Public procurement is a lucrative area for business and corruption as well. It is estimated that approximately 70 percent of the central government expenditure in every country is spent through procurement or contracts annually. Procurement is a regular activity performed by all levels of government, from municipalities, districts and local bodies, to provinces and national governments. While national procurement can be bigger in terms of value per contract, local government procurement is also significant in terms of the number of processes and their impact for delivery of services and quality of development works at the grassroots.
Value of government procurement markets worldwide is estimated around 2 trillion US dollars annually. Wherever such large amounts of money are transacted through procurement, risks of corruption are always higher. Corruption in public procurement distorts fair competition and wastes scarce public resources. Market inefficiencies can emanate from corruption and destroy development opportunities massively. Transparency International (TI) estimates that systemic corruption can add 20-25 percent to the costs of government procurement and results in delivery of inferior quality of goods, services and development works.
Low levels of integrity in public procurement leads to corruption which can be characterized by a number of actions — from bribery, facilitation payments and collusion; to the violation of conflict of interest rules, bid-rigging and trading of influence. In terms of bribery, public procurement is perceived to be more susceptible to corruption when compared to other government sectors such as judiciary, revenue or public utilities.
COST OF CORRUPTION
Procurement related corruption is difficult to measure quantitatively due to secret settings where it occurs. Given such massive amounts of money being spent on public contracts and procurements, corruption risk has a colossal ramification on the effectiveness of public investments. The TI estimates that damage from corruption can represent on average 10 to 25 percent and in the worst cases as high as 50 percent, of a contract’s value.
Surveys at the country level across the globe suggest a high price tag for businesses when it comes to corruption in procurement. In Morocco, despite positive reforms in procurement system, recent calculations suggest that corruption still costs the country about 5 percent of the value of each contracted purchase. In the Philippines, businessmen speculated that this cost may be as high as 50 percent. Globally, procurement of goods, works and other services by public bodies alone amounts, on average, to between 15 and 30 percent of GDP which is even more in some countries.
Low levels of integrity in public procurement leads to corruption which can be characterized by a number of actions — from bribery, facilitation payments and collusion; to the violation of conflict of interest rules, bid-rigging and trading of influence.
In the last one year, Nepal has witnessed scams in a number of public procurements from supplying rations to the security agencies to awarding a contract to a foreign company for printing Machine Readable Passport (MRP). Be it an Airbus purchase deal of Nepal Airlines or procurement of Armored Personnel Carriers (APC) for Nepali peacekeepers in Sudan, corruption worth millions of rupees has surfaced alarmingly. A parliamentary probe committee calculated corruption in APC scam to be around NRs 300 million. In yet another blatant violation of the Public Procurement Act, Madhav Kumar Nepal´s cabinet a few months ago categorically allowed Home, Irrigation, and Science and Technology Ministries to procure new SUV vehicles worth NRs 20 million without going through the competitive bidding process. Procuring goods without competitive bidding means prevalence of corruption.
Likewise, Public Procurement Monitoring Office´s latest report sheds light on cases of corruption in procurements done by several government agencies. This has made us clear that government agencies are purchasing goods and services in stark violation of existing procurement law and this unfolding phenomenon of corruption in procurement has necessitated strengthening the integrity and fair competition among bidders with reforms in national procurement regime.
Over the last few years, even the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action have focused on strengthening procurement systems at country level to better delivery on development money being spent. The international community and developing countries have initiated reforms incorporating integrity as one of the main pillars for an effective procurement system. By institutionalizing Integrity Pact (IP) as an inbuilt component of the entire procurement system, several countries have succeeded minimizing corruption risks in public procurements. This can indeed be a new avenue of learning for Nepal in many ways.
WHY INTEGRITY PACT?
Integrity Pact was developed and tested by the TI during 1990s. It is simply a tool aimed at curbing corruption in public procurement system. The pact is essentially a written agreement between a government body and all bidders to refrain from bribery, cartel and collusion. The pact explicitly mentions rights and obligations that neither side will pay, offer, demand or accept bribes; collude with competitors to obtain the contract; or engage in such abuses while executing the contracts.
Under such written integrity pact, all bidders are required to disclose all commissions and similar expenses paid to anyone in connection with the contract. A pre-agreed set of sanctions for any violation by a bidder of any part of its commitments or undertakings within the pact may result in the loss or denial of contract; forfeiture of the bid or exclusion from bidding on the future contracts or disciplinary action against government employees. By implementing the IP, the government agencies can reduce cost and distorting impact of corruption in public procurement.
With the IP in use, bidding companies or suppliers can abstain from bribing with mutual understanding that their peer competitors have jointly made assurances not to bribe public officials and they collectively believe that government procurement agencies will abide by transparent procedures to prevent corruption including extortions by their officials. Even citizens through civil society organization as a monitoring body can keep close tabs on such leakages or corruption.
Over the last one decade, the pact has been enormously tried and tested in hundreds of contracts in over 15 countries. The beauty of this widely recognized and tested tool is the provision for an independent monitoring system by the civil society organization that provides impartial oversight and increases government accountability and transparency in public procurement process. At a time when increasing need is being felt to involve citizen monitoring in all stages of big public procurements, the use of IPs in countries like Nepal can be the best way to ensure citizen participation through civil society as its representative in all spheres of procurement process.
Regular public hearings as a part of IPs are the best way to inform and keep citizens abreast of all aspects of procurement process in many countries.
Public hearings are a key element of IP in Argentina. Several government bodies in Argentina organize public hearings to increase credibility and prevent corruption in public procurement. In public hearings, participants can raise questions, objections and suggestions which are taken care of and are duly incorporated into the process. Public hearings provide a platform for competent authority to convene citizens, experts, businesses and other stakeholders and present project details and procurement provisions publicly.
Many counties around the world have been using IP as a successful tool to reduce corruption in public procurement process over the last many years. Central Vigilance Commission in India issued Directives for implementation of integrity pacts as ‘standard operating procedure’ in procurement contracts of any major government department. Even Pakistan introduced integrity pacts in 2000 in the Greater Karachi Water Supply project (K-III) which was completed ahead of schedule at a total cost of 10 million US dollars, a less than initially estimated. Pakistan in 2004 also enacted the Public Procurement Rules making it mandatory for all bidders to sign a pact for any contracting process with a value above a given threshold.
The pact has been widely adapted and applied to local government contracts in around 20 districts in Indonesia. As main beneficiaries, general public holds the lead role in monitoring implementation of integrity pacts to ensure quality of the output. In Italy, the pact has been introduced mainly at municipal level. Milan City Council was the first authority to adopt the integrity pact in 2002. Many other European countries such as Germany, United Kingdom, Latvia, among others, have used IP in major public contracts for development infrastructures.
Similarly, Mexico has implemented pacts in over 100 contracts, worth approximately 30 billion US dollars in total. Mexico´s Public Administration Authority in 2004 also issued a decree whereby the role of independent monitoring has become mandatory for national level contracts above a certain threshold. With these successful stories of IP as a tool to reduce corruption risks in procurement in many countries, Nepal can also benefit from the use of IP in public procurements. There is no harm in trying and testing it.
I enjoy reading your articles in Republica. I liked this one much as it comes up with a new tool called Integrity Pact. It would have been very nice if you had drawn up its modality and the process as well.
Pramita Aryal, Chabahil
It is good and complementry articles of before article .I think this article will help to prepare the any guidelines against the corruption of Nepal Goverment one side and another side is : awaring the Nepalease people against the curruption who believe corruption is the root cause of development. Thanks alot to auther for valuable and informative articles
Poshta Bahadur k.c
I pretty much like your idea. Procurement is the most corrupt domain in Nepal now. Take for example, APC scandal, police rations and most recently Special Court´s decision on Kanshakar involvement in corruption in sending lock up advance to purchase airbus. If government makes sincere efforts in institutionalizing the idea you proposed, it can definitely make some difference.
Well expressed and good piece. Procurement related corruption is a burning problem in Nepal and the use of integrity pact can really help it reduce. Congrats!