Ethics in Public ProcurementTünde TátraiAssociate professor

„The people who can best describe corruption are those themselves engaged in corruption.”

Hillman A.. L. (2004): Corruption and public finance: an IMF European Journal of Political Economy.

Purpose

Not only methodologyBut practical solutions, worst – best practices

Comparable data, cultural differences, role of regulation

Adaptation, implementation

Sustainability and accountabilityDoing things better…

SPPDoes an only definition exist?

The strategic and transparent integration and achievement of a public sector organizations’s social, environmental and economic goals in the systematic coordination of key interorganizational commercial processes for improving the long-term performance of the organizaton and the territorial base for which it is democratically accountable for, in line with overarching public policy priorities (Preuss 2009)

SPPAnother aspect of Fisher

„Is is all too easy to focus on rules, regulations and legal technicalities; while obviously essential, they need to be part of a bigger picture about sustainable development to enable government to achieve better things through sustainable public procurement.” (Fisher, 2013)

SPPSustainable PP Workshop Moscow 2013

„How to improve SPP, reduce corruption and use SPP as an instrument of economic growth, and how to apply new research results to do so. „

http://www.hse.ru/en/news/research/96293755.html

Extention of the definition Economic

Social

Environmental

Transparency

Strategy

SPP

Culture

Risk management

Accountability

Society for International Development – Oshani Perera

Why governments need to use their purchasing power when they buy goods, services or infrastructure as a tool to promote sustainable development?

SPP – when governments begin to integrate environment protection and social cohesion in their purchasing decisions

That means to look at value for money across procurement lifecycle and a product, services and infrastructure lifecycle.

Not just in the purchasing price, because the cheapest is not always the most sustainable.

And the most sustainable – where the value is.

The buyer is not typically the user.

- Entity 1 buyer, Entity 2 user, Entity 3 manager

„ Ideally we need to find multi framework budgeting and accounting flexibility for governments to really make sustainable procurement work. „

http://www.youtube.com/watch?v=Eoe5_zg0JOI

Need for data

EuRelated statisticsEcoris study http://ec.europa.eu/internal_market/publicprocurement/docs/modernising_rules/cost-effectiveness_en.pdf

Utility Classic

Share of total (EUR)

17% 83%

Mean contract (mill EUR)

5,9 2,8

Median contract (mill EUR)

1 0,35

Offers (mean) 4,4 5,5

Offers (median) 3 4

Time to offer 50 48

Time to award 100 81

1 in 5 tenders receive 1 bid

Costs of PPEcorys studyhttp://ec.europa.eu/internal_market/publicprocurement/docs/modernising_rules/cost-effectiveness_en.pdf

Open

Restricted

Negotiated

0 5 10 15 20 25 30 35 40 45

Authorities

Pre-award Award Post-award Litigation

Open

Restricted

Negotiated

0 5 10 15 20 25 30 35 40

Business

Pre-award Award Post-award Litigation

Corruption Perception Index of Transparency International (2013)

Source: http://cpi.transparency.org/cpi2013/results/

Denm

ark

Finla

nd

Sw

eden

Neth

erl

ands

Luxem

bourg

Germ

any

Unit

ed K

ingdom

Belg

ium

Irela

nd

France

Aust

ria

Est

onia

Cypru

s

Port

ugal

Pola

nd

Spain

Slo

venia

Lith

uania

Malt

a

Hungary

Latv

ia

Cze

ch R

epublic

Cro

ati

a

Slo

vakia

Italy

Rom

ania

Bulg

ari

a

Gre

ece

1. 3. 3. 8. 11. 12. 14. 15. 21. 22. 26. 28. 31. 33. 38. 40. 43. 43. 45. 47. 49. 57. 57. 61. 69. 69. 77. 80.

0

10

20

30

40

50

60

70

80

90

100

CPI2013Score and rank

Jordan Romania Italy Bosnia and Herzegovina

Serbia Bulgaria Armenia Moldova Albania Lebanon

66 69 69 72 72 77 94 102 116 127

0

5

10

15

20

25

30

35

40

45

50

CorruptionOLAF

project

Measuring the costs of corruption“Development of an EU Evaluation Mechanism in the area of Anti-Corruption with a particular focus on identifying and reducing the costs of corruption in Public Procurement involving EU Funds”.

TED 2011/S 186-303435

http://ec.europa.eu/anti_fraud/documents/anti-fraud-policy/research-and-studies/identifying_reducing_corruption_in_public_procurement_en.pdf

Olaf Conclusions

The fight against corruption is however not only carried out by formal public institutions, but increasingly so by informal networks, such as NGOs, press and citizens. Such a change in attitude has at least three major consequences.

Firstly, decision-makers are under increasing pressure to ensure transparency and reinforce, update and coordinate the national and international anti-corruption agendas.

Secondly, private and civil actors are increasingly detecting corruption and denouncing corrupt behaviour to the competent authorities. This trend is supported by the creation of whistle-blower systems and protection programmes, which represent a real incentive to share and denounce illegal behaviour, both in private companies and in public institutions. It is also supported by political will, free and properly resourced press, and active social media networks.

Thirdly, these societal trends and in particular the rise of social media networks provides new opportunities for formal investigators as well, who see an increase in the amount of leads and data to be pursued.

DefinitionsEthical PP, Corruption, Self-cleaning

Forms of unethical conduct

Connivance of contracting authorities with tenderers in their mutual interest

Common preparation of the public procurement procedure. Unlawful actions during the public procurement procedure. Providing uneven access to information during the public

procurement procedure. Overlooking secondary obligations in the performance

phase, loose control.

Tenderers collaborating in their mutual interest Submitting coordinated tenders. Tendering or not tendering for money Dividing the market between each other.

Abusing (market) position, abusing rights. Blocking the flow of a given procurement procedure. Limiting the range of tendering. Evading the entire public procurement procedure.

Terms

Unethical behaviour = corruptionTransparency = publishing all the tender documents

Probity = symbol

7 stages of development of the pp function

1. Sourcing and delivering goods and services, focused on getting what is required by users in the right quantity at the right time at the right place.

2. Compliance with legislation/regulation becomes the main issue to prevent fraud and corruption.

3. Efficient use of public funds, the focus shifts towards not spending more than required or getting the most for a fixed amount of money.

4.Accountability, the public procurement function’s main issue shifts towards being able to explain (to the legislature, the general public, the press, etc.) that it is doing its job well: required items are acquired at the best value for money, and there was no fraud in the process.

5. Value for money: the scope is broader than before. It is not only costs (or costs vs. quality) that is important in public procurement, but also the value the items and services procured contribute to the organization.

6. As a policy tool to achieve broader government objectives, the public procurement function is contributing to the goals of the public sector organization. As such it starts to have an external role as well. It is seen as a supporter of change/reform; it is aiding policy delivery. Common issues are job creation and employment, strengthening the industry, SME / regional development, diversity, innovation, and sustainability.

7. Delivery of broader government objectives: public procurement is in the lead for economic/social change, and has the full responsibility for delivering the policy objectives .

SPP

1

4

3

2

Based on IRSPP 7-stages model (Harland et al. 2007)

6

5

7The seven stages of development and national priorities of public procurement – focusing on ethics, transparency, accountability

Kép beszúrásához kattintson az ikonraOriginal seven stages of development

Lower ranking priorities

Higher ranking priorities

1. Sourcing and delivering goods and services

   

2. Compliance with legislation/regulation

   

3. Efficient use of public funds    

4. Accountability Ethics Accountability, transparency, probity

5. Value for money    

6. Supporter of broader government policy objectives

   

7. Deliverer of broader government policy objectives

   

Ethical PPNIGP

“Conflict of Interest

Public Procurement professionals shall:

Avoid any private or professional activity that would create a conflict of interest or the appearance of impropriety;

Avoid engaging in personal business with any supplier representative or similar person;

Avoid lending money to or borrowing money from any supplier;

Avoid any and all potential for nepotism;

Avoid any overlap of duties in the procurement process;

Safeguard the procurement process from political or outside influence.

Conduct with Suppliers

Business dealings with suppliers must be fair and transparent. Procurement shall:

Refrain from showing favouritism or being influenced by suppliers through the acceptance of gifts, gratuities, loans or favours;

Safeguard supplier confidentiality;

Refrain from requiring suppliers to pay to be included on an approved or preferred supplier list;

Refrain from requesting donations of goods or services to the public entity;

Select suppliers on the basis of meeting appropriate and fair criteria;

Discourage the arbitrary or unfair use of purchasing leverage or influence when dealing with suppliers;

Avoid the exertion of undue influence or abuses of power;

Treat all suppliers fair and equal.

Corruption

Public procurement professionals who become aware of any corrupt activity have a duty to the profession and to their employing organizations to alert their management and/or elected officials. Public procurement shall not tolerate bribery or corruption in any form.”

The NIGP definitions and content were simplified and shortened.

Self-cleaning

Clarification of the relevant facts and circumstances: the company has to assist in order to clarify the facts and the responsibility of all persons involved in a comprehensive manner.

Reparation of the damage caused: it is required to repair the financial damage caused.

Personnel measures: the company has to ensure that all persons who have been strongly involved in the wrongdoing are dismissed.

Structural and organizational measures: the company has to verify organisational preventive measures, reviews, guidelines and take care of the future.

Arrowsmith et al. (2009)

„the firm that might be excluded from public procurement procedure because of some kind of wrongdoing should be admitted to the self-cleaning process, on the basis that it has taken measures to ensure that the wrongdoing of the past will not occur again in the future”

Role of regulation

CSR and PP (McCrudden, 2006) 1

PP is not an extraordinary adaptable tool which has often been used to meet regulatory need when other methods of regulation are not considered acceptable, available or effective.

Developing CSR – fair trade, reducing the use of child labour….

„Integration of social and environmental concerns in business operations…”

Why the public sector? (based on Preuss)

The public sector is responsible for providing a range of services many of which have direct implications for sustainability, such as economic development, waste disposal…(Wilson and Game, 2006)

PP could use on its purchasing power to develop markets for more sustainable products that otherwise might not emerge… (Erdmenger, 2003)

Next step?

Kattel, Lember: Public Procurement ad an Industrial Policy Tool: an option for developing countries (JOPP, 2010)

Why and how? - based on Fisher’s questionnes,2013.

What sustainable development goals does a public authority intend to contribute to and how will these goals be achieved?

How will sustainable procurement be balanced with other objectives that enter into procurement decisions, including rationales underpinning demand for lowest price and those that ensure the integrity of markets through open competition?

Is it possible to bring together economic, social and environmental goals without generating contradictions?

Fighting courruption

Transparency

Supporting environmenta

l protection

Easing up the fiscal crisis by slowing down

public procurements

Supporting social

considerations

Efficient spending of

public money

Increasing employment

Supporting SMEs

Decreasing go-round debt

Tátrai T., Nyikos Gy. (2012): Uses and Abuses of Public Procurement in. Albano et al. pp. 34.

The role of regulation in fighting against corruption

2004/08/EC Transparency and

publication;

General consideration in the awarding phase of the procedure;

Communication between participants of the procedure;

Statistical obligations and monitoring.

 

2014/24/EC

Transparency and publication;

Conflict of interest;

General consideration in the awarding phase of the procedure;

Communication between participants of the procedure;

Statistical obligations and monitoring;

 Illicit conduct.

Rolfstam (2012) about EU PP

„problems currently slowing down the adoption of public procurement of innovation practices are exclusively of legal nature.”

Lack of procurement competence Lack of legal competence Lack of reasources Lack of political support Lack of understanding for stakeholders” needs

Lack of supplier understanding of procurement process

Risk averseness Lawyers’ inadequate interpretation of the possibilities given by the regulation

BalanceRolfstam (2012)

„The rules for public procurement must strike a balance between maintaining transparency and competition in order to save tax-payers money, prevent fraud on one hand, and allow for interaction, negotiation and uncertainty, which is critical for innovation to take place, on the other hand.” (Rolfstam M. (2012))

Worst and best practices

Transparency and Corruption

„countries that adopt more „transparent procurement”, as calculated by the share of tender advertised publicly, are also the ones where corruption is considered more pervasive”.

Coppier R., Piga G. (2007): Why do transparent public procurement and corruption go hand in hand? in Piga G., Khi. V.T. (2007): The economics of public procurement..

http://www.knowledge4innovation.eu/events/SitePages/Dinner_Debate_Procurement.aspx

Red flegs

The procurement process is examined in relation to three stages of procedure:

preparation of specifications, selection of tenderers, and execution of contracts,

within each of which some specific risks (red flags) are identified.

Dorn N. et al. (2008) "Do European procurement rules generate or prevent crime?", Journal of Financial Crime, pp.243 - 260

Best Anti-Corruption practices

The key principles by Greenwood-Klots (2009) for best anti-corruption practices in public procurement are

transparency good management and the prevention of misconduct

monitoring compliance, accountability and enforcement

Greenwood M., Klotz J. M. (2009): The Fight Against Corruption in Public Procurement: an introduction to best practices in. García R. H. (2009) edt. International Public Procurement.

Reputation systemPicci L. (2007)

Picci proposes a governance model of public works that relies on an internet-based „reputation system”.

„It allows for the routine production of statistics that are useful for monitoring purposes and it provides a coherent framework to limit rent-seeking and corruption.”

Celentani M. et al (2000)

They computed the equilibrium level of corruption, and they studied the impact on corruption of the competitiveness of the environment, and in particular of:

an increase in the number of potential suppliers of the goods or services to be procured,

competitive (rather than collusive) behaviour of procurement agents, and

an increase of competition in the market for procurement agents.

They identified the effects that “influence the equilibrium level of corruption and showed that, contrary to conventional wisdom, corruption may well be increasing in competition”

Probity as the main principle of public procurement regulation

„existence of a clearly corrupt and anonymous bureaucracy is commonly known, bidders will engage in active bribing…” (Büchner et al. (2006): Bribery and Public Procurement)

McCue (2007)

“purchasing professionals in the public sector continue to have to balance the inherent tensions between maintaining control of the purchasing function and loosening the bonds of bureaucracy.”

Mandatory Code of EthicsRobert (2010)

“The heavy focus on compliance with criminal and civil prohibitions tends to obscure the fact that non-criminal or non-civil ethics violations have the ability to severely damage public trust in the integrity of the procurement process.”

Integrity pactTransparency Internationalhttp://www.transparency.org/whatwedo/tools/integrity_pacts/3/

TQM, agreement

Integrity Pacts are a tool for preventing corruption in public contracting. They are essentially an agreement between the government agency offering a contract and the companies bidding for it that they will abstain from bribery, collusion and other corrupt practices for the extent of the contract.  To ensure accountability, Integrity Pacts also include a monitoring system typically led by civil society groups (often our chapters).

How to keep bureaucrates honest? Shead (2008)

“the use of probity audits has flourished in the public sector in recent years.”

“These guidelines tend to focus on competitive procurement processes and ignore broader factors applying to other processes in which probity audits are also used. Further, as there are no professional standards governing a probity audit, it is important that agencies have a clear understanding of their benefits and limitations and of the skills and experience required of a probity auditor before they commission one.”

Probity planningBeth (2006)

Probity planning

Determine whether a probity auditor and/or adviser is needed □

Obtain conflict of interest declarations from team members □

Obtain confidentiality agreements from external participants □

Finalise the probity plan, if one is being used □

Consider confidentiality requirements □

Set up physical security procedures, such as the document register or data room □

Ensure team members are familiar with all relevant policies and documents □

Set up procedures so all potential suppliers have access to the same information □

Procurement process Review probity at the end of the bid

preparation process □

Set up a process for receiving, recording and acknowledging submissions □

Set up a procedure for opening the bid box □

Document any changes that occur, and notify all potential suppliers □

Ensure evaluation of submissions is fair, consistent and competitive □

Review probity at the end of the evaluation process □

Notify the successful bidder as soon as possible □

Notify the unsuccessful bidders as soon as possible □

Debrief unsuccessful bidders □

Ensure all actions are documented, and the documents are stored appropriately □

Review probity at the end of the process □

Recommendations

There is a need to develop an independent monitoring system capable of collecting and comparing data with a unified methodology and logic, and of giving a real picture of the size of the public procurement market.

Real transparency serves prevention. It is not enough to make electronic public procurement obligatory when monitoring systems are not capable of providing all the documents of a procedure to controlling bodies automatically, and of tracking the main data of concluded contracts in a comparable and controllable way from year to year. The aimless supplying or uploading of data on to different websites is virtual transparency only, and does not serve the interest of public procurement.

Knowing best practices and incorporating them into regulations are not only playing with words. “Probity” as a principle of public procurement applies to the preparation phase, communication between parties, the evaluation process, the performance control and the amendment of contracts. The purpose is not to hinder corruption by administrative obstacles but to prevent it. Beside traditional regulatory content (mandatory exclusion of economic operators), it is necessary to make “probity auditing” be part of the regulatory background.

Additional topics

Transparency and the defence sector

81/2009/EC Defence Directive

Real transparency?

„(70) To ensure compliance with the principle of equal treat ment in the award of contracts, it is appropriate to lay down an obligation, which has been established by case- law, to ensure the necessary transparency to enable all ten derers to be reasonably informed of the criteria and arrangements which will be applied to identify the most economically advantageous tender. „

„(73) However, review procedures should take into account the protection of defence and security interests as regards the procedures of review bodies, the choice of interim mea sures or penalties for infringements of obligations relating to transparency and competition.”

Public Procurement and the utilities

Escape route

Example 25/2014/EC:„This Directive shall not apply: (a) to contracts for the purchase of water if awarded by contracting entities engaged in one or both of the activities relating to drinking water referred to in Article 10(1); „

Role of regulationWhere is the water?

(7) It should be recalled that nothing in this Directive obliges Member States to contract out or externalise the provision of services that they wish to provide themselves or to organise by means other than procurement within the meaning of this Directive. The provision of services based on laws, regulations or employment contracts, should not be covered. In some Member States, this might for example be the case for the provision of certain services to the community, such as the supply of drinking water.

(24) Contracting entities that operate in the drinking water sector may also deal with other activities relating to water, such as projects in the field of hydraulic engineering, irrigation, land drainage or the disposal and treatment of sewage. In such case, contracting entities should be able to apply the procurement procedures provided for in this Directive in respect of all their activities relating to water, whichever part of the water cycle is concerned. However, procurement rules of the type proposed for supplies of products are inappropriate for purchases of water, given the need to procure water from sources near the area in which it will be used.

Role of regulationWater, energy, telecommunication

Article 10 Water

1. As far as water is concerned, this Directive shall apply to the following activities:

(a) the provision or operation of fixed networks intended to provide a service to the public in connection with the production, transport or distribution of drinking water;

(b) the supply of drinking water to such networks.

2. This Directive shall also apply to contracts or design contests awarded or organised by contracting entities which pursue an activity referred to in paragraph 1 and which are connected with one of the following:

(a) hydraulic engineering projects, irrigation or land drainage, provided that the volume of water to be used for the supply of drinking water represents more than 20 % of the total volume of water made available by such projects or irrigation or drainage installations,

(b) the disposal or treatment of sewage.

Scope of the utility directives

Council Directive 92/13/EEC of 25 February 1992 coordinating the laws, regulations and administrative provisions relating to the application of Community rules on the procurement procedures of entities operating in the water, energy, transport and telecommunications sectors (OJ L 76, 23.3.1992, p. 14).

Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors (OJ L 134, 30.4.2004, p. 1)

DIRECTIVE 2014/25/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC

Thank you for your attention!Tunde.tatrai@uni-corvinus.hu