USIS Washington 

25 November 1998


(Former aid official calls for transparent bidding) (3090)

Washington -- The former chief procurement officer of the World Bank
says contracts for large construction projects present immense
opportunities for bribes, kickbacks and other payoffs.

"The potential reward for a single contract directed to the right
winner can exceed the legitimate lifetime salary earnings of a
decision-maker," says Donald Strombom

Strombom says the corruption problem can not be handled without
reducing bribes paid for procurement contracts for large ticket items
such as airports, dams and highways.

Strombom's article appears in the current issue of USIA's Economic
Perspectives, which can be found on the Internet at

(Following is the text of the Strombom article:)

(begin text)

Corruption in Procurement

By Donald Strombom, presiden of IDBC

Corruption takes many forms -- the petty bureaucratic variety,
corruption in police and the judiciary, corruption in the election
process, to name just a few. But probably none is more pervasive or
has higher costs than corruption related to procurement: government
buying of goods, works, and services. The reasons are simple. If one
sets aside government salaries and social benefits, procurement
typically accounts for the largest share of public expenditures at all
levels of government. Both the overall amounts and individual contract
amounts are huge, and they offer correspondingly large opportunities
for bribes, kickbacks, and other payoffs. The potential reward for a
single contract directed to the right winner can exceed the legitimate
lifetime salary earnings of a decision-maker. The temptations are
enormous and, in too many cases, the risks of punishment are
relatively small.

Public works construction projects -- airports, dams, highways,
subways, water systems -- traditionally have provided the biggest,
most publicized, and most dramatic cases of corruption worldwide.
Other prime targets are "big ticket" equipment items -- bus fleets,
construction equipment, airplanes, turbines, and generators -- as well
as simple items like office supplies, pharmaceuticals, textbooks, or
uniforms that are purchased in huge quantities year after year.

Corruption practices adapt to changing trends, however. The growing
use of external consultants and the increasing outsourcing of
contracts for maintenance and other services formerly provided by
in-house staff are just two examples of new opportunities for
corruption. Perhaps the ripest new opportunity of all, because of the
general lack of familiarity with what it involves and the numerous
high-value contracts, is in the information technology field. The most
spectacular, attention-catching cases are those in which millions of
dollars change hands over the award of a single contract or in which
governments and political parties fall because of bribery scandals
brought out into the open.

It would be a serious mistake to think that corruption occurs only in
these big, high-visibility cases. One could argue, in fact, that these
are the more easily monitored and controlled situations -- if the will
and the means exist to do so. The more difficult corruption to deal
with is that which is ingrained in the culture and permeates entire
systems of government procurement, from the lowest-level contract
officer and inspector in the field to the ministers or higher who have
final authority for contract approvals.


How does corruption occur in procurement? The popular image is of a
would-be contractor arriving in a minister's or a mayor's office with
a suitcase full of cash, just before a critical decision is made about
a contract award -- an amusing caricature, but an awkward method and
hardly in keeping with modern technology. The reality is more likely
to be an electronic deposit in a foreign account, corporate stock
shares, an elite school scholarship for a son or daughter. The fact
that the recipient may use the proceeds for a worthy cause makes
combating corruption that much harder. But the direct
contractor-client payoff for a contract award is only one of many
possible scenarios, and not necessarily the most common or most costly
form of corruption.

Bribery often occurs at a much earlier stage in the procurement
process: to get a firm included on a restricted list of bidders, for
example, or to encourage a client to write specifications in such a
way that the winning bidder is a foregone conclusion. Or corruption
may be carried out entirely among competing firms, through collusion
and bid-rigging, without the client being involved or even aware it is
happening. Firms may agree in advance who will submit competitive bids
and at what prices, who will win, and how the profits will be shared.
To illustrate how complicated it can be to eliminate corruption, the
prequalification of bidders by a client to ensure that only qualified
and financially sound firms participate in bidding competition quite
unintentionally makes it easier for dishonest bidders to collude,
since all prequalified bidders are announced in advance.

Quite likely the most extensive and costly corruption occurs after
contracts have been awarded. Corruption is not a charitable game;
"winners" have every intention of recovering their bribery costs, and
they have a variety of ways to do so. The first stage, especially in
collusive bidding, is by inflating their bid prices. Further cost
recovery can be achieved during contract performance by over-invoicing
for quantities of goods delivered or work performed, reducing the
quality of materials used for construction or delivering cheaper
models of goods, and obtaining contract change orders to increase the
amounts of goods sold or works performed at overpriced unit costs.
Again, corruption in the post-award stage of a contract may be with
the knowledge and consent of at least some parties in the client's
organization, or it may be through well-concealed initiatives of the
contractor alone.

In fairness to contractors, many of the above practices are motivated
by attempts to hedge against perceived uncertainties and risks in
clients' systems of contracting, rather than deliberate corruption. In
that sense, better risk management and contracting terms may be part
of an approach to reducing "corrupt" practices.

The debate about who is responsible for corruption in procurement is
largely irrelevant, for there is no single pattern. Sometimes the
initiative clearly comes from the client in the form of explicit
demands by a director for a specified percentage of the bid price or
from inspectors who "certify" incorrect quantities for payments to
contractors. (This highlights one difficulty in fighting corruption:
clients are not monolithic, but rather are many different individuals
or groups looking out for their own interests.) In other cases the
bidder is first to offer inducements. In most cases there is some
degree of complicity between client and bidder/contractor. In all
cases, the taxpayer and public at large are the losers.


What are the real costs of corruption in procurement? One way to
measure this is to compare actual prices of similar goods and services
delivered under different conditions; for example, in contracts
awarded through direct negotiations or restricted bidding in
comparison with open and apparently properly conducted competitive
bidding. (This does not mean that contracts awarded by direct
negotiations or restricted bidding are never appropriate; in some
situations these are preferred procedures. The comparisons should be
in cases where these are not likely to be the most economical or
efficient methods.) Price differentials on the order of 20 to 30
percent are commonly found, and sometimes substantially more. These
comparisons are rough approximations at best.

Some would argue that it is virtually impossible to find a reference
case that is completely free from the influence of corrupt practices,
and that the true cost differences are therefore understated.
Conservatively, where corruption is systemic, it probably adds at
least 20 to 25 percent to the costs of government procurement.
Following a corruption scandal in Milan several years ago, which led
to many criminal indictments and closer scrutiny of public contracting
practices, unit costs of major works projects fell by more than 50
percent, according to an IMF working paper, "Corruption, Public
Investment and Growth," by Vito Tanzi and Hamid Davoodi. With annual
purchasing budgets running in the billions or hundreds of millions of
dollars, this begins to involve "real money."

If costs of this magnitude are at stake, why isn't something being
done to correct the waste? Some rationalize inaction on corruption by
the fact that "it's always been there; it's just part of the cost of
doing business." There are those who argue that it isn't really a
"problem" because corruption produces economic benefits by "greasing
the wheels" of inefficient bureaucracies: how else to get prompt
customs clearances, expedite contract payments, and the like? And the
reality is that bribery of foreign officials, for example, is not
illegal in many countries; until very recently, only the United States
had a strong and enforced foreign corrupt practices law. More than
anything else, it has probably been a combination of opposition from
strong vested interests that benefit from continued corruption and a
lack of public appreciation that corrupt practices and their costs can
certainly be reduced, even if never completely eliminated.

The good news is that significant steps are being taken to make it
clear that corruption is not an acceptable part of public procurement.
Various organizations operating on different fronts are mounting a
campaign to create public awareness and citizen empowerment, broaden
the use of sound procurement practices, and penalize the violators of
established norms.


What are the characteristics of a good public procurement system? It
should be able to deliver the goods and services needed by government
to perform its functions in a timely manner and at fair prices; in
other words, it should be economical and efficient. Contracting
opportunities should be widely publicized. Awards should be made to
those who are able to meet the stated needs and required standards and
who make the best offers. Rules should be clear and fair, the process
transparent, and the results predictable. Underlying the entire system
should be a notion that public officials are accountable for the
proper use of public funds and should not enrich themselves in the
process. Unfortunately, all of these concepts are not yet universally
accepted or practiced, and therein lies one of the excuses or causes
for corruption.

Wide international experience shows that these desirable
characteristics can best be achieved through a system that is based on
appropriately designed methods of competition among qualified
suppliers of goods and services. There is also broad agreement about
the main elements in a competitive bidding process; namely, it should

o Public notification of bidding opportunities;

o Documents that clearly set out the needs, describe the bidding
process and contract terms and conditions, and give the criteria for
choosing the winner;

o Submission of secret sealed bids that are opened in the presence of
the bidders at a specified time and place;

o Impartial evaluation and comparison of bids by competent evaluators
without influence or interference by bidders or other parties;

o Award of the contract to the bidder complying with all requirements
and offering the best bid, as defined by the published selection


Governments in many countries and at all levels have developed and
successfully used procurement procedures built around these basic
elements. The major multilateral development banks (MDBs) -- the World
Bank, the African, Asian and Inter-American development banks, the
European Bank for Reconstruction and Development, and others -- have
all adopted rules for procurement that apply to projects they finance.
In order to use funds from their loans, borrowers must follow the
prescribed rules; the banks supervise their loans to ensure the rules
are properly applied. Failure to follow the rules may result in
cancellation of the loans.

In 1993, the United Nations Commission on International Trade Law
(UNCITRAL) adopted a Model Law on Procurement of Goods and
Construction as a guide for countries to follow for the evaluation and
modernization of their procurement laws and practices. This model law
was particularly intended to help developing countries and countries
in transition from planned to market economies to avoid inefficiency,
ineffectiveness, and abuse in public procurement as a result of an
inadequate legislative framework. It embodied virtually all of the
same principles that the MDBs had built into their procurement rules,
as well as administrative and judicial processes for review of
procurement decisions, providing an important step toward the
development of uniform international rules and procedures.

The most significant accomplishment in this regard was the
development, as an integral part of the General Agreement on Trade and
Tariffs (GATT) negotiations, of the Agreement on Government
Procurement, which was signed in Marrakesh in 1994. This agreement,
which entered into force for signature countries in January 1996, is
more commonly identified as the World Trade Organization's (WTO)
procurement rules. Government members of the WTO are encouraged to
accede to this agreement, although this is not a condition for
membership. Whether or not there is formal country accession to the
agreement, the rules and procedures it contains become the closest
thing there is to a universal standard for good practices.

In parallel developments, member countries of the Organization for
Economic Cooperation and Development (OECD) joined in a concerted
effort to promote the adoption of national laws, similar in nature to
the U.S. Foreign Corrupt Practices Act, that make bribery of
government officials, whether at home or abroad, and other forms of
corruption in procurement criminal offenses subject to severe
punishment. In 1996, the Organization of American States approved an
Inter-American Convention on Corruption. That same year, the
International Chamber of Commerce proposed anti-corruption rules of
conduct for corporations and corresponding actions for governments.
Suddenly, much of the official and corporate world seems to have
decided something should be done about corruption.

Transparency International has played a pivotal role by creating
public awareness of the scale of the problem and organizing grassroots
efforts to combat corruption. Their influence has been a driving force
behind many of the reform efforts under way around the world.

Do these converging positive steps mean that the end of corruption in
procurement is in sight? Regrettably, no, for while the rules bring
order and sound principles to the process, determined corrupters can
still find ways around them and get their payoffs. The MDBs, for
example, spend considerable staff time and administrative budget to
supervise each lending operation, and particularly to monitor and
approve procurement procedures and decisions. Yet recent disclosures
suggest that 20 percent or more of these funds in some countries may
be lost through "leakage," a euphemism for moneys misdirected by
corrupt practices into officials' pockets and personal bank accounts.

Even before these estimates became public, the international financing
institutions had taken steps to strengthen their hands in combating
corruption. They expanded their procurement rules to include explicit
prohibitions against fraud and corruption and to impose strict
sanctions in cases in which these practices were discovered: denying
contract awards to violators, prohibiting their participation in
future bidding for contracts financed by the banks, refusing to pay
for improperly awarded contracts, and canceling entire loans in
extreme cases. In addition to their normal project supervision and
financial audit requirements, the MDBs initiated procurement audits by
external companies to determine whether borrowers were strictly
observing their rules and procedures.

Along with this tightening of project monitoring and supervision, MDBs
are taking parallel steps to ensure that borrowers really understand
and are able to apply sound procurement procedures correctly. The
World Bank, for example, now requires regular assessments of its
borrowers' procurement rules and their organizational capacity to
implement them correctly. Conformity with accepted practices and
evidence of corruption are two key areas for investigation. These
country procurement assessments, conducted in collaboration with the
borrower country, become the foundations for designing and funding
technical assistance programs where needed to build professional


Experience of the international financing institutions and others
demonstrates one of the truisms in procurement: corruption is not
stopped or curtailed simply by having sound rules. It is increasingly
clear that other coordinated efforts are needed to make a significant
impact on corrupt practices. Everyone must be made aware that
violations of the rules are illegal acts that will be discovered and
punished. This creates the need for effective monitoring and audit
systems and for enforcement agencies that have the will and ability to
take actions against violators, regardless of their position. It
requires a judiciary system that is not corruptible and is able to
make and enforce convictions. Cadres of procurement professionals must
be developed who are insulated from political interference in contract
award decisions. Temptations for these people to engage in corrupt
practices themselves need to be reduced by paying them a reasonable
wage that compensates them for their honesty. In short, corruption
abatement may require nothing less than a complete overhaul of civil
service and governance systems.

Creative thinking and innovative approaches are needed in the fight
against corruption. One promising development is the movement to
inject transparency into the procurement process by citizen groups
that are not amused by government officials getting rich at their
expense. Efforts to date are largely concerned with recruiting
like-minded citizens and publicizing cases of corruption, but these
groups often lack systematic ways to get more deeply into the reform
process. Means should be devised for them, as true stakeholders, to
take a more active role in monitoring and verifying that procurement
processes are not corrupted. The challenge is how to engage them in
meaningful ways without corrupting them as well.

The complexity of the fight against corruption should not be taken as
an excuse for doing nothing. Many public bodies have already made
notable progress in reducing corruption, and enough experience has
been gained to point with some assurance to the kinds of measures that
are needed and will work. Public reaction against corruption has
probably never been stronger, partly because it becomes increasingly
clear that the public is the big loser if corruption continues.

There is no better time to mobilize forces in a serious effort to take
corruption out of procurement. But reforms must be approached with
realistic expectations about how much time and resources will be
required. Lasting results will take years to achieve, and sustained
efforts must be on a scale commensurate with the problem. It would be
particularly tragic if good intentions are backed up by only
half-hearted, quick-fix measures that allow corruption in procurement
to continue unabated and discourage reformers.

(end text)