Anti-Corruption Progress in Public Procurement

By David Thompson Jan 17, 2024 08:15 PM EST

10 and 10 banknotes on brown wooden table — (Photo : Vu Nguyen on Unsplash)

In October 2023, Indian officials announced they would require prospective vendors bidding on road construction projects to sign an integrity pact (IP) with the government "in keeping with global best practices" in order to be considered for tenders. Integrity pacts commit both sides "not to resort to any corrupt practice in any aspect of the contract at any stage."

This move joins a growing number of countries implementing IPs to bring increased transparency and collaboration with their public procurement suppliers. Since 2002, as one of the pioneers in this area, Mexico, with the help of Transparencia Mexicana, has implemented IPs for a value of $30 billion in over 100 contracts. The UK has used them for its defence sector, Hungary's IP to construct a highway helped identify problems in selection criteria, etc.

The OECD estimates that public procurement represents about 29.1% of all government expenditures in OECD countries. Globally, countries spend an estimated 13 trillion USD (about 10–20% of each country's GDP) on government contracts.

Unfortunately, the UN Development Program (UNDP) estimates that 10-20% of those funds are lost to corruption and bribery, and the World Bank says that even using a conservative estimate of 8% means a loss of $880 billion to corruption per year.

Risks for Public Procurement

The UN Office on Drugs and Crime (UNODC), therefore, explains that public procurement is "one of the most corruption-prone government activities" due to the large number of transactions involved, the complexity of the various processes, the high financial stakes and the close relationships created between government officials and private companies.

The issue affects developed and developing nations alike. 52% of people in the EU believe government contracts are awarded based on personal connections or bribes despite strict EU regulations regarding open and competitive procurement policies for member states.

In some countries, certain forms of corruption are more rampant because of a lack of effective legislation and independent oversight or because of different cultural norms. As Guillermo C. Jimenez and Elizabeth Pulos explain, "It remains difficult to regulate ethical behavior when social and cultural norms vary significantly from country to country. Acts that are considered unethical in one country may represent a traditional way of doing business in another." And HR expert Brian Kreissl observes that "Some would argue our idea of 'corruption' may be clouded by our values and relative prosperity, which result in us having a somewhat 'holier than thou' attitude." This makes it difficult for companies trying to navigate working in such cultures.

Global Efforts to Reduce Corruption

Despite this, global efforts have made progress in helping countries and companies address bribery in public procurement. Article 9 of the United Nations Convention against Corruption (UNCAC) requires States parties to "take the necessary steps to establish appropriate systems of procurement, based on transparency, competition, and objective criteria in decision-making, that are effective, inter alia, in preventing corruption." The OECD Recommendation on Public Procurement provides useful guidelines on the entire procurement process for countries.

A common theme is that public procurement needs transparency to eliminate corruption, and one-way countries are trying to achieve this is through e-Government Procurement tools (e-GP). Countries including Nigeria, Mexico, Bangladesh, Argentina, and the Philippines have implemented e-GP platforms to improve the public's trust in their procurement policies, increase the number of bidders, and reduce costs and the duration of the process. Also, publicizing as much information as possible about calls for tender, both to all professionals eligible to bid and to the public, helps to limit behind-the-scenes arrangements.

Departments That Rely on Secrecy

While this level of transparency is ideal for most public expenses, a few government sectors, such as defence and central banks, rely on confidentiality, especially when contracts involve highly sensitive equipment or processes. They cannot publicize the details of contracts so instead need to reassure the public by selecting suppliers with a demonstrated commitment to anti-corruption.

But given that central banks are literally dealing with printing money and defence departments are spending very large sums often in conflict zones, bribery and corruption are high risk. Because only a few suppliers often exist with the expertise to provide the equipment needed, highly competitive tenders with lots of bids are not an option. Therefore, the best way to limit corruption is to give priority to suppliers that act transparently and have proven their anti-corruption measures through external certifications and partnerships.

Expensive Defence

With conflicts in Ukraine and Israel and tensions between China and Taiwan, military spending worldwide has increased. Unfortunately, as Curbing Corruption observes, "The defence sector will always be vulnerable to corruption due to the risks from high levels of secrecy, complex technical procurements, and exploitation of the hierarchical nature of the military." The OECD also notes that because of the need for secrecy, defence procurement legislation is generally given a wider degree of discretion, which "lends itself to becoming a fertile ground for protectionism, corruption and inefficient use of public resources."

However, there have been many recent "corruption-reducing successes in improving defence procurement" and efforts to identify and prosecute suppliers and contractors that act unethically. Brazil, Kenya, India and the US have systems of suspension and debarment that incite companies to adhere to ethical norms.

Transparency International Defence & Security has also developed the DCI index that assesses contractors' commitments to anti-corruption (only 12% received a top 'A' or 'B' ranking). A few defence contractors (Naval Group, Thales) have recently received ISO 37001 certification, the international anti-bribery standard, but the industry is lagging behind in external certifications.

As a result, it seems the biggest deterrent is global prosecution for corrupt behaviour. In one of history's most watched corruption cases, on January 31st, 2020, Airbus was ordered to pay a total of $3.96 billion in fines to France, the UK and the US. Airbus supplies defence articles and services worldwide but was found guilty of having used third-party brokers to pay bribes to secure contracts. Airbus received a 50% fine reduction from France and the UK for having self-reported the corruption. All three countries recognized that Airbus has since implemented "a compliance programme worthy of the highest standards in this area," fired employees involved, and since prohibited the use of third-party consultants.

The Secrets Behind Banknotes

Similar to defence departments, these authors observe that "Central banking has been traditionally characterized by mystique and an organizational culture of secrecy." Central banks are also given a higher degree of autonomy in procurement processes because of the specialized and confidential nature of their work. While she was the Head of the US Federal Reserve, Janet Yellen argued that the central bank needs the nation's confidence and that its employees must "demonstrate our ethical standards in ways that leave little room for doubt."

Part of that includes working with trusted suppliers that print or provide equipment or material for printing banknotes. The BBC notes that the industry is made up of a small handful of suppliers with highly specialized technology whose credibility relies on its secrecy and security features. And while companies might not disclose which central banks they supply, many are trying to reassure customers of their dedication to anti-corruption.

As such, the Banknote Ethics Initiative (BnEI) was launched in May 2013 by companies in the banknote industry. Members sign a code of ethics and must pass an external accreditation audit. 40 central banks have signed their support of BnEI, and some require potential suppliers to have passed certification in order to bid for banknote-related tenders.

This initiative immediately bore fruit. When KBA-NotaSys (now KBBS) was undergoing BnEI certification as one of the first candidates, it discovered irregularities and, in 2015, self-reported corruption-related conduct to Swiss officials. The company makes specialist presses for security printers and discovered that bribes had been paid between 2005–2012 in Morocco, Kazakhstan, Brazil, and Nigeria. Because the company self-reported, it was fined one symbolic Swiss franc and paid a €27.8 million settlement, part of which was used to set up an Integrity Fund to finance anti-corruption projects. The company is also currently undergoing ISO 37001 certification.

Efforts at the country, international, and company levels to reduce corruption in public procurement processes have made progress and have shone a light on the issue in recent years. Some of the successful practices, including integrity pacts requiring external certification from vendors and industry-level initiatives like BnEI, should be extended to sectors still falling behind.

As Antti Heinonen, former and first chairman of BnEI, pointed out back in 2015: "This can be achieved through schemes such as BnEI, yet few exist. To work there needs to be a critical mass of key industry players, momentum that shows this is more than just a marketing ploy."