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

Public Procurement and Public Procurement and Corruption: Corruption:

What Have We LearnedWhat Have We Learned Thus Far?Thus Far?

Public Financial Management Training Course

May 2, 2006J. Edgardo Campos, PRMPS

Potential Leakage from Corruption:The Case of the Philippines

Government procurement and tax Government procurement and tax collection are perceived to be the collection are perceived to be the major sources of corruption:major sources of corruption:

4 of the top 5 most corrupt agencies (based on national surveys) featured prominently in government contracting

Approximately 20% of government contracts go to kickbacks/commissions (based on surveys of businessmen)

Equivalent to P21 B in 2001 just for the national government

Aid, Governance, andDevelopment Outcomes

Donor Financed Rural SchoolDonor Financed Rural School

Actual School 500 Feet AwayActual School 500 Feet Away

What is actually in the school buildingWhat is actually in the school building

• Bribes and kickbacks

• Front companies

• Bid rigging or collusive agreements

• Use of “loan brokers”/”commissioners”

• Conflicts of interest

• Theft from local accounts and abuse of project assets

• Fraud/Forgery/Misrepresentation

Anatomy of Corruption in ProcurementAnatomy of Corruption in Procurement

Government Funding Source

Government Funding Source

Contractor Inc.

Contractor Inc.

A.K.A. “local rep”

$ $$

$

$““Broker”/Broker”/

””commissioner”commissioner”

Legitimate RelationshipIllicit Relationship

Kickback SchemeKickback Scheme

Subcontractors

A Government Funding Source

$ $$

$

““Broker” asBroker” asProject AdvisorProject Advisor Contractor Inc.

$

Legitimate Relationship

Illicit Relationship

Kickback SchemeKickback Scheme

PIU CONTRACTOR INC.

Owners

Owners

Owners

Hidden owner-Government official

Hidden owner-Government official

Corporate Shield

-Company appears with no history-Company appears with no history-Company providing diverse disconnected -Company providing diverse disconnected servicesservices-Few records exist on ownership-Few records exist on ownership-Extreme interest shown by PIU official in -Extreme interest shown by PIU official in companycompany-Subcontractor who is hired as local agent-Subcontractor who is hired as local agent

Front CompanyFront Company

• Drafting tailored specifications to exclude “unfavored” bidders

• Tipping off the favored bidder that certain components in bid will not actually be called for

• Telling bidders to bid low and recover profit later through contract modification

• Short notice periods for bidding - “emergencies”

• Bidders agree who will win contract

• Component of larger corruption scheme

Bid RiggingBid Rigging

Stages of the Procurement Process

Contract Implementation

Procurement Planning

Preparation

Pre-qualification

Bid Evaluation

Award of Contract

Advertisement

Procurement of goods and civil works

• Lack of PlansLack of Plans

Mis-governancePossible Distortion

Problem Area

• Purposeful Purposeful delay of delay of procurement to procurement to feign “urgency” feign “urgency” and go to direct and go to direct negotiationnegotiation

Lack of Lack of competitiocompetitionn

Procurement Planning

• Unclear Unclear Criteria for Criteria for Project Project SelectionSelection

• misallocation of resources

Lack of Lack of TransparenTransparencycy

Procurement of goods and civil works

Mis-governancePossible Distortion

Problem Area• PMO given sole PMO given sole

responsibility responsibility over the over the determination of determination of contract contract packages and packages and preparation of preparation of specifications specifications (for civil works)(for civil works)

• Contract Contract splitting to allow splitting to allow unqualified unqualified bidders to bidders to participate or to participate or to revert to revert to “simplified” “simplified” biddingbidding

• tailor fitting to tailor fitting to favor a preferred favor a preferred bidderbidder

• BAC BAC members members designated designated solely by Head solely by Head of agency of agency

• BAC members BAC members chosen to stack chosen to stack deck in favor of deck in favor of Head’s choice of Head’s choice of contractorcontractor

Lack of Lack of competitioncompetition

Lack of Lack of TransparencyTransparency

Preparation

Procurement of goods and civil works

Mis-governancePossible Distortion

Problem Area

• Advertising Advertising limited to certain limited to certain types of print types of print media, e.g. media, e.g. regional papers regional papers

• collusion collusion between between newspapers and newspapers and cartel of cartel of contractors – contractors – “early edition” “early edition” phenomenonphenomenon

• publication in publication in the paper with the paper with smallest smallest circulation but circulation but still meets still meets minimum minimum requirementsrequirements

Lack of Lack of TransparencTransparencyy

Lack of Lack of CompetitioCompetitionn

Advertising

Procurement of goods and civil works

Mis-governancePossible Distortion

Problem Area

• Prospective bidders undergo detailed, tedious, and potentially subjective pre-qualification

• Requirements Requirements set to favor a set to favor a particular particular contractor or contractor or group of group of contractorscontractors

• Lengthy Lengthy process that process that creates creates opportunities for opportunities for bribe solicitationbribe solicitation

Lack of Lack of TransparencTransparencyy

Lack of Lack of ContestabilitContestabilityy

Prequalification

Procurement of goods and civil works

Mis-governancePossible Distortion

Problem Area

• Wide Wide discretion of BACdiscretion of BAC

• Quality (technical) and Price (financial) aspects “traded off” in bid evaluation

Lack of Lack of ContestabilitContestabilityy

Lack of Lack of TransparenTransparencycy

• Litigious Litigious tendenciestendencies

• imposition of court restraining orders

Dysfunctional Judiciary

Bid Evaluation

Procurement of goods and civil works

Mis-governancePossible Distortion

Problem Area

• unclear rulesunclear rules • Refusal of Refusal of lowest evaluated lowest evaluated bidder to accept bidder to accept award of award of contract; contract; government no government no recourse but to recourse but to go to second go to second evaluated bidderevaluated bidder

• Head of agency Head of agency delays signing of delays signing of contractcontract

Lack of Lack of TransparencyTransparency

Lack of Lack of AccountabilityAccountability

Contract Award

Procurement of goods and civil works

Mis-governancePossible Distortion

Problem Area

• substitution of substitution of materials of materials of inferior qualityinferior quality

• ghost deliveriesghost deliveries

Lack of Lack of AccountabiliAccountabilityty

Contract Implementation

• weak penalties weak penalties for contract for contract violations -- violations -- purely purely administrative, administrative, e.g. blacklistinge.g. blacklisting

• poor poor monitoringmonitoring

Deficiencies…

lack of transparency

lack of competition/ contestability

weak accountability weak capacity

IMPLICATIONS OF BAD GOVERNANCE

• Graft & CorruptionGraft & Corruption• InefficiencyInefficiency

• Graft & CorruptionGraft & Corruption• InefficiencyInefficiency

• Poor QualityPoor Quality• High CostHigh Cost

• Poor QualityPoor Quality• High CostHigh Cost

POOR SERVICE POOR SERVICE DELIVERYDELIVERY

POOR SERVICE POOR SERVICE DELIVERYDELIVERY

Public Procurement: Increasing Transparency and Competition

Using ICT: Using ICT: ChileChile

All supplier companies register, indicating areas of business (e.g., IT, construction, furniture)

Public agencies submit tenders through internet

Automatic e-mail to all companies in selected area

Online information on name, position of official in-charge

Online information on results: who participated, proposals made, scores received, who won bid, historical record of agency’s purchases and contracts

Engaging CSOs: Engaging CSOs: PhilippinesPhilippines

Legal foundation a mess with over 100 laws and regulations

New omnibus law needed for clarity and predictability in the process

New law in 2003 with determined efforts of reform minded public officials allied with strong and unified advocacy efforts of CSOs to offset entrenched vested interests

For credible enforcement: requirement that all bids and awards committees must have at least one observer from a certified CSO

Extensive training of CSOs now under way

Legal foundation a mess with over 100 laws and regulations

New omnibus law needed for clarity and predictability in the process

New law in 2003 with determined efforts of reform minded public officials allied with strong and unified advocacy efforts of CSOs to offset entrenched vested interests

For credible enforcement: requirement that all bids and awards committees must have at least one observer from a certified CSO

Extensive training of CSOs now under way

““Early Warning” Indicator System: RoadsEarly Warning” Indicator System: Roads

Project Phase Possible Indicators

Pre-Procurement

Project Selection > Ratio of selected projects that meet technical locational criteria

Project design/budget estimation > Design specifications posted in website including name(s) of individuals responsible for the design (yes/no) % of estimated unit prices exceeding 10% of benchmarks

> Difference in days b/w bid opening date and date of issuance of the bid documents

Procurement

Invitation to bid/Advertising > Ratio of no. of days to complete to the maximum allowable under bank rules# of firms submitting Letter of Intent (LOI)

Pre-qualification > # of firms found eligible or pre-qualified relative to total no. of submissions

Bid Evaluation # of days to complete bid evaluation and determination of the “winning” bidder # of eligible or pre-qualified bidders submitting proposals

> # of eligible or pre- bidders withdrawing proposals

> standard deviation of bid prices

Post-qualification Ratio of actual # of days to complete post-qualification to maximum allowable under Bank rules

> Ratio of the winning bid to the budget estimate for the project

Award of Contract Ratio of actual # days to issue award of contract to maximum allowable under Bank rules (after post-qualification)Ratio of actual # days to complete the bid to maximum allowable under Bank rules (after post-qualification)

> Ratio of final contract value (which could be other than the “winning” bid if post disqualification occurs) to budget estimate for the project.

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

Project Phase Possible Indicators

Contract Implementation

Project completion Ratio of #of actual days needed to complete the project to the maximum specified in the contract Ratio of actual cost of project upon completion to the contract value

> Presence of variation orders and the extent of variation (in terms of value),

> Quality of final product as percent of expected quality (as specified in the contract), .e.g value of defects relative to total value of contract

Disbursements > # of days it takes for agency to pay contractor after submission of all requirements

Integrating External Monitoring

> University seniors(civil engineering, economics, other social science)

X31, x32, . . . .Post Award/

Implementation

> TI Indonesia cum

> Religious organization, e.g. Muhamadhiya, CPCP

X21, x22, . . . .Procurement

> University seniors

(civil engineering)

> Contractors association

X11, x12, . . . .Pre-procurement

External monitoring group

IndicatorsPhase