Enhancing-Government-Effectiveness-and-Transparency-The-Fight-Against-Corruption

SETTING THE STAGE Mushtaq H. Khan (2018), “Political settlements and the analysis World Bank (2016). World Development Report 2016, Digital of institutions”, African Affairs, Volume 117, Issue 469, October Dividends. ht tps://openknowledge.worldbank.org/ 2018, p. 636–655. handle/10986/23347. Nicholas Shaxson (2011). Treasure Islands: Uncovering the Damage World Bank (2019) Anticorruption Initiatives— Reaf firming of Offshore Banking and Tax Havens. New York: St. Martin’s Commitment to a Development Priority. Griffin. Oliver Bullough (2019) Moneyland: The Inside Story of the Crooks and Kleptocrats Who Rule the World. New York: St. World Bank (2019). World Bank Group Sanctions System Annual Martin’s Griffin. Repor t F Y19. ht tp://document s.worldbank.org/curated/ e n / 78294157073218 4 391/p d f/ Wo r l d - Ba n k- G r o u p -S a n c t io n s - Omar Azfar and Peter Murrell, (2009), “Identifying Reticent System-Annual-Report-FY19.pdf. Some countries have adopted Respondents: Assessing the Quality of Survey Data on similar systems. Corruption and Values,” Economic Development and Cultural Change 57, no. 2 (January 2009): 387-411. World Bank. 2020. Ensuring Integrity in Governments’ Response to COVID-19 (English). Washington, D.C.: World Bank Group. http:// Open Government Partnership (2019). Right To Information documents.worldbank.org/curated/en/801501588782665210/ Factsheet. https://www.opengovpartnership.org/wp-content/ Ensuring-Integrity-in-Governments-Response-to-COVID-19. uploads/ 2019/07/Right-to-Information-Fact-Sheet-May-2019. pdf. Peter Ladegaard, Petter Lundkvist, Jonathan Kamkhaji (2018). “Giving Sisyphus a Helping Hand—Pathways for Sustainable RIA Systems in Developing Countries” World Bank Policy Research Working Paper 8367. March 2018. Rachel F. Wang, Timothy C. Irwin, and Lewis K. Murara (2015) “Trends in Fiscal Transparency: Evidence from a New Database of the Coverage of Fiscal Reporting”. IMF Working Paper WP/15/188. Shleifer and Vishny 1993. Chuah, Lay Lian; Loayza, Norman V.; Myers, C. Bernard. 2020. The Fight against Corruption: Taming Tigers and Swatting Flies (English). Research & Policy Briefs; no. 27. Washington, D.C. : World Bank Group. Stephen Knack (2006), “Measuring Corruption in Eastern Europe and Central Asia : A Critique of the Cross-Country Indicators.” Policy Research Working Paper; No. 3968. World Bank. Stephen Pinker (2018). Enlightenment Now: The Case for Reason, Science, Humanism and Progress. Allen Lane, UK. Talha Burki (2019), “Corruption is an ‘ignored pandemic’”. The Lancet. Vol 19, p 471, May 2019. http://www.thelancet.com/ infection. Transparency International (2018). Exporting Corruption - Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention. https://www.transparency.org/en/publications/ exporting-corruption-2018. Transparency International. (2019). 25 Corruption Scandals that Shook the World. https://www.transparency.org/en/news/25- corruption-scandals. United States of America Department of Justice. Foreign Corrupt Practices Act. https://www.justice.gov/criminal-fraud/foreign- corrupt-practices-act. World Bank (1997). Helping Countries Combat Corruption: The Role of the World Bank. (p. 5.). World Bank (2012). Corruption According to Citizens, Firms, and Public Officials—Results of Sociological Surveys, World Bank, Government Inspectorate of Vietnam, UK-DFID, and UNDP. Hanoi, Vietnam: National Political Publishing House, 2012. World Bank. 2017. World Development Report 2017: governance and the law: Main report (English). World Development Report. Washington, D.C.: World Bank Group. http://documents. worldbank.org/curated/en/774441485783404216/Main-report. World Bank (2015). World Development Report 2015: Mind, Society, and Behavior. https://openknowledge.worldbank.org/ handle/10986/20597. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 15



PART I Confronting Corruption in Sectors and Functions Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 17

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 Public Procurement

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Introduction Public procurement is often placed at the epicenter efficiency. These principles are reflected in easily of discussions of corruption. Procurement features available and frequently utilized model procurement prominently in corruption scandals in developed laws, such as the UNCITRAL Model Public Procurement countries as well as developing countries, suggesting Law. Implementation of procurement laws are supported that procurement has characteristics that make it by a host of international agreements that create legally uniquely vulnerable to corruption and that corruption enforceable commitments, including UNCAC and the in procurement is particularly resilient. This chapter World Trade Organization’s Agreement on Government examines the nature of corruption in public procurement Procurement. Much less information exists on how to and explores efforts and initiatives to reduce corruption establish well-functioning procurement systems in the in state contracting.1 There is an abundance of face of opposition by individuals and groups benefiting information on principles of good practice in public from existing practices. procurement relating to transparency, equity, and Why is it important to tackle corruption in public procurement?2 Corruption in public procurement has wide-ranging consistently identify corruption in public procurement ramifications for the economy and delivery of as among the major constraints to doing business.5 public services. The need to tackle corruption in Corruption in public procurement continues to be a public procurement is based on the importance of substantial issue in developed as well as developing public procurement in public spending and economic countries and large public scandals involving firms activity, the prevalence of corruption in procurement such as Odebrecht,6 Siemens,7 and Airbus8 have and its impact on how public money is spent, private demonstrated that corruption in public procurement sector investment, and the availability and quality of happens in some of the most advanced economies. public services. Moreover, international and global distortions are sometimes caused by corruption in public procurement Public procurement constitutes a significant transactions. proportion of public spending. It accounts for between 10-25% of public spending globally.3 This figure is The costs and societal damage caused by corruption often substantially higher in countries where the state in public procurement extend far beyond the price participates significantly in economic activity and tag of capital projects. Corruption leads governments directly provides services. Public procurement is often to overinvest in capital projects, given the ease of the single largest channel for government spending, capturing rents from public procurement, and reduces the single largest source of commercial spending in a their return on investment.9 It also robs school children country, and the dominant means for translating public of safe and well-built classrooms, reduces the quality money into public services. of their education by limiting their access to textbooks and school supplies, and endangers their health and Estimates from a variety of sources indicate the health of their communities as publicly procured that corruption in procurement is frequent and medicines are privatized and become inaccessible to extraordinarily costly. Over the years, international the poor. Corruption also results in the provision of organizations have consistently suggested that sub-standard infrastructure, which increases accidents between 10-30% of the cost of capital investment and wear and tear costs, inflates the user-charges projects is consumed by corruption.4 More than one- required to pay for services, and acts as an extra tax half of the cases relating to foreign bribery involve on the citizens. The cost of corruption is then borne by public procurement, and surveys of business owners the poorest citizens who are most dependent on public Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 19

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT resources for access to life-sustaining medicine, public procurement enables well-positioned firms to dominate shelter, or the knowledge and expertise required for markets and restrict the ability of new firms to obtain modern economic activity. contracts and access markets through innovation, creating competitive imbalances with lasting impact for At the same time, corruption in public procurement economic growth.10 The firms that lose out are often creates noxious incentives for firms and distorts those who do not have the financial or political means economic development. Private sector firms are to access public procurement opportunities, but who, encouraged to invest in building networks of influence paradoxically, could have been the prime drivers for instead of investing in skills and expertise, to the the creation of local jobs, thus reducing inequality and detriment of increased efficiency. Corruption in public poverty. What are the characteristics of corruption in public procurement? Although procurement covers a wide range of discretionary nature of the activity. Discretion, and actions, certain characteristics remain the same. the use of professional judgement, is at its highest in In most countries, public procurement takes the form of cases of high-value sophisticated procurement, where a vast number of contracts signed by a broad collection the state invites private parties to propose methods to of government agencies for an extraordinary variety of achieve the specified outcomes. goods, services, and projects.11 The single term, public procurement, encompasses the purchase of office By its very nature, public procurement is highly paper in a small village, contracting for the regular vulnerable to corrupt activity. Given that public maintenance of roads across a district for a period of procurement requires multiple discrete decisions, which years, investment projects supported by development take place in decentralized settings involving public and partners, as well as the acquisition and deployment of private actors and large sums of money, the frequent an advanced military defense system to protect the association between corruption and procurement security of the nation. While these actions could not comes as no surprise. There is a tendency for the analysis be more different in regard to scale, complexity, and of corruption vulnerabilities to concentrate on the risks cost, they share common features. They are the result relating to the selection of a contract award winner, and of choices about what to purchase, from whom, and a very rich literature has developed detailing different at what price. They require an act of purchasing often bribery, extortion, and collusion schemes used to via a contract, and a determination by the purchaser of capture contracts.12 It is clear, however, that corruption whether the contract terms have been properly fulfilled occurs not just around the selection of an award winner, and payment is warranted. but at every stage in the procurement process, from the selection of what to buy to the determination Despite the development of useful tools, discretion that a contract has been fulfilled and the receipt of remains at the core of procurement. Each step final payment. In a compromised process, each stage along the process requires government officials to is engineered to increase the chances of a preferred perform activities that involve the implementation of contractor obtaining the contract. policy choices necessitating extensive interpretation and often substantial discretion. A large number of Corruption risks are as deep as they are broad. tools have been developed to guide procurement, Corruption can take the form of an individual paying including detailed processes to determine capital a bribe to win a contract in a single transaction. In investment decisions, standard bidding documents, other instances, corruption in procurement takes place explicit rules on the evaluation of bids, and exhaustive systematically via a network involving multiple firms price lists for products purchased by the state. Each and individuals both inside and outside of government. of these instructs officials on how they are expected Corruption networks can be strong and entrenched, to make choices, but they do not alter the inherently lasting many years and involving the entire market 20 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT for a good or service.13 In these instances, corruption Corruption risks are also multifaceted. Corruption is systematic and is a function of the relationships risks in public procurement can be driven by the type among parties. In some countries, the money obtained of procurement process (open versus closed), the through systematic relational corruption in public processes used by the ministry and agency responsible procurement fuels political parties and plays an for executing procurement, and the type of contractor essential role in financing politics. In these situations, and his/her network of connections. Other drivers public procurement serves as a way for economic elites include the mechanisms for paying contractors and to capture contracts and public funds and for political managing the assets that have been created, and elites to finance their continued power and authority.14 the interests of those parties with responsibility and Network domination of procurement is not exclusive to authority for overseeing the procurement process. The high-value national markets. It can be found at all levels multifaceted nature of these risks creates extraordinary where power and the authority to spend public money challenges in improving accountability and integrity in through procurement exist. impactful ways. What do we know about fighting corruption in public procurement? A vast and growing literature provides guidance on monitoring of procurement transactions and contract fighting corruption in standard public procurement implementation; mechanisms for raising and addressing transactions. This includes guidance on bidding complaints; Whistleblower statutes to encourage and documents that define the required technical protect informants; and clarity in the prosecution and specifications, design elements, and inputs required. sanctioning of individuals when corruption is identified. The Methodology for Assessing Procurement Systems In addition to these technical aspects, rule-based (MAPS), an internationally developed standard for procurement systems have well-defined roles for evaluating procurement systems, identifies the features citizens, communities, civil society organizations, and of procurement systems that operate with integrity, the private sector in the monitoring and oversight of and allows countries to determine what needs to procurement transactions and outcomes.18 be put in place to address corruption vulnerabilities. Core principles to inform the fight have been set Increasingly, e-GP is identified as the key platform out in publications, such as the OECD’s Preventing for delivering change and addressing corruption Corruption in Public Procurement.15 The guidance vulnerabilities. Buoyed by the positive impact of the provided in this and other similar publications primarily implementation of fully functional systems in Ukraine restates the stipulations on procurement in the UN and Rwanda, policy makers, advisors, and other Convention against Corruption and the OECD’s own stakeholders look to solve their procurement efficiency Convention on Combating Bribery of Foreign Public and corruption issues by rolling out end-to-end e-GP Officials in International Business Transactions (OECD, solutions.19 Such systems, especially when their use is 1997).16 Books and papers by groups like Transparency mandatory, could standardize processes for carrying out International provide complementary pointers and procurement, and at the same time they might radically lessons on using particular tools in fighting corruption, enhance transparency around bidding opportunities, such as integrity pacts or participatory governance.17 bid evaluation, and contract award winners. The shift from paper to a digital platform can allow for the While differences in emphasis certainly exist in collection, sharing, and analysis of outcomes across these materials, there is a general consensus on the vast range of individual procurement transactions. the features of procurement systems that operate Real-time monitoring could identify corruption risks as with high degrees of integrity. Such features include a procurement transaction goes through its different transparency; procedural standardization that reduces phases, allowing officials the possibility of intervening the need for interpretation or human interaction; when red flags are triggered in the process to prevent detailed and inclusive control; oversight and corruption from ever taking place. The analysis of large Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 21

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT volumes of transactions over time could enable the and a reduction in the time required to process a identification of subtle corruption patterns and trends transaction, no statistically significant changes in cost that might otherwise avoid detection, uncovering and time overruns appear to have occurred.22 hidden corruption networks. Several reasons have been put forward to explain The power of e-GP to combat corruption may the difference between the expected impact of be fully activated when the data that is being e-GP on corruption and the actual results. collected is put into a machine-readable format, made publicly accessible, and linked with other • Low capacity. The primary reason may be the data sets. Linking data on contract award winners low capacity of the institutions and individuals with emerging databases on beneficial ownership may responsible for executing procurement and for allow public and private parties to know who is really managing the switch to e-GP systems. Studies competing for and winning procurement contracts and have repeatedly revealed the limited expertise could identify previously hidden networks and conflicts and functionality of procurement officials and of interest. Linking procurement data with data from organizations, who frequently have received little integrated financial management systems can create or no training in how to carry out their current jobs, the opportunity to systematically track physical and much less manage the implementation of an entire financial progress and may create the potential to new system.23 intervene where corruption vulnerabilities appear to be substantial before the loss of public funds happens. • Differences in technology. e-GP systems differ However, there is limited attention and/or guidance greatly regarding their functionality. In many on how initiatives might be designed or sequenced jurisdictions, including in large economies, in jurisdictions without well-functioning systems for technology is used only to switch manual transparency, public administration, law enforcement, processes into automated ones. This, while and judicial decision-making, or where corruption is improving transactional efficiency, is unlikely to relational and systemic. achieve much else. Similarly, limited change is likely to be generated if barriers to registration While expectations are high that the are retained even in an e-GP system. Performance implementation of e-GP will be associated with changes would, perhaps, be more easily captured dramatic reductions in corruption in public by considering only those systems that involve in- procurement, the experience to date is decidedly depth modification of practices, and not simply the more mixed. Cross-country analysis was unable to introduction of technology into the process. detect a relationship between the adoption of e-GP and the level of bureaucratic corruption or the willingness • Lack of corruption baselines. The lack of useful of firms to bid for procurement contracts.20 In more corruption baselines established prior to the developed countries, the adoption of e-GP was found implementation of an e-GP system prevents to increase the likelihood of firm bidding. research from measuring change and detecting an empirical relationship between performance and Country-level studies of the impact of e-GP present the move to e-GP. Without a robust corruption highly variable results. e-GP in India and Indonesia baseline, researchers sometimes place excessive was found to be associated with positive changes in a reliance on measuring changes in cost savings, number of variables that may be linked with corruption— namely the difference between the cost estimate the percentage of contracts awarded to non-local firms, for the procurement and the cost obtained at a reduction in contract delays in Indonesia, and an the end of the tendering process. However, such improvement in the quality of construction in India.21 calculations are difficult and subject to a wide At the same time, the research was unable to detect range of influences and biases. a relationship between e-GP and the cost of contracts at the time of signing, or the final amount paid to the The expected relationship between corruption contractor. Ongoing and preliminary analysis of the and e-GP has so far eluded detection, perhaps influence of e-GP in Bangladesh suggests similar mixed due to a combination of the above reasons. While findings; while the reform is associated with a rising theories of change explain why an intervention should number of tenders, an increasing number of bidders, reduce corruption, the impact of actual reforms often 22 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT falls short of expectations or results in a number Before concluding this section, it is important of unexpected consequences.24 For example, the to discuss an important caveat on the features introduction of e-GP in Albania significantly reduced associated with well-performing public personal contact with officials, but at the same time it procurement systems that operate with high led to a surge in the number of unpublished, negotiated integrity. Recommended practices on confronting procedures done outside of the system.25 In Chile, the corruption are likely to generate large costs for output- expansion of external audits of public procurement was oriented, high-value contracts. In these contracts, closely associated with an increase in the use of direct where the government defines the outputs it desires contracting.26 without prescribing inputs or specific designs, actions that focus on standardization of processes, reduction An efficient and rule-based procurement of discretion, and extensive auditing and oversight system, based on an e-GP platform, is strongly may perversely end up reducing the benefits obtained associated with high performance and low levels through contracting with the private sector. of corruption. Similarly, the successful prosecution of individuals who engage in corrupt actions in public Large capital projects are not efficiently purchased procurement is a feature of most systems that maintain through rigid processes for evaluating bids high standards of integrity. However, the history of submitted in accordance with specified designs efforts to establish effective systems for sanctioning and inputs. In many cases, shifting the responsibility corrupt officials or to drive out corruption by moving of innovation to the private sector unleashes efficiency to e-GP demonstrates the space between inputs and and effectiveness, creates the right incentives and more outcomes. Many countries, especially those with poorly effectively shapes markets. It creates a body of the sub- performing procurement systems that are assessed to contracting industry that is driven and regulated by the be systemically corrupt, can point to an extensive list of market and survives by its capacity to deliver value. This failed efforts designed to fill “gaps” in accountability reduces government intervention (except at the initial by importing best practice models of transparency, procurement stage) and corruption possibilities. participation, and efficiency. Output-based contracts, whether they are The mixed impact of such initiatives appears structured as public-private partnerships or as more to often reflect the degree to which initial traditional procurement, are negotiated, multi- assessments appreciated how accountability stage contracts that often adapt over time as new worked or did not work around procurement, and innovations are identified, and both the contractor the formal and informal mechanisms underpinning and the state develop a richer understanding existing practices. Assessments that provide useful of their objective. Such contracts require a strong inputs for reform are designed to capture the nature of foundation of trust among all parties in order to enable the corruption problem, the capabilities of the parties the best options to come to the fore. They also require responsible for managing change, and the ability of a high degree of expertise and sophistication across those who benefit from existing practices to subvert or all parties in order to ensure that the parties have the circumvent the efforts. ability to detect honest experimentation from strategic behavior. Experience in confronting corruption in public procurement demonstrates the importance of For output-based contracts of this sort, approaches resilience in the pursuit of reform, and the continued to integrity that emphasize extensive systems of use of authority to maintain change. The response internal and external reviews to test compliance to an anti-corruption initiative, especially one that is with standard requirements are likely to be at powerful, has often been to wait out the reform until odds with achieving best value. Multiple review political attention shifts to another issue or politicians and oversight processes generate large time and can be co-opted. Alternatively, they shift the locus of cost delays and reduce the space for innovation and corruption, moving from influencing the contracting experimentation as contractors are forced to justify their process to distorting contract implementation. actions before they can determine their effectiveness. Countries are successful when they develop and sustain The best firms are likely to be discouraged from bidding reforms over time in ways to counter adaptations and in environments where oversight and accountability is defeat efforts to circumvent change. structured in ways that are inimitable to trust. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 23

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Complex output-based contracts remain the phenomenon. A recent study of the interactions exception rather than the rule and are found between audits and the complexity of procurement primarily in advanced and sophisticated markets. in Chile demonstrated the negative consequences At the same time, the tendency for accountability of this dynamic as officials relied upon less efficient contracting in order to reduce costs associated with processes to multiply as contracts become more heightened oversight and monitoring.27 complicated and more valuable is a more general What is needed to reduce corruption in public procurement? Research studies and country experience are the does not always appear. When audit agencies are two primary sources for learning what can reduce themselves corrupt, increased auditing serves to shift corruption in public procurement. The research studies the distribution of corruption or, in the worst-case examine the impact of different types of intervention scenario, increase rents.31 and the country experience focuses on those countries that have been successful in reducing such corruption. At a country level, many of the countries that Both sources have their limitations since many of the have succeeded in reducing corruption overall “experiments” on the impact of different interventions have undertaken major reforms of their public come from more developed countries with better procurement systems.32 In countries such as South data sources, and there have been few efforts to track Korea, Georgia, Rwanda, and Estonia, changes in corruption indicators over time in public procurement procurement policies, which focused on increasing systems. Moreover, these sources provide little or no competition and transparency, have been reinforced information on addressing corruption in high-value by advanced e-GP systems that have standardized output-based public procurement. practices and increased efficiency. In a number of cases, provisions for meeting the Open Contracting Transparency is the sole factor that has been Data Standard have been built into the e-GP systems, demonstrated to reduce the risk of corruption in ensuring a high degree of transparency and information procurement across different jurisdictions and access. These efforts have led to substantial increases conditions. Analysis of cross-country data reveals that in the level of competition in procurement and much ex-ante transparency in regard to the completeness of greater transparency about the identity of contract information in the call for tenders reduces corruption award winners. risks substantially.28 In this situation, transparency allows horizontal monitoring of insiders in the bidding Successful anti-corruption efforts that include process in ways that lead to lower levels of corruption. work on reducing corruption in public procurement share a number of core features. These include: Increased frequency of audits has also been identified in a number of settings as leading to • Strong leadership. Successful anti-corruption reduced levels of corruption. Studies in Brazil29 reforms are initiated and maintained through found a decrease in costs (of approximately 10%) and strong leadership from the highest political decreases in audited resources involved in corruption level. Political leadership creates an overall vision (of approximately 15 percentage points) linked with and orientation, while administrative leadership initiatives to increase the frequency of auditing by 20 establishes the necessity and the space within percent. A 2007 study of village-level procurement in institutions to introduce new processes and Indonesia found that increasing the frequency of audits systems. Finally, technical leadership within to 100% resulted in a decline in missing expenditures organizations establishes new behaviors and by 8 percentage points.30 However, the relationship protocols that show others how to adopt new tools between increased audits and lower levels of corruption and methods. 24 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT • Problem-driven and outcome-oriented. Successful medium to long term and grow over time in order to initiatives to reduce corruption in public sustain change in the face of repeated opposition. procurement are problem-driven and outcome- Resilience is often built through producing concrete oriented. This requires careful analysis of the changes and establishing expanded coalitions specific mechanics of corruption, and often of support that include enhanced roles for the the development of sector or ministry-specific private sector, and for civil society/communities in approaches to reducing the problem. Problem- oversight and monitoring. driven approaches to corruption often result in distinguishing among types of procurement. • Complemented by other refor ms. P u b l i c Addressing corruption problems in local level procurement reforms that succeed in reducing procurement in small markets involves actions that corruption tend to draw support from other are different from those that would be employed complementary reforms. Most directly, such efforts to reduce corruption in the procurement of high- have been aided by the introduction of effective volume standardized goods. In the same vein, systems for asset declaration, prevention of outcome orientation means that efforts to confront conflict of interest, revealing beneficial ownership corruption in procurement are likely to be sector of firms, and enhanced efficiency in sanctioning specific, since corruption functions differently, for misbehavior. Concurrent reforms to improve public example, in a sector like irrigation than it does in financial management, introduce performance wastewater management or education. Outcome contracting, build skills and expertise within orientation also requires close monitoring not the civil service (including procurement skills), only of progress in implementing the reform but privatize and/or improve corporate governance also of outcomes. For example, establishing of state-owned enterprises, and remove barriers multiple points of control in order to prevent and to entry and competition can all contribute to reduce corruption in high-value procurement may strengthening accountability and integrity, and to perversely convince the most reputable firms to changing behavioral expectations and incentives. stay away if they determine that there is insufficient These broader changes are essential in addressing trust to enable creativity and flexibility in creating the systemic collective action problems that drive an asset.33 corruption in procurement in many jurisdictions and settings. • Sustainable. Successful efforts are built over the How to gain traction in fighting corruption in public procurement: Case studies Reforms have to be tailored to the prevailing and Chile—describe anti-corruption reforms in public environment. As with many reforms, much of the procurement that alternative emphasize changing challenge in fighting corruption in public procurement strategic transactions, systems for undertaking public revolves around defining an approach that is procurement, and the interactions between economic appropriate for the problem at hand and tailored and political elites. Differences in the focal point for around the authorizing environment for reform. Reforms reform occur along a governance continuum. that look good on paper often fail because they are not shaped and structured around the political and The Somalia case explores an effort to reduce administrative realities that exist. The three case studies corruption in a limited number of strategic high- that accompany this overview describe very different value procurement contracts, using a specially anti-corruption efforts relating to procurement. designed mechanism established jointly by However, they were all designed to have traction development partners and the Government of and have been shaped by the broader governance Somalia. The intervention does not attempt to reform environment. The three cases—Somalia, Bangladesh, public procurement due to severe limitations on the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 25

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT capacity and authority of the government to manage The final case, Chile, explores a reform effort large reforms and the systemic nature of corruption. where corruption issues in public procurement The initiative is confined to restricting corruption in a were understood to be symptoms of a larger number of transactions, using the combined authority problem in the relationship between economic of the government and international development and political power. The initiative, which was largely partners. Its success demonstrates the ability to achieve driven by an independent and non-political task force, results in even the most challenging of environments. recommended a number of steps to improve the coherence of the public procurement system, within The Bangladesh case explores an effort to reduce a larger program of reforms aimed at restructuring corruption as one dimension of an overall reform the role and transparency of the private financing of of the country’s public procurement system. In this political parties. In the context of a well-performing instance, anti-corruption efforts are closely intertwined state with a relatively high degree of capacity and with work on establishing new mechanisms for carrying integrity, addressing corruption in public procurement out public procurement utilizing an e-GP platform. was approached primarily by modifying the incentives Bangladesh officials included a number of measures to and dynamics in the overarching system of governance. proactively address corruption in public procurement, As with the other two examples, the patterns of success based upon their recognition of the impact corruption that were achieved demonstrate that progress can be has on outcomes and the risk that corruption poses to made in modifying relatively fundamental governance the implementation of the reform. The results to date issues, but the overall process of change is long and demonstrate both the progress that can be made as progress is not constant. well as the tenacity of the problem. Conclusion: What is realistic to expect? The major misconception is the assumption successes will face challenges and that reform progress that, as long as there is sufficient political will, will not be a straight and linear line. Demonstrating corruption can be solved by a technical fix done by concrete progress is an essential part of building the government to address an accountability gap reform momentum, just as learning from setbacks is or capacity weakness. Sometimes that fix is asserted fundamental to establishing sustained change. Anti- to be greater oversight, stronger sanctions, enhanced corruption reforms in public procurement that succeed transparency, or the introduction of e-GP. Reforms are designed to achieve concrete outcomes relating based on this approach often feature the adoption to a reduction in corruption and an improvement of “best practice” processes and practices that have in procurement outcomes. Such reform programs been demonstrated to be closely associated with well- invariably involve actors outside of government, and performing procurement systems that operate with are sustained through coalitions of government, private low levels of corruption. The track record of success sector, and civil society groups. of these efforts is not encouraging, especially in those environments where state capacity and authority are One corollary to the point above is that impactful weakest, where civil society and the private sector are efforts to reduce corruption make use of existing fractured and fragmented, and where corruption is resources. Countries should only attempt reforms that most systematic. are within their capacity; otherwise, they are likely to fail. Examples from countries that have reduced corruption Nonetheless, experience has demonstrated overall, as well as from the specific cases in this report, that it is possible to reduce corruption in public illustrate variations in the depth of those resources procurement regardless of the extent of corruption and the strength of the forces opposing change. and the overall governance environment. To achieve Some circumstances, such as those found in countries progress in this regard, effective approaches are built emerging from conflict, may only allow for initiatives for the long haul, with the expectation that initial to reduce corruption in certain transactions. In other 26 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT cases, anti-corruption work can be woven into systemic ways to address corruption in how procurement procurement reforms in ways that tackle corruption and functions. The development of new tools, like increase the probability of reform success. e-GP and the broad range of other information technologies, greatly expands opportunities for A second corollary is that anti-corruption changes that strengthen accountability and oversight. initiatives in public procurement must consider To be effective, efforts to reduce corruption in public their overall impact on procurement performance. procurement need to identify ways to harness the power This point is most evident in relation to output-oriented of technology to help drive fundamental changes in high-value contracts that are not amenable to strict expectations, incentives, and authority, which form the rules of the pass-fail variety. Obtaining best value basis for better outcomes. in output-based procurement requires developing a deeper engagement with the industry both at the In sum, successfully reducing corruption in public pre-tender stage as well as during the procurement procurement requires a country-specific approach process. In addition, it requires government officials to that pays as much attention to the incentives use professional judgment in applying principles that and capabilities of the institutions responsible for are clearly defined ex-ante. For procurement of this executing procurement as it does to improving the type, constructive anti-corruption actions will involve transparency and efficiency of the procurement defining very tight and verifiable boundaries, investing system. Overcoming repeated opposition to change in professionalization of officials entrusted with requires harnessing forces in the private sector and responsibilities for executing procurement, creating civil society who have a strong interest in improving the right incentive structure, and developing a more procurement outcomes through greater integrity and active engagement with industry while maintaining a accountability. These opposing forces are likely to be level playing field. A more difficult process will be the stronger in high-corruption environments than they are professionalization of the oversight bodies, so that in jurisdictions with lower levels of malpractice. New procurement officers are not penalized for their bona- technologies, like e-GP can dramatically improve the fide decisions. effectiveness and efficiency of public procurement systems, but their potential will only be fully realized The centrality of public procurement for when combined with work to deal with the causes of development means that it is essential to find corruption and not just the symptoms. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 27

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT CASE STUDY 1 CASE STUDY 1 PUBLIC PROCUREMENT Strengthening Competitive Procurement in Somalia Strengthening procurement of high-value contracts in Somalia’s security sector Overview Introduction After years of state collapse, a new Federal Government The new Federal Government of Somalia took office administration took over in Somalia in 2012 and began in September 2012 amidst strong support from the to try to regain the confidence of the Somali public, international community, but with lingering doubts its semi-autonomous regions and the international about its ability to rein in the corruption that had community. Against a backdrop of conflict, warlordism been considered to be endemic during previous and corruption, improving national security and re- transitional administrations. Some actors in the establishing good financial governance practices were international community wanted to establish direct central to the new administration’s credibility. This control over government finances through a joint- nascent credibility received an early blow when the signatory arrangement analogous to the approach Governor of the Central Bank resigned in 2013, citing previously used in Liberia. However, President Hassan concerns over corruption. In 2014, the government Sheikh Mohamud argued that this would impinge and international community established an innovative on the new government’s sovereignty, and asked joint body called the Financial Governance Committee that the administration be given space to prove its (FGC), whose purpose was to provide confidential commitment to better management of government expert advice to the government on strengthening resources. financial governance. The FGC identified improved procurement practices as central to the credibility of In November 2013, the Governor of the Central Bank government expenditures, and in particular noted the of Somalia resigned after only seven weeks in the corruption and security risks associated with sole- job, dealing a blow to the administration’s credibility. source contracting of rations supplies in the security “From the moment I was appointed, I have continuously sector. Rations procurement was not under heavy been asked to sanction deals and violate my fiduciary scrutiny from international actors, despite being the responsibility to the Somali people as head of the government’s largest non-wage recurrent cost. As nation’s monetary authority,” said Yussur Abrar in a result of sustained attention from the FGC over a her resignation letter.34 Abrar alleged that she had number of years, and convening and maintaining a come under pressure to open an account outside the reform coalition at the center of government, rations Central Bank of Somalia to divert recovered assets.35 have finally been competitively tendered and large It also came to light that the government had signed fiscal savings have been realized. a contract with an American law firm on questionable 28 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT terms to assist with the recovery of Somalia’s frozen public concessions and contracts and a Secretariat. The assets abroad. FGC has met on an almost monthly basis for the past six years since its inauguration in early 2014. International partners’ confidence in the federal government was dented, and it became accepted that One of the FGC’s most pressing goals was to reintroduce a new approach to strengthening financial governance competitive procurement practices, especially for major was needed to restore confidence: ‘business as government expenses like security sector food rations. usual’ would not suffice. The government needed to Security as a whole accounted for approximately 42% of implement concrete measures to strengthen financial the federal government’s operational expenditure, and governance, in particular in asset recovery, Central Bank other than wages, food rations for security personnel governance, and government procurement of contracts were the security sector’s biggest expense.36 In 2018, and concessions, in order to restore the confidence security sector food rations accounted for about 20% of of the international community and the Somali public total government non-wage recurrent costs, or USD14 more broadly. million. President Hassan Sheikh Mohamud knew he needed A lack of transparency and competition in the supply help to implement those reforms. Mohamud called of ‘dry’ rations (beans, cooking oil, sugar, etc.) was for measures that would provide him and his team suspected to be fueling corruption and patronage in with confidential expert advice to help make informed the sector, as contracts were directly awarded to well- decisions on sensitive financial governance matters, connected local business people without scrutiny of unit while also respecting Somali sovereignty. costs or justification of volumes. It was also suspected that misallocation of the rations was compromising the Led by the World Bank, the federal government and effectiveness of the security forces, as the rations either the international community reached an agreement did not necessarily reach the fighting forces, or were in early 2014 on the establishment of a Financial being purchased in excess of need, diverting scarce Governance Committee (FGC) to provide a forum for resources away from other expenditures. In addition, a dialogue on strategic financial governance issues. The large proportion of the security sector’s expenditures FGC’s formation was a direct response to the crisis of was transacted in cash, as the commanders were given confidence that followed Abrar’s resignation. It aimed to funds to purchase ‘wet’ (fresh) rations for their units enable the federal government to access independent and to pay individuals’ salaries, creating high potential and confidential international advice on important for corruption and limited accountability. FGC advice areas of financial governance, while also building the consistently flagged the need for rations contracts to international community’s confidence in the federal be competitively procured to improve transparency and government. The FGC’s initial terms of reference reduce costs, and for salaries and fresh food allowances required it to “provide advice on existing concessions to be paid direct to individuals’ accounts, to limit the [and] contracts the Federal Government of Somalia has scope for diversion of funds. entered into.” This remit was subsequently extended by the federal government to include reviewing all draft The implementation process concessions and contracts worth over USD5 million, until such time as capable new national institutions Since security sector rations constituted the single could take over the review function. largest goods purchase within the federal budget, the FGC sought to promote improved transparency and The FGC is chaired by the Minister of Finance and its competition in the award of rations contracts. At first, membership includes the Governor of the Central Bank, the FGC found it difficult to obtain any pre-existing representatives from the Office of the President and rations documentation from security sector institutions, Office of the Prime Minister, the State Attorney General, and it appeared that supplies were being delivered and and the Chair of the Parliamentary Finance Committee. payments made without formal contracts. Somalia’s The international community is represented by legal framework for procurement dated back to the delegates from the World Bank, African Development 1960s, and was no longer used to govern government Bank, and the International Monetary Fund and a purchases. However, FGC’s advocacy for improved delegate appointed by the EU to represent bilateral donors. The FGC is supported by a specialist adviser on Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 29

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT transparency and competition in the sector received 2017 that the contract should be retendered. the support of the President, who announced in September 2015 that food and logistics contracting It took a year of sustained follow-up by the FGC before for security sector institutions would be managed on a the contractor was finally served a termination notice by competitive basis. the Minister of Defense in September 2018. During this period, there were several changes in both the Minister At the time, a new legal framework for procurement had of Defense and the army commander, which delayed been submitted to Parliament and was subsequently the termination process. The Ministry of Finance finally passed in 2016. However, it established a decentralized launched a fresh tender process in October 2018, approach to public procurement, which was not well covering the supply of dry and fresh rations to all army aligned with existing institutional capacities. Line units. However, during bid evaluation it became clear ministries lacked procurement expertise, and the that the contract scope provided by the army had not Procurement Authority—whose role it was to certify been well specified. It proved too ambitious to expect line ministries’ procurement units—had not been a single contractor to deliver dry and fresh rations to established. The FGC therefore recommended that the all army units (‘sectors’) across a wide geographic area, government adopt a set of Interim Public Procurement encompassing both Mogadishu, the capital city, and the Requirements that required all procurements above rest of Somalia. This demonstrated that, in addition to USD100,000 in value to be conducted by the Ministry overcoming overt resistance, the procurement reform of Finance’s Procurement Department until such a time process also needed to address the limited capabilities as line ministries had certified procurement units. of key institutions. The Ministry of Finance launched an open tender for In February 2019, the Cabinet issued a set of financial the supply of dry rations to the Somali National Army management procedures for the security sector, which in 2016, and, following FGC review, the contract was required immediate competitive retendering of all awarded in February 2017. The FGC also reviewed the rations contracts. It also required payment of salaries outcomes of rations tender processes for the police and direct to individuals’ bank accounts, following the the National Intelligence and Security Agency (NISA). completion of a security sector personnel biometric In line with FGC advice, the government began to strip registration process, which had been initiated in out the cash components that had been included in the the second half of 2018. The Ministry of Finance contracts; the intention had been to require contractors subsequently launched four separate tenders in April to provide cash to the force commanders for fresh 2019 for one-year delivery of dry rations to two army rations purchases, in addition to delivering dry rations. units (‘sectors’) located in Mogadishu,37 the police The FGC argued that paying contractors to deliver cash and NISA. Twenty-one different firms submitted bids was not good practice, and that cash requirements for for the various contracts. The FGC reviewed each fresh rations purchases should be regularized through tender process and was satisfied that each had been the payment system and paid to the bank accounts of sufficiently competitive and transparent to justify individual security personnel. contract award. Following the competitive re-tenders, the government’s monthly expenditure obligations on However, following elections in early 2017 the rations contracts nearly halved, generating an annual incoming army commander summarily cancelled the saving of USD6.7 million.38 competitively awarded contract and issued a new contract to a different contractor without following A significant portion of the savings was driven by a due process. This reversion to nontransparent direct reduction in the volume of rations purchased. The contracting, with associated implications of patronage, security sector personnel biometric registration presented a test of resolve for the FGC and the center process, coupled with a re-organization of the security of government more generally. The supplier whose forces, enabled the leadership of each force to provide contract had been cancelled raised a formal complaint, more accurate specifications for its required rations and the Ministry of Finance, at the recommendation of volumes, based on the actual number of personnel that the FGC, responded by conducting a legal review in July required feeding. NISA saw the greatest reduction in its 2017, which determined that the contract cancellation rations volumes (78%), followed by the army (36%). The and re-award was irregular. The Economic Committee re-tendering also enabled the government to achieve a of the Council of Ministers then resolved in September significant reduction in the unit prices of most goods, 30 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT which were reduced by at least 10% in most cases. In Reflections general, the government was able to achieve the lowest unit prices for the larger contracts which attracted The case study highlights how the FGC has been the most bids (army and police), demonstrating that successful in Somalia, and how its approach might be competition helps lower prices. The unit prices achieved applied to other settings. At a strategic level, the FGC under the smaller NISA contract, which attracted fewest helped draw key decision makers’ attention to Somalia’s bidders, were in most cases higher than for the larger procurement problem and suggested a pragmatic contracts.39 approach to solve it. The committee’s regular meetings generated reform momentum among a coalition of top In parallel to reforming security sector rations officials, establishing a common problem definition and procurement, the successful completion of the achieving consensus in an environment beset by low biometric registration exercise for national security intra-governmental levels of coordination and technical sector personnel enabled the government to create a capacity. Vested interests and institutional fragility, comprehensive payroll register for each force, linked to including frequent personnel changes, meant the issue the Somalia Financial Management Information System. required sustained attention and follow-up over a five- As a result, the salaries of security personnel are now year period. paid direct to their bank accounts, instead of being distributed to them in cash by their commanders. This Competitive tendering combined with a better reform was able to overcome vested interests within the specification of needs cut costs by USD6.7 million per higher ranks of the security forces and has significantly year.40 The clear return on investment fostered wide improved the accountability and transparency of support for competitive tendering, illustrating how security sector wage payments. It has also had a concrete results can generate a push for expanding the positive impact on the transparency and accountability effort to other sectors. of fresh rations payments, since all registered soldiers are now paid a USD30 stipend for fresh rations direct The new procurement policy was implemented in to their bank account, whereas previously this cash had tandem with other inter-related reforms, including been received and managed on their behalf by their the comprehensive biometric registration exercise of commanders. security personnel and moving from cash to electronic payments for salaries and fresh rations. However, Despite these achievements, major gaps remain. key challenges remain, including the need to sustain For example, significant effort needs to be put into competitive tendering going forward, to improve verifying the delivery of goods and services. The gains capacity within the security sector for specifying their made in improving the tendering and transparency of procurement needs, and to strengthen the process for rations contracts will count for little if there is limited rations delivery verification. visibility on whether goods and services are delivered. Given the public mistrust of the government’s financial The FGC used its reputational credibility, which came management, it may not be sufficient at this stage to from the expertise and experience of its international rely solely on inspection reports from the receiving members, as a lever to promote the reintroduction spending agency as proof of delivery. The FGC has of due process in procurement. While the FGC was a recommended that the Ministry of Finance establishes voluntary arrangement, the international community an inspection function responsible for verifying the closely monitored the extent to which the federal delivery of goods and services. In addition, to date government adhered to FGC advice, making it difficult rations delivery to the prisons service has remained for the government to leave FGC recommendations outside of the reform process, as prisons already had unaddressed. By combining representatives of the an ongoing five-year rations supply contract. However, World Bank, IMF, and AfDB in its membership, the this contract expires in 2020 and it is anticipated that FGC brought together the key institutions with which a tender process for prisons’ rations will commence the federal government was seeking to re-engage, alongside a new tender process for the army, NISA, and and hence that had most weight in the domain of the police, to replace the contracts awarded in 2019 at economic governance. This is given added weight by the expiry of their one-year term. the support of an expert FGC Concessions Advisor to provide detailed technical review and advice on Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 31

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT BOX 1.1 Timeline on Somali National Army Rations Re-tendering • Presidential Press Release commits that “All tenders for logistic supplies will be carried out through the Interim Procurement Board”, 9 September 2015. • FGC asserts that it should review any draft contracts before signing and seeks to obtain copies of legacy contracts, Ministry of Finance concludes there are no formal contracts by August 2016. • The federal government launches a competitive tender for army rations in September 2016. • FGC reviews the tender process in February 2017. • Competitively tendered army rations contract with new supplier signed 13th March 2017. • The army cancels the contract in May 2017 and makes arrangements with another provider non-competitively. • Competitively awarded supplier complains in June 2017. • The Ministry of Finance reviews the case in July 2017 and writes to Ministry of Defence to say that the competitively procured contract should stand. Ministry of Defence agrees. • Economic Committee of Cabinet determines in October 2017 that the non-competitive contract should be cancelled, and a competitive re-tender process commenced. • Army rations contractor is served a termination notice by the Minister of Defence in October 2018. • A new army rations tender process is launched in October 2018, but is not concluded. • February 2019, federal government issues a set of financial management procedures for the security sector which also required immediate competitive retendering of all rations contracts. • The government issued a tender for two army rations contracts, for supply of dry rations in two army sectors in April 2019. • The bid submission deadline passed by May 2019, and bids were opened by June 2019. • The government completed the procurement process for supply of dry rations in two army sectors (12 April and Hamar), Police and NISA by September 2019. • The FGC reviewed all four processes and advised that they are an appropriate basis for contract award by September 2019. 32 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT procurement processes in a confidential manner. manner that explicitly acknowledged both the politics The FGC also derived credibility from its reputation and the multi-dimensionality of the reform effort) among major bilateral actors, many of whom were with hands-on expert confidential advisory support. major security sector actors in Somalia. These actors In so doing, the FGC’s attention to procurement could follow FGC deliberations—without confidential has cut through the “form over function” problem details—at bi-monthly informal briefings led by the often prevalent in procurement reforms, where the FGC’s international delegates. appearance of best practice rules and systems often conceals the underlying true practices.41 In comparison with more standard internationally supported procurement reform efforts, the FGC Sustained focus over a long period, with multiple approach has been unusual in two ways. First, it is often incremental reform steps and willingness to persevere widely assumed that adopting a “best practice” legal in the face of setbacks, was crucial given the challenging and regulatory framework is the essential foundation and fragile environment. By maintaining government for procurement reform, and that the adoption of good attention on this complex problem over a long period, rules (usually defined as those applied in other places) as well as raising the issue with the international will alone drive out bad practices. By contrast, part of community, the FGC kept actors focused on the matter the FGC’s work has entailed reviewing and supporting over a period of six years. By consistently coordinating the revision of the Procurement Act (which was passed key economic agencies at the center of government as in 2017 and heavily mirrored Liberia’s decentralized well as international partners, the FGC was able to build procurement law) to better adapt it to the Somali and maintain a sufficiently powerful reform coalition context and government capabilities. to overcome security sector actors seeking to revert to non-competitive practices, as well as to provide Second, procurement reforms often push for Ministry technical advisory support to help rectify procurement of Finance-centered reforms of business processes missteps resulting from weak government capability. to be applied to all government procurements, often As a result, the FGC helped the federal government to involving adoption of an e-GP system as a necessary manage the transition from a period of non-adherence reform step. By contrast, the FGC has focused on to due process in public procurement, to gradually a specific set of contracts over a sustained period, establish high-level commitment to and some of the combining high-level engagement with a key coalition institutional underpinnings for due process in public of institutions at the center of government (and in a procurement. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 33

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT CASE STUDY 2 CASE STUDY 2 PUBLIC PROCUREMENT e-Procurement Reform in Bangladesh Overview a symptom of failings in the procurement processes, and an impediment to achieving more competitive, Bangladesh’s public procurement system long transparent, and value-adding procurement. The constrained the nation’s economic development success that Bangladesh has achieved in marginalizing and the performance of the public sector. In 2000, corruption in the contracting process demonstrates approximately 80% of Bangladesh’s developmental the benefits of confronting corruption as one aspect budget and one-third of public spending occurred of a larger systemic reform effort. The Bangladesh through state contracting, using a range of mechanisms experience also highlights the ways that implementing stipulated in a variety of laws and regulations. While a comprehensive e-GP platform can help drive the public procurement system had the capacity to standardization of practices and increased transparency. conduct numerous transactions and spend large sums At the same time, the indication that some corruption of money, its ability to deliver value to the citizens of may have shifted towards contract implementation in Bangladesh was questionable. Opaque accountability Bangladesh indicates the tenacity and resilience with arrangements created a system that favored some which groups fight to maintain their corrupt income. at enormous public cost. The economic loss due to inefficient procurement and misappropriation of funds Introduction was estimated at over 1.5% GDP growth per year. In 2011, Bangladesh was at a crossroads in its efforts In two decades of sustained effort, the government to improve public procurement. Procurement reform established a modern, well-functioning, and had started almost a decade earlier with the Public transparent public procurement system. The country Procurement Reform Project.42 In 2003, the government developed its own Public Procurement Act and introduced a Public Procurement Regulation to start Rules, including tender documents, a nodal agency practicing procurement under a single framework, to regulate procurement, a comprehensive capacity although with limited legal enforcement. To further development program, an integrated e-GP system, consolidate the legal framework, the government an on-line procurement performance measurement introduced a Public Procurement Act in 2006 and the system, citizen engagement, and social accountability Public Procurement Rules in 2008. These laws adopted with a strategic communication framework. A corrupt the principles of the UNCITRAL model in the core system has been reformed and corrupt practices have procurement functions, introducing modern regulations become the exception instead of the rule. on eligibility of tenderers, procurement planning, preparation of tenders and evaluations, tender This case study examines the steps that Bangladesh submission and approval procedures, an independent has taken to address corruption within the context of complaint review mechanism, professional misconduct, its overall reform of its public procurement system. and sanctions, including anti-corruption measures. In Bangladesh, corruption was recognized as both 34 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT This first wave of reforms produced little in the way contracting for a wide range of goods, works, and of improved outcomes and performance. The highly services.43 decentralized paper-based procurement process remained prone to corruption, collusion, and coercion The e-GP platform brought every step of the at the local level. Perverse practices, like the physical procurement cycle online: registration (public agencies/ intimidation of potential bidders and non-competitive bidders/ banks), procurement planning, tendering processes for awarding contracts continued as the (invitation, preparation, submission of bids, including legal changes failed to translate into new processes bid security), evaluations, award, contracting and and behaviors. Bureaucratic resistance to introducing payments. Additional features were added over time new practices was substantial, especially among those to further enhance transparency, including the creation officials who obtained the greatest private benefit from of a citizen portal to disclose procurement and contract the way the existing system functioned. Procurement management data using the Open Contracting Data staff lacked the capacity and incentives to change Standard, as well as procurement performance practices and processes and there was scant evidence to information.44 suggest that new bidders were competing and winning tenders. Procurement volumes and values remained The introduction of the e-GP system presented various high, but the system continued to be characterized by challenges on the ground, mainly related to system inefficiencies, incapacity, and wastage. security, poor connectivity, inadequate IT infrastructure at rural levels, and a lack of knowledge skills among Starting in 2011, the Government began the roll-out users. The roll-out of the e-GP system was enabled by of a comprehensive e-GP system. Through e-GP and the IT infrastructure support created by Bangladesh related reforms, the government aimed to reduce Telephone Company Limited and Power Grid Company corruption in the procurement process and shift to a Limited supported by some private network providers. system that delivered better value for money for the A significant effort was made in ensuring network country’s citizens. The Ministry of Planning’s Central coverage and providing the pilot agencies with the Procurement Technical Unit (CPTU) oversaw public computers and IT equipment necessary to conduct procurement and managed the reform process. all procurement operations on the online platform. Recognizing a lack of existing IT and computer The implementation process knowledge among the procurement staff and the tendering community, CPTU created a help desk for The government’s second wave of reforms to improve e-GP and made a comprehensive effort to organize public procurement performance began in 2011. The technical trainings for procurement officials as well as reforms had three major elements: introducing an for suppliers and stakeholders at large. electronic procurement system, training people how to use the new system, and strengthening monitoring and After the pilot, the CPTU expanded coverage across oversight. government. The steady expansion of e-GP reshaped the mechanics of the procurement process. Digital Rolling out an electronic procurement platforms eliminated the need for a range of face- system to-face interactions. Adopting e-GP also fostered a high degree of procedural standardization, including After completing a readiness assessment for the in the forms and documents used, the publishing of introduction of e-GP, the CPTU implemented e-GP in information on contract opportunities and awards, four pilot agencies: the Local Government Engineering and the recording and filing of information relating to Department, the Roads and Highways Department, the each transaction. As a result, e-GP led to increased Water Development Board, and the Rural Electrification procedural regularity as well as increased ability to Board. The four pilot agencies accounted for identify when and where non-standard processes approximately 40% of the national procurement budget occurred. and included both high-value central procurement transactions as well as smaller value decentralized By starting with a pilot, observers inside and outside the government could track the procurement performance of the pilot group versus agencies still operating under the paper-based system. This required an extensive Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 35

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT effort to collect and harmonize transaction-level data practices and processes. from the e-GP system as well as from the paper-based system. The CPTU conducted a comprehensive communication campaign in order to promote public awareness, Building procurement capacity in the knowledge sharing, advocacy, stakeholder engagement, public and private sectors and behavior change. This included communication support for and around the CPTU, expansion of e-GP, The second key element of the procurement reform open contracting efforts and two-way communication was an extensive and intensive program of training in among multi-stakeholders, including procuring entities, basic procurement skills and in navigating the e-GP line ministries, oversight agencies, businesses, media, platform. The emphasis placed on training responded academia, and beneficiaries. Activities included: social to a need to raise the skill level of officials responsible media campaigns, engagement of beneficiary groups, for procurement and enable new and dynamic private public debates, education programs, awareness sector firms to participate and win procurement campaigns, e-GP orientation for different stakeholder tenders. groups, including media and community support organizations, media awards and fellowships, and The training program was designed to spread expertise collaboration with other governmental organizations widely and to allow training to take place on a continuous involved in increasing information flows.45 basis. The CPTU managed the training of approximately 37,000 people, which included creating a crucial mass The stakeholder engagement program targeted of 60 nationally certified trainers. The trainings ranged political leaders, implementers, bidders, bankers, civil from procurement awareness and orientation to more societies, academia, journalists, and, most importantly, in-depth training on different dimensions of planning citizens. The forums at policy level and district levels, and executing procurement transactions. That number combined with numerous workshops and deeper included at least one procurement officer from each dialogues directly with the field level officials, tendering of the procuring entities in the pilot agencies. Over community, and journalists across the country, created 6,000 private firms interested in participating in future visible momentum. Partnership with a communication procurements were also provided instruction in how to firm and the BRAC Institute of Governance and learn of contract opportunities and submit bids. Development46 effectively moved the reform beyond simplistic technical ‘solutions’, reflecting an integrated Through the training program, a cadre of procurement approach that explicitly addressed both supply and officials gained the knowledge and expertise needed demand issues. to procure goods, works, and services efficiently and in accordance with the rules. The procurement The CPTU recognized that social accountability could officials were distributed within key sectoral agencies. help motivate public sector employees’ performance Equally important, the training programs produced a and that citizen engagement could contribute to community of informed bidders eager to compete for monitoring the execution of public contracts. In order contracts and armed with knowledge and expectations to institutionalize citizen engagement, encourage about how public procurement transactions should be dialogue and social accountability, and enable organized and executed. citizens to participate in the procurement cycle, four platforms were formed: (i) Public Private Stakeholders Strengthening oversight and monitoring Committee comprising representatives from think- tanks, non-profit organizations, academia, and senior The final reform element was to increase transparency officials/ civil servants from the key ministries/ sector in procurement processes and greatly expand the organizations; (ii) Government-Tenderers’ Forum amount of publicly available information concerning with representatives from both the public sector individual transactions and overall system outcomes. implementing agencies and the tender community;47 In addition, the CPTU undertook a determined effort to (iii) Site-Specific Citizen Monitoring activities to monitor increase citizen awareness of public procurement and implementation of procurement contracts at the rural community participation in monitoring procurement level; and (iv) a citizens’ portal for monitoring public spending with appropriate disclosure of procurement information to the public and a feedback portal that 36 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT would help promote dialogue to ensure transparency improved efficiency in terms of timeliness of award and accountability in public spending vis-à-vis better of contracts (award within the initial tender validity service delivery. period), drastically decreasing the cost of accessing information on tendering opportunities, and enhanced From the start, the reform effort was designed to build competition through an increase in participating support and momentum over time. The changes to tenderers. The number of registered tenderers and procurement practices faced strong opposition from the value of invited tenders also increased (Figure 1.1). vested interests in the private sector and the parts of the Quasi-experimental analysis by Blum et al49 suggests bureaucracy that benefited from the existing system. that improvements in the performance of pilot agencies Political support for additional reforms to procurement relative to agencies that remained in the paper-based in 2011 was limited, as politicians were hesitant to system were substantial in terms of lowering corruption become too closely associated with a reform viewed risks. as having limited chances of delivering results. The bureaucratic hierarchy and procurement officials were The effort to engage stakeholders created ownership also among the actors opposed to the introduction of of the reform agenda both among the procuring the e-GP system, concerned about the transformation organizations as well as the tendering community. of officials’ roles, functions, and responsibilities as well Procurement officials started to feel more comfortable in as the deep restructuring within their organization exercising their functions through the new e-GP portal, necessary to accommodate the e-GP adoption. and the private sector began to demonstrate increased interest in participating in tenders for state contracts. After seeing the benefits of e-GP through piloting, a The e-GP system changed the nature of competition in young group of public officials with expertise and public procurement and created demand for an army interest in IT became champions in carrying forward the of employees equipped with the newly necessary IT e-GP agenda within their respective agencies. As the and computer skills among the tendering community. initial successes of e-GP in curbing collusion, coercion, These dynamics opened the door for small and local tender rigging at the local level and improving the firms to win public procurement contracts while also economic efficiency of the procurement system started providing new job opportunities for well-educated to become apparent, the Bangladesh Prime Minster young professionals who could help small firms to bid extended unequivocal support for the total digitization on contracts using the electronic portal, thus ensuring of the procurement process. On October 21, 2015 the significant support for the reform even in rural areas Prime Minister announced that all public procurement and at the community level. would be conducted through the e-GP system by 2016, demonstrating the degree of political support for An on-line survey-based evaluation of officials, private procurement reform that built over time. sector firms, civil society members, media, and financial institutions conducted by the Nielsen Company in 2017 Results found that 79.3 percent of respondents were positive about improved transparency in public procurement The reforms initiated since 2011 transformed the public due to the introduction of e-GP; 76.6 percent viewed procurement system in Bangladesh. Bangladesh stands procurement reforms as effective; 72.3 percent out as a leader in the implementation of procurement recognized the e-GP system as efficient; and 81.9 reforms and in changing how procurement gets percent mentioned that one of the benefits of reform done, especially among countries at a similar level of has been improved accountability.50 economic development.48 As of 2020, the e-GP system had been implemented in more than 900 public sector Data on the impact of the reforms on procurement organizations and local government municipalities, transactions are very encouraging but should be covering about 13,000 procuring entities. treated with care given the on-going nature of the reforms.51 The reform’s direct impact on corruption The average length of time from tender invitation to is not possible to measure. However, corruption risk contract signing decreased from 95 days to 59 days indicators associated with likely corrupt acts, which are between 2011 and 2019. The new system demonstrated particularly well suited for identifying systemic impacts, can be tracked.52 Three corruption risk indicators were thoroughly evaluated by Blum et al53, using a quasi- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 37

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT FIGURE 1.1 Trends of Electronically Administered Tenders and their Value Number of Registered Tenderers Growth of Value of Tender Invitations in e-GP (USD million) 80,000 20,000 60,000 15,000 40,000 10,000 20,000 5,000 0 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 experimental methodology: of successful anti-corruption interventions in public procurement indicates, reform of one procurement • Single bidding,54 phase is likely to induce corruption displacement to • Non-local suppliers,55 and other phases of the process.57 Initial analysis of existing • Winning rebates.56 data by Blum et al58 has been unable to identify improvements in the final cost of capital investment All of these indicators showed a statistically significant projects or in the time it takes to complete such and sizeable improvement due to the switch from projects. Fully 70% of capital investment contracts are manual to electronic tender administration in the impact not completed on time, and there is no indication that evaluation (Figure 1.2). Throughout 2011-2016, the rate the quality of contract implementation has improved. of contracts awarded on a tender with only one bidder While the data is only suggestive, we cannot rule out practically halved, dropping from 33% to 17%. Similarly, that there is a considerable amount of corruption the rate of suppliers hailing from outside the district remaining in the contract implementation phase, which of the buyer increased from 13% to 21%. Furthermore, should be tackled in subsequent reforms. the average winning rebate the successful bidder offered (i.e., discounts) greatly increased, moving from Reflections about half a percent of the initial estimate to close to 7%. Taken together, these improvements in corruption Bangladesh’s more than nine-year experience proxies indicate that across the board, the likelihood of implementing e-GP demonstrates the amount of effort corruption declined as a result of the e-GP introduction. and dedication required to improve procurement These quantitative results were also accompanied by practices. Successfully reforming procurement, anecdotal evidence on the disappearance of physical especially in the face of concerted efforts to maintain violence around bid submission as reported in the local the status quo, is a long process. The resilience of media. the reform effort was a testament to the commitment to reform of officials in the Ministry of Planning and At the same time, there is evidence that procurement their ability to incrementally build support across reforms have not “solved” corruption. While the reforms government through demonstrating their ability to of the procurement process appear to have made a produce concrete and visible results. difference in the integrity of the process of contracting, it is less clear that the reforms have influenced the process of contract implementation. As the study 38 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT FIGURE 1.2 Change in Corruption Risk Indicators as a Result of the e-GP Intervention Panel A. Single bidding and non-local supplier rate Panel B. Winning rebate (percentage point) 0% 10% 20% 30% 40% 0% 2% 4% 6% 8% single bidder % manual non-local supplier % e-GP manual e-GP The more procurement performance improved in become one of the Prime Minister’s most prominent the select group of first movers, the more support political commitments. Key members of cabinet, like procurement reforms gathered. Effectively addressing the Minister of Finance and Planning, also supported corruption was fundamental to achieving early the roll-out of e-GP. successes, for example by preventing the physical intimidation of bidders by corrupt gangs by enabling the Beyond technical content for laws, capacity electronic submission of bids. Concrete improvements development, and e-GP, the CPTU also undertook in procurement created an expanding constituency for a massive stakeholder engagement program that continued reform that was strong enough to overcome supported a range of activities in engaging and the initial opposition to reform from the entrenched sensitizing key stakeholders across the country vested interests in both the public and private sectors. on the importance of procurement reform and The initial adoption of the e-GP system in only the the benefits of efficient procurement. Increased four pilot agencies also allowed government officials transparency, combined with increased attention to to focus their efforts on implementing change across making information publicly accessible, was essential a limited number of entities. Ownership and support to generating interest in public procurement reforms for reforms was built over time thanks to a gradual inside and outside of government. Equally important, sequencing of the reform implementation. newly established mechanisms for capturing and analyzing information provided stakeholders with the Initially, government support for the e-GP reform was opportunity to examine procurement outcomes across weak. Instead, the implementation of the e-GP reform the four agencies, within specific procuring entities, was a bottom-up approach, mainly owned by mid- and in specific transactions. This new insight enabled level public officials of a few key agencies (who wanted officials, bidders, and communities to understand to see changes) and a relatively young tendering where progress was taking place, as well as where community. The project implementers, including CPTU problems persisted and where additional scrutiny and the four pilot agencies, leveraged the support of was needed. Transparency, information provision, and these enthusiastic officials and the young community active monitoring allowed government officials to of bidders as well as communities. Political will to manage procurement reform, while at the same time support procurement reform grew when leaders saw enabling outsiders to monitor and review progress and that new procurement practices and systems were behavior. This combination proved to be a vital source gaining popularity by reducing bid rigging, coercion, of energy and dynamism for reform. and collusion. Shortly thereafter, procurement reform Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 39

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT CASE STUDY 3 CASE STUDY 3 PUBLIC PROCUREMENT Reforming Procurement and Political Party Financing in Chile Overview were financed, the internal rules by which political parties operated, and the transparency of the public In 2014 and 2015, the authority of the Government of procurement system. Success in changing the rules of Chile was challenged by a string of scandals relating to the game demonstrates the possibility of designing the relationship between economic and political power. reforms that address the symptoms and the underlying While many of the “incidents” existed in a gray area causes of corruption. At the same time, the mixed impact of questionable legality, the overall public discourse of the reforms in reducing the power of economic and suggested that the bureaucratic reforms undertaken political elites is a reminder that the overall process of ten years prior had not succeeded in eliminating the changing fundamental aspects of governance is long influence of elites on the workings of government. One and progress is neither linear nor constant. of the scandals, which involved public procurement and the military, hinted at the role of procurement in the Introduction opaque flow of money among economic elites, political parties, and the government. Between September 2014 and March 2015, Chile—which had a reputation as one of the least corrupt countries In response, the government initiated an innovative in Latin America—was rocked by a series of high-profile reform process designed to define new norms and corruption scandals. Investigative journalists revealed expectations for Chilean governance. At its center how President Michele Bachelet’s son had allegedly was an independent and non-political commission engaged in insider trading and influenced peddling in entrusted with responsibility for making specific and a multimillion-dollar real estate play. Bachelet’s former concrete recommendations on restructuring the role finance minister was investigated for alleged campaign and transparency of the private financing of political finance violations but not prosecuted. And executives parties. A number of proposed reforms focused on from one of Chile’s largest financial groups were improving transparency and consistency in public arrested on charges of tax fraud, bribery, and money procurement. In the context of a well-performing state laundering linked to an illegal scheme to finance the with a relatively high degree of capacity and integrity, Independent Democratic Union, an opposition party.59 addressing corruption in public procurement was approached primarily by modifying the incentives and The scandals exposed how prominent Chilean dynamics in the overarching system of governance. politicians and business executives used connections to exert influence and obtain wealth. While improper The Chilean Government subsequently adopted a links between business and politics sometimes resulted number of the commission’s recommendations, which in clearly fraudulent activities, such as tax evasion, served to reshape the manner in which political parties 40 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT the role of money in politics more generally was a The implementation process legal gray area. The links between private interests and politics were systemic, with all political parties Dealing with the symptoms – proposals involved in funneling cash through opaque payment to reform procurement arrangements that had the veneer of legality. To the public, the scandals seemed to prove that the whole Chile’s public procurement law had been revised political establishment was corrupt. Confidence in in 20 03.61 The restruc turing, which enhanced political institutions dropped dramatically, and citizens procurement rules and processes, established viewed corruption as one of the biggest problems of ChileCompra, the Central Purchasing Body in charge the country.60 of managing procurement, and Mercado Publico, the online procurement platform.62 The new systems Corruption in public procurement was another area of fostered transparency and increased competition concern following the “Milicogate scandal” that was among bidders. While the 2003 reforms were a huge exposed in 2014. Between 2010 and 2014, a group step forward, the procurement system retained some of military officers concocted a series of fake military features that enabled the manipulation of rules and procurement deals for goods and services that were processes. The Commission analyzed the public never supplied, embezzling an estimated USD11 procurement system with an eye towards identifying million. At the time, the military procurement system the institutional weaknesses that created opportunities allowed off-budget funds to be transferred to secret for political influence and conflicts of interest. accounts, and there was no parliamentary scrutiny or accountability for how that money was spent. While large parts of the procurement system operated under a common framework, the rules established The scandals in Chile revealed the continued existence special regimes for certain types of transactions, of corruption in Chile and instilled in the public a sense creating a degree of fragmentation (including some of urgency for reform. On March 11th 2015, Bachelet transactions undertaken by state-owned enterprises created the “Commission against Conflicts of Interest, and the military). Some branches of government— Influence Peddling, and Corruption,” an independent the military, for example—were not required to use advisory body with a 45-day mandate to prepare ChileCompra. This fragmentation reduced the value of specific proposals for policy action. The commission the standardization that had been introduced in most was composed of 15 independent and neutral members of the procurement system, and increased corruption and chaired by economist Eduardo Engel. The “Engel vulnerabilities. When the Milicogate scandal broke in Commission,” as it became known, did not include 2014, these vulnerabilities were exposed to the public. anyone who worked in politics or business, a crucial element for building credibility and being perceived as The Commission’s final report included various measures non-partisan. to address the weaknesses identified. It proposed the unification of the entire procurement system under the The Commission’s work was based on the understanding ChileCompra umbrella and further training for staff. that the corruption scandals were symptoms of It also proposed a series of measures to strengthen much deeper problems—the relationships between ChileCompra and extend its scope to coordinate, economic and political power and systemic institutional supervise, and support the entire integrated public weaknesses in political parties. As a result, the anti- procurement system. In order to increase transparency corruption agenda proposed by the Commission was in purchasing and reduce opportunities for elite comprehensive and ambitious, attempting to address capture, the report also proposed strengthening of both the symptoms and the causes of corruption. reporting requirements and further standardization of The agenda included both specific sectoral reforms public purchases that go across government agencies. (e.g., public procurement, market regulation, public The Commission also proposed that the “Copper employment, corporate governance) as well as broader Law” be abolished. The law—which allowed a portion reforms that sought to alter the dynamics around of revenue from the state-owned National Copper political party financing, governance, transparency, Corporation (CODELCO) to be transferred to secret accountability of political parties, and conflicts of military bank accounts—had been exploited by those interest. behind the Milicogate scheme.63 The Commission Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 41

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT wanted to reduce the chances of that happening to enable effective oversight, and then periodically again through the introduction of a multi-year budget review and update their declarations. It proposed with greater planning and oversight capacity and by standardizing the declarations, ensuring they contained eliminating off-budget expenses. sufficient details to clearly determine an official’s wealth, and that declarations be published on Chile’s Addressing the causes – proposals to Transparency Portal in a reusable open data format. reform political party financing The report also addressed the lack of provisions to The Commission’s work was based on the recognition regulate revolving doors between the public and the that Milicogate and the other scandals were private sector,64 recommending a one-year cooling off manifestations of deeper problems related to the period for former officials65 and the creation of a public relationship between economic and political power. directory of all politicians and bureaucrats ineligible Improvements to ChileCompra and other technical for certain contracts or functions upon leaving office. reforms were unlikely to achieve their objectives unless Finally, it proposed several administrative rules to they were combined with actions to change the overall facilitate the application and enhance the effectiveness incentives in the system. The set of reforms proposed of the “Lobby Law”,”66 for example by introducing a by the Commission to shift the dynamics of elite code of conduct for lobbyists and creating a training capture had three pillars: reforming campaign finance, plan and courses on the content and application of the strengthening the governance of political parties, and “Lobby Law”. regulating conflicts of interest. Building support for reform In principle, the Commission determined that it was essential to regulate political parties as if they The Commission submitted its final report on April 24, were public institutions in order to achieve greater 2015. Acting on the Commission’s recommendations, equity and fairness in political and economic life. the government quickly formulated a comprehensive Recognizing that parties’ reliance on private funding set of reform measures. On April 28, President Bachelet had facilitated their capture by private interests, the announced the “Integrity and Transparency Agenda”, Commission proposed introducing public funding for and in May and June the government introduced 21 political parties. The Commission’s report also included legal and 14 administrative initiatives. The “Integrity proposals to improve the governance, transparency, and Transparency Agenda” consisted of a broad set and accountability of political parties, including stricter of medium- and long-term measures intended to regulations on private financing. improve anti-corruption laws and make transparency a centerpiece of the relationship between politics and At the time, most private donors gave money through business. “reserved contributions” where, in theory, neither the public nor the candidate knew the donor’s identity. Monitoring implementation of the anti-corruption As became clear with the 2014-2015 scandals, in agenda was an arduous task given the number of bills practice candidates knew exactly who was making and proposals promoted by the Commission, which large donations, and only the public was left in the had to make their way through Congress. In order to dark. In order to reduce the interconnections between keep citizens engaged during the legislative process politics and business and to increase transparency, the and facilitate the production of accurate and timely Commission’s report proposed allowing only individuals information, two civil society organizations created the (not private businesses) to finance political parties, and Anti-Corruption Observatory in November 2015.67 The the public disclosure of significant contributions. observatory evaluated the achievement of objectives and tracked the legislative process. During the The Commission’s proposals on conflicts of interest legislative process for the implementation of the reform had a similar focus on enhancing transparency. agenda, the Observatory published this information in The Commission proposed that asset declaration real time on its website, enabling citizens to validate requirements be enhanced so that officials should be progress and keep on pushing for completion of the mandated to declare all their interests before assuming reform agenda. public office, provide additional details on their assets 42 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Progress on reforming procurement (iv) extend the use of Framework Agreements and establish objective criteria for their development;68 and Chile achieved mixed success in operationalizing the (v) cancel the “Copper Law” and provide Congress with recommendations of the Engel Commission in regard greater capacity to monitor military purchases. to reforming procurement. For example, there was no progress with respect to some of the proposals included In 2017, 99% of award contracts were published in the Commission’s final report, such as stronger according to the new standards of transparency and sanctions against irregularities in the procurement integrity promoted in the Commission’s final report process or the creation of a strategic unit to oversee and adopted in the “Integrity and Transparency special purchases. However, Congress approved bills Agenda”.69 The number of public agencies qualified to: (i) expand the scope of the public procurement to publish Bidding Requirements (Bases de Licitación) system to consider the entire procurement process, with advanced electronic signature in the ChileCompra including support in the development of the bidding online platform increased from 0 in 2014 to 17 in 2017. rules, the award and the execution of the contract; (ii) In the same year, 8.7% of the bidding processes used promote an anonymous system to report irregularities; advanced electronic signature. (iii) sanction the use of direct contracting for contracts whose characteristics, by law, do not justify its adoption; In May 2017, ChileCompra approved the Code of Ethics Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 43

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT in Public Procurement Processes, establishing the The impact of these reforms can be appreciated by reporting obligation of officials participating in public looking at the political donations in the presidential procurement. In 2018, a connection was developed election of 2017. Comparing the presidential elections between Mercado Publico and the National Financial immediately before and after the reforms (2013 Management System. This enabled the tracking of and 2017) the number of donors increased from government spending from the procurement process approximately 1,200 in 2013 (mostly firms) to close to to the payment of supplier invoices within the finance 8,000 in 2017 (only individuals), while both the average system and it strengthened ChileCompra’s ability and the median donation went down significantly.71 to monitor payments to suppliers that do not relate As intended, the proportion of public financing of to procurement activity conducted within Mercado campaigns increased, providing almost two-thirds of Publico. Finally, in 2019 ChileCompra launched the financial resources once the reform had been enacted. system for anonymously reporting irregularities in The reforms also had a positive impact on transparency government procurement on its website. regarding the wealth of public officials. The share of officials that submitted their declarations of interests The advancements related to the “Copper Law” and assets (among those obliged to do so by Law and transparency of military purchases were notable N° 20.880, 2016) increased from 90% in 2015 to 94% achievements given the history of attempted but failed in 2017 (95.4% in the Central Administration and 91% reforms. In 2015, a motion to make the content of the among municipal officials). “Copper Law” publicly available was approved and in December 2016, the complete content of Chile’s Progress continued after 2017, but at a slower pace. “Copper Law” and its amendments since 1958 became For example, in 2017 the OECD released a statement publicly available. In September 2019, Chile partially urging Chile to address the remaining weaknesses in replaced the “Copper Law” with new legislation that its frameworks to combat foreign bribery. In November ended the transfer of funds from the copper tax to 2018, Chile published a new law amending the Criminal the military, and instead directing those funds to the Code and providing a more complete Anti-Corruption regular state budget.70 Statute. Finally, in July 2018, President Piñera signed into law a widely-hailed Bill on Public Integrity, which Progress on overall “Integrity and regulates the hiring of relatives, the nature of lobbying Transparency Agenda” and interest management, and conflicts of interest between state officials and their ownership in entities When Bachelet left office in March 2018, Congress had that might be subject to audits by the state. already enacted 12 major anti-corruption-related bills, while the executive branch had implemented several Lessons learned administrative changes. A 13th bill was approved in late 2018 under Bachelet’s successor, Sebastián Piñera. The Chilean case represents a relatively unique effort Based on the last update (2017), the Anti-Corruption to address the symptoms and causes of corruption by Observatory reported a 63% degree of progress in the confronting the undue influence of economic elites legislative process and 4.5/5 evaluation of achievement on public sector decision-making. Reforms centered of objectives. “Financing Politics to Strengthen around changing regulations on the funding of political Democracy” was the area that registered most progress parties and the rules by which they operated. Reform according to the Observatory, with a completion score actions also included a number of changes in regulations of 83%. relating to public procurement, especially in relation to public finance and procurement in the security sectors. The reforms introduced public funding for political parties in proportion to their representation in The approach to reform was as creative as its substance. Congress, an important step forward in reducing the The creation of a strict timeline for producing a influence of money on politics, but one that was very national program injected a high degree of urgency unpopular with the public according to opinion surveys. into the process and generated intense pressure to In addition, the Electoral Service established limits on negotiate and find consensus across groups, while electoral spending as well as on maximum electoral the creation of an independent committee to lead the contributions. 44 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT strategy process established a high degree of public the outrage created by the scandals, public support legitimacy and independence into the proposed for the Commission’s work and President Bachelet’s changes. The Commission’s work was participatory, leadership made opposing the anti-corruption agenda seeking guidance from technical experts and support political suicide for legislators. Once bills were put to from citizens. Realizing the importance of building a vote, deputies and senators felt enormous pressure momentum and creating a common understanding in to vote in favor and not be perceived as undermining public opinion on the anti-corruption reform agenda, efforts to clean up the system. the Commission relied on civil society organizations and the media to inform and empower civil society In times of crisis, politicization of corruption scandals and build political capital to be spent during the can poison the political environment, impeding legislative process and implementation of the reform collaborative efforts and the creation of a shared agenda. Civil society and the media had a crucial role in reform agenda. In this case, because all parties had monitoring the implementation of the anti-corruption been involved in the corruption scandals and illicit agenda and holding the administration and Congress campaign finance schemes, there was no scope accountable. Because of the intense public scrutiny on for political shaming. Even further, the government the government and Congress, all political parties were understood that any proposals coming directly from under enormous pressure to embrace and support the the political establishment would be received by the ambitious and comprehensive anti-corruption agenda public with enormous skepticism—and that a more pushed by the government. neutral agent would have to initiate the process. The Engel Commission’s neutrality and independence The Engel Commission’s work and the reform agenda earned it high credibility in public opinion, allowing it promoted by the government were based on the to elaborate concrete proposals that gained unanimous understanding that corruption in the public sector in consensus. Chile was the symptom of much deeper problems—the relationships between economic and political power At the same time, it is important to recognize that the and systemic institutional weaknesses. Earlier reforms reforms of 2015 represent a step in Chile’s development had already created the regulatory foundations for a and not an end point in its national development nor transparent, meritocratic, and well-performing state. the end of corruption in the country. In 2019-2020, The intervening years had demonstrated the ability Chile has experienced a round of protests relating to of economic elites to find ways to circumvent some of issues of inequality and elite privilege. the technical solutions that had been implemented. As a result, the specific technical or sectoral reforms that had been enacted were at risk unless they were buttressed by actions to change the overall incentives in the system, and the dynamics between economic and political power. This case provides an example of how, by recognizing and acting when a window of opportunity emerges, a broad and non-partisan coalition can make progress on previously intractable problems. Until scandals erupt, citizens and politicians may not perceive the importance of anti-corruption reforms and affected groups may have veto power, resulting in reforms being blocked. The corruption scandals that occurred in Chile in 2014 and 2015 created a window of opportunity, and citizens demanded strong, clear and prompt actions by the government and Congress to introduce significant anti-corruption reforms. Congress was initially reluctant to embrace the anti-corruption agenda, with senior lawmakers and party bosses fearing the impact of stricter campaign finance and transparency norms. But Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 45

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Notes 1. For the purposes of this chapter, the terms “public 13. Network analyses show that public procurement markets procurement” and “state contracting” are used are dense and well-connected (Fazekas, Skuhrovec and interchangeably to indicate that the discussion of corruption Wachs, 2017), high corruption risk organizations are clustered applies broadly, and includes traditional public procurement, (Fazekas and Tóth, 2016) and corruption in public procurement public-private partnerships, as well as contracting by state- is predominantly about the exclusion of suppliers (Fazekas, owned enterprises. We differentiate between input-oriented Skuhrovec and Wachs, 2017). public procurement (where state contracting occurs on the basis of clear technical specifications, designs, and 14. Balrunaite (2019) demonstrates that banning political enumerated inputs) and output-oriented public procurement contributions to party campaign financing reduces corruption (where state contracting happens on the basis of specified risks in public procurement. Fazekas, Skuhrovec and Wachs outcomes/functionalities), since anti-corruption activities (2017) show that captured buyers (buyers with high corruption differ depending on this distinction. risk and denser networks) are significantly less stable around changes of government, supporting the theory that political 2. Public procurement is defined as the purchase by government connections shape markets and are key drivers of corruption of goods, services, and works. There are four main phases: patterns. These papers show that public procurement can project identification and design; advertising, prequalification, be a vehicle for the connections between economic and preparation of bid documents, and submission of bids; bid political interests, in an implicit quid-pro-quo where firms evaluation, post qualification, and award of contract; and contribute to party financing, the political elites disburse contract performance, administration, and supervision. compensations through public contracts and money obtained thanks to political favoritism are reinvested to reinforce these 3. World Bank. (2020). Doing Business 2020. Washington D.C.: relationships. The World Bank. https://www.doingbusiness.org/en/reports/ global-reports/doing-business-2020. 15. OECD (2016), “Preventing Corruption in Public Procurement”. ht tp://w w w.oecd.org/gov/ethics/Corruption-Public- 4. See G. Ware, S. Moss, J. Campos, and G. Noone, Corruption Procurement-Brochure.pdf in Public Procurement: A perennial Challenge, in J. Campos and S. Pradhan, The Many Faces of Corruption: Tracking 16. OECD (1997), “OECD Convention on Combating Bribery of Vulnerabilities at the Sector Level, World Bank, 2007. Foreign Public Officials in International Business Transactions”. ht tp://w w w.oecd.org /cor r uption/oecdantibr iber yconvention. 5. Corruption in public procurement leads to distortion of htm. competition, limited market access and reduced business appetite for foreign investors. Not surprisingly, companies 17. See, for example, “Model Monitoring Agreements on Integrity increasingly demand for improved fairness in public Pacts for Infrastructure: An implementation guide for Civil procurement procedures. The 2014 Business and Industry Society organizations,” Transparency International, 2018. Advisory Committee to the OECD (BIAC) Economic Survey indicates that among business leaders, enhancing efficiency 18. See Knack, Stephen; Biletska, Nataliya; Kacker, Kanishka. and transparency in public procurement is the top priority for 2017. Deterring kickbacks and encouraging entry in public public sector reforms. procurement markets: evidence from firm surveys in 88 developing countries (English). Policy Research working paper; 6. Chavkin & Shiel (2019). Bribery Division: What is Odebrecht? no. WPS 8078. Washington, D.C.: World Bank Group. http:// Who is Involved?. International Consortium of Investigative documents.worldbank.org/curated/en/817871496169519447/ Journalists. https://w w w.icij.org/investigations/briber y- Deterring-kickbacks-and-encouraging-entry-in-public- division/bribery-division-what-is-odebrecht-who-is-involved/. procurement-markets-evidence-from-firm-surveys-in-88- developing-countries. 7. Berghof (2018), “Organised irresponsibility”? The Siemens corruption scandal of the 1990s and 2000s”, Business History. 19. For example, the OECD report on “Preventing corruption in public procurement” and the 2015 OECD “Recommendation 8. United States Department of Justice. Airbus Agrees to Pay of the Council on Public Procurement”. over $3.9 Billion in Global Penalties to Resolve Foreign Bribery and ITAR Case. https://w w w.justice.gov/opa/pr/airbus- 20. Kochanova, Anna, Zahid Hasnain & Bradley Robert Larson agrees-pay-over-39-billion-global-penalties-resolve-foreign- (2016), “Does E-Government Improve Government Capacity? bribery-and-itar-case. Evidence from Tax Administration and Public Procurement,” World Bank Policy Research Working Paper Series. 9. See V. Tanzi and H. Davoodi. 1998. Roads to Nowhere: How Corruption in Public Investment Hurts Growth, IMF Economic 21. Lewis-Faupel, Sean, Yusuf Neggers, Benjamin A. Olken & Issues, No. 12, March 1998. Fazekas and Tóth (2018): “In Rohini Pande (2016), “Can Electronic Procurement Improve transport infrastructure, corruption steers infrastructure Infrastructure Provision? Evidence from Public Works in India spending towards high value as opposed to small value and Indonesia”, American Economic Journal: Economic Policy. investment projects. It also inflates prices by 30–35% on average with largest excesses in high corruption risk regions.” 22. Blum, et. al. 2019. 10. Knack, Biletska and Kacker (2017) show that in countries with 23. For example, an OECD study on the Latin American region more transparent procurement systems, where exceptions to revealed that a common challenge faced by both procuring open competition in tendering must be explicitly justified, entities (47%) and potential users of e-GP systems (57%) are firms are more likely to participate in public procurement low knowledge and skills of ICT. Lack of innovative culture markets. (47%) and limited knowledge of the economic opportunities raised by e-GP systems (38%) were identified as additional 11. The term “agencies” includes all enterprises where the challenges for procuring entities. government or state has significant control through full, majority, or significant minority ownership. 24. There is limited evidence that increased prosecutions for corruption in public procurement leads to lower levels of 12. For an extensive discussion of corruption vulnerabilities and corruption. Researchers have been unable to detect the corruption schemes across the entire procurement process, influence of legal rules and legal enforcement on corruption see G. Ware, et al., 2007. levels in general, or in procurement, despite regular repetition 46 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT of the importance of active policing in deterring corruption 37. Sectors outside of Mogadishu were covered by in-kind and extensive efforts to stamp out corruption. See Minxin Pei, support from the international community. China’s Crony Capitalism: The Dynamics of Regime Decay, 2016 for an extensive discussion of the impact of China’s 38. FGC Advisory Note. (2020, Jan). “Gains from competitive punishment-led anti-corruption efforts. Some countries, like rations tendering in the security sector”. Indonesia, have sought to prevent corruption by criminalizing activities that might reflect misbehavior, such as contract 39. FGC Advisory Note. (2020, Jan). modifications and cost overruns. There is no evidence that these efforts contribute to solving the problem, and many 40. FGC Advisory Note. (2020, Jan). anecdotal stories indicate that criminalization slows down decision-making as officials are disinclined to make decisions 41. This “form over function” problem is sometimes also referred that expose them to risk. to as isomorphic mimicry, see for example “Building State Capability: Evidence, Analysis, Action,” Matt Andrews, Lant 25. Transparency International (2014), “The Role of Technology Pritchett, and Michael Woolcock. in Reducing Corruption in Public Procurement”. https:// k n ow l e d g e h u b.t r a n s p a r e n c y.o r g / h e l p d e s k /t h e - ro l e - of- 42. The Public Procurement Reform Project (2002-2007 was technology-in-reducing-corruption-in-public-procurement. initiated, with the support of the World Bank, and designed to implement the recommendations of the 2002 Country 26. Gerardino, Maria Paula, Stephan Litschig & Dina Pomeranz Procurement Assessment Review. See World Bank. 2002. (2017), “Can Audits Back fire: Evidence from Public Bangladesh - Country procurement assessment report Procurement in Chile”, CEPR Discussion Paper. (English). Washington, DC: World Bank. http://documents. w o r l d b a n k . o r g /c u r a t e d /e n / 812 0 414 6 8 74 3 6 5 6 4 8 6 / 27. Gerardino, Litschig, Pomerantz, 2017. Bangladesh-Country-procurement-assessment-report. 28. Bauhr, Monika, Agnes Czibik, Jenny de Fine Licht & Mihály 43. The e-GP system was initially piloted only in four procuring Fazekas. 2019. Lights on the Shadows of Public Procurement: entities of the four “pilot agencies”, then in 50 procuring Transparency as an Antidote to Corruption. Governance: entities, then in 308 procuring entities, and eventually in all An International Journal of Policy, Administrations and procuring entities within the four “pilot agencies” (about Institutions. 1300). 29. Schargrodsky, Ernesto & Tella, Rafael Di (2003), “The Role 44. The Open Contracting Data Standard, developed by the of Wages and Auditing During a Crackdown on corruption Open Contracting Partnership, defines what procurement in the City of Buenos Aires”, Journal of Law and Economics; information should be made publicly available, and the form Zamboni, Yves & Litschig, Stephan (2018), “Audit Risk and Rent the information should take in order to enable civil society Extraction: Evidence from a Randomized Evaluation in Brazil”, oversight and monitoring. See Open Contacting Partnership. Journal of Development Economics. Volume 134, September org for additional information on the OCDS. 2018, p. 133-149. 45. The key activities for the communication campaign included: 30. Olken, Benjamin A. (2007), “Monitoring Corruption: Evidence conducting 99 events on procurement reforms covering over from a Field Experiment in Indonesia”, Journal of Political 5,700 participants, convening 64 e-GP awareness workshops Economy. at district level with over 2,400 participants, establishing 64 Government and Tenderers’ Forums covering 3,300 procuring 31. See Bandiera, Best, Khan, and Pratt, 2019 for findings from a entities, and organizing four e-GP workshops including one at complex random control trial experiment in Pakistan relating the national level for 44 registered banks in the e-GP system. to the impact of auditing, performance pay, and discretion on Also, it developed a mobile app, produced an e-GP theme corruption in public procurement. song, videos, radio and television commercials and success stories, and created two digital billboards in Dhaka that 32. For a review of countries that have successfully reduced displays on-line live procurement data with a direct feed from corruption, see A. Mungiu-Pippidi, A., & Hartmann, T. (2019). the e-GP platform. Corruption and Development: An Overview. In Oxford Research Encyclopedia of Economics and Finance. Oxford: 46. The BRAC Institute of Governance and Development, Oxford University Press. operated by the internationally recognized Bangladesh NGO – BRAC – undertakes work in support of governance 33. For a discussion of the South Korean experience in addressing improvements in Bangladesh and across South Asia. For more corruption at the sector level, see Arsema Tamyalew, A information See www.Brac.net/ Review of the Effectiveness of the Anti-corruption and Civil Rights Commission of the Republic of Korea, World Bank. 47. The GTF provided an informal platform for government For Rwanda, see Addressing Administrative Corruption in officials and bidders to share information and experience Rwanda, World Bank, 2020, forthcoming. including issues and resolutions about procurement and the e-GP system. 34. Manson, Katrina (2013, Nov 3). “Somalia central bank governor resigns after seven weeks”. Financial Times. https://www. 48. See Zafrul Islam, “Bangladesh’s Success in Public Procurement: ft.com/content/5bf9ac6c-4319-11e3-8350-00144feabdc0. Sustained reform really pays off,” World Bank Governance of Development Blogs, Nov 19, 2018. 35. Jorgic, Drazen (2014, Feb 14). “Insight: Graft allegations test West’s ties to Somali president”. Reuters. https://www. 49. Blum et al, 2020, forthcoming. reu ter s.co m /ar ticle /us - s o malia - cor r uptio n - ins ig ht / ins ig ht- graft-allegations-test-wests-ties-to-somali-president- 50. See Islam, 2018 for additional information on the survey idUSBREA1D08P20140214 methodology and findings. 36. 2020 Appropriation Act allocated USD146 million for security 51. A detailed analysis of the transaction-level data is presented in sector operational costs out of a total operational budget of Blum et al, 2020, forthcoming. USD349 million. Rations spending was budgeted at USD15 million in 2020, around 11% of security sector operational 52. Mungiu-Piuppidi, A. and Fazekas, M. (2020). “How to define spending. and measure corruption.” Mungiu-Piuppidi, A., & Heywood, Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 47

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT P. M. A Research Agenda for Studies of Corruption. Elgar. a Consultant Office on Public Affairs, a lobby firm dedicated Chapter 2, p. 7-26 to helping energy companies prevent and solve conflicts with local communities. 53. Blum et al, 2020, forthcoming. 65. Cooling-off periods are minimum time intervals restricting 54. Mihály Fazekas and Kocsis, Gábor, (2020), Uncovering High- former public officials from accepting employment in the Level Corruption: Cross-National Corruption Proxies Using private sector. Cooling-off period regulations are a common Public Procurement Data. British Journal of Political Science, measure to prevent conflicts of interest. 50(1), p. 155-164. 66. The main provisions of the Lobby Law (Ley N° 20.730, 2014) 55. Mihály Fazekas, Luciana Cingolani, & Bence Tóth (2018), included: (i) The establishment of legal definitions for lobbying, Innovations in Objectively Measuring Corruption in Public activities and actors; (ii) The creation of public registers Procurement. In Helmut K. Anheier, Matthias Haber, and Mark where authorities must disclose information regarding A. Kayser (eds.) Governance Indicators. Approaches, Progress, regular meetings and individuals/lobbyists who attended Promise. Ch. 7. Oxford University Press, Oxford. those meetings; (iii) Sanctions and fines for infractions; (iv) A mandate for the Council for Transparency to consolidate data 56. Decio Coviello and Stefano Gagliarducci, (2017), Tenure in O on lobbying activities and make that information public via a ffice and Public Procurement.” American Economic Journal: website. Economic Policy 9(3), p.59-105. 67. The t wo organizations were Espacio Público (Public 57. Elizabeth Dávid-Barrett and Fazekas, Mihály (2020) Anti- Space in Spanish) and Fundación Ciudadano Inteligente corruption in aid-funded procurement: Is corruption (Intelligent Citizen Foundation in Spanish). The results from reduced or merely displaced? World Development. the Anti-Corruption Observatory can be found at: https:// ht tps://w w w.sciencedirec t.com/science/ar ticle/abs/pii/ observatorioanticorrupcion.cl/ S0305750X20301261 68. Framework agreements are arrangements between one or 58. Blum et al, 2020, forthcoming. more buyers and one or more suppliers that provide the terms governing contracts to be established for a certain period of 59. See Kevin Casas-Zamora and Miguel Carter, Beyond the time, in particular with regard to price and, where necessary, Scandals: The Changing Context of Corruption in Latin the quantity envisaged. Other repetitive conditions known America, Inter-American Dialogue, Rule of Law Report, Feb in advance, such as the place of delivery, may be included. 2017 for additional information. They are intended to provide expeditious ordering of commonly used, off-the-shelf goods, purchased on the basis 60. A national opinion survey by the Research Center of Public of lowest price. Examples of such goods are printing supplies, Studies (CEP) shows that between 2012 and 2015 public stationery, computers and software, and pharmaceutical confidence in the government, the National Congress of supplies (UNECE, Trade Facilitation Implementation Guide). Chile (Congress) and political parties fell, respectively, by 19 percentage points, 10.5 percentage points and 5.5 percentage 69. IDB (2019), “Bankability through the Lens of Transparency, points. In just five months prior to April 2015, the share of Increasing Private Investment in Latin American Infrastructure”. the population considering corruption one of the top three h t t p s: //p u b li c a t i o n s .i a d b.o r g /e n / b a n k a b ili t y - t h r o u g h - l e n s - problems of the country tripled from 9% to 28%, while support transparency-increasing-private-investment-latin-american- for Bachelet dropped by almost 10 percentage points. infrastructure. 61. Public Procurement Act (Law n° 19.886) 70. According to the new legislation, the Chilean National Congress must approve allocations for arms acquisitions 62. www.chilecompra.cl and military investment, thus officially ending the use of off- budget funds, and the Comptroller General (the government 63. The Milicogate scheme was abetted by the “Restricted audit office) has now oversight powers on all financial activities Copper Law” (Ley Reservada del Cobre), which required the involving these funds. The derogation of the “Copper Law” state-owned National Copper Corporation (CODELCO) to and the enactment of the new funding system involve a transfer 10% of revenues from its copper exports to pay for transition plan until 2032. Funds from the copper tax will be arms acquisitions and equipment maintenance for the armed gradually phased out over 12 years: the 10% tax on copper forces. The “Copper Law” was restricted in the sense that exports will remain until 2028 and will then decrease by 2.5% its full text was secret and the funds were transferred every each year until it disappears in 2032. During this period, year to secret military accounts. This off-budget system led however, copper revenues will no longer be transferred to military spending unrelated to any assessment of actual directly to funds for arms acquisitions controlled by the armed defense needs, unplanned and uncoordinated spending, and forces; instead, they will be made available to all sectors of no parliamentary scrutiny or accountability for how money was government through the regular state budget. spent, opening the door for corruption. The inadequacy of the “Copper Law” had been discussed since Chile’s return to 71. Engel, Eduardo (2019), “Money and Politics: Recent Reforms in democracy in 1990, and in 2011 the Congress introduced a bill Chile”, Espacio Público and University of Chile. to abolish the “Copper Law” and allow Congress to oversee arms acquisitions and the military budget. The bill reached the Senate in 2012, where it stalled. 64. For example, Rodrigo Hinzpeter was the Interior Minister from 2010 to 2012 and Defense Minister from 2012 to March 2014, and only one month later he was hired as General Manager at Quiñenco, which holds stakes in companies that engage in a wide array of business activities related to regulated industries, including oil imports-exports and the transport sector. Andrés Chadwick Piñera was the Interior Minister from 2012 to March 2014 and in June 2014, three months after handing over power, announced his decision to create 48 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

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Chiappinelli, Olga (2017), “Decentralization and Public OECD (2017), “Government at a Glance: Latin America and the Procurement Performance New Evidence from Italy”, DIW Berlin Caribbean”. https://w w w.oecd.org/gov/government-at-a- Discussion Paper. glance-latin-america-and-the-caribbean-2017-9789264265554- en.htm#:~:tex t=It%20contains%20new%20indicators%20 Coviello, Decio & Mario Mariniello (2014), “Publicity Requirements on,special%20feature%20on%20health%20budgeting. in Public Procurement: Evidence from a Regression Discontinuity Design”, Journal of Public Economics. Olken, Benjamin A. (2007), “Monitoring Corruption: Evidence from a Field Experiment in Indonesia”, Journal of Political Economy. Coviello, Decio, Andrea Guglielmo & Giancarlo Spagnolo (2016), “The Effect of Discretion on Procurement Performance”, CEPR United States Department of Justice. Airbus Agrees to Pay over Discussion Paper. $3.9 Billion in Global Penalties to Resolve Foreign Bribery and ITAR Case. https://www.justice.gov/opa/pr/airbus-agrees-pay- Decarolis, Francesco (2014), “Awarding Price, Contrac t over-39- billio n - glo bal - p e nalties - res olve -foreig n - b r ib er y- and - Performance, and Bids Screening: Evidence from Procurement itar-case. Auctions”, American Economic Journal: Applied Economics. Tella, Rafael Di & Schargrodsky, Ernesto (2003), “The Role of Fazekas, Mihály, Jiri Skuhrovec & Johannes Wachs (2017), Wages and Auditing During a Crackdown on corruption in the “Corruption, Government Turnover, and Public Contracting City of Buenos Aires”, Journal of Law and Economics. Market Structure”, Government Transparency Institute Working Paper. Tran, Anh (2008), “Can Procurement Auctions Reduce Corruption? Evidence from the Internal Records of a Bribe-Paying Firm”, Fazekas, Mihály & Bence Tóth (2018), “The Extent and Cost of Working Paper. Corruption in Transport Infrastructure. New Evidence from Europe”, Transportation Research Part A: Policy and Practice. Transparency International (2014), “The Role of Technology in Reducing Corruption in Public Procurement”. https:// Fazekas, Mihály & István János Tóth (2013), “Corruption Manual for k n ow l e d g e h u b.t r a n s p a r e n c y.o r g / h e l p d e s k /t h e - r o l e - of- Beginners: Corruption Techniques in Public Procurement with technology-in-reducing-corruption-in-public-procurement. Examples from Hungary”, Working Paper. V. Tanzi and H. Davoodi. 1998. Roads to Nowhere: How Corruption Fazekas, Mihály, Luciana Cingolani & Bence Tóth (2016), “A in Public Investment Hurts Growth, IMF Economic Issues, No. Comprehensive Review of Objective Corruption Proxies in 12, March 1998. Public Procurement: Risky Actors, Transactions, and Vehicles of Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 49

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT World Bank. (2020). Doing Business 2020. Washington D.C.: The Transparency International (2019), “Global Corruption Perception World Bank. https://www.doingbusiness.org/en/reports/global- Index Report”. https://www.transparency.org/en/cpi/2019. reports/doing-business-2020. World Bank. (2002). Bangladesh - Country procurement assessment Zamboni, Yves & Litschig, Stephan (2018), “Audit Risk and Rent repor t (English). Washington, DC: World Bank. ht tp:// Extraction: Evidence from a Randomized Evaluation in Brazil”, documents.worldbank.org/curated/en/812041468743656486/ Journal of Development Economics. Volume 134, September Bangladesh-Country-procurement-assessment-report. 2018, p. 133-149. Zafrul Islam, (2018), Bangladesh’s Success in Public Procurement: Case Study 1: Strengthening Competitive Procurement Sustained Reform Really Pays Off, World Bank, Governance for in Somalia Development Blogs, Nov 19, 2018. FGC Advisory Note. (2020, Jan). “Gains from competitive rations Case Study 3: Reforming Procurement and Political tendering in the security sector”. Party Financing in Chile Jorgic, Drazen (2014, Feb 14). “Insight: Graft allegations test West’s Consejo Asesor Presidencial contra los Conflictos de Interés, ties to Somali president”. Reuters. https://www.reuters.com/ el Tráfico de Influencias y la Corrupción. (2015). Informe ar ticle/us - somalia - cor r uption -insight /insight- gr af t-allegations - Final, p. 110. http://consejoanticorrupcion.cl/wp-content/ test-wests-ties-to-somali-president-idUSBREA1D08P20140214. uploads/2015/04/Consejo_ Anticorrupcion _ Infor me_ Final.pdf. Manson, Katrina (2013, Nov 3). “Somalia central bank governor Ellie, Matteson (2016). How Chile’s Recent Political Scandals Led resigns after seven weeks”. Financial Times. https://www.ft.com/ to Reforms. https://www.corporatecomplianceinsights.com/ content/5bf9ac6c-4319-11e3-8350-00144feabdc0. chiles-recent-political-scandals-led-reforms/. Case Study 2: e-Procurement Reform in Bangladesh Engel, Eduardo (2016), “From Corruption Scandals to Reforms: The Work of Chile’s Anti-Corruption Commission”, presentation Decio Coviello and Stefano Gagliarducci, (2017), Tenure in O 2016 ffice and Public Procurement.” American Economic Journal: Economic Policy 9(3), p.59-105. Engel, Eduardo (2019), “Money and Politics: Recent Reforms in Chile”, Espacio Público and University of Chile. Elizabeth Dávid-Barrett and Fazekas, Mihály (2020) Anti-corruption in aid-funded procurement: Is corruption reduced or merely IDB (2015). Chile pushes integrity and transparency agenda displaced? World Development. https://www.sciencedirect. with help from the IDB. https://www.iadb.org/en/news/news- com/science/article/abs/pii/S0305750X20301261 releases/2015-12-14/chile-anti-corruption-and-transparency- loan%2C11366.html Jurgen Blum, Mihaly Fazekas , Sushmita Samaddar , Ishtiak Siddique (2018). Evaluating the Impact of Introducing E-procurement in IDB (2015), “CHILE’S INTEGRITY AND TRANSPARENCY AGENDA Bangladesh. Policy Note. Washington, DC. SUPPORT PROGRAM II” https://ewsdata.rightsindevelopment. org/files/documents/11/IADB-CH-L1111_mgRsAhC.pdf Jurgen Blum, Mihaly Fazekas, Sushmita Samaddar, Ishtiak Siddique. (2019). Introducing e-procurement in Bangladesh: IDB (2019), “Bankability through the Lens of Transparency, The promise of efficiency and openness. Working Paper. World Increasing Private Investment in Latin American Infrastructure”. Bank, Washington DC. h t t p s : //p u b l i c a t i o n s .i a d b.o r g /e n / b a n k a b i l i t y - t h r o u g h - l e n s - transparency-increasing-private-investment-latin-american- Mihály Fazekas, Luciana Cingolani, & Bence Tóth (2018), Innovations infrastructure. in Objectively Measuring Corruption in Public Procurement. In Helmut K. Anheier, Matthias Haber, and Mark A. Kayser (eds.) IDB (n.d.), “Programa de Apoyo a la Agenda de Probidad y Governance Indicators. Approaches, Progress, Promise. Ch. 7. Transparencia de Chile I y II (CH-L1110; 3617/OC-CH) (CH-L1111; Oxford University Press, Oxford. 3748/OC-CH), Informe de Terminación de Proyecto (PCR)” https://ewsdata.rightsindevelopment.org/files/documents/10/ Mihály Fazekas and Kocsis, Gábor, (2020), Uncovering High-Level IADB-CH-L1110.pdf Corruption: Cross-National Corruption Proxies Using Public Procurement Data. British Journal of Political Science, 50(1), p. Kevin Casas-Zamora and Miguel Carter (2017). Beyond the 155-164. Scandals: The Changing Context of Corruption in Latin America, Inter-American Dialogue, Rule of Law Report, Feb 2017. Mungiu-Piuppidi, A. and Fazekas, M. (2020). “How to define and measure corruption. Mungiu-Piuppidi, A., & Heywood, P. M. A Kurtenbach, S., & Nolte, D. (2017). Latin America’s Fight against Research Agenda for Studies of Corruption. Elgar. Chapter 2, Corruption: The End of Impunity. GIGA German Institute pp 7-26 of Global and Area Studies - Leibniz-Institut für Globale und Regionale Studien, Institut für Lateinamerika-Studien. https:// S.R. Croomand Brandon-Jones, A. (2005), “Key Issues in nbn-resolving.org/urn:nbn:de:0168-ssoar-52149-6. E-Procurement: Procurement Implementation and Operation in the Public Sector”, Journal of Public Procurement, 5(3), 367–387. OECD (2019), “Repor t on The Implementation of the Recommendation of the Council on Public Procurement”. S. Lewis-Faupel, Y., Olken, B. A., & Pande, R. (2016), “Can Electronic https://one.oecd.org/document/C(2019)94/FINAL/en/pdf Procurement Improve Infrastructure Provision? Evidence from Public Works in India and Indonesia”, American Economic OECD (2019), “Productivity in public procurement, A Case Study Journal: Economic Policy, 8(3), 258–283. of Finland: Measuring the Efficiency and Effectiveness of Public Procurement”. https://www.oecd.org/gov/public-procurement/ Transparency International (2005), “Global Corruption Perception publications/productivity-public-procurement.pdf Index Report”. https://www.transparency.org/en/cpi/2005. OGP (2001), “Lobby Law in Chile: Democratizing Access to Public Authorities”. https://www.opengovpartnership.org/wp- content/uploads/2001/01/report_Lobby-law-in-Chile.pdf. 50 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Romero (2015). Chile Joins Other Latin American Nations Shaken by Scandal. The New York Times. https://www.nytimes. c o m / 2 015 / 0 4 /10 / w o r l d /a m e r i c a s /c h i l e - j o i n s - o t h e r- l a t i n - american-nations-shaken-by-scandal.html Simon (2019). From Scandal to Reforms: Chile’s Unusual Breakthrough. https://www.americasquarterly.org/content/ when-reforms-happen-chile. SIPRI (2019). Ending off-budget military funding: Lessons from Chile. https://www.sipri.org/commentary/topical-backgrounder/2019/ ending-budget-military-funding-lessons-chile Tufts (n.d.) Chile’s Milicogate Scandal. Compendium of Arms Trade Corruption. https://sites.tufts.edu/corruptarmsdeals/chiles- milicogate-scandal/. Weller, Claro & Blanco (2008). Sustainable Public Procurement: Where do we Stand in Chile?. https://www.iisd.org/pdf/2008/ spp_chile.pdf Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 51

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 Public Infrastucture

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Introduction Why does corruption in public civic engagement and leads to low-quality results. infrastructure matter? Malfeasance and mismanagement along the project lifecycle result in transactions that have high external The world’s infrastructure needs are huge. Globally, costs and low public benefit. These results tend to an estimated USD3-4 trillion on an annual basis through repeat themselves, not least when corruption goes 2030 is required to meet the infrastructure needs of the unchallenged, but risk management is a persistent 1.2 billion people who lack electricity; the 663 million challenge facing public entities. who lack adequate drinking water sources; the 1 billion who live more than two kilometers from an all-weather Risk management is complicated by the many road; and the many millions who are unable to access possible entry points for corruption. Projects often work and educational opportunities due to the absence cut across several institutions, jurisdictions, levels or high cost of transportation services.1 of government, and policy areas on their long-run path to delivery. This complexity makes corruption Corruption exists in all sectors and its impacts tricky to detect. Infrastructure is also often subject are universally negative, but corruption in public to considerable local influence on topics such as infrastructure has particularly serious implications land use and access to services leading to many for low-income countries where infrastructure opportunities for rent extraction. Finally, the corruption accounts for a higher share of GDP and institutional risks in infrastructure development are inextricably structures may be less stable. Inappropriate project linked to those in government contracting. As such, preparation and selection, poor price forecasting, the preceding chapter on public procurement draws limited competition, and badly designed tenders complementary lessons and insights. lead to excessive time and cost overruns, inadequate maintenance, and low-quality end results. This all World Bank experience shows that the stakes impacts negatively on economic growth and poverty are high in infrastructure, but mitigation efforts alleviation. matter. The World Bank’s infrastructure lending portfolio represents a significant portion of its activities. Private sector funding is urgently needed, but In 2014 alone, the World Bank allocated USD24 billion corruption makes investors reluctant. Given the so- to infrastructure, amounting to roughly 40 percent of its called infrastructure gap, the growing need to attract total lending that year. A project mainstay of the World financing from a nuanced range of new and conventional Bank through the years has been road construction. sources is evident. Yet surveys conducted among the Between 2000 and 2010, USD56 billion was directed private sector unanimously show that corruption risks are to roads and road maintenance projects. The Bank’s among the top barriers to investment in infrastructure Independent Evaluation Group (IEG) reports that roads and auxiliary sectors. The size, complexity and long-run and other transport projects consistently score higher nature of infrastructure projects leaves them vulnerable on measures of outcomes, institutional development, to corrupt practices and, as a result, the prospect of and sustainability than non-transport projects. Yet, exposure to criminal or ethical misconduct functions as one quarter of the more than 500 projects with a Bank- a deterrent to investors. funded roads component during that decade drew one or more allegations of corruption-related activity. In In addition to large financial losses, the cost comparison to non-Bank projects or projects with no of corruption to governments is reputational. corruption mitigation efforts, this number is low, hinting Diminished public trust and disinterest in public- at the true extent of the problem. private cooperation from quality contractors decreases Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 53

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Identifying corruption risk: Targeting the whole project cycle Research consistently shows that corruption in a lack of data on other phases. Estimates of losses occurs at every stage along the project lifecycle. to bribery in construction, which lies downstream Every phase in an infrastructure project involves from procurement, are as high as 45 percent of distinct combinations of institutions and stakeholders, construction costs.3 To illustrate, more than a quarter each with their own vulnerabilities to particular types of the allegations against the road projects with World of misconduct. The interaction of country specific Bank involvement, mentioned above, concerned fraud circumstances, market conditions, and project during the construction phase.4 Better oversight of the particulars determine where the dark corners are.2 entire project cycle is essential: If an economically viable project is selected in the initial phase, and the quality Overlooking early and late stages is detrimental and maintenance of the end-product is ensured, the to fiscal prudence. Attempts to measure corruption potential impact of corruption is already substantially in the infrastructure sector have tended to focus reduced. predominantly on the procurement phase, resulting Corruption entry points by phase To understand which types of corruption most places some parties at an advantage to others. commonly afflict the infrastructure sector, it can be helpful to simplify the corruption challenge In the absence of fair competition, project value is by breaking it down into stages. This section compromised. In many jurisdictions, bribery is plainly describes some examples of the most common types unlawful, while lobbying might happen legally in ways of misconduct as they might occur in the early, middle that cause information asymmetry between bidders and late project stages. and undermine competitive procedures. However, the result of the two scenarios can be the same: financial 1. Needs identification, appraisal and pressure or lobbying power wins out over public project planning: Bribery and undue interest in project selection. The cost of this bias in influence project selection is cumulative. For governments and end users, overall project value is negatively impacted The high stakes and outsized profits of when funds are directed to projects that are not multimillion-dollar contracts provide an alluring selected based on fair competition. incentive to influence the identification, selection and planning process. Early project stages involve The size of bribes has a significant impact on multiple actors with competing agendas, such as procuring entities. Statistics show that bribes during potential contractors, lobbyists, and regulators. The the submission, evaluation and awarding of contracts bribery of officials, driven by the potential returns are between 10 to 15 percent of the contract value. on misconduct, is aimed at gaining connections or One well-known and recent example of grand undermining merit-based procedures for project or corruption is the Odebrecht scandal, which saw the contractor selection, for example through access to Brazilian infrastructure giant bribe its way to contracts confidential information such as financial or commercial in otherwise largely competitive auctions across two project details. Similarly, policy capture, whereby the continents for more than a decade. Between 2005 and government body responsible for project selection is 2015, the equivalent of Odebrecht’s entire profit was subject to undue influence—concealed as lobbying— made from infrastructure contracts won from bribes. By Odebrecht’s admission in a U.S. District Court, 54 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE the company paid about USD788 million in bribes in awarded to the bribe-paying firm, whose prices are Brazil and 11 other countries, securing more than 100 now inflated to cover the cost of the bribe. It is done contracts that generated USD3.3 billion in profit for the by limiting calls for bids, skimping on advertisements or company. Typically, bribe payouts are recovered in the setting unrealistically short timeframes with specifically mark-up placed on the unit prices of the procurement tailored requirements. A study of more than 3.5 million items, driving up costs for procuring entities who end government contracts across Europe showed that up paying the price, twice. publishing more information about contracts decreases the risk of single bid tenders. This matters because Bribery aside, the early project stages are sensitive single bid contracts are a governance risk and are over to several types of misconduct. For example, bidders 7 percent more expensive. Publishing five more pieces may present fraudulent information to pass technical or of information, or data points, about each tender would other assessments, potentially prompting serious safety save up to USD3.9 billion in Europe.6 hazards to people and the climate, not to mention the costs tied to fixing defunct infrastructure at a later Nepotism occurs when decision makers influence date. Proposed budgets that either overestimate the processes of procurement to favor bidders outcomes or underestimate costs are another example who are connected to them via professional or of misreporting that intentionally skews competition. familial networks. This is done by either limiting the These types of misreporting can be difficult to detect set of bidders in the advertisement phase or unfairly in time and, because the cost of re-contracting for assessing bidders in the assessment phase. The payoff governments is prohibitively high, they can lead to a for this can come in the form of kickbacks or political pernicious outcome of rewarding fraud. campaign support in a textbook example of corruption as the misuse of public office for private gain. 2. Procurement: Collusion and nepotism 3. Construction, operation and maintenance: Fraud and The procurement phase may hold the highest risk of renegotiation corruption. Compared with other areas of development lending, large-scale, technically elaborate infrastructure Years of construction lead into decades of operation projects require more specialized contractors and and maintenance (O&M), yet PPP regulations tend consultants and more capital input, leading to complex to neglect the long tail-end of projects. Too often contractual procedures throughout. The procurement there is no robust evaluation plan in place, nor a clear phase may indeed be where this complexity creates procedure for dealing with unexpected risks. As a the most entry points for corruption, and the biggest result, contract execution and infrastructure operations chance of rewards for misconduct. A study showed that are vulnerable. While mechanisms to ensure the quality government procurement worldwide was worth around of outcomes are key to long-range project success, USD9.5 trillion in 2014.5 Due to the size of the market, there is a lack of ready tools to help governments even low percentage levels of corruption account for evaluate and manage indicators of corruption through enormous financial losses. construction and O&M. This gap is compounded by the fact that O&M is often underfunded: The average cost Collusion occurs when bidders conspire to for road rehabilitation across 18 countries with good limit competition through schemes, including data on both bribes and costs was USD36 per square complementary bidding, market division, and bid meter in 2010. In countries with a low risk of bribery, it suppression. This type of cartelization defeats the was USD30 and in those with a high risk it was USD46, a competitive bidding process in order to inflate prices to spread of more than 50 percent.7 artificially high levels. Contractors may also act alone, offering payments for contract awards or facilitation One of the most common risks during the payments to circumvent taxes and customs. construction phase is ex-post renegotiation of performance requirements in the contract details.8 Or, the government contracting authority When contractors’ terms begin to deviate substantially manipulates the bidding process to exclude other from initial requirements, it can be an indication that competitors. This ensures that the contract will be the contract was won through intentional under- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 55

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE bidding. Renegotiations reflect the fact that PPPs guidance on how countries can protect themselves suffer from chronic cost overruns, and recurrent from disingenuous contract offerings that lead to renegotiations are a likely outcome of the incentive renegotiation attempts. structure in place. Recent evidence shows that when firms pay bribes, renegotiated amounts and cost The operational, audit and evaluation phases are overruns are substantially larger,9 yet renegotiations also particularly sensitive to fraudulent results continue because the financial and reputational cost reporting. Auditors play an important role, but to be to government of returning to the tendering process is efficient they need to be sufficiently resourced and likely perceived to be too high. Case Study 5 provides siloed from situations where they may be exposed to more insights into how renegotiation affects PPPs in attempts at facilitation payments to overlook violations particular, and, using country-level examples, gives of controls. Policy actions: Integrity and transparency in governance Planning is an essential part of protecting against inception to project closure. IEMs should be financial and reputational losses. Measurements required to monitor objectively and may have of losses to corruption in the infrastructure sector administrative or enforcement responsibilities, for are open to wide margins of error, but a comparison example the power to halt a project in the case of of World Bank supported projects with non-Bank allegations of wrongdoing. related projects shows that the mere presence of a risk management strategy results in fewer allegations of • Digitization of information and dissemination for corrupt activity overall.10 equal access by all stakeholders. This includes the public and civil society organizations, which play a The best prevention is a whole-of-government key role in successful oversight. approach. Neither increasing the costs associated with misconduct, nor adding time-consuming layers • Integrating PPPs into a broader public investment of due diligence has proven to be a catch-all defense. management process as well as ensuring sign- Corruption is a human incentive-based behavior with no off from the Ministry of Finance at key points can archetypal villain, and prevention, as ever, is preferable reduce the scope for poorly prepared projects. to treatment. Best practices for governments entail formalized criteria to guide the prioritization, approval, Other efforts that are shown to make a difference: and funding of projects. • Risk mapping. Understanding who is involved At the project level, policy measures to encourage at each step of the procurement process, and integrity can include requirements for: the links between people and entities is key to limiting losses. First steps to formulating a policy • Mandatory conflict of interest disclosure for all response could include a ‘risk map’ for relevant persons who come into contact with the project government bodies to identify official positions at the government level. This is a key part of risk that are vulnerable to outside influence, and to planning that helps prevent incentives for corrupt set a threshold for determining which types of behavior by limiting the possibility for persons to projects are particularly risk prone, based on costs make project related decisions that benefit them and complexity. Building a risk map helps establish personally. a clear view and open lines of communication between all relevant government departments. • Systematic controls via Independent External Monitors (IEMs) who review the process from • Codes of conduct and training. This should include 56 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE provisions on asset declaration and whistleblower ownership is attempted for several reasons, procedures including, importantly, whistleblower including to hide connections or collusion between protections. Training relevant officials on how to government officials and owners. See Chapter 9 avoid corruption and providing general ethics for more information on how beneficial ownership and integrity training raises awareness, builds registries are being implemented globally. commitment and opens up space to discuss wrongdoing and bring it to light. • Cross-government reporting and monitoring. Monitoring cash payments and ensuring that • Multi-stakeholder agreements. In places where financial transactions are sufficiently tracked and the whole-of-government approach is untenable, recorded facilitates the detection of irregularities. risk mitigation instruments can be put in place on Following the whole-of-government ideal, this a case-by-case basis. One way to do this is for all includes cross-referencing public expenditure stakeholders—government, potential contractors, information within and across sectors. and civil society—to sign a binding agreement mutually pledging to avoid corrupt practices and • Encourage integrity among potential project ensure enhanced disclosure, including to the partners. Even when governments have sound public. This type of contract can be implemented regulations in place, compliance monitoring is on all or parts of a project and adapted to the never failproof. A lot of risks come from working context at hand. For example, agreements can with third parties who, directly or indirectly, stipulate requirements for an IEM, such as a relevant pose a threat. Some partners might obscure civil society group, and sanctions for transgression, ultimate beneficial ownership details that can hide including contract cancellation. important conflict of interest information. Others may not have any screening measures in place for While being a good preventive tool, this type of subcontractors or, indeed, any risk management at agreement is limited in scope. Like any strategy, all. To avoid doing business with companies that do if not carefully managed, it can be merely window not actively manage risk in their own operations, or dressing. It works best as a supporting mechanism in their sub-contractors, is a crucial step in avoiding to weak regulations but requires complementary external risk. approaches, such as effective intervention of control agencies and the timely prosecution of Box 2.1 is an example of the types of internal criminal offenses in order to be most efficient. policies and practices that a project owner should be screening for in partners on major Introducing a multi-stakeholder approach to infrastructure contracts. It draws on the experience accountability can involve partnering with of the International Finance Corporation (IFC), initiatives, such as Transparency International, which the largest global development institution has created the Integrity Pact for this purpose; the focused exclusively on the private sector. Early Open Government Partnership; Open Contracting identification of corruption and other integrity risks Partnership; or, the Infrastructure Transparency is an essential component of IFC’s overall project Initiative (CoST). See Case Study 4 of this report risk management. Through due diligence, IFC aims to read more about how CoST uses a four-pillar to identify likeminded clients and partners who approach to improve service delivery and value for are committed to transparency, sustainability and money in public infrastructure spending. good business practices. IFC’s methodology is relevant for practitioners from all sectors, including • Beneficial ownership disclosure laws. Beneficial SOEs, investors, and government procurement owners are natural persons who effectively own bodies, because it sets a standard at the project or control a legal entity, in this case the bidder. level for all stakeholders, equally. It mirrors the rise Preventing their anonymity complicates the of environmental, social and governance standards process of illegal practices, including money that large institutional investors and corporates laundering and corruption, by blocking attempts increasingly apply to their own decision-making. to obscure ownership through layers of entities across several jurisdictions. Concealing beneficial Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 57

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE BOX 2.1 IFC’s Integrity Due Diligence (IDD) The purpose of the IDD process is to understand the ownership structure of the client and partners, determine the ultimate beneficial owners, and identify integrity risks, such as corruption, fraud, money laundering, tax evasion, lack of transparency and undue political influence associated with the project. Mapping the underlying ownership structures and networks of the parties involved helps the IFC gain a view of the potential risks of engaging with parties who are sanctioned or have a known history of misconduct; or of engaging with unknown third parties who could present other risks. Opaque structures may be used to evade taxes, hide ownership and wealth, facilitate criminal activity and launder the proceeds of crime. For these reasons, as part of its IDD process, IFC is required to conduct due diligence to understand the structures used by its clients. Enhanced due diligence is required for investments involving intermediate jurisdictions (broadly defined as jurisdictions other than those of transaction sponsors or project companies and sometimes referred to as offshore financial centers). IDD also covers other entities and individuals whose role in a project could potentially have a material adverse reputational or financial impact. Policy articulation: Drawing on the experience of multilateral organizations Competition is cleaner and kickbacks are fewer and awareness-raising amongst public officials; and human smaller in places where transparent procurement, resources management. independent complaint procedures and external auditing are in place. These findings of a World Bank Multilateral institutions have followed the OECD’s survey of 34,000 companies in 88 countries are in line example. The OECD may currently take intellectual with today’s standards for best practice, as formulated leadership in its work with corruption related issues, by a handful of multilateral organizations.11 but a large number of multilateral institutions have similar initiatives in place. These include regional The OECD takes intellectual leadership in this area. partnerships, such as the African Union’s Convention The OECD’s work on anti-corruption is a diverse toolbox on Preventing and Combating Corruption and the that includes frameworks for developing standards and Economic Community of West African States’ Protocol best practices on issues such as bribery, procurement, on the Fight Against Corruption; economic and and public financial management.12 The G20 also political organizations such as the World Economic takes a leading role. The G20 High-Level Principles Forum’s Principles for Countering Corruption, which (2017) take a narrower approach, concentrating on the builds on its early work on countering bribery; and structural organization of public administration against the United Nations Convention Against Corruption corruption.13 They are divided into organizational (UNCAC), which is the only legally binding and universal measures that focus on administrative procedures; instrument. 58 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Across these frameworks, the following common directives on what constitutes ethical behavior. principles emerge: Governments should establish and disseminate a chain of responsibility and obligations for internal • Openness/Transparency reporting with well-defined responsibilities Countries where information about contracting for designing, leading and implementing is made public have reduced prices, increased corruption prevention measures across the public competition and better ser vices.14 Potential administration at all levels. Guidelines and regular suppliers, contractors and the public should be integrity training go even further in helping to provided with consistent information so that the ensure impartiality, manage conflicts of interest, public procurement process is clear and the and give directives for how to handle suspicions of outcomes are equitable. Governments should misconduct. promote transparency for and among relevant stakeholders, such as the public and oversight • Monitoring and accountability institutions, across the entire public procurement Governments should provide mechanisms to cycle. monitor public procurement as well as detect misconduct and apply sanctions accordingly. This Transparency is not just a trendy term for keeping can include an independent monitoring body governments honest and citizens happy. A with the power to halt projects on the basis of growing body of academic research shows that suspicions of foul play or an ombudsman that a certain level of disclosure by companies is reviews department practices and complaints and strongly correlated with lower cost of capital, ensures alternative dispute resolution processes. improved capital allocation, enhanced earnings, and increased company valuation.15 This is true As described in the following section, citizen for companies across markets and includes monitoring can complement traditional financial and non-financial disclosure on social and accountability measures and the positive effects environmental factors. of empowering the public are well documented. A randomized control study of roadworks projects • Coordination, code of conduct, and training in Afghanistan, for example, found that new roads A code of conduct for all government officials in were of significantly higher quality and more touch with the planning, procurement or execution durable in neighborhoods where the community processes builds cohesion and trust and gives clear had monitored the implementation of the project.16 Using data and citizen monitoring Good governance, risk management and practice, project data helps decision-makers identify transparency go hand in hand. End-to-end vulnerabilities and plug these gaps; for example, by monitoring of public spending contributes to good generating probability scores for the risk of bid rigging governance objectives by strengthening public sector or mining e-GP systems for patterns that indicate efficiency, while policies that promote transparency favoritism or collusion. impact citizen trust, value for money and competition.17 Bringing procurement processes online has large One of the most convincing trends in cost-efficient payoffs, not only in terms of streamlining data and effective risk mitigation is the technology- points. E-GP systems are not only less prone to human driven use of data collection, storage, and analytics error than manual ones, but also lower the barrier of to promote these goals. This implies gathering, entry to smaller companies. On average, more than inspecting, and modeling data on, for example, four times more firms bid for e-GP tenders than for transactions or networks in government spending, in manual ones (5.2 versus 9.4, respectively).18 Moreover, order to inform current and future decision-making. In market participants’ perception that data is timely and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 59

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE accurate is a precondition for capital market financing of Of course, transparency requirements must be infrastructure and for the development of infrastructure balanced by procedures for safeguarding privacy, as an asset class. such as information relating to national safety or commercial and competitive information. Transparency Engaging citizens in the monitoring process requirements that are untimely or overreaching can provides a feedback loop of valuable information allow competitors to monitor each other’s pricing and for governments to act on. A growing body of bidding strategies. For example, revealing companies’ evidence supports the theory that citizen monitoring bids for a sequence of similar contracts might facilitate reduces corruption, improves the quantity and quality anti-competitive agreements – collusion – as companies of public services, and strengthens the demand for can observe if competitors submitted their bids as long-term reforms. In Colombia, for example, an app illicitly agreed. Requirements to disclose ultimate was introduced in 2013 that allows citizens to flag beneficial ownership information, on the other hand, is over-priced, neglected or incomplete public works an efficient, low-cost way to avoid conflicts of interest. (so-called white elephants) to the government’s Ensuring a reasonable balance requires regulations transparency secretariat. Colombians use the to determine levels of transparency and channels for app to upload photos of construction projects in reporting suspicions related to leaks of confidential municipalities across the country. Users cast votes for information. the most disliked projects and the app collects data on where the white elephants are located and which Organizations are pushing for greater transparency are most frequently reported, allowing government of administrative data on government tenders. to prioritize its investigations. Once the secretariat One of these organizations is the Open Contracting receives a report, it begins assessing the case for Partnership (OCP), initially hosted by the World Bank. corruption. By the end of 2017, the secretariat had OCP utilizes data analytics as a tool to promote pushed the government to finish 15 of more than openness and prevent corruption. OCP monitors public 50 projects, worth more than USD400,000. Citizens procurement by connecting stakeholders around a are stakeholders and their proximity to projects and standardized contracting platform designed with interest in seeing taxes efficiently spent makes them a the principles of transparency at its core. The Open valuable partner. Contracting Data Standard platform—and the OC4IDS platform designed specifically for infrastructure— When linked to regulations that grant public access tracks and logs spending while guaranteeing data to information on government spending, open data immutability and access to information for relevant can boost transparency, increase competition and stakeholders, including civil society, at various deter collusion. In Peru, a study found that monitoring project stages. In practice, it provides guidance to contracts in public infrastructure decreased costs by governments on what information to disclose at each up to 50 percent19 and multi-country studies show stage of an infrastructure project so that public money similar outcomes: adequate disclosure policies reduce is spent well from planning to completion. Case Study prices, increase competition, and result in better quality 6 is a concrete example of how open contracting and services.20 e-GP can benefit public infrastructure. Conclusions develop over time. In some situations, these practices may not even be considered particularly harmful or The key message is this: for integrity to overcome wrong by the participants—as illustrated by the oft used the forces of corruption, a broad and vigorous term for corruption: the price of doing business. This alliance is needed, using varied tools to foster chapter argues that if the political level commits to the transparency and openness. Corruption is a reflection systematic implementation of integrity measures across of how things are currently done by certain officials, the infrastructure cycle, it will make a difference on both businesses, and politicians in specific situations. This a systemic and project level. In addition, and crucially, does not happen in a vacuum; corruption is enabled by conventions and approaches that have been allowed to 60 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE mobilizing citizens and stakeholders and strengthening risk mitigation can be supplemented with project their hand through greater project transparency and level interventions on a case-by-case basis, using openness can build momentum and change the instruments that target particular types of corruption political economy and cultural considerations that along the project cycle. Because of the complexity of have allowed corrupt practices to happen. Through corruption in public infrastructure, there is no specific such a sustained and broad-based movement, country set of regulations or policy actions that is adequate for examples demonstrate that change can happen at both eliminating corruption risks. The menu of policy options the project and society level. described in this chapter aims at addressing multiple entry points and incentives that drive corruption. They There are considerable gaps in our practical can contribute together to a broader risk management understanding of how to anticipate and manage strategy, but their ultimate effectiveness will be corruption in the provision of public infrastructure, influenced by the support from the political elites who but the fight is worth joining. What we do know is may benefit from the existing system. that corruption occurs across the entire life of a project, from needs identification through procurement to The power of citizens makes the difference. construction, operation, and maintenance. Government Government plays a central role in prevention efforts, efforts to combat corruption pay off early and the but civil society and the private sector must be part of the benefits are long run. Studies by the World Bank, the solution because of the political economy constraints IMF, and the OECD show that the quality of governance to effective policy implementation. Involving the public of public investment is directly correlated with outcomes requires a willingness for transparency and disclosure, at the national and subnational levels.21 as well as timely incentives and opportunities for civil society to get engaged. When implemented correctly, Decades of research and experience indicate that transparency fosters better, fairer competition; and a whole-of-government approach presents the leads to lower prices and higher quality end-results. strongest barrier to corruption, but the political Counter to popular belief, principles of transparency landscape must allow for such policies to be also support private sector growth and development: implemented. Today’s best practices for tackling Good corporate governance based on principles of corruption at the policy level are founded on work from transparency helps companies operate more efficiently, a number of multilateral organizations: the strongest gain access to capital, mitigate risk, and safeguard defense against corruption is the integration of principles against mismanagement. By setting integrity and of integrity across all levels of government with clearly transparency standards for the types of companies they formulated and well-disseminated formalized criteria will do business with, governments can help facilitate a for prioritization, approval, and funding. In low capacity level playing field and reduce the avenues for corrupt or institutionally weak environments, traditional agents to benefit. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 61

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE CASE STUDY 4 CASE STUDY 4 PUBLIC INFRASTRUCTURE Accountability in Infrastructure: The CoST Approach (Thailand, Ukraine, Honduras) The Infrastructure Transparency Initiative When it was launched as a pilot project in 2008,23 (CoST) is the leading global initiative working to the CoST initiative was one among a growing improve transparency and accountability in public number of public sector accountability initiatives infrastructure. By promoting accountability in the based on multi-stakeholder approaches. The CoST governance, planning and delivery of infrastructure, the initiative builds on the experience of earlier initiatives CoST initiative seeks to improve both the quality and (see for example a comparison with Integrity Pacts value for money of public infrastructure investments. In in Box. 2.1) and leverages the technical and policy doing so, it also aims to reduce risks for investors and contributions and the international convening roles of create a more level playing field for the private sector.22 accountability platforms, such as the Open Government FIGURE 2.1 Core Elements of the CoST FIGURE 2.2 CoST Goals Benefit from Approach Synergies with other Multi-Stakeholder Initiatives OGP EITI Multi- Disclosure stakeholder OCP GIFT Working Better value for money & better quality services Social CoST Accountability Assurance 62 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Partnership, the Open Contracting Partnership, the that are complementary to these platforms. CoST Extractive Industries Transparency Initiative and also contributes to accountability goals in a range the Global Initiative for Fiscal Transparency.24 CoST of areas, including in public procurement, public has benefited from a convergence of some of the investment programming, and strengthened audit goals shared by these platforms (see Figure 2.2), and capacity. While the effectiveness of multi-stakeholder contributes to enhancing public accountability in ways initiatives in confronting corruption is (as yet) hard to BOX 2.2 The Evolution of Multi-Stakeholder Approaches to Accountability in Infrastructure The Infrastructure Transparency Initiative (CoST) leverages the expansion of digital governance and data to enable a more participatory approach to public accountability in infrastructure than was possible two decades ago when Integrity Pacts were developed. CoST also works in conjunction with other accountability initiatives, like the Open Government Partnership (OGP) and the Open Contracting Partnership (OCP), to leverage the policy commitments made by governments as part of their membership of these platforms, including commitments in the adoption of open data standards. The expansion of digital government (GovTech) and open contracting data has been particularly useful in creating a more enabling environment for multi-stakeholder approaches to take effect. Integrity Pacts were pioneered by Transparency International in the 1990s. Key differences (in the table below) between Integrity Pacts and the CoST approach illustrate how much accountability structures and opportunities for multi-stakeholder working have evolved in the last two decades. Comparison of Integrity Pacts and the CoST approach Integrity Pacts CoST approach • Emphasis on the prevention and detection of • Emphasis on quality and value for money, corrupt practices in public contracts and the responsiveness of infrastructure investments to public interest and needs • Targeted to individual contracts • Principle-based (a voluntary ethical • Applied to projects or sectors (multiple contracts across project lifecycle) commitment) • Two-party commitment (public sector agency/ • Accountability-driven (through mandatory data disclosure, and the validation of data from a contractor) sample of projects) • Oversight by third parties (civil society) • Deterrent effect depends on credible • Multi-stakeholder commitment to meeting and working collaboratively (public sector agency consequences from oversight authorities / private sector associations / civil society organizations) but typically government-driven • Oversight by all stakeholders; data validation by industry experts • Publication of validation reports for review by policy makers (interactive data tools also supported) Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 63

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE establish or measure,25 the CoST approach represents in different governance settings.26 a significant advance in applying multi-stakeholder working methods to strengthen governance in the This case study will explain the elements of the infrastructure sector through improved transparency, CoST approach and will describe the experience stakeholder engagement and accountability (see Box and results achieved in three country examples: 2.2). The growth in demand for CoST programming has Thailand, Ukraine and Honduras. Through country taken time to mature. After ten years of incremental examples, this case study will explore the reform growth in the number of CoST national and sub- paths, constraints and results achieved in infrastructure national programs and tools, evidence of positive transparency in different environments and will also impacts is now established. The country examples review CoST’s contributions to global tools and below describe the impacts and experiences of each standards and how these are playing a role in reform at country in achieving success as well as the constraints the national and sub-national levels. BOX 2.3 The Role of the CoST Secretariat The CoST Secretariat provides technical support to CoST members to set up and sustain these elements and develops technical and policy tools drawn from research to advance infrastructure transparency at the national and sub-national levels, and among international policymaking bodies. To become a CoST member, a national or sub-national authority submits an application to join to the CoST Secretariat. The merit of an application is evaluated on the basis of its commitment to CoST core principles, willingness to publicly announce CoST membership and commitments, and a concrete, detailed and budgeted implementation plan. The CoST Board makes the final decision on the approval of applications. The CoST Secretariat provides funding to support CoST programs.27 Non-compliant CoST members or members who are persistently unable to implement the core elements of the CoST approach lose their membership status.28 64 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption