1. DEVELOPING A PRO-COMPETITION PROCUREMENT POLICY
Alison Jones

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

3. the problem

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

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

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

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

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

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

10. mechanisms to prevent, detect and punish collusion

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

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

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

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

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

16. Conclusions and Proposals?

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

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

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

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