CORRUPTION IN MAJOR CONTRACTS - B (1)

CORRUPTION IN MAJOR CONTRACTS WORLDWIDE

By: Einhard E. Mwenda *

Public Procurement has a major economic importance in any

country and it accounts to more than 14% of

The GDP, and 70 % of Budget is used in Public Procurement,

yet Corruption has eroded the Public Procurement and it is

said that in most Public Procurement Contracts 20% of the

contracted value are misprocured, through many types of

corruption in the Procurement Process.*(1)

No country is free of corruption and western world has seen

its fair share of scandals even in Public

Procurement Contracts.

Etymologically the word “corruption comes from the Latin

Verb “corruptus” (to break) it literally means broken

object.

Conceptually, corruption is a form of behaviour, which

departs from ethics morality, tradition, law and civic

virtue. The classic definition, followed by the World Bank

and Transparency International, views corruption as the use

of one’s public position for illegitimate private gains.

Abuse of power and personal gain, however, can occur in both

the public and private domains and often in collusion with

individuals from both sectors.

Lebanon Anti-Corruption Initiative Report (1999) defines

corruption is the behaviour of private individuals or public

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officials who deviate from set responsibilities and use

their position of power in order to serve private ends and

secure private gains.

UN’s Global Programme Against Corruption (GPAC) defines

corruption as the “abuse of power for power gain” and

includes thereby both the public and private sector.

Although perceived differently from Country to Country,

corruption tends to include the following behaviours:

Conflict of interest, embezzlement, fraud, bribery,

political corruption nepotism and extortion.

Although Corruption’s prominence on the International agenda

is a relatively new development, there has been increasing

interest in understanding improvement and setbacks in terms

of corruption levels, since the fight against corruption

began in earnest a decade ago.

Corruption takes many forms but probably none is more

pervasive or has higher costs than corruption related to

Public Procurement, that is government buying of goods,

works, and services.

Large-scale corruption in both developing and developed

countries is closely connected to contracts, concessions and

privatization. * (2)

Chairman of Transparent International Mr Peter Eizen had

this to say “ Corruption in large – scale Public Projects is

a daunting obstacle to sustainable development. *(3)

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There are five critical contracts prone to Corruption, which

are:

(i) The Public Procurement Contracts

(ii) The Public Private Partnerships Contracts

(iii) Mining contracts

(iv) The foreign consultancy contracts

(v) Employment Contracts

In this paper only Public Procurement Contracts will be

examined. The Public Procurement area is leading loophole.

A lot of contracts entered in the Public Sector are not

without traces of corruption.

It would be a serious mistake to think that corruption

occurs only in these big, high-visibility cases. One could

argue, in fact that these are the more easily monitored and

controlled situations – if the will and the means exist to

do so. The more difficult corruption to deal with is that

which is ingrained in the culture and permeates entire

systems of Public procurement from the lowest – level

contract and inspector in the field to the minister or

higher who have final authority for contract approvals.*(9)

Although Public Procurement Act has recently been repealed

in Tanzania (2004), and new Act introduced has not been able

to monitor properly the performance of many contracts and

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the manipulated invoiced contracts (loaded invoices) that

are common on Public contracts with variations.

But in Africa it is perpetuated due to poverty and unguided

Public Sector. In real sense corruption holds a country’s

development back, spawning an atmosphere in which illegal

practices become increasingly attractive as a way of making

ends meet.

Public Sector governance covers how public sector entities

are controlled at the highest levels. This varies from

country to country. There are, however, a number of

principles based on four pillars of good governance. These

are identified as: Openness, accountability, intergrity and

participation

Major contracts involve Public Sector and Private Sector and

it is in procurement process of large contracts where the

corruption is almost legalized.

“When the size of a bribe takes precedence over value for

money” the results are shoddy construction and poor

infrastructure management. Corruption wastes money,

bankrupts countries, and costs lives.

Research*(4) has confirmed that Corruption adversely affects

the poorest within societies, exerting the highest costs on

those who can least afford them. For example, in health

sector corruption deprives those in need of essential

medical care and helps spawn drug- resistant strains of

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deadly diseases in short the price of corruption in health

sector is paid in human suffering. Corruption in the

pharmaceutical chain can prove deadly. Drug

counterfeiting, facilitated by corruption, kills en masse

and anybody can be a victim.

In Nigeria, water was substituted for life-saving adrenaline

and of active ingredients being diluted by counterfeiters,

triggering drug – resistant strains of malaria, tuberculosis

and HIV, the World’s biggest killers. *(5)

Corruption affects health policy and spending priorities.

Examples in 2005’s global Corruption Report from Mexico and

Kenya illustrate how Public Officials have abused their

power to divert funds to “pet” projects, regardless of

whether they are in line with agreed health policy.

The Procurement Process popularly known as tendering is

singled out at the most abused and used channel of

corruption. *(6)

The report of T.I. Uganda observes that such manipulation of

the Procurement Process; especially at local government

(Councils) by “big shorts” in the government was the major

cause of increasing cases of shoddy work.

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The VFM Audit report on School Facilitation Grant by the

Auditor General recently indicated that more than Ushs.15

billions is likely to be lost through shoddy work and most

building structures will not last their full life of 30

years.*(7)

Developed countries have their share in corrupt practices

when it comes to Public Procurement, one case was captured

by The New York Times*(8) which says that some of the costs

related to Hurricane Katrina are; $568 million contracts for

debris removal which was awarded to a Florida company with

ties to the Republican Governor in Mississippi.

Forms of Corruption

How does corruption occur in Public Procurement? The

popular image is of a would-be contractor arriving in a

minister’s or a mayor’s office with a suitcase full of cash,

just before a critical decision is made about a contract

award – an amusing caricature, but an awkward method and is

hardly keeping with modern technology. The reality is more

likely to be an electronic deposit in a foreign account,

corporate stock shares, an elite school scholarship for a

son or daughter. The fact that the recipient may use the

proceeds for a worthy cause makes combating corruption that

much harder. But the direct contractor – client pay off

possible scenarios, and not necessarily the most common or

most costly form of corruption.

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Bribery often occurs at a much earlier stage in the

procurement process to get a firm included on a restricted

list of bidders for example to encourage a client to write

specifications in such a way that the winning bidder is a

foregone conclusion. Or corruption may be carried out

entirely among competing firms, through collusion and bid

rigging, without the client being involved or even aware it

is happening. Firms may agree in advance who will submit

competitive bids and at what prices, who will win, and how

the profits will be shared.

To illustrate how complicated it can be eliminate

corruption, the prequalifications of bidders by a client to

ensure that only qualified and financially sound firms

participate in bidding competitive quite unintentionally

makes it easier for dishonest bidders to collude, since all

prequalified bidders are announced in advance.

Quite likely the most extensive and costly corruption occurs

after contracts have been awarded.

Corruption is not charitable games “winners” have every

intention of recovering their bribery costs; and they have a

variety of ways to do so. The first stage, especially in

collusive bidding, is by inflating their bid prices.

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Further cost recovery can be achieved during contract

performance by over-invoicing for quantities of goods

delivered or work performed, reducing the quality of

materials used for construction or delivering cheaper models

of goods and obtaining contract charge orders to increase

the amounts of goods sold or works performed at overpriced

unit costs.

Again, corruption in the post award stage of a contract may

be with the knowledge and consent of at least some parties

in the client’s organization, or it may be through well-

concealed initiatives of the contract alone.

In fairness to contractors, many of the above practices are

motivated by attempts to hedge against perceived

uncertainties and risks in client’s systems of contracting,

rather than deliberate corruption.

The debate about who is responsible for corruption in public

procurement is largely irrelevant for there is no single

pattern. Sometimes the initiative clearly comes from the

clients in the form of explicit demands by a director for a

specified percentage of the bid price or from inspectors who

“certify” incorrect quantities for payments to contractors.

(This highlights one difficult in fighting corruption.

Clients are not monolithic, but rather are many different

individuals or groups looking out for their own interest).

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In other cases the bidder is first to offer inducements. In

most cases there is some degree of complicity between client

and bidder/contractor. In all cases the taxpayer and public

at large are the losers.

Types of Reported Irregularities in Public Procurement

Tendering Process

Providing preferential treatment firms during the process

of establishing specifications and determining contract

methods.

- Being influenced by certain firms when preparing

specifications, or restricting the

Opportunities for participation in the tender by other

firms.

- Limiting competition unnecessarily or abusing the use

of private contracts.

Providing preferential access to tender information at

the time of making an order.

- Carrying summarized tender information in the

government gazette and disclosing detailed information

to prospective bidders in a selective and limited

manner.

Applying procedures for selecting successful bidders and

for conducting private contract negotiations in an

arbitrary manner.

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- Interpreting selection criteria, including pre-

qualification, arbitrarily rather than in an open and

transparent way.

- In the case of a private contract, applying different

negotiation prices for different prospective

contractors.

Wrongdoings of Procurement/Supplies Officers.

- Intentional delays in placing orders, determining

successful bidders, concluding contracts, and arranging

payment.

- Issuing or receiving false documents

- Treating customers in a discourteous and highhanded

manner.

Why the trend is not changing?

According to Ms Lynda Chalker, the African Governments

greatest weakness has been its inability to fight

corruption, which has created an unfavorable climate for

business.*(10)

Also the encouragement of Privatization of Public Services

and infrastructure by the World Bank and others has

multiplied the potential scale of this business.

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At the same time it has multiplied the incentives for

Multinational companies active in these sectors to offer

bribes in order to secure concessions and contracts.

Both the overall amounts and individual contract amounts are

huge, and they offer correspondingly large opportunities for

bribes, kickbacks and other payoffs. The potential reward

for a single contract directed to the winner can exceed the

legitimate lifetime salary earnings of a decision maker.

Temptations are enormous and, in too many cases, the risks

of punishment are relatively small.

Also in Tanzania there is a culture of tolerance in Public

Sector hence the culprits are left untouched and in some

cases the worst penalty for misdeeds is transfer to another

Ministry /Department/district.

The regulatory and Professional bodies are not effective in

Developing Countries.

Only a handful of the professional bodies have penalties in

their bylaws to punish the unethical members.

For example how many corrupt members of our Professional

bodies have been penalized for their professional

misconduct? (Their involvement in shoddy deals).

Only CRB has on several occasssions come up with reprimand

and Public call for unethical deals of its members.

I am sure many Professionals have not only escaped the

attention of the professional bodies but are honoured

members of the regulatory bodies simply because there are

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paying annual subscriptions. Is subscription enough

regulatory mechanism to contain malpractice among the

members?

Corruption has to be contained by establishing binding

ethical codes by professional bodies. Only members who are

abiding to these ethical codes should be allowed to

practice.

Our local Professional bodies, which have outdated ethical

codes, that leaves a lot to be said. For example one local

body has 10 years old Professional ethical standards, which

are not biting in the current modern society where E-World

and related E-Commerce has made their ethical standards

mockery.

What are the Real Costs of Corruption in Procurement?

Corruption doesn’t just line the pockets of business elites,

it leaves ordinary people without essential services and

deprives them of access to sanitation and housing. *(11)

One way to measure cost is to compare actual prices of

similar goods, works and services delivered under different

conditions, for example, in contracts awarded through direct

negotiation or restricted

negotiation or restricted bidding in comparison with open

and apparently properly conducted competitive bidding.

(This does not mean that contracts awarded by direct bidding

are never appropriate; in some situations these are

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preferred procedures. The comparisons should be in cases

where these are not likely to be the most economical or

efficient methods). The price differentials on the order of

20 to 30 percent are commonly found, and sometimes

substantially more.

These comparisons are rough approximation at best.

A new vehicle, which has market value of US $ 25,000, is

sold to Public Sector at US $ 40,000despite of the fact that

the Public Sector is a good Paymaster.

Contract Post award Monitoring is very poor and there is

little guarantee of the quality of goods/works delivered.

For example the much Publicized Roads construction are worn

out within a year (or after one rainy season) because many

construction firms are clearly vetted on low prices only but

Money for Value Procurement is important factor than low

prices.

The only thing the Public Sector Procurement is interested

is Lower Prices which not proper because the Price cannot

tell us everything about the Lowest Quoted

Supplier/Contractor who may be almost bankrupt.

According to former World Bank President James

Wolfenson*(12) corruption is diversion of funds from

publicly financed projects represents an unacceptable tax on

the poor.

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In construction sector the corruption in Procurement

represents a deplorable opportunity lost for the delivery of

essential services and it undermines citizen trust in

government.

What is required in Public Procurement in Tanzania and other

developing Countries?

The strongest economic defense against bribery in public

procurement is to limit the privatization of parastatals and

when there is privatization then very transparent and

analytical process should take place because disposal of

public assets is also an area of

great concern and elements of corrupt practices have been

traced in many disposal processes. Other measures are listed

below but they may not be applied as combined solutions,

each solution can be applied individually depending on the

prevailing condition at particular situation.

1. Public Awareness Campaigns:

Public awareness is the process by which a Community

strives to acknowledge the existence of a political or

social issue.

There are different methods to promote public

awareness.

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The media is probably the most common instrument.

Specific strategies include news coverage special

reports, interviews, investigative journalism and even

paid advertisement.

The Internet is also an excellent vehicle to

communicate ideas and opinions, though access is more

limited to massive audiences.

Conference, conventions, symposiums and other forms of

reunions are often used to draw attention on social

issues.

___________________________________________________

12. BBC News –International version –Iraq facing corruption threat.(16th March

2005).

There are more specific methods to promote public

awareness.

Conducting surveys and opinion polls is one of them.

These are important instruments to identify social

concerns and generate public consciousness.

In fighting corruption creating awareness – and keeping

the public concern alive is a key component.

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From the Public Sector, the fairness, transparency and

inclusiveness of decision-making define the level of

trust.

The Public education campaigns should help to build the

anti corruption activities

Educating both young and adults on ethical issues is

very effective.

Extra curricular activities can also have a strong

educational effect. Promoting certain activities can

facilitate reaching more than one goal.

One example is to organize education contests for

students and teachers to produce original approaches to

the issue of corruption. A play by school on bad

effects of corruption can be tapped in video for

distribution.

There is also a tendency to educate adult on ethical

issues. It is not uncommon

for Companies/Institutions to deliver ethics courses

for their employees.

Governments, in some Countries also train their

employees to face and solve ethical issues.

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2. The ethical codes for Public Sector Procurement should

be established and be enforced to all Public Sectors

officials in order to save the Public Money otherwise

taxpayers and donors will be exhausted through

misprocurement.

3. Creation of Whistle-blowing:

Whistle-blowing regulations are intended to provide

protection to citizens at large and public officials

who have the knowledge of a potential case of

corruption and are willing to provide information.

The protection is intended to shield denunciators from

the possible threats and negative consequences of their

action.

Basically, whistle-blowing regulations try to create

incentives for people to provide the authorities with

evidence to investigate and prosecute cases of fraud

and corruption.

People who have sufficient power and influence to

control or suppress evidence and to intimidate those

who might bring to light their situation often perform

the corruption crime.

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The best tool in favour of whistleblower is passing law

protecting the practice and introduce hotlines for

reporting corruption.

4. Establish a workable legal definition of corruption.

Even the Public Procurement Act No. 21 of 2004 has not

defined corruption

5. Extend the scope of legislation to all officials in

public bodies, corruptors and their agents.

6. Create presumption of prima facie proof to facilitate

prosecution of an offence.

7. Establish extra-territorial application and

jurisdiction, and compliance with

International conventions to which Tanzania is a

signatory.

8. Improve the civil and recovery elements of the

legislative framework, prevention of organized crime,

freezing of assets and return of assets to institutions

that incurred losses.

9. Enable the state and individuals to claim for damages.

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10. Prohibit corrupt individuals from further

employment in the Public Sector as well as prohibit

corrupt Businesses (including principals and directors

of such Businesses) from gaining contracts funded from

public source

11. Regulate post-Public Service employment.

12. Establish responsibility for maintaining the

witness protection system.

13. Make legislation easy to understand and apply.

14. Establish mechanism of dealing with corruption of

witnesses and deliberate frustration of investigations.

15. Establish mechanism of dealing with possession of

unexplained wealth.

16. Establish the condition in Public office that it

will mandatory or the obligations to report corrupt

transactions.

17. Introduce tougher and punitive measures to stamp

out corruption in Public

Procurement.

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18. Bar companies found guilt of bribery should be

prevented from bidding for

similar work.

19. Introduce transparency in tendering processes, so

that the process should be open

to public scrutiny and independent oversight.

20. Introduce the application best risk management

techniques and develop better

contracting terms will reduce corrupt to some extent.

21. Introduce as soon as possible the electronic

Procurement System in Public Sector.

BIBLIOGRAPHY

1. New Dawn – Supply Management Journal (CIPS) – July 2005

2. Public Enemy Number One – Supply Management Journal

(CIPS) – 2001

3. How Efforts were Made to Slow Down Rip-off Probe – Anglo

Leasing Scandal

Daily Nation – January 28, 2006

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4. Organizers look to learn from Athens

By Rejew Syal & Dominic Kennedy – Times (January 30,

2006)

5. Tender Cancellation – By Philip Ngunjiri – The East

African – January 30th – 5th

February 2005

6. What Measures should be taken to set an effective Public

Procurement System in East

Africa? By Odhiambo, W. Kamau (OECD – Development

Centre 2003)

7. Public Procurement Act No. 21 of 2004 and its Regulations

8. USAID Anticorruption strategy January 2005.

*Author is corporate member of CIPS (UK), and an experienced

Procurement Consultant with 15 years in Procurement

employment in Public Sector and Private Sector, he is

currently working with several colleges as Lecturer in

Tanzania. He is a student to the PhD Programme (distance

learning) at A.I.U (Atlantic International University),

Honolulu in USA.

Contact address:

Einhard E. Mwenda,Procurement Expert

P.O. Box 20967,

21

Dar-es-Salaam,

Tanzania, East Africa

Email: [email protected]

Tel No. 255-0754-623376/0712-805460

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