration • Conflict of interests, clientelism, misuse of power, fraud, kickbacks, non transparent party financing • Unenforceable regulation, insufficient control mechanism • Public Procurement (17% of GDP) • Perception of State – system works, individual cases of wrongdoing sometimes happen everywhere • Perception of Public – system problem, corruption monumental, manipulations immense

15. Procurement problems: government side • Non-partcipatory planning phase (badly designed, undesired projects) • Specification of technical details favours particular bidders • Manipulations with choice of tendering procedure (limited procedures prevail) • Selection criteria (often very subjective) • Selection committees (political pressure) • Expert commitee ranks bids, govt. often changes ranking without explanation • Articificial dividing of contracts - to avoid open tenders • Non-transparent allocation of below-threshold contracts • Contracts are NOT signed in line with tender conditions

16. Procurement problems: bidders side • Shift in power between contractor and bidder - blacklisting and debarment might be solution • Bidders pressure to discredite unloyal contractors („Kompromat“) • Cartels - Bidders often form a cartel, which then tries to manipulate the award decision in favour of one of their members, with or without the involvement of a corrupt inside official. • no real competition - subcontracting, silent agreements between bidders) • Problematic role of middlemen (consulting companies - organizers of procurement)

17. Legislative drawbacks • Modern, but complicated legislation • Focus on modern, but marginal issues (electronic auctions, …) • Frequent ammendmends of legislation • Focus on large contracts only, no rules for small - below-thresholds contracts • Exceeding of contracts in costs and content • Limited disclosure - not legally binding

18. Anti-Corruption Strategies

19. Principles • Integrity • Transparency • Impartiality • Efficiency • Fairness • Accountability

20. TI Minimum standards on PP • procurement of goods and services • supply, construction and service contracts (including engineering, financial, economic, legal and other consultancies) • privatisations, concessions and licensing • subcontracting processes and the involvement of agents and joint-venture partners

21. TI Minimum Standards forPublic Procurement • Debarment • Integrity Pacts • Control • Whistleblowing protection • Prevention – hotlines,.. • E-procurement

22. Access to information • FoI Act - still suppression of information • Very limited disclosure (minimum is to make contracts and ammendments public) • Stock companies owned by local govt. – no information provided • Business secrecy clause - abused in contracting • Bidders do no request information - fear of worsenning relations with contractors • Monitoring is very difficult

23. Control Institutions • Antimonopoly Office • Formal control of law infrigements only • Office reacts on received complaints only - bidders do not file complaints • Sanctions are low (no prevention) • No methodical guidance • Supreme Audit Office • No control of local govt. spending • No enforcement mehanisms

24. INTERNATIONAL ANTI-CORRUPTION CONVENTIONS • OECD • UN (UNCAC) • Regional conventions

25. Good Practices – Case studies • Mexico • Argentina • Colombia • Germany • Czech Republic

26. Monitoring of construction procurement in big cities - REPORT • Texts on all 8 cities (4-6 pages) • Tables with information from municipalities, Audit Office and Anti-monopoly Office • Table with companies contributions to political parties • BPI (Bribe Payers Index) – as illustration and comparison

27. III. Monitoring of construction procurement in big cities - CONCLUSIONS • Political interference (mayors, councillors, top officials) • Conflict of interests, clientelism, patronage (post-employnment moves, „revolving-door syndrome“ • Excessive costs, price increases • Individual companies get most of contracts • Ologopolistic situation in construction business • Weak control (institutional and civic), difficulties to get information • Companies finance political parties (directly or indirectly) • No personal responsibility deduced

28. Specific Case study:Defense procurement • Legal exceptions for hard purchases (including millitary components) is used for all kinds of soft purchases (uniforms, …) • TIC monitored Ministry of Defense contracts (in 2002-2004) • only 6% open tenders, 94% no tenders (contracts awarded directly to one company) • Recent case of planned acquisition of truck cars: armour-plate fronts will be attached (millitary component) - to avoid open tender

29. Monitoring conclusions • Monitoring very difficult, but possible • Useful method to Illustrate main procurement manipulations • Very desired activity (NGO, consultants, media), yet very sensitive, time-consuming and complicated • Clientelistic networks become less secure • Pressure Initiate reforms and increases disclosure • Activates bidders to take more active approach and to request information • Initiate prosecution (accountability)

30. CZECH REPUBLIC – Case study • Research of public funds losses due to corruption and lack of transparency

31. Research: public funds losses WHY? • WHY: Attracting method to draw decision-makers attention and set reform political agenda • Need to prove innefficiency with numbers • Lack of numbers (quantification) • AIM: to quantify amount of unnecessary costs of public contracts due to opacity and corruption

32. Research: public funds losses HOW? • Preparation • Quantification of procurement market • Develop methodology: • I. Assessment of the volume of economic losses at the central level • II. Assessment of the volume of economic losses at the municipal level • III. Total estimate • RESOURCES: Supreme Audit Office, Public services provided at local level, Ministry of Finance

33. Public procurement market OECD*

34. Research: public funds losses Central Level • To define the total amount of public funds used at the central level of public budgeting for the purchase of goods and services (public procurement). • Data about public funds management. The most reliable data concerning the efficiency of the management of public funds is provided by the Supreme Audit Office. Based on annual reports for the last eleven years, the average inefficiency rate occurring in the public sector can be assessed. • To apply the established inefficiency rate to expenditure for the purchase of goods and services by the public sector at the central level in 2004 and subsequently assess the extent of inefficient management in this part of public funds. • CENTRAL LEVEL: the average inefficiency rate in public funds and property management amounts to 14.7%. • 14.7% x 118.3 billion = CZK 17.411 billion. In 2004, out of the total amount of public funds, CZK 17.4 billion was used inefficiently at the central level.

35. Research: public funds losses Local Level • Municipal services selected: municipal waste, maintenance of roads, operation of water treatment plants, street lighting, cemeteries • If we assume that approx. 12 % of these funds is used inefficiently, then it is possible to estimate the loss caused by the absence of any type of tendering procedure at CZK 15 billion. • In 2004, out of the total volume of public funds, CZK 15 billion was used inefficiently at the municipal level.

36. Research: public funds losses • Results: • 14.7% losses at central level: 17.4 billion CZK (590 milion EUR) • 12% losses at local and regional level: 15 billion CZK (510 milion EUR) • Total losses: • 32.4 billion CZK (over 1.1 billion EUR) per year

37. Monitoring of construction procurement in big cities „Clientelistic Map“)

38. III. Monitoring of construction procurement in big cities - AIMS • Illustrate main methods how procurement can be manipulated - govt. vs. bidders methods • Identify clientelistic (patronage) networks developed around municipalities • Publish information (as much as possible) • Initiate investigation and activitity of control institutions • Show to media and other NGOs in what way such monitoring can be done

39. III. Monitoring of construction procurement in big cities - STEPS • Preparation • Selection of municipalities (8 largest cities) • Selection of criteria • Request for information • Investigation, local interviews • Elaboration of Information (understandable) • Presentation, interpretation

40. IV. Public Private Partnership (PPP) New challenge • Professionality of public administration • Low ability to divide project risks adequately and transfer some of them on private investor • Length of contracts period realization • Political accountability for unsuccessfull projects very questionable • Complexity of contracts • Impossibility of public control • Risk of excessive indebtness of public administration in future • Unrealistic expectations of public sector

41. PPP: TIC activities • Evaluation of tender documentation on selection of advisors (consortium) in pilot PPP projects • Economic analysis (to assess PPP system risks) • Comments on proposed legislation (Law on concessions) – no success • Publishing of articles and media comments

42. Thank you for attention www.transparency.cz David Ondráčka ondracka@transparency.cz