IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures Public Procurement Against Corruption IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures 1
Corruption in public procurement and how to avoid it Public procurement is one of the key areas where the public sector and the private sector interact financially. Normally, the volume of public procurement corresponds to some 10-20 % of the GDP in European countries. In Croatia, the public procurement value was 40,6 billion kuna in 2009 and 24,8 billion kuna in 2010. This is why public procurement is one of the prime candidates for corrupt activities as well as other undesirable practices like favoritism and bribery. The procurement process should have as an objective the following: Satisfying the needs of the public sector while at the same time obtaining value for taxpayers money Opening up public spending to economic operators on equal, transparent and fair basis, to stimulate growth and create new jobs Equal treatment, by protecting the rights of participating bidders in an effective and efficient way For countries committed to the European Union Directives on Public Procurement, the rules and institutional setting to ascertain transparency are additionally given in the specific Review and Remedies Directives, applicable for all different types of public sector procurement; classical public procurement, procurement in the utilities sector, and for defense and national security procurement. The collective rules on public sector procurement are aiming at fulfilling the objectives above, but also at preventing corruption and collusion. However, these objectives cannot generally be met unless contracts are awarded on a truly competitive basis under a system that has clear guidelines incorporating transparency, scrutiny/appeals, efficiency, economy, accountability and fairness into the public procurement system as a whole. Although EU public procurement legislation is fairly complex and can be implemented differently in various jurisdictions, the three main phases of the public procurement process are: 1. Procurement planning, budgeting and preparation 2. Notification, information and evaluation of tenders 3. Award and contract performance Corruption can arise in various forms in each of these separate phases of the procurement process, as indicated below. 1. Procurement planning, budgeting and preparation Different activities are taken before launching a procurement procedure. In the procurement planning, budgeting and preparation phase, the contracting authority needs to determine what goods, works or service it would like to buy (the requirement) and how much it IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures 3
would like to spend (the budget). In both of these cases, there are opportunities for corruption. Preparing budget for the procurement, identification of contracting authority/s needs and a design of tender documentation are all vulnerable to corruption since some corrupt practices that will occur later in the procurement process can be planned already at that stage. For example the budget for the particular procurement can be set artificially high so that excess allocations could be stolen or diverted. In addition budget could be devised in such a way that there are overlapping budgetary allocations among separate departments that could also be applied in a corrupt manner. In determining the contracting authority/s requirements, reports could be prepared that falsely justify current or future authority/s needs, falsely inflate actual needs or falsely report damaged equipment in order to create an excess supply that could be used for corrupt purposes. The procurement requirements could also be written to favor or disfavor particular suppliers. For instance, hidden mistakes and/or fictitious positions can be built into the project calculation and design, affecting the technical specification, which at the selection stage can influence evaluation process and/or at a contract performance stage leave open space for account for increased costs. Award criteria and scoring methods in tender documents are particularly sensitive because they can be drafted to favor a particular supplier or service provider or likewise could be drafted to emphasize weaknesses of a particular competitor. Last but not the least, simply selecting a type of procurement process itself may influence the occurrence of corruption. The procurement process may be more exposed to corruption when procurement procedures such as negotiated procedure without prior publication, contract awards within framework agreements, or negotiations within the system of competitive dialogue are chosen. 2. Notification, information and evaluation of tenders During the tender submission period, the main tasks are making the tender documentation public, clarifications and communication, receiving bids and conducting evaluation (of selection and award criteria). Here a risk of corruption comes mainly in form of discriminatory treatment of (potential) bidders. For example, after the procurement was being made public favorite supplier could get more information than his competitors and/or could be supplied with information which should otherwise be kept secret (this problem can get even worse if only one person is entitled to communicate with potential bidders). Lack of transparency and control may also occur in cases where received bids are not publicly opened, since their content may be subject to manipulation (the absence of objective and strict rules on timeliness and completeness of received bids could result in accepting late and/or incomplete offers or rejecting legitimate ones). Later during the evaluation of the bids, the award criteria could be misapplied, further defined and/or amended in favor of the favorite bidder (the absence of objective award criteria and/or vaguely and loosely described evaluation methods can greatly contribute to such an outcome). In negotiated procedures during this phase it is also possible that advance information are provided to a particular supplier in order to improve his negotiation position. Other 4 IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures
techniques such as failing to include all the qualified providers (wrongfully restricting a range of providers), soliciting providers known to be inferior to a favored supplier, simply misaddressing tender documents etc., are techniques that can be utilized to corrupt the procurement process. 3. Award and contract performance. Corruption opportunities also abound at the contract award and performance phase of the procurement process. There are many techniques to hide corruptive practices during the execution of a contract. As this phase is normally less regulated than the first two phases, alterations between the originally made procurement decisions and their actual implementation can easily go unnoticed. For example, selected provider could have proposed an unrealistically low offer in the hopes that after the contract is awarded to him procurement officials will allow amendments to the contract to increase costs. Likewise, a provider could have offered exceptionally high quality products or excellently qualified personnel to meet a particular requirement in the tender documentation and then upon contract award will substitute it with inferior products or personnel. After the evaluation phase is completed and the best bid is selected, it is also possible to award a contract that materially differs from the original terms of the tender documents in form of rendering fictitious work, inflating the actual work volume, rescheduling schedules, changing orders and/or performing contract obligations in an improper way. Oversight and reporting requirements may also be minimized and in some cases cost overruns can be corruptly explained away or falsely justified. Certification of the execution of the works may not correspond with the real supply. Finally, supporting documentation could be intentionally lost or destroyed making detection and prosecution of corruption offenses difficult. How to prevent corruption and conflict of interest Recommendations to contracting authorities Collusion by tenderers Tenderers may use different methods to manipulate the bidding process, by various means of cooperation and/or cartels. They may submit fake bids to give the contract to one of the tenderers, either aiming at rotating the contract awards in between themselves or apply market allocation. There are different measures that can be taken to prevent or at least minimize these risks: Market intelligence The more knowledge about the market, the lesser the risk of being manipulated. Therefore, IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures 5
knowledge on e.g. the number of actors, their respective size and market share, price levels and development, their competitive advantages, etc., is crucial to avoid becoming mislead and subject to collusion. Having regular contact with other contracting authorities and/or private buyers is one way of obtaining some of this information. Tender design and choice of process The tender documents should be cleverly designed, and the most suitable process chosen, to increase open and wide competition. Also, the invitation should comprise a warning that collusion or illegal cooperation between tenderers are subject to sanctions. It is recommended that the tenderers submit a signed certificate of independence in the bidding process, and that they are obliged to disclose any contact or communication with their competitors. Change your behaviour If possible, change the construction of the procurement and contract, which will complicate supplier collusion. E.g. it is recommended to vary the size and contract timing. Perhaps cooperation with other contracting authorities is possible, either by joint contracts, from one time to another, and/or information exchange and strategic timing. Being unpredictable, however, does not mean that the requirements should not be clearly defined. Selection and award criteria Carefully choose and examine (preferably by simulations) the selection and award criteria. Also, consider future impact on market and competition development, as an effect of the criteria chosen. Make sure that the existing contractor will not have excess information, giving them an advantage to the market, perhaps even having more information than the contracting authority, which may rely too much on information provided by the incumbent supplier. Ascertain competence When drafting the specifications, make sure that either internal resources or hired consultants have sufficient knowledge and that they are totally independent. Confidentiality and Conflict of interest certificates should be signed. Subcontracting Be aware that subcontracting may be a way to delude the contracting authorities to avoid e.g. social security contributions and taxes, for money laundering, etc. Thus, always ascertain that subcontractors are stipulated in tenders and listed in the contract, and that they may not be altered without prior approval from the contracting authority. Awareness Raise awareness with the people within the contracting authority on the risks of corruption in the tender procedure. Reward staff reporting suspicious supplier behavior (whistleblowers). 6 IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures
Recommendations to suppliers Get to know your share of public procurement market. Examine the positive European and national legislation and jurisprudence (both of the Court of Justice of the EU and your national review authority) and see what it offers you. Get familiar with the public authorities future needs use free access to public information if necessary. Gather information, ask questions. Search for opportunities Follow publication of procurement opportunities in EU and/or national gazettes or data bases. Obtain a tender documentation and examine it carefully. Pay a special attention on crucial parts such as qualification and award criteria. Be alert for any vague and ambiguous terms which at later stages of procurement process could lead to different and/or bias interpretation. Ask for clarification if you do not get it or if it is not satisfactory, timely start a review procedure (as you might get precluded after the deadline for submission of tenders). Contribute to the transparency and fairness of the procedure Attend the opening of tenders in all cases whenever it is made public. Make notes and compare it to information you will receive from contracting authority when it notifies you of its choice (contracting authority is obliged to send you a written award decision together with a statement of reasons otherwise you can start a review procedure solely on basis of non being properly informed). If necessary request a disclosure of procurement files, if not to complain, in order to achieve information for improved knowledge on how to improve future opportunities. Be attentive on illegal direct awards Check national and/or EU gazette for Prior notices of the intention to award a contract in the negotiated procedure without prior publication and in other cases that allow authorities to directly award public contracts. If you think that there are reasonable doubts as to the reasons justifying direct award in a particular case, you can start a review procedure. If it comes to your attention that particular procurement has not been advertised at all (when it should be) you may even start a procedure for declaring that contract ineffective. Also, check Contract Award Notices, which may indicate non justified choice of excepted procedures, upon which a procedure may lead to contract ineffectiveness. Be aware of your rights Even when a procurement process is closed and a public contract is already being executed, you still have some opportunities to monitor its implementation. Think that contract is being performed under different terms than originally advertised in procurement documents? Check it out! Inform the competent supervisory authorities and require that they report their findings. If necessary ask for disclosure of files under regulations on access to public information. Do not forget: public procurement is about taxpayer/s money and you are a taxpayer too! IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures 7
IPA 2008 twinning light project Strengthening capacities to remedy irregularities in public procurement procedures This project is funded by the EUROPEAN UNION This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of BBG and the Ministry of Economy, Labour and Entrepreneurship and can in no way be taken to reflect the views of the European Union.