Corruption in public

procurement
Causes, consequences and
cures

Tina

Søreide R

2002: 1
 Corruption in public
procurement
Causes, consequences and
cures

Tina Søreide

Report R 2002: 1

Chr. Michelsen Institute Development Studies and Human Rights

CMI Reports

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ISSN 0805-505X
ISBN 82-8062-007-9

Indexing terms

Corruption
Procurement
Public administration

© Chr. Michelsen Institute 2002

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Contents

1 INTRODUCTION.............................................................................................................................
...1
Motivation .........................................................................................................................................
....1
Assumptions and
definitions................................................................................................................2
Contents..............................................................................................................................................
...3
2 THE PROBLEM OF CORRUPTION IN PUBLIC
PROCUREMENT.....................................4
2.1 OBVIOUS
INCENTIVES?.....................................................................................................................4
2.2
THE RUN FOR CORRUPT RENTS … A RACE TO THE
BOTTOM?.............................................................5 2.3 CORRUPTION, “STATE CAPTURE” AND
TRANSITION ECONOMIES ...................................................6
2.4 IMPAIRED COMPETITION, ABATED INTERNATIONAL INTEREST AND FIRM BEHAVIOUR.................8
2.5 THE DYNAMICS OF
CORRUPTION......................................................................................................9

3 THE COMPLEXITY OF PROCUREMENT AND THE MECHANISMS OF

CORRUPTION...................................................................................................................................11
3.1 DIFFERENT SITUATIONS – DIFFERENT RISKS OF CORRUPTION
......................................................11
The
procedure.....................................................................................................................................11
The type of
contract............................................................................................................................11
Size, complexity and the sector of
economy......................................................................................12
Degrees of
objectivity.........................................................................................................................13
3.2 CORRUPTION THROUGH HIDDEN VIOLATIONS OF ORDINARY PROCUREMENT RULES...................14
The power of
invitation ......................................................................................................................14
Short listing /pre-
qualification ..........................................................................................................14
The choice of
technology....................................................................................................................15
Confidential
information....................................................................................................................15
Modifications of the
contract.............................................................................................................16
3.3 CORRUPTION THROUGH LEGITIMATE DEVIATIONS FROM THE PROCUREMENT RULES.................17
Justifications for bilateral negotiation of governmental
contracts.................................................17
Major events and states of
emergency ..............................................................................................18
Corruption without a specific
case....................................................................................................18
4 PUBLIC PROCUREMENT ANTI-CORRUPTION
STRATEGIES........................................20
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4.1 POLITICAL
COMMITMENT...............................................................................................................20 4.2 THE
ORGANISATION OF PUBLIC PROCUREMENT............................................................................21
Performance
rating ............................................................................................................................21
Procurement
unit ................................................................................................................................22
4.3 ELEMENTS IMPORTANT TO REDUCE OPPORTUNITIES FOR CORRUPTION.......................................23
Disturbance of corrupt
relationships................................................................................................23
Simplification of
rules ........................................................................................................................24
Bench marking and off the shelf
items...............................................................................................24
Supplementary
work ...........................................................................................................................25
Rules for exceptional
cases................................................................................................................25
4.4 TRANSPARENCY AND THE PROBLEM OF DISCRETIONAL
POWER...................................................25
Trust, communication and
information.............................................................................................26
The use of discretional
authority.......................................................................................................27
Enabling
inspection............................................................................................................................27
Codes of conduct and rules of
disqualification................................................................................28
4.5 COMPETITION AND TECHNOLOGICAL
COMPETENCE......................................................................28
Does competition impede
corruption?..............................................................................................28
International
competition...................................................................................................................29
The need of private expertise to ensure
quality................................................................................30
Supply-chain
corruption.....................................................................................................................30
4.6 TENDERS ON THE
INTERNET...........................................................................................................31 No assurance
of a clean process .......................................................................................................31

iii

4.7 THE SUPPLY SIDE OF

CORRUPTION.................................................................................................32
Agents, middlemen and
“fronts”.......................................................................................................33
Company
responsibility......................................................................................................................33
White lists, self certification and anti-bribery
commitments...........................................................33
4.8 DETECTING CORRUPTION
...............................................................................................................34
Inspection...........................................................................................................................................
.34
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Reporting
corruption..........................................................................................................................35
4.9 SUGGESTED
STRATEGIES................................................................................................................35

5 SUMMARY OF MAIN
CONCLUSIONS......................................................................................39

6 REFERENCES..................................................................................................................................
.41
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1 Introduction

This study was initially carried out for a research institute in Angola, the Angola-
Instituto de Pesquisa Económica e Social (AIP), as a contribution to the domestic
preparations for a public procurement reform. This version is generalised and
discusses the topic without any specific country in mind. The report provides an
introduction to the international debate and experiences with procurement-related
corruption, as well as recommendations on anticorruption measures to be
implemented in procurement procedures1.

Motivation
For almost a decade now there has been a significant international focus on corruption
as a threat to economic and human development. Several multilateral organisations,
like the UN, the World Bank, the WTO and OECD, aims at fighting the problem. So
far, however, the strategies to transform the alleged practices of a state administration
from corrupt to honest and clean have failed in most cases. There are several ways to
explain this persistence of corruption. The time it takes to curb the problem may have
been underestimated. There may also be a failure in the adjustment of anticorruption
strategies to local conditions. And finally, the incentives to implement the necessary
measures may be poor among politicians benefiting from the current system.

However, in countries where corruption is a common problem it tends to disturb the

market mechanisms and impede economic development. Corruption in public
procurement makes the officials or the politicians in charge purchase goods or
services from the best briber, instead of choosing the best price-quality combination.
The result may be construction projects several times as costly as necessary, or the
acquisition of goods not actually needed. As an illustrating example Italian
economists found that the cost of several major public construction projects fell
dramatically after the anti-corruption investigations in the early nineties. The
construction cost of the Milan subway fell from $227 million per kilometre in 1991 to
$97 million in 1995. The cost of a rail link fell from $54 million per kilometre to $26
million, and a new airport terminal is estimated to cost $1.3 billion instead of $3.2
billion (Rose-Ackerman, 1999:29). Hence, when aggregated to a macro-economic
level non-optimal choices of contractors can have noticeable effects on the economy.

Also the efforts of public officials to get into position for obtaining bribes may
represent a signifiant cost. Gifted youth often prefer jobs in the bureaucracy instead of
more scientific professions, the allocation of public funds may be biased in favour of
capital intensive sectors at the expense of health and education, and laws and
regulations may be introduced just in order to obtain bribes. Even worse, public sector
corruption has a pervasive impact on the poor since it reduces the funding available
for social services and distorts public choices in favour of the wealthy and powerful,
resulting in larger income differences between rich and poor.

1 The author would like to thank Arve Ofstad and Odd-Helge Fjeldstad of CMI for valuable comments,
and Johann Graf Lambsdorff of Göttingen University for providing relevant literature.

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Assumptions and definitions

Corruption, as an illegal activity, is difficult to define exactly as different attitudes and
customs prevail, for instance when it comes to gift-giving and bureaucratic integrity.
However, this report is mostly concerned about the clear-cut cases, where no doubt
about the misuse of public office exists. This is usually the case when the following
conditions are all met (Tanzi, 1995:167168). First, the act must be intentional and in
conflict with the principle of objectivity in public service performance. This implies
that the rule that is broken is precise and transparent. Second, the person who breaks
the rule must derive some recognisable benefit for him/herself, his family, his friends,
his tribe or party, or some other relevant group. Third, the benefit derived must be
seen as a direct return from the specific act of “corruption”.

For public procurement it may also be useful to distinguish between political or high
level and administrative or bureaucratic corruption. Tanzi (1998:119) explains that
corrupt behaviour taking place during the budget preparation phase, a time when
political decisions are made, reflects political corruption. Corrupt behaviour during
the budget execution phase reflects mostly bureaucratic corruption. Amundsen
(1999) extends the definition of political corruption to include all the corrupt
transactions performed by political decision-makers. Political corruption may thus
also take place when the improved procurement procedure is implemented, resulting
for instance in political disagreement with a contract assignment.

The use of the term procurement applies to all kinds of acquisition of public goods
and services. However, the problem of corruption is more common in certain
categories of public procurement than others. Rose-Ackerman (1999) divides
procurement into four categories:

(i) Purchases that require specialised research and development, such as newly
designed military aircraft.
(ii) Purchases of complex, special purpose projects, such as dams or port facilities,
that do not involve advances in technology but require managerial and
organisational skills.
(iii) Purchases of standard products sold in open markets, such as motor vehicles or
medical supplies (off-the shelf purchase).
(iv) Customised versions of products otherwise available in open markets, such as
special purpose computer systems or fleets of police cars.

The procedures of procurement will differ for these four cases. The difficult question
in the first case is how to write a contract for a product not yet developed.
International Competitive Bidding (ICB) may be useful for the second case. The third
case represents the benchmark-case for which the simple rule prevails - purchase at
lowest price available, taking into account discounts that may be available to large
purchasers. The fourth category is more problematic as neither ICB with sealed
bidding nor off-the shelf purchase is appropriate (Rose-Ackerman, 1999:60).

Although it is important to keep the different categories of public procurement in

mind when discussing the administrative procedures and their vulnerability to

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corruption, the report mostly describes procurement in general terms. The relevance
of the arguments will therefore vary depending on the acquisition in question.

When it comes to the providers of goods and services, the terms applied are
companies, firms and enterprises, as well as private companies. Included in these
terms are also state-owned companies, as well as bureaucratic institutions functioning
as providers of goods and services for other parts of the state administration.

Contents
Chapter 2 describes various problems that may arise in a society if the bureaucracy is
corrupt. Chapter 3 mainly concentrates on the mechanisms of corruption: How is
corruption actually performed? Public procurement anticorruption measures are
described in Chapter 4. The discussion is focused on practical elements of the
procedures. The chapter also includes a discussion about political commitment as a
necessary condition for successful reform. The supply side of corruption and how to
increase the companies’ responsibility for the problem of procurement-related
corruption is the final subject of debate.
2 The problem of corruption in public
procurement

2.1 Obvious incentives?

The logic of incentives makes it reasonable to assume that human greed explains most
of the bureaucratic corruption. However, in many developing countries, where
monthly wages for ordinary officials often are less then $100, the actual need may be
an equally prevalent reason. In some cases these wages represent a capitulation wage.
According to Besley and McLaren (1993) capitulation wage refers to a situation
where the government “capitulates” because corruption is endemic and monitoring
does not function. Thus, it makes no sense to revise salaries and the government pays
very low wages, aware of the bureaucrats’ ability to manage on bribes and stealing.
The bureaucrats’ demand for bribes is understandable under such circumstances.
Nevertheless, it is observed in many countries that officials covering their economic
need by the help of bribes do not stop when they reach an acceptable standard of
living.

The supply side incentives may appear less obvious because bribes often represent a
significant cost to a company. Preparing for a tender is a costly and time consuming
process and the company may not trust their winning chances on legal basis alone. A
bribe may thus ensure that the company obtains the government contract. Corruption
may also help companies obtain a de facto monopoly situation, to retain business, to
obtain secret information, to counterbalance poor quality or high price, to facilitate
trade or investment, or to create demand for goods that otherwise would not have been
purchased. Other motives may be to reduce political risk, to receive import licenses,
to reduce taxes and attain special modifications of laws or just to induce government

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employees to perform their duties. Despite the secrecy in these cases, it is not difficult
to exemplify incentives from the media and court cases2.

The major reason for bribery in public contract assignment, however, is probably
because everyone believe that everyone else is involved in such kind of business.
Losing a contract because a competitor bribed the officials must be very frustrating.
This problem of hidden information is reflected in the way that all the companies
involved pay a bribe even if they would be better off with no corruption (prisoner’s
dilemma). Hence, the companies that bribe public officials seem to forget the negative
externality they impose on other firms, as well as the worsening of their economic
environment.

For the company involved there are several common drawbacks related to bribery.
One is the information about the bribery in hand of the public officials, information
applicable to hit the reputation of enterprises, the multinationals in particular. A
problem is also enforcement, that a bribing company has no judicial guarantee of
obtaining what it has paid for (unless the courts are corrupt as well). And, once a
company has established a corrupt relationship it may be confronted by unexpected
demands for additional payments. Ending a corrupt relationship is often difficult
because of the risk of menaces, violence and other criminal activities. Apart from this,
close connections to the government may imply a risk in case of political and
governmental changes (Lambsdorff, 2000a and b).

2.2The run for corrupt rents … a race to the

bottom?
Very often the most damaging cost of corruption is not the waste of money spent on
bribes. Vito Tanzi (1998) states: “The total economic and social effects of corrupt
actions might be very costly and out of proportion to the bribes received by corrupt
officials in terms of resources wasted, the opportunity cost of resources misused, and
the inefficiencies introduced in the system. ”

The theory of rent seeking provides a useful starting point to understand the economic
effects of corruption. Rent seeking is called corruption when competition for
preferential treatment is restricted to a few insiders and when rent-seeking expenses
are valuable to the recipient (Lambsdorff, 2000)3. The inclination by public officials to
generate rents for private benefit has several welfare implications, as described in (i)-
(vii) below. These implications also indicate why the influence by lobbyism is less
harmful to a bureaucracy than corruption.

(i) Decisions are biased, for example when it comes to the award of procurement
contracts and concessions. The company in charge of building the new hospital
may for instance not be the one representing the best price/quality-combination,
but rather the most successful briber or the one with the best governmental

2 The books by Rose-Ackerman (1999) and della Porta and Vannucci (1999) provide examples on
bribery of public officials.
3 Johann Graf Lambsdorff (2000) discusses corruption from a rent-seeking perspective explaining why
corruption makes more harm than traditionally assumed in this theory.

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connections. The result may be a project far more expensive than it could have
been, with qualities below official standards (Tanzi and Davoodi, 1997).
(ii) Also the individual job-decisions are affected by corruption. Gifted youth
welcome a prosperous future by seeking positions in the bureaucracy, extracting
as many rents for themselves as possible, instead of applying their talents in
more scientific professions (UNDP, 1997; Diamond, 1993).
(iii) Rent seeking increases expenditures. The bribe often increases with the size of
procurement and is often calculated as a percentage of the total sum. The more
money involved, the more important will it be for the companies to win the
tender. Providing the public official with a higher bribe may also be necessary
to compensate for the increase of risk involved with large projects. This
proportional relation between project size and the bribe involved may result in
inflated prices (Lambsdorff, 2000a).
(iv) Corruption affects the allocation of public spending as investment decisions are
influenced by the opportunity to obtain bribes. Large construction projects (e.g.
big dams) are given priority to health and education projects, while spending on
operation and maintenance is neglected (Tanzi and Davoodi, 1998; Mauro,
19974).
(v) The run for rents may result in a total disregard of existing procurement laws
and procedures. Politicians may also be motivated to create inefficient rules
intended only to generate rents for the public officials (Tanzi, 1998).
(vi) Point (i) and (iii) explain the increase of public spending due to the too high
payment for goods and services and the promotion of unnecessary or
unproductive expenditures. These inferior investments also decrease
government revenues, explaining parts of the budget deficit facing many
countries in which corruption is comprehensive.
(vii) Finally, it has been argued that corruption increases efficiency when the existing
rules are too rigid and when the bribes to be paid are predictable (Leff, 1964).
The given arguments about rent seeking clarify why this might be true only
when the perspective is limited to the individual and restricted in time.

To illustrate the economic impact of rent seeking and corruption with an example,
imagine that a highway is to be built, a $500 million project. Ten companies take part
in the tender. A modest suggestion is that five companies each pay $500.000 in
various types of grease payments to win the contract, while the winner also pays 10%
of the contract value, $50 million. The apparent effect is that $50.250.000 is wasted
(at least if the money is brought out of the country). Besides, the bribe paid by the
contractor most probably inflates the highway price, or makes the company skimp on
quality. The other four bribing companies also have to regain their sunk cost, for
instance by increasing prices on other products offered by the company, contributing
to higher domestic inflation. Macroeconomic effects are obvious if this example

4 Mauro (1997) finds that government expenditure on education and health is negatively correlated
with higher levels of corruption. Between corruption and the level of public spending, however, he
does not find any relationship. According to Tanzi (1998), the reason may be that corruption both
increases public spending and decreases government revenue, so that the pressure on higher spending
is balanced in part by the reduction in resources necessary to finance spending. In general, however,
statistical research on corruption is questionable, mainly because the data material on corruption is
dubious.

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portrays e.g. ten percent of the public acquisitions in a country. This percentage is
most likely higher in countries experiencing extensive corruption.

2.3 Corruption, “state capture” and transition

economies
A different side of bureaucratic rent seeking is state capture, defined as the propensity
of firms to shape the underlying rules of the game (i.e. laws, decrees and regulations)
through illicit and non-transparent private payments to public officials (Hellman et al.,
2000a). State capture evolves as a result of grand corruption. Key state institutions are
“captured” by private interests to bias the policy-making process in favour of
particular firms, leaving the operation of government non-transparent. The underlying
threat to democracy is obvious when elected politicians and public officials make
decisions on grounds deviating from the expected.

During 1999 the World Bank and the European Bank of Reconstruction and
Development (EBRD) co-operated on a survey across 20 transition economies to
acquire more information about grand corruption, manifested as “state capture” in the
corporate sector5. Firms were asked about the extent and frequency of bribery, the
recipients of bribes and the nature of the corrupt transaction. Some of the World Bank
researchers conclude that the problem of state capture is particularly prevalent when
“firms face insecure property rights, insufficient economic liberalisation and
competition, and only a partial liberalisation in civil society and media activities,
impairing their ability to effectively monitor the activities of the state" (Hellman et al.,
2000a).

When it comes to public procurement the survey finds that 14.6% of a company’s
total amount of bribes is averagely spent to obtain governmental contracts, in four of
the countries between 30% and 45%6. On average the companies in all but one
country paid more than 2% of the contract value in additional or unofficial payments
to win the public procurement contract. The survey included the following question
asked to reveal the opportunity for public officials to engage in corruption: ”How
often is the following true? If a government agent acts against the rule I can usually
go to another official or to his superior and get the correct treatment without
recourse to unofficial payments.” This was most often not the case. Only 10% of the
respondents in all the 20 countries answered “always”.

The survey also reveals that bribery means more time on contract negotiations, not
less; that more than 50% of the companies admitted bribery in 18 of the 20 countries;
that in 17 of the 20 countries bribery represents an average cost similar to 3%-8% of
yearly enterprise revenues; that new private firms have to pay higher bribes and meet
corrupt demands more often compared to more established enterprises, and that small
companies are more exposed than large ones. The strong incentives for new firms to
engage in state capture represent a serious problem. State capture weakens the state’s
capacity or commitment to enhance security of property and contract rights, a
5 The survey is called the 1999 Business Environment and Enterprise Performance Survey (BEEPS
1999) and is part of the World Business Environment Survey. It covers the perspective of 3000 private
enterprises in Central and Eastern Europe and the former Soviet Union.
6 Croatia, the Czech Republic, Estonia and Slovenia.

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weakening that further amplifies the incentives of other firms to influence on state
activity by the help of corruption, representing a vicious circle. In conclusion, the
survey warns about the active “captor’s role” of private companies and describes a
need to include strategies for addressing the way in which firms interact with the state
in the planning of public sector reform.
2.4 Impaired competition, abated international
interest and firm behaviour
“Systematic corruption can induce inefficiencies that reduce competitiveness. It may
limit the number of bidders, favour those with inside connections rather than the most
efficient candidates, limit the information available to participants and introduce
added transaction costs” (UNDP, 1997). These distortions of market forces obstruct
the ordinary benefits induced by competition, like the achievement of best value for
money, a rational allocation of resources, and the pressure experienced by individuals
and companies for general improvement. Usually, a public tender affected by
corruption represents an inefficient investment of public assets. One reason is inflated
prices, another is that a corrupt official who discriminates in favour of some bidders
frequently selects an inefficient contractor (Lien, 1990; Rose-Ackerman, 1978).

A pervasive level of corruption in the economy may also abate the international
interest in both trade and foreign direct investment (Wei, 1997 and 1999), resulting in
a GDP growth lower then it could have been and a reduction of qualified competitors
in procurement projects. Corruption represents an increase of trade or investment
expenditures to a foreign enterprise. When demands for bribes also appear
unpredictable, counting on the necessary profit is difficult.

Predictable corruption, however, may not necessarily be less harmful than

unpredictable corruption. Lambsdorff argues that confidence in corrupt deals
enhances the further spread of corruption. “When business people have confidence
that after paying a bribe a return will be provided as promised, there is less
motivation to seek legal alternatives” (Lambsdorff, 2001b:14). The uncertainty with
regard to costs may thus cause the enterprise to turn the tender in question down.
Besides, operating in a situation with informal rules is difficult as the company may
not understand how to behave and react, who to bribe (and not to bribe), what contact
to grease, etc., explaining a certain refusal to approach the economy. Companies may
also decline tenders likely to be affected by corruption because of legal restrictions on
bribery of foreign public officials7.

The companies defying all these challenges, on the other hand, experiencing
successful trade or investment in the economy despite high levels of corruption, often
exhibit a more lenient attitude towards bribery. Furthermore, UNDP (1997) explains
how the uncertainties introduced by corruption into the economic environment may
affect the way private firms do business. The firm may take up a short-run orientation,
fearing either that those in power may overthrow because of their corruption, or the
imposition of arbitrary financial demands once investments are sunk. The
consequence may be a reluctance to invest in stationary capital and a too hasty project
7 When it comes to investment, Brunetti and Weder (1998) show that uncertainty caused by regulatory
instability, of which corruption is only one element, affects investments more than does corruption
itself.

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completion ignoring quality demands. Political instability is though not always a

problem in countries where corruption is extensive.

Of course, these problems are not characterising all companies. To some degree,
however, the attitude towards bribery and the effect on firm behaviour may cause an
adverse selection of foreign companies operating in the economy, companies whose
success rests on bribery. Such an adverse selection of companies would ensure a
constant flow of illegal payments to public officials, and restrict the efficiency of anti-
corruption measures.

2.5 The dynamics of corruption

Another serious aspect of corruption is the way it amplifies other problems facing a
society. Making an end to bureaucratic rent seeking is a very difficult task, as this
“bad habit” tends to be increasing with the level of corruption.

According to Andvig and Moene (1990), the negative dynamics can be explained as
follows: When corruption is rare, the economy is in a “lowcorruption-equilibrium”, in
which both demand and supply is limited. Looking for someone to bribe is more risky
when the bureaucrats hold high ethical standards. With increasing corruption levels,
however, the request for bribes becomes easier, so does the proposal of bribes. The
moral scruples of corruption as well as the risk of being caught, falls with a higher
frequency of corrupt acts. This way corruption may lead the economy into a vicious
circle, ending up in kleptocratic circumstances under which corruption is the standard,
where honesty is too costly, with a general disregard of law and a higher level of
criminal activity, and where each individual is busy making the most for him/herself,
feeling no obligations for the country. The situation is often referred to as a
corruption-trap. This self-propagating force of corruption may also explain parts of
the difference in corruption levels sometimes experienced by quite similar economies.
(Andvig and Moene, 1990; Søreide, 2000).

The figure below describes several adverse dynamic effects initiated by corruption.
These effects recoil on the extent of corruption, representing interaction and thus
vicious circles.

Various rent-
Abated risk seeking
of being problems
State capture by
caught the corporate
Reduction of the sector
transaction costs
involved with Pervasive corruption Impaired
corruption

Adverse Impaired morality

selection
of employees
Organise Adverse selection A weakening of
d of companies the juridical
Figure 3.1 criminalit operating system
in the economy

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This theory on the dynamics of corruption also includes positive circles, in which a
small reduction of the general corruption level may result in a significant
improvement of the situation. A strategic choice of anti-corruption measures may in
some cases commence this kind of positive dynamics, facilitating the fight against
corruption.

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3 The complexity of procurement and

the mechanisms of corruption

Public procurement is a complex matter in a two-dimensional way. First, it represents

many different situations, anything from the construction work of a new international
airport to the acquisition of pencils. Second, the tender procedures usually include
several steps, from designing the tender to evaluating the bids. Both the procedures
and the opportunities for corruption vary significantly among the categories of
procurement. To make these differences more visible this chapter starts by classifying
procurement. Subsequently the mechanisms of corruption are studied, asking how the
corrupt agreements are carried out. Section 3.2 considers corruption carried out by
cheating on the procurement rules, while Section 3.2 describes corruption through
legitimate deviations from the existing rules. This section also includes bribery
without a specific case, frequently referred to as ‘grease payments’.

3.1 Different situations – different risks of

corruption

The procedure
Governmental procurement is often supposed to be carried out according to the
principles of International Competitive Bidding (ICB). (A discussion about ICB
follows in Section 4.2). The major steps in this procedure are: (1) The choice of what
to request8; (2) The tender design, including the technical tender specifications and
criteria of evaluation; (3) Qualification and identification of the tenderers, including
pre-qualification and short-listing; (4) The tender; (5) Evaluation, contract award; (6)
Negotiations, final agreement; (7) Execution/delivery; (8) Evaluation and controls.

Each step is described by elaborated rules in the procurement directives, ensuring fair
competition and best value for money. Disregard of the rules is, however, a problem
in many countries. The ordinary procedure may be totally neglected, basing the
procurement on negotiations alone. Alternatively, one or several steps may be
ignored, leaving uncertainties about how competition and transparency have been
protected. There are several legitimate reasons to evade the rules. Section 3.3 explains
how these reasons can be misused to obtain bribes.

The type of contract

Within the ICB concept the type of contract may vary. The contracts most often
referred to are the “fixed price contract” where the price is determined before the
contract is awarded, the “cost-plus contract” in which the contractor is paid a fee plus
the costs of carrying out the project, and the “incentive contract” where payments
depend upon the contractor’s performance. These details are not actually part of the

8 The allocation of resources across the state budget is vulnerable to corruption, but not part in what we
generally call a procurement process. The procurement rules may neither apply to all sectors of an
economy. Procurement involving national defence or national security is often exempted from the
ordinary procurement rules.

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procurement procedure, and therefore, outside the scope of this report. Important to
be aware of, however, is that the choice of contract between a government and a
company can be very important to induce cost-efficient behaviour, as well as to
reduce the opportunities for corruption during execution of project/delivery of goods
(Laffont and Tirole, 1993; McAfee and McMillan, 1988).9

Size, complexity and the sector of economy.

The size and the complexity of the project or product in question are the most
important factors explaining differences in motivation and opportunities for grand
corruption. George Moody-Stuart (1997) describes three criteria of attractiveness:

(i) Size: Bribes are often calculated as percentages of the total sum, representing a
proportional relationship. Hence, the more money involved the more reason to
demand a bribe.
(ii) Mystification: The more high technology involved, or seemingly involved, the
more attractive the project will be to the potential beneficiaries. This kind of
“mystification” reduces the risk of being criticised for paying too much.
(Moody-Stuart exemplifies: “How many people can say whether a particular
fighter aircraft should have cost $21million rather than $23million?”)
(iii) Immediacy: The term of office may be brief to many politicians, but also to
officials. From this it follows that the most attractive projects are those in which
the full purchase price, or at least a very substantial deposit, is payable at an
early stage.

Moody-Stuart (1997:14) also explains that: “A convention appears to be quite widely

recognised that the proportion of commission payable from the deposit or down-
payment belongs to those in office when the contract is signed, whereas the balance of
the commission goes to those in office when it falls due. It would be a vary rash
supplier who would be prepared to disburse the total commission in advance, as
subsequent office-holders might then prove to be very uncooperative.”

Compatible with the “criteria of attractiveness” is a ranking by Transparency

International, presented in the Bribe Payers Survey (Transparency International,
1999)10. Based on a high number of interviews, the survey ranks sectors of the
economy according to their vulnerability to corruption - as follows:
1. Public works contracts and construction;
2. Arms and defence industry;
3. Power (including petroleum and energy);
4. Industry (including mining);
5. Healthcare/social work;
6. Telecommunications, post (equipment and services);
7. Civilian aerospace;8. Banking and finance;

9 McAfee and McMillan (1988) describe the optimal cost-effective contract. They also discuss how
alternative types of contracting can be combined with competitive bidding. Laffont and Tirole (1993)
explore the issue of incentives in regulation and procurement.
10 For more information, see: www.transparency.org or www.transparency. org/
documents /cpi/bps.de.html

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9. Agriculture.

Rose-Ackerman (1999:29) argues, however, that not all procurement and contracting
scandals involve large-scale construction or capital goods projects. Goods that are
used up in consumption are “prime candidates for payoffs” because post-delivery
inspection of quantities and qualities are difficult. She exemplifies from a case in
Malawi where auditors found that millions of dollars of non-existent stationary had
been ‘purchased’ by the Government Press Fund.

Degrees of objectivity
“Whenever regulatory officials have discretion, an incentive for bribery exists”,
according to Rose-Ackerman (1999:18). This discretionary authority of public
officials often represents a golden opportunity to obtain bribes. della Porta and
Vannucci (2001) rank discretion as follows:

(i) When public demand and preferences are precisely defined with respect to both
qualities and price structure. The award is automatic, and the public agent
exercises no discretionary power.
(ii) While public demand is precisely defined, general criteria for prices describe the
public preferences. Discretionary intervention is necessary.
(iii) Public demand is not defined with precision. Public preferences are described by
general criteria for both price and quality. The public official has the power to
assign weight to the various offers, according to general criteria.
(iv) The demand and the public preferences are precisely defined during a bilateral
bargaining process, delegated to the public agent. S/he is choosing the private
part, while price and other contract conditions are the result of the negotiation
process.

This way of classifying public procurement into various degrees of discretionary

authority, or objectivity, is important to understand the inclination to corruption in
different situations.

To conclude, some elements important to understand the risk of corruption in public

procurement are: The amount of money involved, the complexity of the technology
involved, the urgency to acquire the goods or the immediacy of the project, as well as
the discretionary authority among the public officials.
3.2 Corruption through hidden violations of
ordinary procurement rules
Disturbing the procurement process so that one specific bidder wins the contest
represents a significant challenge. To reduce the risk of being caught the illegal
transactions must be hidden while it must appear as if the rules have been respected.
This section describes some of the more common ways to perform corruption in
public procurement.

The power of invitation

The public officials may have the power to decide which enterprises to invite to the
tender. One option to make the bribing company win the tender is to limit the call for

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bids, as well as keeping the project/acquisition secret as long as possible. The

competition appears real if a large number of companies are invited to the tender.
Della Porta and Vannucci (2001) explain, however, that these companies may not be
real competitors. The tender invitation can be sent to companies with a completely
different area of specialisation or without any experience in the relevant field. Another
option is to make sure that only a limited number of the invited enterprises receive the
invitation, and then put the blame on the mail system.

These methods become more efficient when combined with restrictions in time. The
public acquisition and the call for bids may be exposed for a very short time, so that
only the company/ies already informed have time to prepare the tender documents.
Making the tender public during holiday time, when most administrative offices are
closed, has the same effect. della Porta and Vannucci (2001:6) exemplify with a case
from Parma, in which a corrupt official in the public health system used “the summer
call for bid” together with a very close deadline for the presentation of the application.
In other cases, time restrictions may even provide the bribing company with a
monopoly situation, resulting in monopoly prices. This is also the case for sub-
contractors, as time limits may justify the use of other suppliers than those agreed
upon in the contract (Andvig, 1994).

Short listing /pre-qualification

Limiting the number of competitors according to previous experience is often referred
to as short-listing or pre-qualification, representing a necessary step in the procedure
when a high number of companies offering quite different degrees of quality want to
take part in the tender. The inclusion on a shorter list may be dependent on a bribe,
instead of quality and experience. A real competition among the companies accepted
on a shorter list does perhaps take place, also when a bribe ensured their participation
in the tender. According to della Porta and Vannucci (2001), however, a more
common result is that the bribing companies share the contract among themselves like
in a cartel, increasing prices and profits for all. In particular, this represents a threat
when all the contractors are local.
When only one of the pre-qualified companies has bribed the tender board,
justification of the contract assignment may be difficult if other companies apparently
have better bids. One option may be to put much weight on one particular criteria of
evaluation met by the bribing company only. Another possibility is to disqualify
unwanted suppliers, for instance on ethical or political reasons (like trade with
countries or groups in conflict with the government). If this fails, the tender may be
delayed or recalled on grounds of changed priorities, shortage of finance, or a
larger/smaller scope of work (Moody-Stuart, 1997).

The choice of technology

Another method in use by corrupt officials is to design the tender so that particular
qualifications are requested, representing comparative advantages held by the bribing
company. The protected company will thus offer the lowest price, and the contract
award is defensible. Rose-Ackerman (1999: 64) tells about “an African country [that]
reportedly once set its telephone specifications to require equipment that could

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survive in a frigid climate. Only one telephone manufacturer from Scandinavia could
satisfy this obviously worthless specification.”

The choice of technology has more consequences for larger projects. Andvig (1994)
explains the impacts of choosing either a production ship or an oil platform, made out
of either steel or concrete. In such cases, the choice directly affects what sub-
contractors to use. These specialised companies may thus have significant incentives
to pay bribes, paying the public officials directly or to a construction company in
order to be included in their bid.

Confidential information
There are numerous ways for a public official holding confidential information to
misuse his/her position. For instance, few acquisitions have a character that makes
them able to be treated completely automatic, only considering a price. Parameters
like technical value, times of execution and costs of utilisation can to some extent be
treated objectively. Some discretionary judgement will nevertheless often remain, for
example when it comes to design and architectural values. When the public
preferences are not clearly specified, the control of the choices becomes more
difficult. And where no reliable way of evaluating the bids exists the ground is left
open for corrupt officials.

Accordingly, the procurement procedure may appear competitive, still being

vulnerable to corruption. When the briber knows in advance the relative importance of
various parameters of evaluation, s/he can obtain the contract formally without any
irregularity (della Porta and Vannucci, 2001:9-10). And when it seems obvious that
several competitors had a better offer, the contract award may be justified by the
extreme importance of one particular evaluation element.
Confidential information may also be bought for bargaining. Negotiations between the
government and the chosen contractor on the terms of agreement are common in
projects of significant size and complexity. For the company it will be easier to
improve the contractual conditions when it is provided with confidential information
about the other bids. A company holding a bid below those of the competitors may
use the information to bargain an “uplift”, a higher price without technical
improvements. And when the winning bid is high (to ensure profit) the company may
bargain to reduce the contractual obligations. The potential gain of holding
confidential tender information may thus be substantial, and in several sectors
“information brokers” operates between the state and the companies involved, selling
and buying facts and figures (Andvig, 1994).

Modifications of the contract

della Porta and Vannucci (2001:14-20) explain the way price revisions, modifications
of the contract or obstacles to a quick payment of procurement contracts may be
motivated by corruption. Changes of initial projects or supplementary works can be
justified by new events or conditions found after the contract has been drawn. When
the bureaucratic capacity of projecting and planning is inefficient such changes are
particularly likely to occur. One explanation may be the incentives of the contractor to
manipulate decisions regarding modifications or additions to the original project, as

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this kind of work usually increases the enterprise profits (also when rates for
supplementary works are contractual). Hence, inadequacy among public officials in
charge of the project can be misused by the executing enterprise. The enterprise
ability to understand deficiencies of the initial project and to forecast the nature and
dimension of the changes may thus become important to win public procurement
contracts in general. Bribes are paid in this context to obtain promises of changes and
additions of the work, so that the enterprise can win the bid with an inferior offer.

Similar agreements may also be settled once a project has started. Andvig (1994)
explains several ways to obtain a request for supplementary work. The technical
expertise of the procurement department can be bribed to ignore work that is left out
of the contract. Those who define what to be counted as supplementary work may be
corrupt. Or, the public officials may delete parts of the contract once the enterprise
has won the tender, again in exchange for a bribe.

Other commodities worth bribing for during execution are time extensions (including
more payment), as well as already agreed upon payments of the work. Both Jain
(1998) and della Porta and Vannucci (2001) describe the way payments are delayed
by the public officials in order to obtain bribes. This measure is efficient as enterprise
expenditures on the project increase continuously. Besides, such delays are also
applied to sanction defections from promises of bribes. A final example on how to
obtain bribes during execution is the proposal of impaired controls. Skimping on
quality without (short-term) risk may leave the project more profitable as expenditures
are reduced. The completion may also be achieved sooner than intended.

Hence,
“Those who believe – and particular those who want to believe – that grand
corruption in the South is not really a major problem, place much reliance on the
discipline of International Competitive Bidding. They are deluding themselves. ICB
makes life a little more complicated for the suppliers and the receivers of corrupt
payments but it seldom defeats them.”
George Moody-Stuart
(1997:16)

3.3 Corruption through legitimate deviations from

the procurement rules
The previous section discussed the way deviations from the procurement rules can
have considerable consequences caused by corruption. This section concentrates on
the deviation of the competition-ensuring rules, motivated by corruption but justified
on legitimate basis. There are indeed many examples of the total neglect of
procurement procedures, contract awards with no justification for ignoring the rules.
These cases represent a political problem outside the scope of this report. The focus of
this section will rather be on the reasons for being suspicious to justifications given
for avoiding ICB, while assuming that procurement rules usually are respected.

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Justifications for bilateral negotiation of governmental

contracts
A common applied justification is the preference for a previous supplier whose
performance has been satisfactory. Working with known and trusted faces, the
uniformity of spare parts and familiarity of operators with similar equipment represent
real advantages, though often over-valued in price compared to the cost-efficient
result usually achieved by competitive bidding. These advantages may be alleged and
cover a corrupt transaction (Moody-Stuart,1997).

Other reasons for avoiding the bidding procedure are speed and cost. MoodyStuart
(1997:16-17) explains that “the need for a very detailed specification and proper
legal formality in tender documents, as well as the time required for bidding and
adjudication of bids, certainly makes ICB a time-consuming business.” Usually, the
tender procedure will delay a project by at least six months. In many cases this delay
is a legitimate excuse for deviating from the bidding procedure. However, it may also
be applied to cover corruption.

Referring to the aspect of cost is also possible, but seldom an honest excuse. There are
at least three conditions for a direct negotiated agreement to be superior to ICB in
cost-efficiency: Public officials holding (1) the necessary technical competence, (2) a
cost-minimising focus, and (3) a high morality. These are qualities difficult to control.
Consequently, the potential for corruption and dishonesty makes direct negotiations
inappropriate for most major contracts.
Major events and states of emergency
Speed is already mentioned as a corruption-motivated reason to deviate from the rules.
In some cases, the project is really urgent, for instance after an environmental disaster,
or a sudden happening. In these exceptional cases certain public agents may be
provided with significant authority for signing contracts exempted from the ordinary
procurement rules, de facto also exempted from monitoring procedures.

In these cases the agent may hold the maximum degree of discretionary power (see
Section 3.1), and corruption may be considered both easy and less risky. The Okinawa
G8-meeting in 2000 is one such example of generous funding combined with inferior
inspection. The spending has been subsequently investigated, and has so far resulted
in several public officials being charged of corruption. Two officials are accused of
fraud of approximately $250.000 when awarding a car rental contract. A public
official working in the department of foreign affairs told The Japan Times that
accountal inspection is inferior in connection to major events as long as budgets are
not exceeded. For some reason, however, the voted funding was exceptional large in
this case, at about $700 million (Aftenposten, 18.07.2001).

Motivated by corruption, the definitions of urgency and exceptional may be extended

to avoid an ordinary competitive bidding procedure. In Italy a “culture of emergency”
developed, and resulted in “a systematic search for the exceptionality” and a frequent
use of “mechanisms of arbitrary choice in public contracting” (della Porta and
Vannucci, 2001). According to the same source, 75% of 10.000 billions of lira
contracts in connection with the 1990 Italian World Football Championships were

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awarded through “private negotiations”. All the contracts assigned in connection with
the Celebration of Christopher
Columbus Anniversary of 1992 were also assigned by such private negotiations. And
after the earthquake in Irpinia, 1980, “public bodies received a huge amount of public
funds to be spent with full discretion,” resulting in numerous judicial inquiries on
bribe payments.

Corruption without a specific case

It may appear difficult to define corruption exactly, and the legal aspect of “grease
payments” and “maintenance of connections” might be uncertain. This kind of
activity may thus turn out to be legal. It may also have significant effects on the
assignment of public contracts.

della Porta and Vannucci (2001:22) explain that enterprises specialised in the public
market often search for a “general protection” inside the public administration. In this
way they may avoid obstacles created by rent-seeking officials, as well as “problems”
that may arise in an unpredictable bureaucracy (like loosing the contract to another
company for no apparent reason). The general protection is provided with some kind
of personal benefit even if no specific case of corruption takes place.
A legal establishment of connections may also represent the initiating step towards a
corrupt agreement. According to Lambsdorff (2001a) corrupt agreements may emerge
as a by-product of already existing legal relationships. This problem is present all over
the world but is more serious the wider the bounds for public officials to pursue
private interests in work.

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4 Public procurement anti-corruption

strategies

The number one problem in the planning of a governmental procurement reform is the
contradicting considerations. Within given resources the procedure is supposed to be
fair, competitive, information-protecting, transparent, cost-efficient, impartial and
ethical, with rules ensuring secrecy, accountability, simplicity and justice. These
demands indicate a complicated task that is not simplified by the fact that too many
changes facing the public officials may ruin the success of reform.

When it comes to corruption in particular, the contradiction between simple rules and
discretionary authority implies a certain challenge. A desire to regulate all
procurement situations arises, making the procedure automatic in most cases.
However, when rules become more complex, more reasons to deviate from them
usually arise as well.

This chapter describes important qualifications and strategies to reduce the

opportunities for corruption in public procurement. An overview is provided in
Section 4.9.

4.1 Political commitment

Corruption in public procurement is often caused by top officials over-ruling the
tender board, disregarding existing procurement rules 11. Where this is common, it may
be more difficult to find honest officials at lower hierarchical ranks. Hence, it is found
in most countries that the fight against corruption must start with an explicit
commitment by the prime leadership of the country. Ending the pettier forms of
corruption in the bureaucracy is difficult if the grand political corruption persists. An
honest intention has to be followed up by good behaviour, expressing opposition
against all forms of corruption, whether it involves family members and friends,
political associates, or other members of government.

Accordingly, political commitment is a necessary condition for successful

procurement reform. New rules alone are not sufficient. In many countries the
regulatory framework is too wide as it is. Tanzi (1998) explains that one reason for
corruption in developing and transition economies is that the role of the state to a
large extent is carried out through the use of rules and regulations. The many
regulations provide the public officials with a monopoly authority that may prove
useful to demand bribes. In order to reduce the level of bureaucratic corruption it will
therefore be important to reduce this regulatory framework, while improving, as well
as executing, the anti-corruption laws. della Porta and Vannucci (2001) explain the
early 1990s’ procurement reform in Italy as symbolic and that the levels of corruption
are probably again increasing. This is partly due to a resistance against anti-corruption
laws in the Parliament. As a paradox, “it seems that in Italy institutional reforms,

11 Coolidge and Rose-Ackerman (1997) provide an economic model and a broad discussion about
political commitment as a necessary condition for reform. The paper includes case-studies from
Botswana, Nigeria, Uganda and Somalia.

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relevant for the struggle against corruption, were easier to develop the less they
focused on corruption” (della Porta and Vannucci (2001: 25). The need for individual
protection in higher political circles may thus undermine the total effect of an anti-
corruption reform.

An anti-corruption reform of the public procurement system also depends on the

political will to disclose the state budgets, extend the obligation to keep accounts,
establish external monitoring systems and improve public access to bureaucratic and
political information. The culture of concealment, prevalent in many corrupt
bureaucracies, need to be replaced by a “culture of transparency”. Extended freedom
to the press is an important element to establishing such a new culture.

A final but not less important issue of political commitment is the necessary will to
revise the salary structure for public sector employees. The combination of higher
payment and larger risk of being caught was a central element in the successful anti-
corruption reforms carried out in Singapore and Hong Kong. The curbing of
corruption may thus turn expensive, though it will probably not exceed the price of
doing nothing. Section 2.5 describes some dynamic effects of corruption and warns
about vicious circles. As also mentioned, these circles may turn the opposite way by
implementing anti-corruption measures. Today, a significant amount of knowledge is
generated on measures to combat corruption, and some of our international
organisations (like the World Bank and the UN) have worked out comprehensive anti-
corruption strategies.

4.2 The organisation of public procurement

International Competitive Bidding (ICB) is the most accepted procurement procedure
worldwide, mainly due to a high probability for a cost-efficient result when applying
this system. One problem, however, is the many ways ICB can be manipulated. This
implies that the cost-efficient result aimed at by ICB, is dependent on certain
institutional qualities held by the state administration. Rose-Ackerman (1999:63-68)
argues that many developing countries may not fill these necessary conditions, as the
level of corruption may be extensive and the scarcity of economic and human
resources severe. Hence, when the ICB concept is unlikely to be effective, alternatives
to the procedure should be considered.

Performance rating
One example might be a system of "performance rating", as is part of the new
procurement system introduced in the United States (in combination with ICB). This
represents a negotiated contract where the company is chosen on the basis of past
experience. For smaller countries, the reputation of bidders can be drawn from the
international arena. Rose-Ackerman argues that performance rating would reduce
malfeasance and improve efficiency for many developing countries with limited
capacity to carry out complex bidding procedures. At its best, it would encourage
good performance at both sides of the table. Companies would have incentives to
perform well in respect of contract agreements and they would be rewarded for
helping the government to avoid mistakes. In order to improve their “performance

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rating” they would also have incentives to make investments and innovations
specifically for the government work. Under ICB principles, in contrast, the lowest
“responsible” bid must be accepted. If followed mechanically, this rule can lead to
low-quality work and bid-rigging, in addition to the mentioned risk of corruption.

The major subjects of controversy regarding performance-rating are the evaluation of

experience and the problems for small and new companies to enter the market. A
further problem with performance-rating is actually the risk for corruption, as it
asserts a high degree of discretion. Besides, several of the problems explained in
Chapter 3 may also arise within this system. As compared to ICB, however,
performance rating could be preferable if combined with an independent procurement
unit.

Procurement unit
A well-functioning tender procedure is dependent on a high degree of professionalism
among the responsible public officials. Professionalism is, however, difficult to obtain
when the general level of education is low and when jobs are better paid outside the
state administration. A procurement unit of few but well trained officials could
therefore be established. Independence is important for protection against corrupt
politicians and high-level officials. An improvement of the state’s reputation in
procurement cases, might be another beneficial consequence of an independent
procurement unit, increasing the attractiveness of FDI and trade with the country. A
decent wage in combination with bonuses and loss of position in case of corruption
would be necessary to encourage to an honest award of contracts. A control system
would also be needed, carried out for instance by a the General Accountant.

Provided with thorough instructions about the goals of procurement, the procurement
officials could (to some degree) be accountable for the contractor's ability to fulfil the
procurement goals, as well as for the absence of corruption. Independent and
accountable procurement units are also part of the US model on procurement
(developed by Steven Kelman, Harvard)12. This model is more focused on the results
of procurement, and provides the procurement unit with considerable flexibility to
determine the procurement procedures. Decisions about what to procure become no
less important than decisions about how to carry out the procurement.
Performance-rating in combination with an independent
procurement department represents a fundamental shift in perspective. The suggestion
is motivated by the problems related to ICB, and included mainly to encourage a
critical attitude towards this ruling system. Most of the discussion in this paper
assumes an ICB procedure.

4.3 Elements important to reduce opportunities

for corruption
This section continues the focus on organisational matters of public procurement. In
contrast to 4.2, however, we now turn to more detailed recommendations. Issues of

12 For more information about the US model on procurement, contact the US Department of
Commerce. www.stat-usa.gov

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concern are disturbance of corrupt relationships, simplification of rules, bench

marking of prices, supplementary works and rules for exceptional cases.

Disturbance of corrupt relationships

A challenge in the arrangement of corrupt agreements is often the search for a proper
counterpart. It is important to find the right connection, preferably in a manner so that
only the relevant connection knows. This is a risky undertaking as the counterpart
may refuse on moral grounds and thus reveal the corrupt proposal. Apart from the will
to be corrupt, the associates must also be “honest” enough to carry out their part of the
agreement. The settlement of a corrupt contract represents a challenge on its own, as it
may prove difficult to determine the appropriate value of a bribe and how to disguise
payments. The transaction costs involved with corrupt agreements may thus reach a
significant level. However, these costs are reduced by the help of rumours, past
experience and the establishment of secret networks of associates. When this kind of
transaction cost is reduced corruption becomes cheaper (Lambsdorff, 2000 and
2001b).

Accordingly, Lambsdorff (2001a) argues that an important anti-corruption strategy

would be to disturb these established connections and increase the transaction costs of
corruption. Rotation of public officials responsible for procurement could be an
important measure in this respect. In countries experiencing rampant corruption, the
benefits of reducing the opportunities for corruption may be superior to those obtained
by keeping each official with a permanent area of responsibility. However, rotation
may also lead to increased corruption if the officials use the opportunity on a lucrative
post to steal as much as possible. Still, UNDP (1997) suggests the strategy, but warns
that in a highly corrupt bureaucracy, superiors may use their ability to reassign
officials for not playing along.

A common way to reduce the opportunities for corruption is to separate the evaluation
work in the purchasing organisation, so that the economic department receives the
price information in the bids while the technical department evaluates the quality
specifications of material solutions. A consultancy is often applied for the technical
evaluations. It may be important to divide large decisions into separable tasks.
However, as a strategy against corruption it might be worth reconsideration.
According to Andvig (1994) this kind of separation may create opportunities for
middlemen with high technical competence to buy information in the economic
department and subsequently sell it to bidding companies. Also della Porta and
Vannucci (1999) argue that the number of decision-making centres should be reduced.
Hence, the fewer officials informed about confidential information, the fewer can
profit by revealing it.

A further way to “disturb” corruption is to reduce the opportunities to delay the total
procedure or parts of it. A public official may profit on delays as continuation could
depend on bribes. Strict time limits by which a given request must be rejected or
accepted are therefore important to curb corruption, or to “reduce the chance that
public officials invite bribes by simply sitting on requests” (Tanzi, 1998:124). Still, the
time limits must be wide enough to allow adequate and reasonable time for interested

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suppliers to prepare and submit the responsive bids (APEC, 1999). If not, these time
limits may be misused to protect a bribing company, as explained in Section 3.2.

Simplification of rules
It is important that the underlying rules are clear and simple, so that people know what
an honest system is supposed to produce. 13 Uncertain and variable rules, in contrast,
create opportunities for corruption. Information about areas of responsibility and
degrees of discretionary authority among public officials should be accessible to
ordinary people. Changes of the rules should also be published immediately.

This sort of transparency would make corruption more visible, and hence more risky
for the agents involved. It is also important to establish whether officials act outside
their area of competence in return for bribes, or whether they are providing something
the payer should have received without a payoff (UNDP, 1997:2).

Despite the need to regulate authority, several researchers working on this field
recommends a simplification of rules. della Porta and Vannucci argues as follows:
“An excess of rules stiffens the administrative system, justifying the emergency
procedures, which then support the violations; the possibility to apply one law or the
other, to implement or not to implement a control increases the arbitrary power of
public administrators, and the push for private entrepreneurs to recur to ‘political
protection’.“

Bench marking and off the shelf items

Rose-Ackerman (1999:63) argues that also the goods procured should be “simplified”.
Anti-corruption benefits is just one of several economic reasons to prefer standardised
products to more specialised custom-made or “state-of–theart” products. The state
administration should apply private market prices as benchmarks and specify their
requirements in terms of standard off-the-shelf items. This would reduce both the cost
of procurement as well as the risk of corruption. International prices instead of
domestic prices should be preferred as bench marks because the government’s own
demand is unlikely to affect these prices. Goods sold in international markets should
thus in many cases be favoured. 14

Supplementary work
Section 3.2 explains the range of opportunities for corruption exposed in the “concept
of supplementary works”. Accordingly, the way additional work is specified in the
contract is very important to reduce the risk of corruption. Does such kind of work
have to go through a new procurement procedure? Or is it supposed to be carried out
by the same enterprise? The latter might end up in a monopoly price if not prices of

13 The procurement rules developed by APEC (Asia Pacific Economic Cooperation) are exemplary in
their simplicity and their practical applicability (www.apec.org).
14 The suggestion about a preference for goods sold in international markets must of course be
weighted against other regards, such as the need to develop domestic economic activity. The
perspective of this report is limited to the problem of corruption. When it comes to bench marking,
quite detailed prices are obtainable in international trade statistics.

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supplementary work are determined in advance. And what is the definition of

supplementary work? These questions should be clearly answered in the procurement
contract, while decisions to change or supplement the project should be monitored
with caution by officials external to the centre in charge of the contract award.

Rules for exceptional cases

Some of the opportunities to misuse rules regarding exceptional cases are explained in
Section 3.3. The exceptional situation may endure for a long time, for instance a war
creating a constant state of emergency. Rules for emergency cases should thus not be
absent, just made as simple as possible. The “emergency procurement” should be
followed by evaluation and the rules applied for the real emergency cases only. It is
therefore important to define the term “emergency” precisely.

In order to reduce the threat of “emergency cases” occurring after the assignment of
contract, the introduction of insurance coverage and payments of deposits should be
considered. To some degree at least, this sort of obligatory payments could protect
both the public administration and the winner of the contract against non-fulfilment,
burdens due to unanticipated difficulties, and other unforeseen circumstances (della
Porta and Vannucci, 1999).

4.4 Transparency and the problem of discretional

power
“Transparency is a central characteristic of a sound and efficient public procurement
system and is characterised by well-defined regulations and procedures open to
public scrutiny, clear standardised tender documents, bidding and tender documents
containing complete information, and equal opportunity for all in the bidding
process,” (UN, 1999:4). This quotation expresses the major points in this section.
Trust, communication and information
Making information confidential often creates opportunities to obtain bribes. Access
to information ought therefore to be the number one transparency principle in tender
procedures, still including a few exceptions. The governmental request should be
announced as early as possible and invitation for tender published in due time in the
major newspapers, specialised trade journals, as well as some other compulsory
sources. Among the information to be included in this announcement are the objective
of the procurement, the chosen procedure, the most important rules and time limits,
the criteria of evaluation, demands regarding tender documents, and other important
conditions. APEC (1999) provides more details in this respect.

Protection of competition and business secrets represent the major reasons to deviate
from the principle of transparency. The tender can be open in cases where this kind of
protection is unimportant. However, in sealed bid tenders the competitive element will
be undermined if one company holds information about the other competitors’ bid.
The market value of this type of information can be very high, and thus beneficial for
public officials and information brokers to get hold of.

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The bids may also include business secrets, like technological knowledge and
organisational expertise. Diffusion of this information may reduce the competitive
advantages of a company. Before deciding whether to join a tender a company
probably translates risk to cost when measuring out the possible profit. A weakening
of the enterprise confidence in the tender board will thus in some cases reduce the
number of competitors attending the tender. Consequently, a general confidence in the
bureaucracy that secrets are kept within the system is important to ensure competition.

It takes some time to build confidence. However, encouraging respect for the
communication rules of procurement is a significant step in the right direction. In this
regard APEC (1999:10) declares that: “Contact between all procurement and
evaluation personnel and tenderers and prospective tenderers should be on a formal
basis once the formal procurement process starts.” Other information rules, such as
keeping tenders sealed until the designated time of opening, and the impartial
treatment of all bidders, are equally important.

To improve confidence in the tender board it is also important to provide the

unsuccessful bidders with an explanation of the rejection of their bid and relevant
information about the tender (the number of competitors, their total contract price,
etc.). These tender participants, as well as other interested parties, must be allowed to
complain about the contract award, as well as the tender procedure. The procurement
rules must therefore include an appeal procedure. Accordingly, a board of contract
appeals should be appointed, for instance as part of the institution responsible of
monitoring public procurement.
As a concluding remark, the confidential parts of the bids have to be kept secret, while
open information must be accessible for all. Partial solutions in this respect will
provide opportunities for corruption.

The use of discretional authority

This topic represents a difficult balance. While the integrity of public officials should
be assumed, one should not trust that decisions are unaffected by personal benefit.
The perceived level of corruption and fraud in the bureaucracy is important for the
choice of strategy against possible opportunistic judgements, although mechanisms to
reduce the opportunity for corruption are important in all countries.

The contradiction between regulations and discretionary power represents another

challenge. As complicated rules increase both the inclination for corruption and the
cost of running the state administration, the number of directives regulating discretion
should be minimised. One should not aim at developing rules for every kind of
evaluation that may arise in all the different categories of procurement. In contrast,
significant attention has to be paid to the objectives of each single procurement
project.

To identify the desired outcome of each procurement activity, the officials in charge
should consider “where, why and when the need arises and for how long and for
which unit or location”. This quotation is one out of several practical advises for the
procurement planning procedure, offered by APEC (1999:5, Paragraph 18-24).
Accordingly, a thorough planning procedure has to take place in front of each

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procurement project. In particular, the identification of need and allocation of public

funds are important in this respect. The practical consequence of a more thorough
planning procedure, will thus be a reduction of discretional authority, while the
procurement rules are not made more complex.

Enabling inspection
All kinds of procurement decisions have to be monitored in some way. For
discretional procurement decisions this represent a certain challenge. While elements
like technical value, times of execution, costs of utilisation to some extent can be
monitored objectively, there will often remain an aspect of evaluation that is clearly
individual (della Porta and Vannucci, 2001:9). Also to enable inspection of these
judgements, specific objectives are the solution. When significant problems arise
during execution, a committee should respond, and not just one official.

The most important way to enable inspection is, however, record keeping. APEC
(1999:13) suggests: “Proper record should be kept of the entire procurement process,
including decisions and actions taken during the process and reasons for taking them,
to the extent that is sufficient to justify the decisions and actions taken. These records
should be retained for a predetermined period.” Both the APEC rules and the
UNCITRAL model law on procurement (UN, 1999) provide a list of the basic matters
to be documented.
To improve accountability and reduce the risk of corruption it is also important to
document the name of public officials responsible for the request, as well as the tender
procedure.

Codes of conduct and rules of disqualification

Rules to ensure integrity make it easier for public officials to renounce corruption.
Codes of conduct is a “compulsory” part of any procuring institution. However, they
should not just remain on the paper, but characterise all forms of bureaucratic activity.
A step in that direction would be to include ethical standards in the legal framework.

Codes of conduct are supposed to serve as an obstacle for private interests to interfere
with those of the government. Important elements are the way gifts and personal
benefits should be treated; forms of communication and association with external
agents involved in administrative cases; what to do when fraud or corruption is
discovered among colleagues; and what to do when uncertainty about these issues
arises. Transparency International provides practical details for such rules, as well as
an overview of the “codes” in use by different countries worldwide15.

Rules of disqualification are supposed to ensure integrity when codes of conduct is

insufficient. A high international standard of these rules is very important, for instance
to reduce the opportunities for insider-dealings. To illustrate, UNDP (1997:54) refers
to a case in Argentina where several officials who designed a highway privatisation
bidding process were employed by the companies that acquired the highways.
Lambsdorff (2001a:17) explains the risk of corrupt agreements carried out through
15 http://www.ti-bangladesh.org/cgi-bin/cgiwrap/Wtiban/bpvo.pl and
http://www.ti-bangladesh.org/cgi-bin/cgiwrap/Wtiban/bpvodocs.cgi

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common ownership: “Those who deliver and those who receive services or goods
[may] integrate vertically to form a new company under common ownership and
control. Raising the profit of the firm is now in the self-interest of each partner.”

Consequently, public officials in charge of the procurement should have no forms of

personal interest in any of the companies attending the tender, neither in countries
where corruption is the absolute exception.

Finally, it must be realised that introducing codes of ethics and rules of

disqualification are steps in the right direction, but not sufficient when the aim is to
change a culture of rampant corruption.

4.5 Competition and technological competence

Does competition impede corruption?

Competition impedes corruption, according to Ades and Di Tella (1999), because it
reduces the returns of economic activity and consequently also the funds available for
bribery. A reduction of the bribes may also reduce the motivation of public servants to
enter into corrupt agreements. These arguments are logical. Still, they should not be
allowed to pass unchallenged.

For instance, a look to the opposite situation, monopoly, makes it plausible to assume
that more control of the market means less reason to bribe. If only one enterprise is
able to provide the requested product, why should it pay bribes? Two companies
operating in the market, however, may result in a fully competitive price, much
dependent on the requested product. Under what circumstances will competition be
ensured?

The number of competitors is thus not a reliable indicator of competition. Attending

the tender of large projects means writing an entire book about technical details,
prices, qualities, etc., usually at a high probability of loosing the contract. Bidding
may thus represent an expensive undertaking. The more profit involved the more
apparent is the reason for commencing this work. Accordingly, a high number of
bidders may indicate that excess profits are anticipated, perhaps through corrupt
arrangements with officials. A small number of bidders may just mean that the
government is viewed as especially likely to assure a competitive bidding process. A
contract with a very high rate of return and a small number of bidders may, however,
indicate a deal based on corruption (Rose-Ackerman, 1999:67).

And finally, in a true competitive environment corruption is still likely to take place.
For instance, a competitive price may be the result if all the competitors pay about the
same amount in bribes. In this case bribes would appear as a tax and part of the
economic environment. However, a direct assignment of the contract is not the only
advantage obtainable through bribes. Chapter 3 explains that bribes are used to skimp
on quality, to reduce the obligations according to the contract, to obtain
supplementary work, etc. This implies that a company’s ability to influence on the
tender documents is important to win a tender in a corrupt environment. The
incentives to do so are obvious in a highly competitive market.

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International competition
Do the same arguments count for competition across borders? Perhaps multinational
enterprises are less inclined to bribe compared to those operating in domestic markets
only. These companies are often governed by additional legal constraints, they may
have adopted voluntary codes of conduct, including anti-bribery commitments, and
usually they are “keen to enhance their reputation and respond to stakeholder
pressures for more responsible corporate practices” (Hellman et al., 2000c:4).

Actually, the World Bank/EBRD survey of transition economy businesses, the BEEPS
referred to in Section 2.3, suggests just the opposite. According to Hellman et al.
(2000c:5) transnational firms headquartered abroad are more likely than other firms to
pay public procurement kickbacks. More than 35% of the FDI firms headquartering
abroad pay kickbacks for public procurement in the transition economies included in
the survey, while about 25% of the domestic firms admit bribery in public
procurement. The share is slightly higher for the locally headquartered FDI firms.
Hellman et al. (2000c:6) continues: “At least for transition economies, these results
challenge the efficacy of transnational anti-bribery conventions and laws or self-
imposed codes of conduct to reduce corruption by themselves.” Maybe multinationals
tend to adapt to new conditions, and bribe if the culture makes them believe that the
competitors do?

Therefore, opening up public procurement for international bidding is not alone a

reliable curb on corruption in public procurement. Applying international prices as
benchmarks in negotiations will probably be more efficient to obtain an international
competitive result. As argued above, this would also reduce the opportunity for
corruption in public tenders.

The need of private expertise to ensure quality

Technical expertise among the public officials concentrates the competition to price
offers and a more efficient result may prevail. This assumption supports the
establishment of an independent procurement unit with professional officials. Due to
experience, the technical skills will increase faster within a small group working on
procurement issues, compared to a situation when procurement is carried out by the
different purchasing institutions. Assistance from private sector expertise may,
however, be useful in certain projects, independently of bureaucratic professionalism.
In these cases it is important to be aware of the opportunities for corruption, and take
necessary precautions16.

A company may bribe the external (private) technical expertise to recommend a

certain solution appropriate to the bribing company. In cases when the
recommendations are confidential the technical expertise may try to profit on the
information. Implementing efficient measures is difficult at this point as well. Andvig
(1994) recommends evaluation from different perspectives, although he warns about
informal communication networks across company borders, for instance among
engineers or other professions. Due to such networks it may prove difficult to keep

16 Manipulation of the tender through technical details and corrupt officials is mentioned already. At
this point we concentrate on the external expertise, assuming an honest tender board.

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technical information confidential. Again, transparency, as well as determined

objectives, reduces the opportunities to sell or manipulate information.

Supply-chain corruption
In large projects a company aiming at participating in the tender usually makes a
number of technical decisions while working out the tender documents or after
contract assignment. These decisions may not be regulated in the tender
specifications, neither determined after a bidding procedure. Some examples are
technical specifications in minor operations, about the material to be applied, about
co-operating companies, design, environmental considerations, etc., decisions just
informed about in the tender documents without much discussion. These “sub-
decisions” are essential to niche companies aspiring to be included in the bid.
Corruption may thus take place in the tender procedure, still out of the control of the
governmental institution in charge of the procurement. Similar to other forms of
public procurement corruption, it may result in higher prices or less than optimal
qualities.

4.6 Tenders on the Internet

Using the Internet for public procurement is a new option for most bureaucracies.
Electronic commerce in general represents a new concept of trade and implies a
number of benefits, in particular a potential for reduction of costs and a simplification
of international trade. According to the UN (1999): “The many advances in
technology together with the relaxing of barriers to global trade have created an
unprecedented area of opportunity.” This section, however, will focus on the new
opportunities for corruption introduced by applying the Internet for public
procurement.

No assurance of a clean process

One of the benefits using the Internet is the new opportunity for a quick and paperless
exchange of critical business information. This will, however, also imply a
simplification of the opportunities for corruption. Electronic documents can easily be
copied, changed and forwarded to companies offering bribes. For instance, if one
company decides to send their tender contribution two days in advance to avoid
problems with net and server stability, a competing company may be offered the
secret documents and price estimates two days before the tender deadline. Again,
confidential information is an attractive commodity, in many cases worth a significant
bribe. When all the transactions can be carried out through the Internet, this kind of
corruption is simplified.

To reduce the opportunity for corruption all the participants should submit the bid at a
designated point of time. Otherwise, routines must be made to ensure that the tender
documents can wait safely on the Internet.

A further problem is the business secrets often part of the tender documents. This
information about one company will still be valuable for the competitor. Accordingly,
a simultaneous submission of the bids would not eliminate the incentives to bribe for

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confidential information, not even after contract assignment. The use of the Internet
will still make it easy to forward documents to a briber in a competing company.
Proper routines should thus be developed for all parts of the Internet tender. However,
it should be noted that any deviations from the routines to ensure a fair competition
and limit opportunities for corruption would also reduce the potential benefits from
using the Internet.

Irregularities in computer systems often occur in modern European or American

companies with a good computer network and infrastructure, as well as skilled people
to maintain the network. In many developing countries where the electricity supplies
and phone systems are less stable, this problem is much more frequent. Presence of
old computers, maintenance problems due to lack of spare parts, and a lower
competence of computer assistance would reduce the computer network stability. An
Internet tender represents transfers of large amounts of data. This can easily amount to
10s, maybe 100s of Mb. Applying an ordinary modem line for these transfers can thus
take hours. Even with an ISDN quality long transfer significant time are required for a
100 Mb. Stability problems in the e-mail systems, as well as limitations in the
computer memory and disk space at the local server, may turn out to be significant
obstacles to this transfer process.

Despite some technical problems, the Internet provides new opportunities to announce
a tender and also to distribute necessary information efficiently. When applying the
Internet for sealed bid tenders the risk of corruption is probably lower in the
prequalification phase compared to the final competition. In order to reduce the risk of
corruption concentrating the use of the Internet to this part of the tender should be
considered.

4.7 The supply side of corruption

Definitions of corruption tend to focus on public officials misusing their bureaucratic
position. The effect of measures may be limited if also the strategies for reform
represent such a biased perspective. In practice, both the payer and the receiver of
bribes must agree for corruption to occur.

A problem facing many developing countries in their achievements to curb corruption

is the continuous supply of bribes from more developed countries. Industry
representatives often point to an alleged cultural acceptance of corruption in the
importing countries, disclaiming responsibility and assuming a higher degree of
corruption in foreign countries. “By contrast, people from less developed countries
point to the difficulty of establishing an honest administration and a transparent
political environment when low-paid public servants are constantly offered side
payments by business people from industrial countries,” (Lambsdorff, 2000:43).

Multilateral measures to obstruct the supply of bribes have been established in recent
years, motivated by a US law that forbids companies to bribe abroad to obtain
business.17 The most important establishments are the OECD convention on

17 The US Foreign Corrupt Practices Act (FCPA) of 1977. In many years the US was pushing
countries to settle similar rules. The end of the cold war has facilitated widespread agreement and it has
proved easier to initiate multilateral measures.

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combating bribery of foreign public officials in international business transactions

(enacted in 1999) and the OAS Inter-American convention against corruption (1998).
A proposal for a UN convention is also in a preparatory stage. Evaluating the effect of
these efforts is difficult. The conventions are still important as they represent a new
willingness to confront the issue. They also illegalise cross-border bribery. A major
remaining problem is that the activity of middlemen is not sufficiently regulated in the
conventions.
Agents, middlemen and “fronts”
In many countries a local agent is the key to obtain a business agreement. The agent
represents the company and serves its interest in a foreign culture. In some cases the
agent also functions as the key to an informal network of public officials willing to be
corrupt. Different kinds of middlemen may thus play a central function in the
accomplishment of corruption. Usually the agent is independent of the company and
paid a certain percentage of the contract value after assignment. In cases of corruption
the independence is important to arrange for shady operations, still protecting the
name of the company. A company facing accusations of corruption may thus turn the
charges towards their agent to make him a scapegoat. In order to solve the problem of
“damaging information”, explained in Chapter 2, the agent may also keep the identity
of the company hidden, for instance when bribing to obtain confidential information.
In this way the agent serves as a “front” to protect the company (Lambsdorff, 2001a).

It is important to consider the function of middlemen, agents and brokers in the

procurement procedure if aiming at restricted corruption. A sufficient identification of
all the persons involved should follow the tender documentation, while some kind of
registration of middlemen should be requested. Middlemen that have bribed or tried to
bribe public officials should be excluded from future tenders.

Company responsibility
Both the domestic and the multinational companies face a dilemma when dealing with
corrupt regimes. Each company believes that it needs to pay bribes, as if it were a
victim totally unable to influence its environment. However, each company does
probably understand that they all would be better off if nobody paid. It is therefore
reasonable to claim also the multinationals responsible for the problem. This would
probably not scare the foreign companies off, but rather improve the investment
climate.

Accountability implies welfare aspects taken into consideration, as well as the

externalities imposed on other companies and the total business climate. Susan Rose-
Ackerman (1999:188) explains that it also means choices: “Companies operating in a
corrupt environment must decide whether to participate actively, quietly refuse to
deal, or report corruption to local authorities and to those in the outside world.” A
company choosing to keep quiet about a tender won by bribing competitors, has not
only lost business, but also contributed to a further cementation of the corrupt
practice. Reporting corruption, on the contrary, would embarrass the competitor, but
more importantly, it could have an important effect on bribery.

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White lists, self certification and anti-bribery commitments

Despite the open eyes of consumers, the media, and other watchdogs, accountability
and integrity do not come automatically from multinationals experiencing clear
incentives to bribe public officials. However, access to procurement may be a tool to
make private companies stay honest.

OECD (2000) calls it the “white list” approach. Companies certifying that they
comply with all anti-bribery laws and that they have internal managing and
accounting practices adequate to ensure compliance with these laws can be included
on the list. OECD (2000:81) further suggests: “Contractors must state that no bribe,
gift, benefit, or other inducement has been or will be paid directly or indirectly to
obtain the contracts; and contracts are terminated if the statements turn out to be, or
become false”. The system would need a certification unit administering a database of
“possibly clean companies” and “companies at risk”. As long as new opportunities of
corruption do not arise with such a system it may reduce the companies’ incentives to
bribe. The chances of making it do so increase if the contracts include provisions for
liquidated damages. A certain percentage of the contract amount could be held back
from payments and forfeited if bribery was detected.

Certification approaches are, according to OECD (2000), not widely used, not even in
well-developed procurement systems. But with the new international focus on bribery
such procedures will probably be more applied in the future. At least the companies
selected for contract awards should meet this kind of requirements.

4.8 Detecting corruption

The problem of corruption is difficult to defeat by the help of new procurement
procedures alone. There will always be ways to deviate from the rules and directives.
The risk of corruption will therefore prevail, also when the rules for procurement are
excellently developed. The rules must therefore be followed by qualities like
accountability and integrity. Apart from higher wages, improved working conditions,
specified areas of responsibility, as well as delegation of authority will be important to
promote these values.

Inspection
Moral conduct can also be promoted by inspection and sanctioning. However, too
many controls may encourage bribery of the controllers. Therefore, the reviews of
cases that are carried out have to increase the chance that a corrupt act is discovered.
More concentration on product controls (concerning the attainment of the aims) and
less focus on process controls (concerning the formal regularity of the acts) is,
consequently, to be recommended (della Porta and Vannucci, 2001:28). For instance,
if the inspectors obtain bonuses according to the number of problematic cases
discovered there are no incentives to go deeper into each single case, and only the
most visible cases will be discovered. Bribes are often buried in other transactions and
may be difficult to detect. Consequently, an analysis of the objectives behind the
project, the criteria of evaluation, as well as the bids submitted by the different
competitors have to be carried out for the case under scrutiny.

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The choice of cases inspected has to be unpredictable. However, della Porta and
Vannuci (1999:271) argue that the frequency of controls should be related to the
amount of resources administered by the different divisions, so that the additional
gains from corruption are more than balanced by an increase in their expected costs. It
will also be important to inspect the role of officials at different levels of the
hierarchy. All the persons involved in a corruption scandal have to meet sanctions,
without regard to their position.

Reporting corruption
In many cases bribery is detectable only for the colleagues of a corrupt official. The
cases difficult to observe for the police may be apparent for the associates. These can,
for instance, discover unreasonable argumentation in favour of a certain company.
Other people involved in the tender may also come across corruption. A way to report
on the cases should therefore be established and published. A problem with
anonymous “whistle-blowing”, however, is the risk of dishonest information reported
in order to blacken certain persons and companies. Still, anonymous information has
to be accepted to obtain knowledge about corruption from people fearing sanctions. In
any case, the safety of persons revealing corruption scandals has to be considered.

When corruption is revealed the persons involved should be charged. Sanctions are
therefore mainly a matter of the legal system. Either imposed by judges or the
bureaucracy, the sanctions should, however, include a system of incentives in which
the penalties for the corrupters grow more than proportionally to the price of the
public contract. This would reduce the incentives to illegal activities (Rose-
Ackerman, 1978).

4.9 Suggested strategies

The following points provide an overview of the strategies so far suggested.
Explanations are provided and the relevance for corruption described in their
respective sections.

• An independent procurement unit with professional officials should be established

(4.2 and 4.4).
• Rotation of public officials responsible for procurement within a certain area
should be considered in countries with high levels of corruption (4.3).
• Performance rating should be a part of the procedure in large procurement
projects (4.2).
• The number of decision-making centres should be reduced. Separating the
evaluation of bids into a technical and an economical team should be carefully
considered (4.3).
• The procurement rules should be made clear and simple - so that people know
what an honest system is supposed to produce (4.3).
• Time limits by which a given request must be rejected or accepted must be strictly
respected, still defined wide enough to allow reasonable time for interested
suppliers to prepare and submit the bids (4.3).
• The state administration should specify the requirements in terms of standard off-
the-shelf items (4.3).

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• International prices should be applied as benchmarks as far as possible (4.3 and

4.5).
• Supplementary work should be specified in the contract as far as possible. Also the
term “supplementary work” should be precisely defined (4.3).
• The procurement procedures should include rules for exceptional cases, including
a precise definition of the terms “emergency”, “exceptional” and “immediacy”
(4.3).
• When rules for exceptional cases are applied, the procurement should be
subsequently followed up by an evaluation team (4.3).
• Insurance coverage and payments of deposits should be requested to reduce the
threat of various forms of problems that may arise after contract assignment (4.3).
• Access to information should be a number one rule in the procurement procedures,
while the information still confidential should be treated respectfully according to
the given routines (4.4).
• Rules and routines for communication during the tender should be carefully
respected (4.4).
• The request should be announced as early as possible and invitation for tender
published in due time in major newspapers (4.4).
• Unsuccessful bidders should be provided with an explanation of the rejection and
relevant information about the tender (4.4).
• A board of contract appeals should be appointed (4.4).
• The objectives of each single procurement project should be determined as
precisely as possible (4.4).
• When significant problems arise during execution of large procurement projects, a
committee should respond, not just one official (4.4).
• Record keeping is essential to enable inspection (4.4).
• Codes of conduct should be central in all forms of bureaucratic activity (4.4).
• Rules of disqualification concerning public officials responsible for the acquisition
should be included in the procurement procedures (4.4).
• A high number of tender participants are no assurance of a competitive result. And
competition does not ensure a clean process. Benchmark prices should be referred
to in negotiations (4.5).
• Technical expertise among the public officials is important, at lest to enable
internal evaluations of consultancies (4.5).
• Routines to reduce new opportunities for corruption by using the Internet should
be created and included in the procurement rules (4.6).
• The use of the Internet for procurement procedures should depend on technical
qualities. To reduce the opportunities for corruption the use should be considered
restricted to the pre-qualification phase.
• Identification of the persons involved in a tender should follow the tender
documentation. Registration should be requested for middlemen and agents (4.7).
• Middlemen that have bribed, or tried to bribe, public officials should be excluded
from future tenders (4.7).
• Companies should be encouraged to certify that they comply with all antibribery
laws. The companies selected for contract awards should be met with direct
requirements of anti-corruption commitments (4.7).
• The tender contracts should include provisions making it possible for the state to
hold back payments to be forfeited if bribery is detected (4.7).

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• Monitoring routines should be implemented in the procurement rules. There

should be more concentration on product controls (concerning the attainment of
the aims) than process controls (concerning the formal regularity of the acts)
(4.8).
• A way to report about detected corruption should be established and made known
(4.8).
• Sanctions of corrupt acts, either internal or imposed by judges, should be
proportional to the price of the public contract.

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5 Summary of main conclusions

Corruption is rarely a one-sector phenomenon, occurring only in one institution of the

state, or at one level of the bureaucratic hierarchy. Where it exists as a problem, it
tends to pervade large parts of the state administration. The impairment of judicial
systems, the police and investigative institutions are particularly destructive in this
respect. Frequent failures to sanction and arrest perpetrators create a general disregard
of existing laws. Trying to curb corruption by implementing anti-corruption measures
into the procurement procedures can therefore appear optimistic in such a setting.
However, the procurement system is a good place to start a more comprehensive
anticorruption reform.

This report discusses some strategies to reduce the problem of corruption in

governmental acquisitions. In particular, it supports the establishment of an
independent procurement unit of professional officials. In order to increase the
chances of a cost-efficient result, the report also argues that the choice of procurement
procedures should be influenced by certain qualities of the state administration, such
as the level of bureaucratic corruption and available resources. Under certain
circumstances the ICB concept, for instance, may fail to produce the expected
competitive result.

Furthermore, the importance of transparency to reduce the level of corruption can

hardly be underestimated. All relevant information should be made available to all
interested parties in the same way. Albeit information to protect business or the
competitive element of a tender has to be kept confidential, the principal rule should
always be to publish as much information as possible. Transparency in procurement
does also imply clear and simple rules, the announcement of evaluation criteria, and a
well-documented explanation for the contract award. Clear and simple rules may,
however, appear as a contradiction to restricted discretion. At this point the report
argues for a thorough planning procedure. Specified objectives reduce the
opportunities for corruption as well as the need for elaborated procurement rules.

While corruption tends to disturb a competitive result, the report argues that
competition does not necessarily impede corruption. The need to apply international
prices as benchmarks has been amplified, as has the advantage of standardising – to
the extent possible - the goods and services requested.

A further discussion concerns the responsibility of private companies for the

bureaucratic corruption in the countries where they operate. Many companies argue
that corruption is a part of foreign culture. Each company then claims it necessary to
adapt to this “culture” in order to obtain contracts, as if bribery could be justified by
the companies’ need for profit. These attitudes imply an impaired economic
environment for all. Consequently, the report argues for anti-corruption commitments
as a necessary requirement for a company to be awarded a contract. Also agents and
middlemen activity should be regulated.
The recent international anti-bribery conventions support this kind of requirements.

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Finally, the report amplifies political commitment as the most important contribution
to reduce the problem of corruption.

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6 References

Ades A. and R. Di Tella (1999) “Rents, Competition and Corruption”, American

Economic Review, Vol. 89, No.4: 982-94.
AIP (2001) “Relatório de evolução do projecto”, AIP unpublished paper of the 24th of
May 2001, Luanda.
Amundsen, I. (1999) “Political corruption: An introduction to the issues”, Chr.
Michelsen Institute, WP 1999:7, CMI, Bergen.
Andvig, J.C., O. Fjeldstad, I. Amundsen, T.Sissener and T.Søreide (2000)
Research on corruption: A policy oriented survey, Report commissioned by
NORAD, collaborative work between Chr. Michelsen Institute and NUPI, CMI,
Bergen.
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Summary
This study explores the problem of corruption in public
acquisitions of goods and services. While mainly concentrating
on the bureaucratic administration, the discussion often
includes the political level. Three aspects of procurement-
related corruption have been examined. First, problems that
often arise if this type of corruption is common. Secondly, the
mechanisms: How is this illegal activity actually carried out?
And finally, a major concern of the study is the practical
strategies to combat the problem. This section also includes a
discussion of the responsibility and regulation of private
companies, and emphasises political commitment as a
necessary condition for successful reform.

ISSN 0805-505X
ISBN 82-8062-007-9