Transcript Document
Corruption and Anti-Corruption. In procurement.
Gustavo Piga 9.6.2014
1
Glauco or Socrate in Moscow.
•
Who can avoid to do evil to another being for its own gain if he is not or badly monitored?
Repubblica, Plato
Socrates: all,
Man chooses always to do good and if he does evil it is only by intellectual mistake. Justice, indeed, gives happiness to those who exert it.
• Glaucon” (Gige’s Myth): no one,
Injustice provides more joy than justice.
Is it an issue of human nature? Or also
of incentives
?
2
ACT I ANTI CORRUPTION Yes or No?
3
Does Culture Matter?
The Role Played by our Heritage.
United Nations Diplomats in New York: Parking Habits.
Benefits are the Same across Countries, but Costs?
Data! Kuwaitian: 526 fines in 2000 (not only close to the UN!). Norwegian or Swedish: 0 fines.
4
Yes and No
5
Don’t Fight it: Just You Wait
• • • •
We know that growth curbs corruption; More resources available to fight it?
The more economies rely on markets that are distant, the greater the need to create more trust?
So just wait that economic growth takes care of it.
6
Don’t Fight It: not a bad
• • •
(1) La corruption est difficile à éliminer car elle n’est pas moralement mal vue par une large fraction de la population a. Il faut se méfier de la vision occidentale moralisatrice (2) En effet, le non-corrompu est aussi moralement condamnable que le corrompu car le premier sacrifie le bien être de sa famille pour son confort intellectuel (pour le Paradis)
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Don’t Fight It: justifiable
8
Dont’ Fight It: useless
•
What does a Mayor learn fom his first term in Office? Italy, 2000-2005.
•
The longer the years in office, the lower the number of participants to the tenders, the lower price discounts.
•
2.8 years of political longevity reduce the number of tender participants by at most 14% and discounts by 1.6 to 8%.
•
For 500.000 euro tenders, a mayor with long tenure spends 10.000 euro more than a novel mayor. The long tenure mayor se an increase of 24.5% probability that the tender is allocated to a loal firm.
(Coviello-Gagliarducci)
9
But … (Ferraz-Finan)
• •
The reduction in corruption practices induced by electoral accountability is not only statistical significant, but economically important.
Assuming that, in the absence of reelection incentives, first-term mayors would behave as second-term mayors, we estimate that reelection incentives are responsible for inducing a reduction in resources misappropriated in the order of R$600 million (US$205 million).
10
The romantic vision of Corruption Italian Case of Clean Hands
“Madame Tien per cent” , wife of indonesian leader Suharto 11
Not so much “Victimless crime”?
Or, better, “Crimeless Victim”?
12
ACT II MEASURING CORRUPTION Possible?
13
Anti Corruption PR
• … the estimates of bribery exchanging hands for public
procurement bids can be estimated in the vicinity of US$200 billion per year, the overall annual volume estimate of the 'tainted' procurement projects, where such bribes take place, may be close to US$1.5 trillion or
so … and does not account for the significant losses in investment, private sector development, and economic growth to a country, or to the increases in infant mortality, poverty and inequality all resulting from corruption and misgovernance.
Kauffman (2006)
14
How to Measure C.
The sum of bribes? Perception indicators?
Trials? Sentencings?
The visible damage?
The kid killed by malaria for a rat-bitten anti mosquito net The invisible damage? All things that kid could have done/earned in his life. 15
One example of measuring. School Grades in Brazilian States
In blue: States with No Corruption In red: States with Corruption.
16
How to Measure over Time?
“Is it Good or Bad to Have Crimes of Corruption Increase or Decrease over Time?”
17
Working with Investment Data
Lucio Picci’s work. In every Italian region spending was 100?
In Umbria 1.77 bridges, in Sicily 0.74.
P.S.: why this waste? 18
Waste: Working with Overrun Data (Flyvbjerg) Project Cases Average Cost Overrun % Inaccuracy of demand forecast
Rail
58 44,7 -51,4%
Boston’s Big Dig Tunnel: Bridges and Tunnels Road
33 167 33,8 20,4
275% (111 bn. $) over budget when it opened.
19
Working with Overrun Data (Flyvbjerg)
Cost overruns generate: a) Waste due to inferior projects being awarded; b) delays; c) destabilize policy action and public finances.
Causes? Over-optimism or Deliberate Strategic Deception.
20
Deception or Corruption? Some interviews
• • • «You will often as a planner know the real costs. You know that the budget is too low, but it is difficult to pass such a message to the … politicians and the private actors. They know that high costs reduce the chances of national funding.» « The system encourages people to focus on the benefits – because until now there has not been much focus on the quality of risk analysis and the robustness of projects. It is therefore important for project promoters to demonstrate all the benefits, also because the promoters know that their project is up against other projects and competing for scarce resources.» « Most decent consultants will write-off obviously bad projects, but there is a grey zone and I think many consultants in reality have an incentive to try to prolong the life of the project which means to get them through the business case. It is in line with their need to make a profit.»
Project Approval Stage is critical moment. Is it Corruption?
21
Waste How much waste in purchases could be eliminated by bringing “the worse at the level of the best”? “If all public bodies were to pay the same prices as the one at the 10th percentile, sample expenditure would fall by 21% . . . Since public purchases of goods and services are 8% of GDP, if sample purchases were representative of all public purchases of goods and services, savings would be between 1.6% and 2.1% of GDP !” p.s: worldwide phenomenon How Much Public Money Is Wasted, and Why? Evidence from a Change in Procurement Law Oriana Bandiera, Andrea Prat, Tommaso Valletti, American Economic Review
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What do we Know about Corruption?
How much of this waste is
passive
(inefficiency [and capture from ignorance?]) vs.
active
(corruption)? “On average, at least 82% of estimated waste is passive and that passive waste accounts for the majority of waste in at least 83% of our sample public bodies.” How Much Public Money Is Wasted, and Why? Evidence from a Change in Procurement Law - Oriana Bandiera, Andrea Prat, Tommaso Valletti, American Economic Review
23
Waste?
THE UNITED KINGDOM EXPERIENCE
Interval between max and min price in the purchases of 121 public bodies, removing extreme cases Interval Variation% CartridgeToner (per cartridge) Electricity (daily rate per kWh) Box of 5x500 A4 paper (80g/m2) Post It (pack of 12) £41 to £89 4.8p to 8.3p
£6.95 to £14.95 £4.41 to £10.55 117 73 115 139 24
Careful about understanding waste!
Source: Giuseppe Catalano, il Mulino 2004 .
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(Keeping in mind that low prices are not always good news) Analisi di Benchmark (Valori Medi)
€ 3,50 € 3,00 € 2,50 € 2,00 € 1,50 € 1,00 € 0,50 € 0 0,5 1 1,5
Livello Prestazionale (h/mq anno)
2 2,5 Banca A Banca B Banca C Banca D Banca E Banca F Banca G Banca H Banca I Banca L Banca M Banca N 26
(Keeping in mind that low prices are not always good news) Analisi di Benchmark (Valori Medi)
€ 3,50 € 3,00 € 2,50 € 2,00 € 1,50 € 1,00 € 0,50 € 0 0,5 1 1,5
Livello Prestazionale (h/mq anno)
2 2,5 Banca A Banca B Banca C Banca D Banca E Banca F Banca G Banca H Banca I Banca L Banca M Banca N 27
ACT III DEFINING CORRUPTION
28
What is Corruption? Soreide (2005)
29
Definitions evolve
• World Bank: “the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party” .
(before: public official in the procurement process or in contract execution”).
30
And evolve. UK Bribery Act, 2010
31
What is Corruption?
No definition
32
UN Convention Definition (of Bribery!)
• “(a) The promise, offering or giving, to a public official, directly or indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties; (b) The solicitation or acceptance by a public official, directly or indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties.” (article 15).
33
Semantics
Definition that seems to imply: • • • essentially a bilateral relationship; the existence of a “First Mover”; An almost “contemporaneous” exchange.
http://www.unodc.org/unodc/en/tre aties/CAC/index.html
34
Does it Matter to Define Corruption in Procurement?
• No. Lambdsorff (2007).
“Still some researchers display their endeavors in this area. They are willing to go into time-consuming debate and are fierce in preferring one approach to another.
Such debate, however, tends to absorb much of the energy that is desperately needed elsewhere”.
Yes. Humpty Dumpty (1871).
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Definitions - 1
`When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.' `The question is,' said Alice, `whether you can make words mean so many different things.' `The question is,' said Humpty Dumpty, `which is to be master -- that's all.' Through the Looking-Glass, and What Alice Found There (1871), Lewis Carroll 36
Corruption involves …
Society Politicians Bureaucrats Firms
37
Definition
Misuse of public
power
[in procurement] for private benefits.
Lambdsorff (2007)
Both politicians and bureacrats alike
38
Definitions
Misuse of public power [in procurement] for private benefits.
Lambdsorff (2007)
No reference to specific time or specific exchange nor to two main individuals. Beyond Bribery toward Corruption: Bribery AND Cronysm, Patronage….
(Venice!)
39
Definitional Risks
Systemic Corruption.
• We might run the risk of sometimes exaggerating the likelihood of corruption (Type I error) but we will avoid the risk of missing large corruption occurring under our nose (Type II error).
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ACT IV CORRUPTION AND PROCUREMENT
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The Workings of C.: my brother wins MY BROTHER THE WINNER COST OF B. COST OF W.
42
The Workings of C.: my brother won already THE OTHER MY BROTHER COSTS OF OTHER COSTS OF B.
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The Workings of C.: my brother does not win MY BROTHER COSTS OF B.
THE WINNER COSTS OF OTHER
44
Open Tenders: Harmful? Sometimes, with complex projects
Lowest price selects the worse supplier when: Supplier knows more than procurer about contract features;
Supplier expects not to be asked to provide the
required quality; Supplier underestimates cost; Supplier is near bankrupt and bids aggressively, relying on limited liability.
45
What do we Know about Corruption?
•
Tender specifications is an Important Channel of Corruption/Collusion.
Soreide: “41% of the firms said that tender specifications happen to be designed to fit the offer of one specific company”.
• Kosenok and Lambert-Mogiliansky show that favoritism facilitates collusion because ‘it induces …. the selected contract specification reflecting the cartel’s interests instead of social preferences’.
• They find that overall favoritism ‘exacerbates the cost of collusion for society. The contract specification is socially inefficient and the price is higher than with collusion alone’.
• So do Scoring Rules appropriately targeted to specific firm’s characteristics.
46
Tender specs matter.
• Once upon a time, the Department of the Interior decided it wanted to move to the cloud, and issued a procurement request asking vendors to send it bids, as is typical with government procurements. However, in the fall of 2010, Google filed suit against this process, noting that it required any bidder to be compliant with Microsoft's Business Productivity Online Suite — needless to say, a provision with which only Microsoft products could comply. This is typically thought to be a no no in government procurements. In January of 2011, Google won a preliminary injunction against the contract, which became final in July 2011. • Google has ended up being awarded a gigundo contract to supply Google Apps to the U.S. Department of the Interior, over Microsoft. But there's a lot more to the story than that. • The contract provides email and collaboration software to 90,000 Interior employees, for $34.9 million over seven years -- or $14 million less than Microsoft would have been paid, http://h30565.www3.hp.com/t5/Policy-Watch/After-Lawsuit-Google-Wins-Over-Microsoft-in-Government-Contract/ba p/3295 47
Making life easy for cartels
• If …. Why?
a) 2 lots for 2 firms; b) 1 lot, allowing temporary consortia or sub contracting among large firms; c) 12 firms, 12 3-month contracts instead of 1 36 month contract d) 1 large 5-year contract instead of dual sourcing; e) Choose a high base price when cartels are around.
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Or why not choose a sealed-bid?
Supply
Wheelchairs for Persons
Contracting Authority
Umbria Region
200 190 180 170 160 150 140 130 120 110 0 8 fornitori 10 20 30 7 fornitori 40 Base price
199.000 €
50 Awarded price
116.000 € Euro
Price decrease
42%
ultimi 10 min.
Migliore offerta a 147.500 Euro (-25,8%) Inizio autoestensione Migliore offerta a 137.000 Euro (-31%) 60 Minuti 6-5-4 fornitori 70 80 Asta aggiudicata a 116.000 Euro (-42%) N ° of suppliers participating
8
3 fornitori 90 100 2 fornitori 110 120 49
An Italian case of collusion
PE
50 50
P P
min
P O P
min
O
if
P O
1
P P O B
P average P average
if
P O
P average P average
Formula that rewards less discounts under the average price than those between base price and average price when the distribution of bids is not too dispersed
50
The Collusive strategy
51
Cartel behavior when average price wins
52
What do we Know about Corruption?
Its Impact Must Also be Evaluated Taking Into Account its Invisible Effects
a) Distortion in MEAT criteria towards less points to quality and more to price; b) [N]arrowing discretion . . . while preventing the agent from doing (corrupt) things that are slightly injurious to the principal it may at the same time prevent him from doing (non- corrupt) ones that would be very beneficial to him. If simply to prevent corruption an agent is given a narrower discretion than would be optimal if there were no corruption, whatever losses are occasioned by (lower) discretion must be counted as costs of preventing corruption.
53
A criterion that rewards reputation
Punteggio
a P B
P B P O
b
IR
c
Sensitive to inspector
ICC
d
DSTC
capture Aggiudicazione Gara
a*
40
%
30
23,2
20 10 0
AM 22,1
100
% Sconto offerto 21,2 20,8 20,5 F L I A + Indicatore Reputazionale V 4,0 3,9 AL 2,0 M 100 65 30 -5 AM
24,9
F
25,5
L
24,3
I 26,7 A
23,3
V
12,7
AL
10,8 9,9
M Punteggio Totale
b*
65 30 -5
40,4 55,7 52,6 80,4 48,9 91,2 73,1 80,8 AM F L I A V AL M
• •
Con i parametri della formula che assumono i seguenti valori:
•
a
= 90
b
= 10 PB = € 250.000
54 40
%
30
23,2
20 10 0
AM F
100
%
65 30
40,4
-5
AM F L I L I A V AL M A V AL M
Preferences in Procurement
• Fraud. “fake” (small) corporations might be created only for the purpose of being awarded the procurement contract at a higher price. Or else, large companies might redefine their structure to participate as small ones and obtain the advantage (Brazil). A corrupt environment might
make this fraud easier.
•
Preferences in the hands of dominant lobby.
55
What do we Know about Corruption?
Corruption and Collusion are strategic complements.
a) Collusion benefits from corruption: - To make defection harder or impossible; - To make cartels even more profitable. b) Corruption can be facilitated by collusion - Rents (extra profits) are resources for corruption.
- Lower probability to blow the whistle against corrupt officers. NB: Keeping in mind that cartels typically exclude SMEs.
Expo 2015: tender specified minimum revenues impossible for small firms to achieve.
NB: and Mafia too. 56
SMEs are special
Problems faced by EU bidders, (by bidders size relative to large firms) The column of totals displays on average which portion of firms interviewed answered “always” or “often” Potential problems Over-emphasis on price Long payment terms Late payments No debriefing Administrative burden Lack of clarity Limited options for interaction Disproportionate financial criteria Insufficient time to bid Lack of information on opportunities Tenders not evaluated fairly Disproportionate technical criteria Large contract value Joint fulfillment of criteria not allowed Micro
1,1 1,4 1,3 1,2
1,5
1,4 1,4
2,0
1,4 1,4 5,3 1,4 22,0 2,0
Small
1,0 1,2 1,0 1,0 1,1 1,0 1,0 1,2 1,2 1,3 4,7 1,4 22,0 2,0
Medium Large TOTAL %
0,9 1 1,0 1,1 1 1,1 1,1 0,9 1,2 1,0 0,9 1,1 0,7 1,1 8,7 1,1 5,0 1 1 1 1 1 1 1 1 1 1 1 1,1 1,0 1,1 1,1 1,0 1,2 1,0 1,1 6,3 1,2 7,0 1,5 1 1,3 57
Winner is: the best BRIBE offerer
No Corruption Infinite Bribes Possible Only Finite Bribes Possible (Risk) What if one FIRM cannot bribe?
CARTEL CARTEL Corrupt officer can choose winner beyond minimum price
Government Firms Bureaucrat Price Bribe R 0 0 Best Marginal Cost 0 0 0 R Reservation Price Reservation Price - MC 0 R-B B Reservation Price
NOT P +B
B < Reservation Price – MC R 0 0 Best Marginal Cost
CARTEL
0 R-B B Higher than Marginal Cost 0 B 58
The Carabiniere’s view of waste
•
“Professor, there is no waste due to incompetence.
Why did they hire incompetent people in the first place?”
•
Useless to answer. Incompetence and corruption are strategic complements. Incompetence facilitates corruption and corruption reduces scope for competence-building.
59
ACT V DEFEATING CORRUPTION IN PROCUREMENT
60
Rules?
• Evidence: (Soreide 2005) “procurement rules are important, though not in themselves a good anti corruption tool. In fact, as many as 55% of the respondents did not think that tender rules could prevent corruption. Fifteen percent said that tender rules do function as an obstacle, while only six percent considered tender rules to be an efficient obstacle to corruption.” 61
Statement number 1
(Good) Ethical Codes and (Good) Ethical Training do Matter
• • •
Not for all, but for those who Socrates was thinking of.
Huge amortization of fixed costs centralizing ethical codes and focusing only on issues arising from internal organization specific characteristics.
And anyway they introduce some hurdles also for the bad guys.
•
And, while we are it ….
62
Statement number 2
Rule-driven Transparency Matters, after All
1) Yes, rules deprive competence-building , innovation and may decrease accountability.
2) But … Mie Precture of Japan had had been using opaque and discretionary practices while qualifying suppliers for bidding for small-scaled public-works projects. Switched to more transparency and 8% lower costs! Review of Industrial Organization.
63
What do we Know about Corruption?
Some things that do not fight corruption inequivocally well
a) Rotating Officers/Commissioners b) Central Purchasing Bodies c) E-procurement 64
The Bulgarian example
“The Bulgarian Cabinet has appointed Finance Minister Simeon Djankov in charge of all public procurement procedures handled by the state. “Minister Djankov becomes the Central Unit for Public Procurement,” states the government’s decision made Wednesday the rationale for the decision being that the new arrangement will help reduce spending and corruption when it comes to tenders.
The centralization of the public procurement procedures is supposed to save money and to hinder corruption schemes.” http://www.publictendering.com/corruption-costs-make-bulgarian-minister-take-over-public-procurement/
65
Does e-proc help transparency? 82 Russian regions EPROC % REGIONS EPROC
Browsing Tenders Browsing Tenders con advanced research tools Database signed contracts Search signed contracts 100% 43,2% 43,2% 14,8%
% REGIONS
Portals with login E-tendering RFQ 43,2% 13,6% E-tendering Reverse auction E-purchasing Online payment 14,8% 0% 66
Statement # 3
The paradox of the right solution.
It works best there where needed the least.
Anticorruption Authorities
Michela Wrong – It is Our Turn to Eat
Whistleblowers
Søreide (2008) firms will not engage in whistleblowing against corruption- related challenges in the local business climate unless local levels of corruption are considered to be low
67
Challenges of ACAs
• • • • • • Tension between prevention and prosecution Big fishes or small ones?
Clear mandate leads to better coordination among different agencies Need for clear agreements among agencies …resources are a constraint. Accountability: administrative and judicial 68
Statement # 4
Fighting Cartels can be one of the Best Tools to Fight Corruption
• • • •
If Authorities are not Captured.
Strengthening legislation penalties against cartels might be a good idea.
Cooperation Between Antitrust and Procurement Authorities.
But, it is almost impossible for small procurers to identify cartels and for large procurers to blow the whistle at them (risk-aversion).
69
Spotting a cartel in PP
Too hard to do: a) Cartels can be done over time (today I go, tomorrow you go) or over space (I go to Monterrey you go to Mexico City): how can one notice?
b) Stopping a cartel might mean stopping sourcing of urgent services or delivery of goods: organizational problem and internal resistance.
So….
a) Antitrust authorities and availability of public procurement data, together with whistleblowing legislation are the best instruments to fight it.
b) Internally, competences and the right procurement strategy might still help to make cartels’ life miserable.
70
Statement # 4
Fighting Cartels can be one of the best tools to fight Corruption
•
Do we Know what to do with: Base Price, Contract Duration, Lots, Award Formula, Temporary Consortia, Auctions
to avoid Cartels
?
•
Not always. EC Directive fights for SMEs by “mitigating aggregation of demand by increasing lots”, which usually imply better and more stable cartels.
71
A “good procurer” avoids waste
Waste arises from:
Incompetence and Corruption.
Keeping in mind that: a) Incompetence and Corruption sustain each other; b) Cartels and Corruption sustain each other; c) Cartels do exclude SMEs; d) It is very hard for a single procurer to “spot” cartels.
72
Statement # 5
Foster Competence Building (and you will fight Corruption)!
Corruption drives low returns from competence. Incompetence drives “capture”, which often coincides with “soft corruption”.
But …. Competence-building requires: a) trust (tomorrow you will be able to apply your knowledge) and b) accountability (I will reward you for that effort).
i.e. a modified approach in procurement organizations.
73
Statement # 6
Fighting Cost Overruns
Subject demand and cost forecasts to independent peer review Benchmark forecasts Make forecasts and benchmarks and peer reviews public Penalize planners/forecasters that are consistently biased Make forecasters share financial responsibility
74
# 7: Scoring Rules
Total pts awarded
a P B
P B P O
* 100
b
Q
With (a + b) = 1 and Q(uality) between 0 and 100 As b rises so does the discretionary power of the Tender Commission. But discretion is often good and lack of it will go at the expense of final quality!
If discretionary power of Commission is limited, the potential for corruption might be good to push the best firm to be more aggressive.
If power is high, then it is optimal to reduce quality points.
75
The New Solution ?
Grassroots Monitoring
* Olken (2007) shows however that increasing grassroots participation in monitoring has little impact, due to elite capture and free-rider problems.
* But, the Web distances the principal from the agent and increases the number of principals, changing the bargaining power.
*Web-based solutions are becoming more widespread.
Brazil is possibly the best example.
* Concept of
Social Stigma
at work.
76
The New Solution?
Grassroots Monitoring
*Danger of statistical incompetence by managers of datawarehouse and grassroot movements.
“High Prices are Good Quality”
*Undesired consequence of pressure on public employees, that are inherently risk-averse, to innovate.
*Basic Concept: lack of productivity?
trust
, stigma. Followed by lack of 77
Statement # 8
Centralize Data and…
1) But not procurement 2) But not (necessarily) publishing them to a wide audience?
78
What do we Know about Corruption?
• “Corruption cannot be considered in isolation […] it
follows that anti-corruption policies which focus narrowly on the corruption issue will miss the complexity of the relations and are therefore likely to fail. More appropriate, then, are policies which aim to
suitably reform prevailing governance systems.” Picci 2011 •
So, change the focus onto the organization, while trusting!
79
Statement # 8-bis
Foster Organizational Change Toward Performance
• • • • • Use Data for Internal Improvement Use Data for Setting Targets, Motivations, Rewards Use Data that are oriented toward output-based measurement of
performance
Organize Institution
Around Self-Improvement.
The Philippines example stands out as a potential benchmark: 80
A comprehensive approach
• •
The results should not be used to compare the agency’s score against that of other agencies but to provide a benchmark against which it will measure its own subsequent performance. The assessors shall then identify areas of strength (sub-indicators receiving a satisfactory or Very Satisfactory score) where it can continue to improve and weaknesses (sub-indicators rated poor or acceptable) where it needs to develop a specific plan of action.
A Plan of Action to Improve Procurement Capacity will then be developed …
81
Low Corruption High Corruption Low Competence High Competence GOOD EQUILIBRIUM BAD EQUILIBRIUM
82
Low Corruption Low Competence ORGANIZATIONAL REFORM INCENTIVE TO TAKE ADVANTAGE OF CAPTURE High Competence GOOD EQUILIBRIUM REWARDING COMPETENCE BAD EQUILIBRIUM High Corruption NOT REWARDING COMPETENCE
83
Recommendations:
“Attract, Reward, Retain and Develop”.
84
Conclusion
• • So it is about Trust in the nature of Man.
But wouldn’t it help to help nature do its job?
Give me four years to teach the children and the seed I have sown will never be uprooted.
V.I. Lenin 85
T H A N K Y O U
86