Curbing Fraud, Corruption, and Collusion in the Roads Sector The World Bank Integrity Vice Presidency THE WORLD BANK 1818 H Street, N.W. Washington, DC 20433 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized closure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized closure Authorized
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Curbing Fraud, Corruption, and Collusion in the Roads Sector
The World BankIntegrity Vice Presidency
THE WORLD BANK
1818 H Street, N.W.Washington, DC 20433
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Typewritten Text
64283
Curb
ing Fraud
, Co
rruptio
n, and
Co
llusion in the R
oad
s Sector
The Wo
rld B
ankInteg
rity Vice Presid
ency
June 2011
2011 Th
e Intern
ational B
ank for R
econstru
ction an
d Developm
ent/T
he W
orld Ban
k
Integrity V
ice Presiden
cyT
he W
orld Ban
k Grou
pM
SN U
11-1100W
ashin
gton D
C 20433
http://w
ww
.worldban
k.org/integrity
All righ
ts reserved
Th
e fin
dings, in
terpretation an
d conclu
sions expressed h
ere are those of th
e auth
or (s) and do n
ot necessarily refl
ect th
e views of th
e Board of E
xecutive D
irectors of the W
orld Ban
k or the govern
men
ts they represen
t. Th
e World B
ank
cann
ot guaran
tee the accu
racy of the data in
cluded in
this w
ork.
Righ
ts and
Perm
issions
Th
e material in
this w
ork is copyrighted. C
opying an
d/or transm
itting portion
s or all of this w
ork with
out perm
is-sion
may be a violation
of applicable law. T
he W
orld Ban
k encou
rages dissemin
ation f its w
ork and w
ill norm
ally gran
t permission
promptly.
For permission
to photocopy or reprin
t any part of this w
ork, please send a requ
est with
complete in
formation
to the
Integrity V
ice Presiden
cy at the address stated above.
Co
ntents
AC
KN
OW
LE
DG
ME
NT
S
v
FO
RE
WO
RD
v
ii
EX
EC
UT
IVE
SU
MM
AR
Y
Ix
I. IN
TR
OD
UC
TIO
N
1
Developm
ent Im
pact of Roads
1
II. W
OR
LD
BA
NK
INV
ES
TIG
AT
IVE
FIN
DIN
GS
5
III. C
OL
LU
SIO
N IN
RO
AD
TE
ND
ER
S
11
A.
Evidence from
Non
-Ban
k Projects
12B
. C
artel Theory
12C
. D
eveloped Cou
ntry E
xperience
13D
. E
ffect of Collu
sion on
Tender P
rices 13
IV.
FR
AU
D A
ND
CO
RR
UP
TIO
N IN
CO
NT
RA
CT
IMP
LE
ME
NT
AT
ION
1
7
V.
CO
MB
AT
ING
CO
LL
US
ION
, FR
AU
D, A
ND
CO
RR
UP
TIO
N
19
A.
Measu
res to Redu
ce Collu
sion
19P
un
ish cartelization
severely 19
Create in
centives for th
e exposure of cartels
20
Revise ten
dering ru
les 20
Requ
ire indepen
dent bid certifi
cates 23
Retain
an in
dependen
t procurem
ent evalu
ator 23
B.
Measu
res to Redu
ce Fraud an
d Corru
ption
24Stren
gthen
the en
gineer
24
Hire a tech
nical au
ditor 25
En
gage civil society mon
itors 26
Develop accu
rate cost estimates
26
Ch
eck the w
ealth of key procu
remen
t agency offi
cials 26
C.
Longer-Term
Capacity-B
uildin
g Measu
res 27
Modern
ize the roads sector agen
cy 27
Strength
en com
petition law
enforcem
ent
27
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
iv
D.
Experim
ental M
easures
27Im
pose ceiling on
bids 28
Use com
petitive negotiation
28
Con
tract out procu
remen
t 28
E.
Issues for C
onsideration
by Ban
k Operation
s Staff 29
Trade-offs between
Transparen
cy and C
ollusion
30
Subcon
tracting as a facilitator of capacity-bu
ilding an
d collusion
30
Cu
stomizin
g measu
res to address fraud an
d corruption
in civil w
orks contracts
30
Developin
g expertise on cost estim
ating an
d detecting collu
sive bidding
30
Reevalu
ate curren
t contract m
anagem
ent form
31
Target enforcem
ent on
engin
eering fi
rms
32
Increase con
tingen
t of professional W
orld Ban
k staff with
road engin
eering expertise
32
Spend m
ore on corru
ption preven
tion in
projects 32
VI.
CO
NC
LU
SIO
N
35
RE
FE
RE
NC
ES
3
7
AN
NE
X 1
: PR
OV
ING
BID
RIG
GIN
G O
N R
OA
DS
TE
ND
ER
S
45
AN
NE
X 2
: RE
FO
RM
S T
O P
UB
LIC
PR
OC
UR
EM
EN
T IN
OE
CD
CO
UN
TR
IES
4
7
TablesTable 1. Miscon
duct C
ases in W
orld Ban
k Roads P
rojects: Sanction
s Imposed
6
Table 2. Miscon
duct C
ases in W
orld Ban
k Roads P
rojects: Sanction
s Pendin
g or Not Sou
ght
7
Table 3. Estim
ated Cartel O
vercharges
14
Table 4. Resu
lts of Au
dit of Zam
bian R
oads Projects
17
BoxesB
ox 1. World B
ank D
efin
itions of M
iscondu
ct 2
Box 2. C
ollusion
and C
artels 8
Box 3. Ten
Indicators of C
ollusive B
idding
12
Box 4. P
ublish
ing C
ost Estim
ates: the Trade off B
etween
Transparen
cy & C
ollusion
21
Box 5. C
ombatin
g Collu
sion by C
han
ging th
e Procu
remen
t Process
22
Box 6. C
ertificate of In
dependen
t Price D
etermin
ation
24
Box 7. U
sing C
ompetitive N
egotiation to C
ircum
vent a C
artel: the U
S Experien
ce 29
Box 8. R
educin
g Fraud an
d Corru
ption in
Civil W
orks 31
Ackno
wled
gm
ents
Th
is report was au
thored by R
ichard M
essick (INT
) un
-der th
e direction of Leon
ard McC
arthy, Vice P
resident,
INT, an
d Galin
a Mikh
lin-O
liver, Director for Strategy
and C
ore Services, INT. V
aluable in
puts w
ere pro-vided by A
nders A
gerskov with
support from
Virgin
ia Fatou
rou-Papan
ikolaou, A
lba Struga, an
d Ath
ene A
. V
ila-Boteler of IN
T’s P
reventive Services U
nit.
Helpfu
l comm
ents an
d contribu
tions w
ere provided by colleagu
es across INT, in
cludin
g in particu
lar Stephen
Z
imm
erman
(INT
OP
), Jonath
an Sh
apiro (INT
OP
), Sim
on R
obertson (IN
TO
P), Leon
ard New
mark
(INT
OP
), Susan
Hu
me (IN
TSC
), An
nie Yau
(INT
SC),
and D
avid Bern
stein (IN
TSC
), and n
um
erous col-
leagues in
SDN
, OP
CS, th
e regions, LE
G, an
d GSD
,
inclu
ding M
arc Juh
el (TW
ITR
), Gou
tham
i Padam
(TW
ITR
), Hu
dayberdi Ah
medov (T
WIT
R), Pau
l B
ermin
gham
(OP
CO
S), Bern
ard Becq (O
PC
PR
), Maria
Van
nari (O
PC
PR
), Moses W
asike (OP
CFM
), Rich
ard A
. Calkin
s (Con
sultan
t), Jack Titsw
orth (O
PC
FM), Pat
Rogers (O
PC
CS), C
harles K
enny (C
enter for G
lobal D
evelopmen
t), Luc Lecu
it (EA
CT
F), Carolin
a Mon
salve (E
CSS5), B
ill Patterson (C
onsu
ltant), G
aël Raballan
d (A
FTP
R), D
onald M
phan
de (AFT
FM), T
ina Soreide
(U4), Steve B
urgess (E
AP
CO
), Joel Turkew
itz (EA
PV
P),
Ah
san A
li (EA
PP
R), C
ecilia D. V
ales (EA
PP
R), T
herese
Ballard (G
SDP
R), A
nton
io Capobian
co (OE
CD
), Ben
G
eiricke (EC
SSD), Fran
k Fariello (LEG
OP
), Row
ena M
. G
orospe (LE
GO
P), L
auren
ce Folliot Lalliot (L
EG
OP
), an
d An
eta K. W
ierzynska (C
onsu
ltant).
Simon Robertson/World Bank
Forew
ord
From earliest tim
es one of th
e strongest in
dicators of a society’s developm
ent h
as been its road in
frastructu
re, or lack th
ereof. At its h
eight, th
e Rom
an E
mpire repu
t-edly bu
ilt the best en
gineered an
d most com
plex road n
etwork w
orldwide. T
he O
ld Testamen
t also contain
s referen
ces to the an
cient K
ing’s H
ighway. C
orduroy
roads were bu
ilt in G
lastonbu
ry, En
gland in
3300 BC
w
ith street pavin
g going back to early hu
man
settlemen
t arou
nd 4000 B
C in
the In
dus V
alley on th
e Indian
sub-
contin
ent. O
ur h
istory speaks roads.
Well plan
ned, properly m
aintain
ed, and safe roads are
critical for econom
ic growth
and overcom
ing poverty
in developin
g coun
tries. Th
e roads sector has been
a m
ajor target for developmen
t fin
ancin
g over the en
tire h
istory of the W
orld Ban
k and rem
ains im
portant today.
Betw
een 2000 an
d 2010, the W
orld Ban
k comm
itted close to $56 billion
for road constru
ction an
d main
te-n
ance an
d expects to contin
ue its active su
pport for the
roads sector in its clien
t coun
tries for years to come.
Wh
ile roads projects supported by th
e World B
ank
Grou
p have h
ad consisten
tly positive developmen
t re-su
lts, dangers of frau
d, corruption
, and collu
sion plagu
e th
e sector worldw
ide. Th
ough
this is a problem
for both
developed and developin
g coun
tries it is mu
ch m
ore costly in
terms of opportu
nity costs an
d lost econom
ic grow
th for developin
g coun
tries. Given
the im
portance
of roads to the poor, th
is challen
ge is of special signifi
-can
ce to the W
orld Ban
k.
To help ou
r clients safegu
ard their roads projects from
frau
d, corruption
, and collu
sion, th
e World B
ank m
ust
be inn
ovative and learn
more system
atically from ou
r experien
ces and th
ose of our developm
ent partn
ers and
client cou
ntries. T
his report of th
e Preven
tive Services U
nit of th
e World B
ank’s In
tegrity Vice P
residency
(INT
) supports th
is effort by turn
ing both
the resu
lts of IN
T’s investigation
s and th
e experiences of developed
and developin
g coun
tries into practical advice abou
t a ran
ge of measu
res in order to stem
collusion
in ten
ders for roads con
tracts, and frau
d and corru
ption in
con-
tract execution
.
Ein
stein said, “W
e can’t solve problems by using the sam
e kind of thinking w
e used when w
e created them.” So w
e n
eed to revisit past practices, drawin
g on th
e know
ledge of th
ose on th
e groun
d in clien
t coun
tries.
Th
e report recognizes th
at condition
s across borrowin
g cou
ntries differ sign
ifican
tly, as they do in
developed cou
ntries, an
d that w
hat w
orks in on
e coun
try may n
ot in
anoth
er. Th
e measu
res we offer are n
ot panaceas, or
“cookbook” solution
s. Diagn
oses of the n
ature of th
e problem
s are importan
t in devisin
g possible solution
s. O
ur aim
is to spur dialogu
e amon
g all stakeholders on
h
ow to im
prove the w
ay the W
orld Ban
k and its clien
ts do bu
siness in
the roads sector.
Th
e bad new
s is that en
surin
g the in
tegrity of roads projects is a ch
allenge for m
any developed and devel-
oping cou
ntries sin
ce fraud, corru
ption an
d collusion
h
istorically prove resistant to easy treatm
ent or sim
ple solu
tions. T
he en
couragin
g new
s is that th
e coun
tries th
at are comm
itted to stampin
g out th
ese problems can
draw
upon
the learn
ing an
d successfu
l experiences of
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
viii
many oth
ers. Th
e corrupt can
be bested. Fraud can
be thw
arted. Collu
ding n
etworks can
be coun
tered and
even broken
.
We w
ant th
is report to be a living docu
men
t, the breed-
ing grou
nd for n
ew solu
tions, as w
e seek to protect and
safeguard an
importan
t driver of growth
. Th
e World
Ban
k and oth
er developmen
t partners stan
d ready to h
elp.
Robert B
. Zoellick
May 2011
Executive Sum
mary
Becau
se an exten
sive, well m
aintain
ed netw
ork of roads is essen
tial for econom
ic developmen
t, road constru
c-tion
and m
ainten
ance projects h
ave been a m
ainstay of
the W
orld Ban
k’s lendin
g portfolio since its fou
ndin
g. T
his lon
g experience in
the roads sector is refl
ected in
favorable project evaluation
s. Th
e Ban
k’s Indepen
dent
Evaluation
Grou
p reports that roads an
d other tran
s-port projects con
sistently score h
igher on
measu
res of ou
tcomes, in
stitution
al developmen
t, and su
stainability
than
non
-transport projects an
d the B
ank’s Q
uality
Assu
rance G
roup h
as foun
d that roads projects are
well-su
pervised.
At th
e same tim
e, roads projects aroun
d the globe re-
main
plagued by frau
d, corruption
, and collu
sion. A
Tran
sparency In
ternation
al poll ranked con
struction
as th
e indu
stry most pron
e to corruption
and a su
rvey of in
ternation
al firm
s revealed that com
panies in
the
constru
ction in
dustry w
ere more likely th
an fi
rms in
any oth
er sector to have lost a con
tract because of bribery.
World B
ank-fi
nan
ced projects are not im
mu
ne. R
ough
ly on
e-fourth
of the 500 plu
s projects with
a Ban
k-fun
ded roads com
ponen
t approved over the past decade drew
on
e or more allegation
s of fraud, corru
ption, or collu
-sion
; to date, the B
ank’s In
tegrity Vice P
residency (IN
T)
has con
firm
ed allegations in
25 projects resultin
g in 29
cases of miscon
duct u
nder B
ank ru
les.
Th
e most com
mon
forms of w
rongdoin
g in th
ese 29 cases are collu
sion am
ong fi
rms biddin
g on a project
and frau
d and corru
ption in
the execu
tion of th
e re-su
lting con
tract. Th
e Ban
k has con
trols to reduce th
ese form
s of miscon
duct—
procurem
ent process review
s, fi
nan
cial audits, an
d field su
pervision—
and eviden
ce
suggests th
at losses in B
ank-fi
nan
ced programs are less
than
in th
ose not su
bject to Ban
k oversight. N
oneth
eless, for th
e developing cou
ntries of th
e world, any loss on
a road project, w
heth
er fun
ded by the W
orld Ban
k or not,
is un
acceptable.
Th
is report explores how
the W
orld Ban
k and develop-
ing n
ations can
reduce losses from
collusion
in procu
re-m
ent an
d fraud an
d corruption
in con
tract execution
, draw
ing on
wh
at INT
has learn
ed from its investiga-
tions of B
ank-fu
nded roads projects, investigation
s and
reports by borrowin
g coun
try governm
ents, an
d the
experience of developed cou
ntries. T
he aim
is twofold:
(a) to provide inpu
t into th
e World B
ank’s review
of its policies an
d processes as part of the on
going reform
of its bu
siness m
odel, and (b) to in
form a broader dialogu
e on
ways to preven
t collusion
in procu
remen
t, and frau
d an
d corruption
in con
tract execution
in all roads proj-
ects—n
o matter th
e fun
ding sou
rce.
Th
e report begins w
ith a review
of the fi
ndin
gs in 29
cases of miscon
duct in
World B
ank-fu
nded projects. It
follows w
ith an
analysis of th
e inciden
ce of collusion
in
procurem
ent in
non
-Ban
k projects and estim
ates of its im
pact on project price. It th
en exam
ines m
easures
developed coun
tries have taken
to attack collusion
and
suggests h
ow th
ey can be adapted to th
e environm
ent
in developin
g coun
tries. Some steps w
ill be the sam
e regard
less of the cou
ntry con
text. A cou
ntry sh
ould h
ave law
s penalizin
g bid rigging, m
arket division, an
d other
forms of collu
sive behavior alon
g with
the com
mitm
ent
and capacity to en
force them
. Oth
er steps will depen
d u
pon th
e market con
ditions an
d other cou
ntry-specifi
c circu
mstan
ces and risks.
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
x
Some cou
ntries m
ay wish
to limit su
bcontractin
g or revise th
e rules govern
ing h
ow fi
rms qu
alify to bid on
con
tracts. Oth
er coun
tries may d
ecide th
at more sign
if-ican
t chan
ges in p
rocurem
ent p
rocedu
res are required
. T
he rep
ort suggests th
at in con
siderin
g such
reforms,
trade-offs m
ay be required
to ensu
re that th
e values of
transp
arency, cap
acity-build
ing th
rough
subcon
tract-in
g, and
other goals are p
ursu
ed in
a man
ner th
at does
not in
advertently lim
it comp
etition by facilitatin
g collu
sion.
Wh
ile preventin
g fraud an
d corruption
durin
g the ex-
ecution
of a road contract sh
ould be everybody’s job,
the stan
dard road contract u
sed by the W
orld Ban
k and
most developin
g coun
tries assigns th
is responsibility
to the con
sultin
g engin
eer. Th
e engin
eer approves all paym
ent requ
ests and ch
ange orders, en
surin
g in every
instan
ce that th
e road is built accordin
g to specification
s an
d that valu
e for mon
ey is received. Th
e engin
eer is thu
s the gu
ardian of project in
tegrity. In W
orld Ban
k-su
pported projects, how
ever, INT
has fou
nd in
stances
wh
ere the en
gineer w
as asleep at the post an
d others
wh
ere the post w
as altogether deserted. Stren
gthen
ing
the en
gineer, ch
angin
g the in
centives faced on
the
job, or even retain
ing a secon
d guardian
to guard th
e fi
rst guardian
are some of th
e suggestion
s the report
advances.
A n
eed to appoint som
eone to gu
ard the gu
ardian is
a sign of a system
ic problem an
d INT
’s fin
dings ech
o earlier reports by govern
men
ts, NG
Os, academ
ics, and
donor agen
cies; collusion
and corru
ption are som
etimes
deeply ingrain
ed in th
e roads sector. Th
e schem
es may
involve not on
ly firm
s but roads agen
cy personn
el and
even sen
ior officials. In
these later cases, th
e system feeds
off itself. Th
e high
er the collu
ders raise the price, th
e m
ore they can
pay in bribes an
d kickbacks. Th
e more
they pay, th
e more th
ey have to ch
eat the govern
men
t to m
ake a profit. T
he m
ore corruption
, the m
ore all w
rongdoers stan
d to gain. T
hus all h
ave a shared in
terest in
busin
ess as usu
al.
Wh
en collu
sion or corru
ption is system
ic, chan
ge requ
ires breaking th
e cycle of abuse by brin
ging in
som
eone from
the ou
tside—a prosecu
tion service, an
ti-corru
ption agen
cy, competition
law au
thority, su
preme
audit in
stitution
, or, in th
e case of a local governm
ent,
the n
ational govern
men
t. If senior offi
cials are involved, in
troducin
g an ou
tsider can be particu
larly challen
ging.
Wh
en corru
ption is deeply in
grained, sh
ort-term pallia-
tives, such
as an in
dependen
t procurem
ent evalu
ator or tech
nical au
ditor, may be th
e answ
er. More drastic m
ea-su
res may also be requ
ired and th
e report reviews th
ree: th
e use of bid ceilin
gs, competitive n
egotiation, an
d tu
rnin
g procurem
ent over to an
indepen
dent agen
t.
Not all corru
ption is system
ic, and thu
s not all reform
s requ
ire such
signifi
cant steps. In
the W
orld Ban
k-su
pported Bali U
rban Infrastructure Project, th
e cir-cu
lation of ten
der notices to fi
rms in
other provin
ces defeated a local biddin
g ring. In
the P
hilippin
es, civil society m
onitors u
ncovered corru
pt schem
es in a variety
of governm
ent con
tracts, and in
the secon
d phase of th
e N
ational Road Im
provement and M
anagement P
roject, civil society grou
ps will m
onitor all ph
ases of the w
ork.
Th
e report suggests th
at, in addition
to expandin
g proj-ect-level preven
tive measu
res, more atten
tion sh
ould
be paid to project supervision
, especially in h
igh-risk
environm
ents, w
ith a particu
lar focus on
verification
of cost estim
ates and th
e identifi
cation of collu
sive bid-din
g. A review
of the W
orld Ban
k’s supervision
strategy for roads projects m
ay also be in order, som
ethin
g that
migh
t inclu
de ensu
ring th
at seasoned road en
gineers are
available to assist clients an
d enh
ance tech
nical su
pervi-sion
of the projects.
Non
e of the steps recom
men
ded are costless, but th
e losses from
collusion
, corruption
, and frau
d can be su
b-stan
tial. Th
is report seeks to spur a dialogu
e inside an
d ou
tside the W
orld Ban
k on h
ow to m
ore effectively com-
bat collusion
, fraud an
d corruption
and thu
s produce
better developmen
t outcom
es.
Introd
uction
Th
e World B
ank’s In
tegrity Vice-P
residency investigates
miscon
duct in
Ban
k-fun
ded projects and advises W
orld B
ank staff an
d borrowin
g coun
try personn
el on corru
p-tion
prevention
measu
res. Wh
en IN
T fi
nds m
iscondu
ct in
a World B
ank-fu
nded project, th
e Ban
k can bar th
e fi
rms or in
dividuals involved from
bidding on
futu
re W
orld Ban
k-fin
anced con
tracts. It can also provide in
-form
ation to n
ational law
enforcem
ent au
thorities in
the
coun
try or coun
tries wh
ere the m
iscondu
ct occurred or
wh
ere the com
panies or in
dividuals reside for possible
crimin
al prosecution
. Its preventive u
nit distills investi-
gative fin
dings in
to them
atic reports like this an
d other
docum
ents th
at it shares w
ith W
orld Ban
k staff and bor-
rowin
g coun
try personn
el to help th
em redu
ce miscon
-du
ct in fu
ture projects.
Wh
ile docum
entin
g cases of miscon
duct, IN
T often
learn
s of corrupt sch
emes prevalen
t in a cou
ntry or
across an en
tire indu
stry. For example, IN
T’s investiga-
tion in
to the P
hilippin
e First National R
oad Improvem
ent and M
anagement P
roject revealed practices that in
flated
highw
ay constru
ction costs th
rough
out th
e nation
. INT
also fou
nd eviden
ce of schem
es involving bribery an
d siph
onin
g of fun
ds durin
g contract execu
tion in
roads projects in
Ban
gladesh, C
ambodia, In
dia, Indon
esia, the
Ph
ilippines, an
d Senegal.
Develo
pm
ent Imp
act of R
oad
s
In th
e period 2000–2010, the W
orld Ban
k lent close to
$56 billion for road con
struction
and m
ainten
ance—
sligh
tly less than
20 percent of th
e Ban
k’s total lendin
g over th
e past decade. Lendin
g for roads constitu
tes a
signifi
cant portion
of the W
orld Ban
k’s portfolio for good reason
: an exten
sive and w
ell-main
tained n
etwork
of primary, secon
dary, and feeder roads is critical for
econom
ic growth
and poverty alleviation
. As th
e Ban
k’s tran
sport strategy for 2008–2012 explains, “B
ecause of
their h
igh an
d diverse fun
ctionality an
d wide ran
ge of ben
eficiaries, roads h
ave become an
essential com
ponen
t of all n
ational tran
sport systems, u
sually con
sum
ing
the greatest proportion
of public an
d private invest-m
ent resou
rces in both
infrastru
cture an
d services” (W
orld Ban
k 2008a, 48). A cross-cou
ntry an
alysis done
for the 1994 W
orld Developm
ent R
eport confi
rms th
e im
portance of roads for developm
ent, fi
ndin
g a strong
and con
sistent lin
ear relationsh
ip between
the exten
t of a cou
ntry’s road n
etwork an
d its level of developmen
t (W
orld Ban
k 1994, 16).
Cou
ntry-level stu
dies also show
the developm
ent im
pact of road con
struction
. In ru
ral India, road investm
ent
sharply boosted agricu
ltural produ
ctivity and grow
th
(Fan, H
azell, and T
horat 1999). In
Ch
ina an
d Th
ailand,
road investmen
ts contribu
ted signifi
cantly to grow
th in
both
farm an
d non
-farm ou
tput (Fan
et al. 2000, 2002, 2004), a fi
ndin
g recently replicated in
Ugan
da (Gollin
an
d Rogerson
2010). In M
exico, increases in
investmen
t in
roads led to a strong an
d positive increase in
labor produ
ctivity (Deich
man
n et al. 2002). A
n an
alysis from
the U
nited States poin
ted to the steep declin
e in pu
blic spen
ding on
road infrastru
cture as th
e likely cause of a
fall-off in produ
ctivity in m
anu
facturin
g in th
e 1970s (Fern
ald 1999).
Road
s projects are an
imp
ortant p
art of the W
orld
Ban
k’s portfolio becau
se, as the B
ank’s In
dep
end
ent
I
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
2
Evaluation
Grou
p h
as observed, th
e poor are often
their
prim
e benefi
ciary (World
Ban
k 2007, 4). In E
thiop
ia, access to all-w
eather road
s redu
ced p
overty by almost
seven p
ercent an
d in
creased con
sum
ption
growth
by 16.3 p
ercent (D
ercon et al. 1998). A
hm
ed an
d H
ossain
(1990) foun
d th
at better road access by th
e rural p
oor in
Ban
gladesh
increased
hou
sehold
incom
e from both
w
ages and
micro-bu
siness earn
ings. In
rural V
ietnam
, th
e poor rep
orted th
at the greatest ben
efit th
ey real-ized
from im
proved
access to roads w
as edu
cational;
child
ren w
ere able to attend
school year-rou
nd
(Songco
2002). An
assessmen
t of a World
Ban
k-fun
ded
road
project in
Morocco fou
nd
that it n
ot only boosted
pro-
du
ctivity and
encou
raged th
e plan
ting of h
igher-valu
e crop
s but also im
proved
access to health
services and
in
creased sch
ool attend
ance levels (K
han
dker, L
avy, and
Film
er 1994).
Becau
se road
s projects are esp
ecially imp
ortant for
poverty red
uction
, the im
pact of frau
d, corru
ption
, and
collusion
in su
ch p
rojects is of special sign
ifican
ce to th
e World
Ban
k. Evid
ence gath
ered by IN
T sh
ows th
at th
is imp
act can be qu
ite substan
tial. In th
e Cam
bodia P
rovincial R
ural In
frastructu
re Project, collu
sion sh
arply
infl
ated con
struction
costs. In In
don
esia, the u
se of su
bstand
ard con
struction
materials red
uced
the u
se-fu
l life of a road
and
dam
aged th
e vehicles u
sing it.
Accord
ing to tru
cking association
represen
tatives in
Ban
gladesh
, poorly m
aintain
ed ro
ads h
alve the u
se-fu
l life of mem
bers’ vehicles. IN
T also saw
contractors
fraud
ulen
tly failing to com
ply w
ith su
ch essen
tial safety featu
res as lane m
arkings, resu
lting in
a sharp
ly in-
creased risk of accid
ents.
On
e of the ch
allenges in
preven
ting frau
d, corru
p-
tion, an
d collu
sion in
the road
s sector is that th
ere are so m
any ways th
ey can seep
into th
e process
of design
ing, ten
derin
g, and
man
aging con
struc-
tion con
tracts (Patterson an
d C
hau
dh
uri 2007). T
he
2006 Project A
pp
raisal Docu
men
t for the Paraguay
BOX 1
Wo
rld B
ank Defi
nitions o
f Misco
nduct
The Wo
rld B
ank deb
ars any contracto
r found
to have eng
aged
in one o
r mo
re of the fo
llow
ing fo
rms o
f m
iscond
uct on a B
ank-funded
contract:
Co
rrupt p
ractice: offering
, giving
, receiving o
r soliciting
, directly o
r indirectly, o
f anything o
f value to influence
imp
rop
erly the actions o
f another p
arty.
Fraudulent p
ractice: any act or o
missio
n, including
a misrep
resentation, that kno
wing
ly or recklessly m
isleads,
or attem
pts to
mislead
, a party to
ob
tain a financial or o
ther benefit o
r to avo
id an o
blig
ation.
Co
llusive practice: an arrang
ement b
etween tw
o o
r mo
re parties d
esigned
to achieve an im
pro
per p
urpo
se, includ
ing to
influence imp
rop
erly the actions o
f another p
arty.
Co
ercive practice: im
pairing
or harm
ing, o
r threatening to
imp
air or harm
, directly o
r indirectly, any p
arty or
the pro
perty o
f the party to
influence imp
rop
erly the actions o
f a party.
Ob
structive practice: d
eliberately d
estroying
, falsifying, altering
or co
ncealing o
f evidence m
aterial to the
investigatio
n or m
aking false statem
ents to investig
ators in o
rder to
materially im
ped
e a Bank investig
ation
into alleg
ations o
f a corrup
t, fraudulent, co
ercive or co
llusive practice; and
/or threatening
, harassing o
r intim
idating
any party to
prevent it fro
m d
isclosing
its know
ledg
e of m
atters relevant to the investig
ation o
r fro
m p
ursuing the investig
ation, o
r acts intended
to m
aterially imp
ede the exercise o
f the Bank’s insp
ection
and aud
it rights.
Source: W
orld
Bank (2006a).
Intro
du
ction
3
Road M
aintenance Project id
entifi
ed 36 areas at risk
of corrup
tion in
the d
esign, p
lann
ing, aw
ard, an
d
man
agemen
t of a roads con
tract and
recomm
end
ed
mon
itoring 59 d
ifferent in
dicators (W
orld B
ank 2006b,
146–154). Wh
ile in an
ideal w
orld borrow
ing cou
n-
try person
nel overseein
g roads p
rojects wou
ld w
atch
everythin
g everywh
ere always, tim
e and
other resou
rces are lim
ited. T
he aim
of this rep
ort is to help
policym
ak-ers p
rioritize oversight resou
rces by iden
tifying recu
r-rin
g forms of m
iscond
uct in
roads p
rojects that cau
se sign
ifican
t harm
and
suggestin
g measu
res to redu
ce or elim
inate th
em.
Wo
rld B
ank Investigative Find
ings
A review
of INT
cases in th
e last ten years provides criti-
cal insigh
ts into th
e natu
re of the problem
s that m
ay arise in
roads projects in term
s of the variou
s forms of
fraud, corru
ption an
d collusion
, and th
e World B
ank’s
ability to detect, investigate, and san
ction su
ch m
is-con
duct. T
his data can
inform
and gu
ide the reform
s u
nderw
ay in th
e Ban
k’s busin
ess model an
d the related
policies and processes. G
iven its lim
itations, h
owever,
this data can
not be u
sed to extrapolate the scale of th
e problem
. Moreover, m
any of the preven
tive measu
res bein
g introdu
ced in projects are relatively recen
t and
their im
pact and cost effectiven
ess require close observa-
tion an
d adaptation.
In th
e 10-year period July 1, 1999, to Ju
ne 30, 2009,
INT
foun
d miscon
duct in
25 World B
ank-fu
nded roads
projects. Sanction
s were im
posed in ten
cases and pro-
ceedings are pen
ding in
anoth
er five. San
ctions w
ere not
pursu
ed in th
e remain
der for one of several reason
s: the
governm
ent h
ad already imposed effective pen
alties, the
evidence w
as too dated or was in
suffi
cient, or th
e sever-ity of th
e violation did n
ot merit th
e comm
itmen
t of re-sou
rces required to see th
e matter th
rough
the san
ctions
process. Th
ere were also in
stances w
hen
the pu
rsuit of
sanction
s wou
ld have requ
ired revealing in
formation
th
at was obtain
ed in con
fiden
ce or that m
ight pu
t wit-
nesses in
jeopardy
All cases th
at result in
sanction
s are in th
e public do-
main
and su
mm
aries are posted on IN
T’s w
ebsite (w
ww
.worldbank.org/integrity). Table 1 lists th
e ten roads
cases by coun
try with
a brief description of th
e project, its dates of operation
, and th
e principal form
s of mis-
condu
ct foun
d. More th
an on
e case may arise from
a
single project or m
iscondu
ct on separate projects m
ay be treated as a sin
gle case. Thu
s, for ease of reference, cases
in th
e table are separated by high
lightin
g. Cases w
here
proceedings are pen
ding or w
here san
ctions w
ere not
sough
t remain
confi
dential. Table 2 provides a gen
eral description
of each of th
ese 19.
Th
e data in th
e two tables m
ust be in
terpreted with
care:
Th
e 29 cases arising from
the 25 projects w
ere open
ed on th
e basis of complain
ts INT
received, not
as the resu
lt of drawin
g a representative sam
ple of th
e 540 projects with
a road compon
ent approved
durin
g this period. T
herefore, n
o inferen
ce about
the in
cidence or degree of frau
d, corruption
, or col-lu
sion in
the W
orld Ban
k’s roads portfolio can be
drawn
from th
ese data alone.
Th
e fact that som
e coun
tries have m
ore cases than
oth
ers does not n
ecessarily mean
there is m
ore frau
d, corruption
, and collu
sion in
their roads sec-
tor than
in th
e roads sector in oth
er coun
tries. Cases
vary signifi
cantly in
scope and, as n
oted above, th
ere are instan
ces wh
ere miscon
duct on
separate projects w
as lum
ped together in
a single case an
d oth
ers wh
ere more th
an on
e case arose from a sin
gle project.T
he data do n
ot capture all attem
pts to corrupt th
e procu
remen
t process. Depen
ding u
pon risk levels
and n
ational procu
remen
t capacity, a certain per-
centage of con
tracts in every B
ank-fu
nded project is
reviewed. B
ecause roads projects are con
sidered high
risk for corru
ption, th
e World B
ank’s procu
remen
t specialists review
a large nu
mber of con
tracts in
these projects an
d have u
ncovered efforts to falsify
II
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
6
a bidder’s prior experience, fi
nan
cial strength
, and
other qu
alification
s; the su
bmission
of fraudu
lent
bid securities; an
d bidding pattern
s that su
ggest collu
sion. W
hen
miscon
duct is su
spected, remedial
action can
be taken on
the spot. IN
T is also n
oti-fi
ed and depen
ding on
its priorities, may open
an
investigation. IN
T data thu
s does not captu
re all
instan
ces of miscon
duct in
World B
ank-fu
nded
projects or remedies applied to address it.
Despite th
e caveats, these 29 cases do provide im
por-tan
t insigh
ts into m
iscondu
ct in W
orld Ban
k-fun
ded roads projects. T
hey sh
ow fi
rst the differen
t ways in
w
hich
World B
ank staff eith
er discover or learn of th
e
TABLE 1
Misco
nduct C
ases in Wo
rld B
ank Ro
ads P
rojects: Sanctio
ns Imp
osed
Co
untryP
roject
Pro
ject d
atesC
ollusio
nFraud
in im
plem
entation
False d
ocum
ents
Bang
ladesh
Third R
oad
Rehab
ilitation and
M
aintenance: One co
ntract for
supervisio
n of ro
ad reco
nstruction.
1997–2005
Third R
oad
Rehab
ilitation and
M
aintenance: One co
ntract for d
esign
and sup
ervision o
f feeder ro
ads.
1997–2005
Cam
bo
dia
Provincial R
ural Infrastructure: Seventeen ro
ad rehab
ilitation co
ntracts, total $8.9
millio
n.
2003–2010
India
And
hra Pradesh State H
ighw
ay: Two
co
ntracts for ro
ad w
idening
and
strengthening
of hig
hways, to
tal $91 m
illion.
1997–2004
Indo
nesiaSum
atra Reg
ion R
oad
s: Twenty-tw
o ro
ad
rehabilitatio
n contracts, rang
ing fro
m
$56,025 to $614,415.
1997–2005
Second
Sulawesi U
rban D
evelop
ment:
One co
ntract to refurb
ish road
s in villag
es, $18,300.
1997–2002
Second
Sulawesi U
rban D
evelop
ment:
One co
ntract to o
versee desig
n eng
ineering w
ork, $320,000.
Kenya
Urb
an Transpo
rt Infrastructure: A co
ntract to
build
a GIS d
atabase o
f urban ro
ad
inventory and
cond
ition survey, $2.7
millio
n.
1993–2005*
Philipp
inesFirst N
ational R
oad
Imp
rovem
ent and
Manag
ement: Tw
o co
ntracts to
rehabilitate and
upg
rade ro
ads and
b
ridg
es, $33.2 millio
n.
1999–2007
Senegal
Urb
an Develo
pm
ent and D
ecentralization
Prog
ram: Tw
o ro
ad rehab
ilitation
contracts, $99,270 and
$133,440.
1997–2004
Urb
an Mo
bility Im
pro
vement: Three
contracts fo
r road
constructio
n wo
rks.2000–2008
Key:
violatio
n substantiated
; * violatio
n reasonab
ly suspected
Wo
rld B
an
k Inve
stiga
tive F
ind
ing
s
7
TABLE 2
Misco
nduct C
ases in Wo
rld B
ank Ro
ads P
rojects: Sanctio
ns Pend
ing o
r No
t Soug
ht
Reg
ion
Pro
ject descrip
tion
Pro
ject d
atesC
ollusio
nFraud
ulentIm
plem
entation
False d
ocum
entation
Africa,
Eastern
Euro
pe,
Central
Asia
Wo
rks and E
mp
loym
ent: One co
ntract fo
r prep
aration o
f tender d
ocum
ents for
paving
three streets, two
for technical
studies, and
one fo
r road
pavem
ent sup
ervision, to
tal $57,634.
2000–2007
Transpo
rt Develo
pm
ent: One ro
ad
rehabilitatio
n contract, $7.5 m
illion.
2005–2010
Ro
ads Im
pro
vement Pro
ject. Co
ntract to
imp
rove m
ajor hig
hway, U
S$24 m
illion.
2006–2013
Municip
al Develo
pm
ent: Co
ntract to
rehabilitate fo
ur city streets, $727,000.2002–2007
*
East &
So
uth Asia
Transpo
rt: Three contracts fo
r rehab
ilitating flo
od
-dam
aged
road
s, each $2.5 m
illion.
1998–2005
Transpo
rt: One co
ntract for sup
ply and
installatio
n of eq
uipm
ent, $128,700.1998–2005
Infrastructure Develo
pm
ent Fourteen
contracts fo
r repair o
f floo
d-d
amag
ed
road
s, $35 millio
n total.
1997–2007
Rehab
ilitation: Tw
o ro
ad rehab
ilitation
contracts, $83,524 and
$69,261.2001–2005
Ro
ad Im
pro
vement: Six co
ntracts for
wid
ening and
strengthening
highw
ays.2001–2008
Reg
ional R
oad
s: Three maintenance
contacts, rang
ing fro
m $83,853 to
$267,005.
Urb
an Develo
pm
ent: One co
ntract to
refurbish ro
ads in villag
es, $13,700.
Urb
an Develo
pm
ent: One co
ntract to
refurbish ro
ads in villag
es, $16,000.
Urb
an Develo
pm
ent: Co
ntract for
ped
estrian road
imp
rovem
ent, $120,000.
Ro
ads Infrastructure: A
contract
for co
nsulting services fo
r pro
ject p
reparatio
n, $2.89 millio
n.R
egio
nal Transpo
rt: One training
co
ntract and o
ne desig
n and
supervisio
n contract, $2.7 m
illion to
tal.
2001–20092001–2009
Reg
ional Transp
ort: Tw
o co
ntracts to
build
two
road
s, $14.5 millio
n total.
(continued
on next p
age)
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
8
miscon
duct. In
eight in
stances, th
e World B
ank w
as alerted by com
petitors of the fi
rms san
ctioned; in
an-
other seven
Ban
k staff discovered the m
iscondu
ct; in
five eviden
ce was u
ncovered in
the cou
rse of a fidu
ciary review
jointly con
ducted by IN
T an
d regional staff; bor-
rowin
g coun
try officials fl
agged suspiciou
s activity in
three an
d the su
pervising en
gineer in
two.
Th
ese data also show
the types of m
iscondu
ct most
often fou
nd in
World B
ank-fu
nded projects. In
the 29
cases the th
ree most com
mon
forms w
ere:
Collusion—
bidders agreed amon
g them
selves wh
o w
ould w
in th
e bid (see Box 2).
False documentation—
typically, the su
bmission
of false docu
men
ts to qualify to bid.
Fraud in the implem
entation of a contract—u
sually
overbilling or u
ndersu
pplying m
aterials durin
g con-
tract execution
, often w
ith th
e conn
ivance of project
overseers.
As th
e tables indicate, in
many cases m
ore than
one
type of miscon
duct w
as substan
tiated; for example, in
th
e Cam
bodian P
rovincial Rural Infrastructure P
roject, IN
T docu
men
ted all three. A
cross all 29 cases, INT
sub-
stantiated ten
instan
ces of collusion
and h
ad reasonable
groun
ds to believe it was presen
t in fou
r more projects.
It also substan
tiated 11 instan
ces of fraudu
lent docu
-m
ents an
d nin
e of fraud du
ring con
tract execution
.
Other form
s of miscon
duct w
ere less comm
on. In
a proj-ect in
Asia IN
T u
ncovered eviden
ce that officials of the
project overseeing the m
inistry had hidden
interests in
the w
inn
ing bidder; kickbacks to career govern
men
t em-
ployees, elected officials, political parties, or som
e combi-
nation
were alleged in
several projects in Sou
th and E
ast A
sia and Latin
Am
erica. Two W
orld Ban
k staff skimm
ed
(continued
)
BOX 2
Co
llusion and
Cartels
Co
llusion
refers to
any
com
binatio
n o
r ag
reement—
no m
atter how
inform
al—am
ong
sellers, to
raise or fix p
rices or rig
bid
s or to
red
uce o
utput
in o
rder
to
increase p
rofits.
Altho
ugh the term
cartel is often used
when the
collusive arrang
ement is a fo
rmal ag
reement,
the econo
mic effects o
f collusio
n and cartels
are the
same.
In line
with
usage
in m
any O
EC
D
countries,
this p
aper
uses the
terms
interchangeab
ly.
Source: O
EC
D (1990).
TABLE 2
Misco
nduct C
ases in Wo
rld B
ank Ro
ads P
rojects: Sanctio
ns Pend
ing o
r No
t Soug
ht
Reg
ion
Pro
ject descrip
tion
Pro
ject d
atesC
ollusio
nFraud
ulentIm
plem
entation
False d
ocum
entation
Hig
hways M
anagem
ent: One
consultancy co
ntract for the
develo
pm
ent and im
plem
entation o
f a C
entral Ro
ads D
atabase System
, a B
ridg
e Manag
ement System
and a
Ro
ad M
aintenance System, $2.5 m
illion.
2002–2013*
Latin A
merica
Rural Investm
ent: Eleven ro
ad and
one
brid
ge rehab
ilitation co
ntract, ranging
fro
m $30,000 to
$300,000.
1998–2006*
*
Ro
ad R
ehabilitatio
n and M
aintenance: Fifty-fo
ur contracts fo
r maintenance o
f ro
ads, rang
ing fro
m $6,200 to
$47,000.
1998–2005
Ro
ad R
ehabilitatio
n and M
aintenance: O
ne contract fo
r supp
ly and transp
ort
of co
bb
lestones, $2.7 m
illion.
2006–2011
Key:
violatio
n substantiated
; * violatio
n reasonab
ly suspected
.
Wo
rld B
an
k Inve
stiga
tive F
ind
ing
s
9
fun
ds from a project in
Africa an
d were su
bsequen
tly dism
issed and then
prosecuted by n
ational au
thorities.
As th
e sections below
demon
strate, INT
’s fin
dings
are consisten
t with
the m
ost comm
on in
tegrity risks
affecting roads projects in
developing an
d developed cou
ntries. B
etter un
derstandin
g of these risks sh
ould
enable th
e World B
ank an
d its borrowers to detect an
d address th
em m
ore effectively.
Co
llusion in R
oad
Tenders
Th
e World B
ank’s m
andate requ
ires that it give “du
e at-ten
tion to con
siderations of econ
omy an
d efficien
cy” w
hen
fun
ding a project; its P
rocurem
ent G
uidelin
es th
erefore require th
at, in all bu
t a few n
arrowly cir-
cum
scribed instan
ces, the con
tracts it fin
ances be let
competitively (W
orld Ban
k 2010a, 7). In roads projects,
competition
most com
mon
ly takes the form
of a one-
stage sealed-bid auction
. Th
e agency respon
sible for the
project prepares a description of th
e work requ
ired and
solicits bids from eligible fi
rms. B
ids are kept confi
den-
tial un
til a specified day, w
hen
they are open
ed in pu
blic an
d the bidder offerin
g the low
est price is declared the
win
ner. W
hen
bidders have equ
al access to inform
a-tion
about th
e proposed work an
d compete w
ith on
e an
other to w
in th
e tender, th
is meth
od of awardin
g con-
tracts produces econ
omy an
d efficien
cy (Milgrom
2004; M
cAfee an
d McM
illan 1987).
Evidence gath
ered by INT, h
owever, su
ggests that road
contract aw
ards are not alw
ays the resu
lt of competition
. For exam
ple, Ban
k-fun
ded roads contracts requ
ire a bid-der to su
bmit a bill of qu
antities, a docu
men
t show
ing
the m
aterials, equipm
ent, an
d labor it expects to use to
build th
e road along w
ith th
eir costs. In a com
petitive m
arket, a bidder calculates u
nit prices for each
item on
th
e basis of its cost structu
re, estimates th
e amou
nts
required, an
d arrives at its bid price. Bu
t in a series of
contracts in
an A
sian cou
ntry IN
T fou
nd an
omalies an
d in
consisten
cies in u
nit costs an
d totals for line item
s that
show
ed that bidders h
ad worked backw
ards from a pre-
determin
ed price.
In an
investigation in
Ban
gladesh, eviden
ce show
ed th
at compan
ies paid project officials u
p to 15 percent
of the con
tract value in
exchan
ge for contract aw
ards. A
Kenyan
inform
ant said th
at “collusion
was rife” in
the
nation’s roads sector, an
allegation later con
firm
ed by the
Kenyan
Roads A
uth
ority and th
e Kenyan
An
ticorruption
C
omm
ission (G
overnm
ent of K
enya 2007, 2004). After
interview
ing several fi
rms an
d governm
ent offi
cials in
Cam
bodia, INT
investigators conclu
ded that th
ere were
strong in
dications th
at “a well-establish
ed cartel,” aided an
d abetted by governm
ent offi
cials, controlled th
e aw
ard of roads contracts. In
the P
hilippin
es, “Nu
merou
s w
itnesses in
dependen
tly inform
ed INT
investigators th
at a well-organ
ized cartel, man
aged by contractors
with
support from
governm
ent offi
cials, improperly in
-fl
uen
ced [Departm
ent of P
ublic W
orks and H
ighways]
contract aw
ards and set in
flated prices on
projects fun
d-ed by th
e Ban
k and oth
ers.” (World B
ank n
.d., 3) On
e In
donesian
responden
t explained th
at “the In
donesian
collu
sive system h
ad been operatin
g for 32 years, and
many view
ed the ‘free m
arket’ system as cou
nter to th
e cu
ltural n
orm of con
sensu
s and cooperation
,” a state-m
ent con
sistent w
ith reports by In
donesia’s com
petition
law au
thority (Soem
ardi 2010) and sch
olarly research
(Van
Klin
ken an
d Aspin
al (2011).
Besides th
ese examples, som
e INT
cases labeled “false docu
men
tation” in th
e tables may be th
e result of col-
lusion
as well. In
a project in E
astern E
urope, a W
orld B
ank procu
remen
t specialist alerted INT
to a pattern in
th
e bids on a street reh
abilitation con
tract that su
ggested bid riggin
g. Th
e cost figu
res in th
e bids subm
itted by th
e only tw
o firm
s competin
g were virtu
ally identical—
down
to the sam
e typos in both
. Th
e only differen
ce in
the tw
o bids was th
e total price: one w
as 1 percent
below th
e engin
eering cost estim
ate, and th
e other w
as
III
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
12
1 percent h
igher. W
hile IN
T cou
ld not su
bstantiate col-
lusion
in th
is case, it did fin
d that th
e high
bidder had
provided a false bid security. W
hen
firm
s have agreed
in advan
ce wh
ich on
e will “w
in” the con
tract, the des-
ignated losers frequ
ently su
bmit h
igher “cover bids”
to camou
flage th
e agreemen
t (Khu
malo, N
qojela, and
Njsan
e 2009) Furth
er, because ban
ks charge for issu
ing
a bid security, cover bidders often
falsify the secu
rity to save m
oney. C
ollusion
was also likely in
a case in Latin
A
merica in
wh
ich th
ree firm
s that su
bmitted low
bids on
a contract w
ere disqualifi
ed for reasons th
at INT
su
spected were aim
ed at keeping n
ew en
trants ou
t, a com
mon
strategy for preserving a bid-riggin
g schem
e (Lam
bert-Mogilian
sky forthcom
ing).
How
comm
on is collu
sion in
roads projects? Neith
er the
data in IN
T fi
les nor in
formation
from any oth
er source
can provide a defi
nitive an
swer. B
ut th
e INT
fin
dings,
considered w
ith th
e results of oth
er case studies of th
e roads sector in
developing cou
ntries, th
e experience in
developed cou
ntries, an
d cartel theory, su
ggest that col-
lusion
in roads projects in
developed and developin
g cou
ntries is sign
ifican
t.
A. E
vidence fro
m N
on-B
ank Pro
jects
Staff of the O
verseas Develop
men
t Institu
te reported
evid
ence of an
ind
ustry-w
ide cartel to fi
x prices on
road
s contracts in
Ugan
da (B
ooth an
d G
olooba-Mu
teb
2009). In Tan
zania, a review
by a former P
rime M
inister
disclosed
an in
du
stry-wid
e cartel in th
e roads sec-
tor (Govern
men
t of Tanzan
ia 1996). In 2005 In
dian
D
epu
ty Govern
men
t Secretary Sanjeet Sin
gh told
p
articipan
ts at an in
ternation
al conferen
ce that car-
tels in th
e roads sector op
erated in
various In
dian
states (Sin
gh 2005). A
joint stu
dy by the G
overnm
ent
of Nep
al, the A
sian D
evelopm
ent B
ank, th
e U.K
.’s D
epartm
ent for In
ternation
al Develop
men
t, and
the
World
Ban
k conclu
ded
that in
recent years n
o tend
er in
the N
epalese con
struction
ind
ustry h
ad been
free of collu
sion (G
overnm
ent of N
epal 2009). A
statisti-cal an
alysis of bids in
road ten
ders by th
e Lith
uan
ian
comp
etition agen
cy strongly su
ggested collu
sion am
ong
firm
s there (G
overnm
ent of L
ithu
ania 2008); a 2009
World
Ban
k study of p
ublic p
rocurem
ent in
Arm
enia
noted
wid
espread
reports of collu
sion in
tend
ering
(World
Ban
k 2009b); and
in 2005 th
e Slovakia An
ti-M
onop
oly Offi
ce un
covered a cartel am
ong road
con-
struction
firm
s (Govern
men
t of Slovakia 2005). At th
e 9
th Global Foru
m on
Com
petition
in 2010, th
e govern-
men
ts of Colu
mbia, Peru
, Pakistan, an
d Tu
rkey all re-p
orted th
at cartels were op
erating in
their road
s sector (O
EC
D 2010a).
B. C
artel Theory
It is not su
rprising th
at cartels are comm
on in
the road
constru
ction in
dustry in
developing cou
ntries. R
oad
BOX 3
Ten Indicato
rs of C
ollusive B
idd
ing
1. N
umb
er of co
ntract award
s to a sp
ecific firm2.
Project b
id tab
ulations
3. Firm
s that subm
itted a b
id later b
ecame a sub
contracto
r on that p
roject
4. R
otatio
n of firm
s that are the low
bid
der
5. A
consistent p
ercentage d
ifferential betw
een the firms’ b
ids
6. A
specific p
ercentage o
f the available w
ork in a g
eog
raphic area g
oes to
one firm
or to
several firms o
ver a p
eriod
of tim
e7.
A co
nsistent percentag
e differential b
etween the lo
w b
id and
the engineer’s estim
ate8.
Locatio
n of the lo
w b
idd
er’s firm versus lo
cation o
f the second
and third
low
bid
ders’ firm
s9.
Variations in unit b
id p
rices subm
itted b
y a bid
der o
n different p
rojects in the sam
e setting10.
Num
ber o
f firms that req
uested b
id p
ackages versus the num
ber actually sub
mitting
a bid
Source: G
overnm
ent of the U
nited States (2004).
Co
llusio
n in
Ro
ad
Ten
de
rs
13
constru
ction an
d repair markets ten
d to be domin
ated by th
e same few
firm
s; the “produ
ct,” a road, is standard-
ized; prices are relatively insen
sitive to deman
d; entry is
often diffi
cult, an
d market con
ditions are predictable. In
addition
, wou
ld-be competitors often
exchan
ge infor-
mation
about both
past and fu
ture opportu
nities an
d develop ties th
rough
subcon
tracting, join
t ventu
res, and
mem
bership in
trade associations. T
he presen
ce of any on
e of these factors in
creases the likelih
ood of collusion
. W
hen
all are present, th
e probability of collusive beh
av-ior is very h
igh (G
rout an
d Sonderegger 2005).
Th
e award
ing of con
tracts throu
gh p
ublic ten
ders ag-
gravates the ten
den
cy toward
cartelization in
the sector.
To ensu
re that con
tracts are fairly award
ed an
d corru
p-
tion risks m
inim
ized, both
borrowin
g coun
try govern-
men
ts and
Ban
k procu
remen
t rules requ
ire that ten
ders
be cond
ucted
transp
arently. Yet, as exp
lained
below,
disclosu
re of some kin
ds of in
formation
facilitates collu
sion.
C. D
evelop
ed C
ountry E
xperience
Collu
sion in
the biddin
g for road contracts is a problem
for developed cou
ntries as w
ell. Th
e U.S. D
epartmen
t of Ju
stice laun
ched a vigorou
s effort in th
e late 1970s to stam
p out bid riggin
g in au
ctions for state h
ighway
contracts, brin
ging cases in
20 states that resu
lted in 400
crimin
al convictions, fi
nes of $50 m
illion, an
d 141 jail sen
tences betw
een 1979 an
d 1983 (Flax 1983). Despite
these efforts, on
e-third of all Ju
stice Departm
ent cartel
prosecution
s in th
e followin
g four years w
ere for bid riggin
g on state h
ighway con
struction
contracts (Joyce
1989). On
ly in th
e 1990s did cartel prosecution
s begin
to decline, a tren
d officials attribu
te to both th
e imposi-
tion of stiff pen
alties for collusion
and ch
anges in
state procu
remen
t laws to abolish
publication
of contract es-
timates, pu
blic openin
g of bids, and conven
ing of m
eet-in
gs wh
ere all bidders can atten
d (Govern
men
t of the
Un
ited States 2008).
Th
e Un
ited States is not th
e only in
dustrialized n
a-tion
wh
ere cartels are active in th
e roads sector. R
epresentatives of D
enm
ark, France, G
ermany, Japan
, Sw
eden, an
d the U
nited K
ingdom
told a 2008 OE
CD
forum
that cartels operated in
their roads an
d constru
c-tion
indu
stries (OE
CD
2008b). In 1992, th
e Du
tch par-
liamen
t conclu
ded that th
e entire con
struction
indu
stry in
the N
etherlan
ds was cartelized (V
an den
Hu
evel 2006); in
2000 the Sw
iss Com
petition C
omm
ission con
-clu
ded that th
e market for road su
rfacing in
the n
orth-
eastern part of th
e coun
try was con
trolled by a cartel (H
üsch
elrath, Leh
eyda, and B
eschorn
er 2009), and in
2010 th
e Konkurransetilsynet, N
orway’s com
petition au
-th
ority, fin
ed two com
panies for collu
ding on
highw
ay bridge m
ainten
ance ten
ders (Govern
men
t of Norw
ay 2011). A
noth
er indication
that collu
sion con
tinu
es to be a problem
in developed cou
ntries is th
e work of th
e O
EC
D. O
ver the past decade it h
as held fi
ve conferen
ces an
d issued h
alf-dozen papers on
how
to combat bid rig-
ging an
d cartelization in
the con
struction
sector.
D. E
ffect of C
ollusio
n on Tend
er Prices
Th
e effect of a cartel is to raise prices above wh
at they
wou
ld be in a com
petitive market. A
n an
alysis of bids from
the A
merican
state of Florida show
ed that collu
-sion
on h
ighway con
tracts increased prices by 8 percen
t (G
upta 2001) an
d a similar stu
dy foun
d prices in Sou
th
Korean
highw
ay constru
ction m
arkets to be 15 percent
high
er than
they w
ould h
ave been w
ithou
t collusion
(Lee an
d Hah
n 2002). T
he D
utch
parliamen
t estimated
that cartelization
added as mu
ch as 20 percen
t to the
price the govern
men
t of the N
etherlan
ds paid on con
-stru
ction con
tracts (Van
den H
euvel 2006), and col-
lusion
on con
struction
contracts in
Japan is th
ough
t to h
ave raised prices anywh
ere from 30–50 percen
t (W
oodall 1996: 48). Surveyin
g econom
ic studies an
d ju
dicial decisions con
tainin
g 1,040 estimates of cartel
overcharges, C
onn
or (2009) foun
d the m
edian cartel
overcharge w
as 25 percent.
Th
ese estimates are alm
ost all drawn
from cartels op-
erating in
developed nation
s. Wh
at evidence th
ere is from
developing cou
ntries su
ggests the im
pact is even
greater there. U
sing in
formation
from don
or-fun
ded roads projects in
29 coun
tries, Estach
e and Iim
i (2008) estim
ated that collu
sion can
increase th
e per-kilometer
cost for buildin
g a road by as mu
ch as 40 percen
t—from
$0.5 m
illion to $0.7 m
illion. IN
T com
pared the w
inn
ing
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
14
bids on don
or-fin
anced roads projects in
the P
hilippin
es again
st engin
eering costs estim
ates and fou
nd a 30 per-
cent varian
ce; earlier estimates ran
ge from 20–60 per-
cent (B
atalla 2000). Prices in
Tanzan
ia in th
e 1990s were
foun
d to be 15–60 percent above com
petitive prices (G
overnm
ent of Tan
zania 1996); a 2003 investigation
in
Rom
ania revealed th
at contractors con
spired to mark
up th
e price of concrete u
sed in road con
struction
by 30 percen
t (Oxford B
usin
ess Grou
p 2004); and a Tu
rkish
governm
ent stu
dy show
ed that, th
anks in
part to cartel-ization
, road constru
ction costs in
Turkey w
ere 2.5 times
high
er than
in th
e Un
ited States (Gön
enç, Leibfritz, an
d Y
ilmaz 2005).
Cartel-set prices in
developing cou
ntries are h
igher th
an
those fi
xed by cartels in developed cou
ntries for tw
o reason
s.
Fear of prosecution
moderates cartel overch
arges in
developed coun
tries. Mem
bers of a New
York State h
ighway bid-riggin
g ring cou
nseled each
other to
limit excess profi
ts on ten
ders to 20–25 percent rath
-er th
an 40–50 percen
t. As on
e conspirator explain
ed du
ring a trial, “gettin
g too greedy” migh
t trigger an
investigation (State of N
ew York v. H
endrickson B
rothers Inc., 840 F.2d 1065 (2n
d Cir. 1988)). B
y con
trast, cartels in m
any developing cou
ntries often
have little reason
to fear law en
forcemen
t auth
ori-ties. B
angladesh
, Cam
bodia, and th
e Ph
ilippines,
three cou
ntries w
here roads sector cartels h
ave oper-ated, h
ave no com
prehen
sive anti-cartel legislation
(D
abbah 2010). Even
wh
ere an effective law
is on th
e books, m
any developing cou
ntries h
ave yet to create in
stitution
s that can
enforce it (Stew
art, Clarke, an
d Joekes 2007; Z
oghbi 2009).
As staff in
the B
ank’s tran
sport sector h
ave ob-served
, “governm
ent offi
cials are often involved
” in
the cartel (W
orld B
ank 2009a, 42). IN
T investiga-
tors were told
that foreign
firm
s wan
ting to bid
on
roads con
tracts in B
anglad
esh w
ere warn
ed by
a senior road
s agency offi
cial that th
ey wou
ld be
disqu
alified
if they u
nd
ercut th
e price local fi
rms
had
agreed on
. In In
dia, a sen
ior official rep
orted
that “road
mafi
as” of contractors, en
gineers, th
e local p
olice, civil servants, “an
d last bu
t not least
local politician
s” all consp
ire to keep p
rices on road
con
tracts above market rates (Sin
gh 2005); an
d in
exp
lainin
g roads sector corru
ption
in th
e state of Jh
arkhan
d, a civil society activist told
the N
ew York
Tim
es that “th
e nexu
s of politician
s, contractors
and
bureau
crats is very strong” (Polgreen
2010). In
Ugan
da, “th
e tend
ering p
rocess has been
turn
ed
into a bu
siness by p
oliticians at th
e district to settle
their econ
omic p
roblems. . . . [T
hey] p
ressure evalu
-ation
teams” to select certain
contractors (O
luka
and
Ssenn
oga 2008).
For a cartel to “succeed,” its m
embers m
ust (a) agree on
w
ho w
ill “win” th
e tender an
d at wh
at price, (b) curb
“cheatin
g” or un
dercuttin
g the agreed price by in
dividu-
al mem
bers, and (c) preven
t non
mem
bers from disru
pt-in
g the agreem
ent by su
bmittin
g a lower bid (Leven
stein
and Su
slow 2006). C
artels rarely fin
d perman
ent fi
xes to th
ese problems. Som
e mem
bers cheat to boost sh
ort-term
profits or n
ew en
trants su
cceed in su
bmittin
g a w
inn
ing bid. Even
wh
en th
e cartel is able to dictate w
ho can
bid and h
ow m
uch
, there are often
periods of in
stability durin
g wh
ich th
e price to some cu
stomers is
at or near th
e market price. B
ut w
hen
governm
ent of-
ficials participate in
the cartel, its du
rability is virtually
assured. T
hey can
dictate wh
ich m
ember w
ill “win” th
e bid an
d at wh
at price, rejecting bids th
at un
dercut th
e agreed price an
d refusin
g to permit n
on-cartel m
embers
TABLE 3
Estim
ated C
artel Overcharg
es
Ro
ad co
ntracts
State of Flo
rida
8%
Rep
ublic o
f Ko
rea15%
Tanzania15–60%
Philipp
ines20–60%
Samp
le 29 develo
ping
countries
40%
All co
nstruction co
ntracts –
Netherland
sU
p to
20%
Japan
30–50%
All cartels
25
%
See text for so
urces.
Co
llusio
n in
Ro
ad
Ten
de
rs
15
to bid. Gam
betta and R
euter (1995) reported th
at or-gan
ized crime fam
ilies perform th
e same fu
nction
s for cartels in
Sicily and N
ew York: w
here fam
ily mem
bers police com
pliance w
ith th
e cartel agreemen
t throu
gh
intim
idation an
d violence an
d take a share of th
e cartel’s profi
ts in retu
rn. T
he effect is th
e same as w
hen
govern-
men
t officials en
force a cartel agreemen
t: the lon
g-term
stability of the cartel.
Fraud and
Co
rruptio
n in C
ontract Im
plem
entation
Th
e risk of miscon
duct in
roads projects does not en
d w
ith con
tract award. A
win
nin
g bidder may frau
du-
lently bill for w
ork not don
e, materials n
ot supplied,
or both. Eviden
ce INT
gathered in
a project in A
frica sh
ows frau
dulen
t claims am
oun
ting to 15–20 percen
t of th
e bid price. An
INT
analysis of tw
o contracts let
un
der a road project in A
sia foun
d that frau
d may h
ave in
flated th
e fin
al price on each
contract by as m
uch
as 25 percen
t. INT
substan
tiated miscon
duct du
ring con
tract perform
ance in
nin
e of the 29 cases sh
own
in Tables 1
and 2 an
d suspected, alth
ough
was u
nable to su
bstanti-
ate, its presence in
several more.
Reports from
Zam
bia suggest th
e scope of one form
of frau
d—fu
rnish
ing su
bstandard m
aterials durin
g con-
tract implem
entation
. Zam
bian con
tractors, engin
eers, an
d governm
ent offi
cials surveyed in
2008 reported that
providing m
aterials of lower qu
ality than
the con
tract called for w
as the sin
gle most “u
neth
ical” practice in th
e in
dustry (Sich
ombo et al. 2009) an
d a 2010 audit of 18
Zam
bian roads projects join
tly fin
anced by th
e govern-
men
t and don
ors, show
n in
Table 4, confi
rmed th
eir view
(Govern
men
t of Zam
bia 2010). As th
e data there
reveals, substan
dard cemen
t was su
pplied in all projects
wh
ile in h
alf the projects th
e concrete w
as weaker th
an
required. IN
T fou
nd sim
ilar levels of fraud in
a contract
in In
donesia: th
e road was 40 percen
t thin
ner th
an th
e con
tract specified an
d the con
tractor used 13 percen
t less asph
alt than
required.
For the con
struction
of roads and oth
er civil works,
the W
orld Ban
k requires borrow
ers to use a variation
of a form con
tract for constru
ction developed by th
e In
ternation
al Federation of C
onsu
lting E
ngin
eers, kn
own
by its French
acronym “FID
IC” (Jaeger an
d Hök
2010). Th
e FIDIC
contract provides th
at the govern
-m
ent agen
cy issuin
g the con
tract will h
ire an en
gineer—
an in
dividual, or, for large projects, a fi
rm—
to oversee con
tract performan
ce (World B
ank 2010b, ¶3.1). T
he
engin
eer mu
st be expert in th
e design an
d constru
ction
of roads, for the FID
IC con
tract requires th
at he observe
the w
ork as it progresses, testing com
pleted sections to
ensu
re they m
eet specification
s, certifying th
e contrac-
tor’s invoices, evaluatin
g and passin
g on its requ
ests to
IV
TABLE 4R
esults of A
udit o
f Zam
bian R
oad
s Pro
jects
Defect fo
und in p
roject
Percentag
e o
f contracts
affected
Imp
rop
erly sized ag
greg
ate p
articles44%
Too
much clay
75%
Ag
greg
ates did
not m
eet crushing
strength
67%
Base thinner than req
uired81%
Surface dressing
layers thinner than req
uired82%
Cem
ent content less than
specified
100%
Co
ncrete samp
les weaker than
required
50%
Source: G
overnm
ent of Zam
bia (2010).
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
18
vary from th
e original plan
s, and resolvin
g confl
icts betw
een th
e borrower an
d the con
tractor (Ndeku
gri, Sm
ith, an
d Hu
ghes 2007). If th
e engin
eer fin
ds that
the bu
ilder is supplyin
g substan
dard materials or less
material th
an requ
ired, infl
ating invoices, or oth
erwise
trying to m
ilk the con
tract, he m
ust refu
se to certify the
contractor’s paym
ent requ
ests. Th
e engin
eer is explicitly respon
sible for the qu
ality of the project an
d thus be-
comes th
e implicit gu
ardian of its in
tegrity.
Despite th
e engin
eer’s responsibility for project in
teg-rity, th
ere is evidence th
at engin
eers have eith
er failed to spot frau
d or corruption
in project execu
tion or becom
e w
illing participan
ts. In a project in
Latin
Am
erica, INT
investigators un
covered evidence th
at the en
gineer cer-
tified invoices for ch
arges not covered by th
e contract.
In In
donesia, en
gineers adm
itted they w
ere bribed to ign
ore fraud, explain
ing th
at if they did n
ot go along, lo-
cal officials “in
on” the frau
d wou
ld refuse to h
ire them
on
futu
re governm
ent projects. In
a project in A
frica, IN
T received in
formation
that in
return
for approving
infl
ated invoices the en
gineer received 15 percen
t of the
amou
nt overbilled. T
he practice is apparen
tly wide-
spread in th
at coun
try; durin
g the investigation
INT
learn
ed that th
e builder h
ad instru
cted its local affiliate
to “develop partnersh
ips with
local consu
ltants,” so th
at if th
ey were appoin
ted engin
eers on fu
ture projects, th
ey w
ould be su
re to cooperate with
similar sch
emes.
Co
mb
ating C
ollusio
n, Fraud,
and C
orrup
tion
Th
is section d
escribes a range of m
easures p
olicymak-
ers shou
ld con
sider to m
itigate the risks of collu
sion,
corrup
tion an
d frau
d in
road
contract p
rocurem
ent
and
project execu
tion. “O
ne size d
oes not fi
t all” is a stap
le of the d
evelopm
ent literatu
re and
one th
at hold
s for both
procu
remen
t rules an
d m
itigation m
easures
(Mariel 2003). A
ccordin
gly, in d
iscussin
g the variou
s recom
men
dation
s, the rep
ort iden
tifies th
e risk profi
les an
d cou
ntry con
texts wh
ere they are m
ost likely to be ap
prop
riate.
Th
e recomm
end
ation
s advan
ced ran
ge from
mo
dest
chan
ges in p
rocu
remen
t pro
cedu
res to m
ore fu
nd
a-m
ental, exp
erimen
tal measu
res that m
ay be required
w
here corru
ptio
n is p
articularly en
trench
ed. So
me
cou
ntry-level refo
rms, su
ch as law
s severely pen
alizing
bid riggin
g or ch
anges to
pu
blic pro
curem
ent ru
les, can
be pu
t in p
lace relatively quickly. So
me p
roject-
level preven
tive measu
res, such
as retentio
n o
f ind
e-p
end
ent w
atchd
ogs o
r strict scrutin
y of p
rocu
remen
t o
fficials’ fi
nan
ces, may take m
ore tim
e. Over th
e lon
ger term
the go
al sho
uld
be to bu
ild effective in
stitutio
ns
to en
force an
ti-cartel laws an
d m
anage th
e natio
n’s ro
ad n
etwo
rk. Bu
t again, n
on
e of th
e measu
res de-
scribed are m
eant to
be ado
pted
with
ou
t close an
alysis o
f market con
ditio
ns, th
e strength
of n
ation
al institu
-tio
ns, th
e degree o
f po
litical comm
itmen
t to refo
rm,
and
oth
er cou
ntry-level facto
rs.
A. M
easures to R
educe C
ollusio
n
Punish cartelization severely
To combat collu
sion an
d cartelization, cou
ntries sh
ould
enact law
s that m
ake bid rigging, m
arket division, an
d oth
er cartel-related behavior illegal. T
hese law
s need to
contain
“effective sanction
s of a kind an
d at a level ad-equ
ate to deter firm
s and in
dividuals from
participating
in cartels.” (O
EC
D 1998) D
eterring collu
sion can
require
more th
an crim
inal pen
alties; a Eu
ropean C
omm
ission
Wh
ite Paper argues th
at to effectively deter cartels, sanc-
tions m
ust give th
ose harm
ed by cartel pricing, su
ch
as road users, th
e right to su
e for damages (E
uropean
C
omm
ission 2008).
To enable effective en
forcemen
t, the an
ti-cartel laws
may n
eed to be supplem
ented w
ith reform
s to the law
s of eviden
ce. Un
til recently, m
ost developed coun
try cou
rts required direct eviden
ce of an agreem
ent to prove
the existen
ce of a cartel, a deman
ding stan
dard often
interpreted to requ
ire testimony from
one of th
e partici-pan
ts. Con
trary to that th
inkin
g, as An
nex 1 explain
s, on
ce Am
erican an
d Eu
ropean cou
rts had h
eard more
cartel cases, they becam
e more com
fortable relying on
in
direct or circum
stantial eviden
ce. With
wh
at is now
kn
own
about th
e harm
cartels cause (Tran
sparency
Intern
ational 2009), developin
g coun
try courts sh
ould
V
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
20
ensu
re that th
ey do not m
ake it too difficu
lt for their
enforcem
ent agen
cies to prove the existen
ce of a cartel.
Create incentives for the exp
osure of cartels
Even if cou
rts accept circum
stantial eviden
ce, noth
ing
provides surer proof of a cartel th
an th
e testimony of a
participant or w
itness to a bid-riggin
g schem
e. Th
ose w
ith in
formation
about a bid-riggin
g ring sh
ould be
encou
raged to come forw
ard. To do so, governm
ents
shou
ld consider gran
ting im
mu
nity to w
itnesses w
illing
to provide credible evidence of a cartel. C
onsideration
also m
ay be given to offerin
g wh
istleblowers rew
ards com
men
surate w
ith th
e savings realized from
the break-
up of a cartel. A
llowin
g wh
istleblowers to sh
are in th
e recovery can
provide a powerfu
l incen
tive for comin
g forw
ard (Depoorter an
d De M
ot 2005).
Mem
bers of cartels shou
ld also be given
an in
centive
to disclose th
e nam
es of the oth
er particip
ants. T
he
OE
CD
(2003) recomm
end
s grantin
g imm
un
ity to the
first fi
rm or in
divid
ual to reveal th
e cartel’s existence
and
the W
orld B
ank itself en
courages con
tractors to reveal p
revious m
iscond
uct on
World
Ban
k-fin
anced
con
tracts. Recen
t research sh
ows th
at such
lenien
cy p
rograms n
ot only are effective in
revealing th
e exis-ten
ce of cartels but can
also discou
rage their form
ation
(Miller 2009).
Revise tend
ering rules
To ensu
re fairness an
d reduce corru
ption in
the pro-
curem
ent process open
, transparen
t procedures for
the aw
ard of public con
tracts are recomm
ended
(Transparen
cy Intern
ational 2006). T
he m
ore transpar-
ency, th
e more likely th
e contractor is fairly ch
osen an
d th
e less likely corruption
will seep in
to the process. B
ut
disclosure of certain
kinds of in
formation
may also
increase th
e risk that fi
rms w
ill fix prices (A
nderson
, K
ovacic, and M
üller 2010; O
EC
D 2008b; G
overnm
ent of
the U
nited K
ingdom
2004). Th
e data in B
ox 4 provides an
illustration
; cost estimates on
46 separate contracts
were pu
blicly disclosed prior to tenderin
g, and in
every
case the w
inn
ing bid w
as virtually iden
tical to the esti-
mate—
an alm
ost certain sign
of collusion
.
Becau
se transparen
cy in pu
blic procurem
ent can
fa-cilitate collu
sion, agen
cies that en
force the com
peti-tion
laws in
both developed an
d developing cou
ntries
caution
procurem
ent staff to con
sider carefully w
hat
inform
ation abou
t a tender to release (G
overnm
ent of
the N
etherlan
ds 2010; Govern
men
t of El Salvador 2010;
Govern
men
t of Brazil 2008; G
overnm
ent of th
e Un
ited K
ingdom
2004, Govern
men
t of France 2003, 2000). T
he
dilemm
a for policymakers is th
at the m
ore they try to
reduce th
e risk of corruption
throu
gh greater tran
spar-en
cy, the greater th
e risk of collusion
. Becau
se carteliza-tion
is so prevalent in
public ten
ders of all kinds, m
any O
EC
D cou
ntries h
ave revised their pu
blic tender ru
les to redu
ce transparen
cy in several respects. A
list of the
reforms differen
t OE
CD
coun
tries have in
troduced is
contain
ed in A
nn
ex 2.
Policymakers in developing countries m
ay wish to consid-
er such revisions as well to ensure rules governing public
tenders strike the right balance between transparency on
the one hand and the risk of collusion on the other. While
different economic conditions and different institutional
settings make it unlikely that any w
ill adopt the OE
CD
re-form
list wholesale, the accum
ulating evidence shows that
some changes are effective in a w
ide array of institutional and econom
ic settings. Following are som
e examples of
procurement process changes to consider in appropriate
situations. (Box 5 illustrates how
changes to the procure-m
ent process helped combat collusion).
a. Bid
der p
re- and p
ost-q
ualification
Road agen
cies un
derstandably w
ant to en
sure th
at firm
s biddin
g on a ten
der will h
ave the fi
nan
cial strength
an
d techn
ical capacity to perform th
e work if th
ey win
th
e tender. Poten
tial contractors are thu
s comm
only
required to “prequ
alify,” that is, to docu
men
t their fi
-n
ancial an
d techn
ical ability to execute th
e contract in
th
e event th
ey win
the bid. In
deed, for all major civil
works con
tracts, the W
orld Ban
k’s Standard B
idding
Docu
men
ts provide that on
ly “exceptionally” an
d “with
previou
s approval of the W
orld Ban
k” can a post-aw
ard
Co
mb
atin
g C
ollu
sion
, Fra
ud
, an
d C
orru
ptio
n
21
review of th
e win
ner’s capabilities be su
bstituted for
prequalifi
cation (W
orld Ban
k 2010b, v). At th
e same
time, prequ
alification
requirem
ents can
discourage
some fi
rms from
bidding, an
d the few
er firm
s that bid,
the h
igher th
e win
nin
g bid (Estach
e and Iim
i 2008; Froeb an
d Shor 2005; B
rann
man
and K
lein 1992). T
he
OE
CD
(2008a) thus recom
men
ds that prequ
alification
con
ditions be carefu
lly drawn
to ensu
re that qu
alified
firm
s are not exclu
ded from th
e competition
.
Policymakers m
ay wan
t to consider in
at least some
cases elimin
ating prequ
alification
all together in
fa-vor of a post-qu
alification
review of th
e win
ner’s
qualifi
cations. T
he W
orld Ban
k recomm
ended th
at In
donesian
officials con
sider scrapping prequ
alification
requirem
ents on
simple goods an
d small w
orks in its
2001 report on In
donesia’s procu
remen
t policies (World
Ban
k 2001, 20). A m
ore recent review
of World B
ank-
fun
ded roads projects in A
frica recomm
ended expan
d-in
g post-qualifi
cation to larger con
tracts (Alexeeva,
Padam, an
d Qu
eiroz 2008, 41). Post-qualifi
cation w
as in
troduced in
to the B
ali Urban Infrastructure P
roject in
Indon
esia and is bein
g used in
the secon
d phase of th
e N
ational Roads Im
provement and M
anagement P
roject in
the P
hilippin
es and th
e Northern C
orridor Transport Im
provement P
roject in K
enya. Post-qualifi
cation in
-creased th
e nu
mber of bidders on
contracts in
the B
ali project, an
d the early resu
lts from K
enya are promisin
g. O
n all th
ree Kenya ten
ders for wh
ich post-qu
alification
w
as used, th
e tenders attracted th
ree or four qu
alified
BOX 4
Pub
lishing C
ost E
stimates: the Trad
e off B
etween Transp
arency & C
ollusio
n
In the name o
f transparency, m
any countries p
ublish their eng
ineers’ estimates o
f the cost o
f build
ing a ro
ad
and in its lo
an agreem
ents the Wo
rld B
ank som
etimes req
uires pub
lication. W
hen the market is co
mp
etitive, p
ublishing
the estimates can p
rod
uce low
er bid
s (De Silva et al. 2008). Pub
lishing the estim
ates also ensures
that all bid
ders are o
n an equal fo
oting
, for co
mp
anies with clo
se ties to the ro
ads autho
rity often o
btain the
estimates “und
er the table.”
Set against these b
enefits is the risk that pub
lication o
f the estimate w
ill facilitate collusio
n. When firm
s are neg
otiating
an agreem
ent on a co
llusive price, co
st estimate p
rovid
es a target o
r focal p
oint fo
r their ag
reement (K
nittel and Stang
o 2003). This effect is illustrated
in an INT co
mp
arison o
f the estimated
price
against the w
inning b
id o
n 46 contracts fo
r road
constructio
n and rep
air let during
2009 and 2010 und
er a B
ank-financed p
roject in an E
astern Euro
pean co
untry. The chart belo
w p
lots the d
ifferences in millio
ns of U
.S. d
ollars b
etween the tw
o. The red
line is the estimate; the b
lue line, almo
st invisible b
ecause it tracks the red
one so
closely, is the w
inning b
id. This d
egree o
f corresp
ond
ence is unimag
inable in the ab
sence of co
llusion.
Co
st Estim
ates v. Winning
Bid
s
0 1 2 3 4 5
14
710
1316
1922
2528
3134
3740
4346
Cu
rbin
g F
rau
d, C
orru
ptio
n, a
nd
Co
llusio
n in
the
Ro
ad
s Se
cto
r
22
bids, more th
an th
e average wh
en prequ
alification
was
required. M
ore tellingly, th
e win
nin
g bids were below
th
e engin
eer’s estimates, rare in
Kenyan
road tenders.
b. B
id p
ackage d
esign
Procu
remen
t officials often
have sign
ifican
t discretion
wh
en decidin
g how
to let a road constru
ction project.
A project to bu
ild a 500 km road m
ight be ten
dered as a sin
gle contract or divided in
to two con
tracts of 250 km
each or ten
contracts of 50 km
each. D
ifferent packages
have differen
t competitive effects. W
hile larger pack-
ages encou
rage interest from
intern
ational fi
rms an
d are su
bject to the m
ore rigorous in
ternation
al competitive
bidding procedu
re, they also can
reduce com
petition
by discouragin
g participation from
small fi
rms th
at can
build on
e or two 50 km
segmen
ts, but lack th
e experi-en
ce or fin
ancial stren
gth to bu
ild a 500 km road. O
ne
way to balan
ce the com
peting in
terests is to tender th
e larger 500 km
project as ten 50 km
contracts, bu
t allow
larger firm
s to combin
e segmen
ts in th
eir bids and even
su
bmit a sin
gle bid for the en
tire road. Kn
owin
g that
smaller com
panies are com
peting on
shorter segm
ents,
the large fi
rm w
ill have an
incen
tive to “sharpen
its pen-
cil”— th
at is, cut its price —
to win
the con
tract. At th
e sam
e time, kn
owin
g that large in
ternation
al firm
s can
bid on a package can
deter local firm
s from riggin
g bids am
ong th
emselves.
Besides allow
ing fi
rms to bid on
one or m
ore prede-term
ined segm
ents, th
e tender m
ight also allow
them
BOX 5
Co
mb
ating C
ollusio
n by C
hanging
the Pro
curement P
rocess: The B
ank’s Exp
erience with
the Bali U
rban Infrastructure P
roject
Wo
rld B
ank staff becam
e suspicio
us when o
nly three bid
s were sub
mitted
for o
ne of the first co
ntracts on
the Bali U
rban Infrastructure Pro
ject. Suspicio
ns were heig
htened w
hen, desp
ite wid
e variations in lab
or and
m
aterials prices o
n the bid
ders’ b
ills of q
uantity, the prices sub
mitted
by all three w
ere within 0.02 p
ercent of
the engineer’s estim
ate. When ad
ditio
nal investigatio
n confirm
ed the existence o
f a bid
-rigg
ing cartel, the
Bank m
ade a num
ber o
f changes to
the pro
curement p
rocess to
increase com
petitio
n:
Procurem
ent notices w
ere wid
ely pub
licized in b
oth natio
nal and p
rovincial p
apers in p
rom
inent place and
in larg
e typefaces.
Local autho
rities’ attemp
ts to lim
it eligib
le bid
ders to
local firm
s were reb
uffed.
Bid
ders’ q
ualifications w
ere evaluated after, rather than b
efore, the tend
er.M
andato
ry particip
ation in p
re-bid
meeting
s, which had
given co
lluders an o
pp
ortunity to
agree o
n prices
and intim
idate firm
s not p
art of the ring
, was end
ed.
A co
mp
laint handling
mechanism
was intro
duced
that allow
ed co
ntractors and
com
munity m
emb
ers to
anonym
ously rep
ort fraud
, collusio
n, corrup
tion, and
intimid
ation.
The imp
act of the chang
es was d
ramatic. A
s the table b
elow
show
s, bid
s dro
pp
ed fro
m am
ounts virtually
identical to
the engineer’s estim
ate to am
ounts 35–40 p
ercent less. Overall, the p
roject team
estimated
saving
s of 15–30 p
ercent on co
ntracts let po
st-changes.
Bid
s for $50,000 C
ontract: B
est Three Bid
s as Percentag
e of E
ngineer’s E
stimate
Orig
inalP
ost-chang
es
98.9%58.0%
99.7%67.6%
100.0%68.0%
Co
mb
atin
g C
ollu
sion
, Fra
ud
, an
d C
orru
ptio
n
23
to offer to build segm
ents of th
eir choosin
g. As is
sometim
es done in
World B
ank-fu
nded projects, bid-
ders could su
bmit a bid on
the con
dition th
at the total
award w
ill not exceed a specifi
ed amou
nt. T
he bids on
th
e various com
ponen
ts of the project w
ould be open
ed sequ
entially. O
nce a fi
rm’s specifi
ed limit is reach
ed, its bids w
ould n
ot be considered on
the rem
ainin
g compo-
nen
ts. Sequen
tial bidding provides in
centives for fi
rms
to bid on m
ore projects with
out w
orrying abou
t taking
on m
ore work th
an th
ey can h
andle (A
llen, C
ulkin
s, and
Mills 1988). M
ixing u
p the “m
enu” of con
tract offers in
these w
ays makes it h
arder for firm
s to agree beforehan
d on
wh
o will w
in w
hat.
c. Pre-bid
meeting
s and sub
contracting
Pre-ten
der meetin
gs should, w
henever practical, be
limited to on
e firm
at a time. A
s the author of the fi
rst econ
omics textbook w
arned, “People of the sam
e trade seldom
meet together, even
for merrim
ent an
d diver-sion
, but the conversation
ends in
a conspiracy again
st the pu
blic or in som
e contrivan
ce to raise prices” (Smith
1937 [1776], 128). While on
e-on-on
e meetin
gs increase
the risk that a procurem
ent offi
cial will provide a favored
firm
with con
fiden
tial inform
ation or otherw
ise tilt the procu
remen
t process, safeguards can
be introdu
ced to m
inim
ize this risk. An
outsider can
attend, or video re-
cordings or tran
scripts can be m
ade and circu
lated.
Subcontracting can also facilitate collusion, for it can be a w
ay of dividing the profits realized from bid rig-
ging. Testimony in a crim
inal prosecution of collusion in roads contracting in O
klahoma revealed such a schem
e. C
ompetitors of the B
oce Com
pany allowed it to w
in a tender “w
ithout having to fight,” and in exchange Boce
agreed to subcontract all the work in one region to a com
-petitor (U
nited States v. Metropolitan Enterprises, Inc., 728
F.2d 444 (10th C
ir. 1984)). Countries w
ith a large number
of capable firms should consider banning subcontract-
ing among com
petitors altogether or, as the January 2011 European C
omm
ission Green Paper on procurem
ent reform
suggests, barring subcontracting by firms w
hich participated in the tender (E
C 2011). If subcontracting is
permitted, data should be kept and analyzed periodically
for any signs that suggest collusive arrangements.