DEVELOPING A PRO-COMPETITION PROCUREMENT POLICY Alison Jones

Overview The problem of collusion and corruption in public procurement markets Dealing with the problem – current techniques Some thoughts on designing yet more effective systems

the problem

Regulation of Public Procurement Governments around the world exchange an estimated $9.5 trillion for goods/services each year Crucial public services – e.g., construction of hospitals, roads, other critical infrastructure Importance of regulating public procurement – to ensure low prices, high quality of goods etc But process can be undermined by collusion and/or corruption

Public procurement markets are frequently prone to collusion Well-established body of literature identifies the types of market in which collusion is likely to flourish. Dependent on ability of firms to: Align behaviour Ensure collusion is internally stable and sustainable – deviations detected and punished Ensure collusion is externally stable and is not counteracted by third parties, especially new entrants or powerful buyers

Explicit collusion may occur through: Public procurement markets are frequently prone to collusion Structural features and procurement process may facilitate alignment and stability Constant and predictable demand Few competitors and barriers to entry Standardisation Market transparency Corruption/ presence of an insider/facilitator Explicit collusion may occur through: Bid suppression Cover bidding Market/ customer allocation Bid rotation Identical or unnecessary joint tendering Subcontracting/ compensation and or side payments

Also risk that facilitated/ encouraged by corruption Cartels are fragile. Further, public procurers in a strong position to identify unlawful bid rigging Incentives to capture officials – to turn blind eye to, to stabilise, facilitate or orchestrate bid rigging Tenderers may feel compelled to offer bribes if they believe their competitors may do so (prisoners’ dilemma) Financial incentives or job offers may be hard for procurement officers to resist

A global problem, e.g., Bid Rigging OECD reports EU – Elevators and Escalators Germany – pre-insulated pipe Korea - construction Mexico- insulin UK – construction industry US – school milk/ public highways MDBs integrity units – especially in road building projects (WBG) Corruption US – John Bennett and Guam (Thyphoon Paka) China Quebec construction industry Germany – combat boots for armed forces Japan – a number of instances identified eg steel bridges and railway construction

Bribes: waste resources but harm expands well beyond Estimating Harm Bid rigging Increases prices/ decreases quality/ range etc Particular impact on the disadvantaged Estimates of cartel harm – 10-25% overcharge Bid rigging may be more stable? If set prices 20% higher, reducing bids by even 1% may save more than annual operating budget of some competition agencies, Anderson & Kovacic Bribes: waste resources but harm expands well beyond Misallocation of public resources undermining productivity and economic growth Adds to cost of procurement, drains public funds and affects infrastructure/ social programmes Distorts rule of law – lowers trust and threatens democracy Discourages foreign investment Unequal societies

mechanisms to prevent, detect and punish collusion

A global discussion as to how to design an effective legislative framework A sound public procurement system, focused on economic goals, designed to prevent corruption and collusion Competition laws which clearly condemn cartel with effective sanctions Anti-corruption laws – clearly condemning and criminalising bribery MDBs also playing a role in sanctioning corruption through integrity units

Achieving a pro-competitive procurement system Joined up policies and enforcement Transparent and open procurement process Maximising bidders and preventing distortion Detection techniques Enforcement - investigation and prosecution

Prevention Considerable literature on how to ensure integrity to the public procurement process (eg OECD 2012 Recommendations) and examples of good practice Training of public procurement officials and businesses Understanding the market and potential bidders Careful construction of competitive tender design and tender process –

Detection Advocacy - training of public officials/ businesses/ the wider public Red flags/ warning signs, indicators of bid rigging, monitoring and screening tools Indicators of Corruption Investigative techniques (reactive and proactive)

Enforcement and Sanctions Risk of prosecution and finding of infringement must be real Effective sanctions and accountability

Conclusions and Proposals?

Mixed success Considerable work/thinking on how to design open and transparent public procurement processes and to fight cartels But public procurement is still being distorted by anti-competitive and corrupt practices - a fraction of illegal activity being deterred? Efforts to reduce corruption and bid rigging in many countries has had mixed success, partly perhaps because of an unwillingness to enforce anti-corruption measures and limited resources of competition agencies

Regime and institutional design/ arrangements Effective public procurement regime and commitment to anti-corruption and antitrust laws Fighting corruption will facilitate prevention and detection of collusion – corruption more frequently overlooked? Close consideration of institutional design/ inter-agency cooperation to facilitate policy coordination, streamlining/ coordination of investigation processes, prosecutions and information exchange etc International cooperation also vital

Prevention, Detection and Enforcement The importance of advocacy, training and procurement design (transparency, maximising participation and minimising opportunity for bribery and collusion) Certification of independent bidding – should be routine Integrity standards/ ethical codes for procurers Incentivising competition compliance programmes – eg US and Germany Mandatory disclosure of public contracting data (eg Portugal) Greater use of (electronic) screening devices for identifying suspicious markets Broadening the pool of informers Incentivising procurers Coordinated enforcement efforts – competition agencies to take note of facilitators Procurers as private claimants

Further thought on sanctions Criminal sanctions for bribery and asset recovery Sanctions for bid rigging? Beyond civil corporate fines for cartelists Antitrust sanctions for facilitators? Targeted criminal antitrust offence for bid rigging – individual and/or firms: Imprisonment and fines Civil fines for responsible individuals Non-monetary sanctions Director disqualification Debarment/ punitive injunctions for corporations Private damages actions by procurers – routine?