Italy

#31 - Francesco Decarolis (Einaudi Institute for Economics and Finance)

Reputation and corruption in public procurement

Interview with Francesco Decarolis, Associate Professor at Einaudi Institute for Economics and Finance in Italy. Francesco is currently a Research Fellow of the National Bureau of Economic Research. He was recently awarded ERC Starting Grant to investigate reputation and corruption in public procurement.

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Transcript

Hello, Francesco, welcome to the podcast.

Hello, thank you for this invitation.

 

Francesco, I usually like to start the interviews by getting the guests to speak a little bit about their background. Could you tell us a little bit more about yourself?

Yes. So I have been working in the last 12 years in the USA, so as you were saying, I completed my PhD in Economics at the University of Chicago, where I focused on the analysis of auction and procurement markets, which is a rapidly growing and very successful area of economics, with a broad range of applications, from auctions and procurement systems that government use to various private sector applications.. Examples include spectrum, allocation for telephone operators, the allocation of oil and gas exploration permits, and really almost every other area you can think of. My origin is Italian, and while studying in the US, and learning about this new area of economics, I realised that there was a big discrepancy between many of the economic models and the practice. The actual way in which certain procurement, important procurement markets, were arranged, and that it was particularly interesting to try to bridge what was in our economic textbooks with what was happening in the practice, because these textbooks were missing some key features of the real-world environment. But also these real-world environments, and the rules under which they developed, were sort of addressing in an imperfect way, in a potentially problematic way, some of the real problems that they were facing. And so this is how I began to build a career as a researcher in the area of auctions and procurement. My studies are based mainly on the empirical analysis of auction and procurement data, but also with some focus on the underlying theory.

 

What brought you back to Italy, then?

So, in essence, the ERC grant.  I worked in several universities in the US. Most recently, I was at Boston University, in the Department of Economics, and while I was there, more precisely I was on sabbatical at Stanford University during the Fall 2015, I learned that I was the recipient of one of the ERC StartingGrants for economics. This grant is an absolutely fabulous opportunity to allow me to conduct research on areas of public procurement that I did not have the time or the resources to explore before, but that I always found very interesting and fascinating. Especially the use of past reputation in public procurement and the role of corruption in procurement. And the reason why I mentioned that I didn’t have the resources is also that for doing some of these studies, especially the one that I’ll be glad to tell you about in a few minutes, I collaborate closely with contracting authorities that implemented these rules, and working with the contracting authorities to try out different procurement formats, evaluating from an ex-ante perspective how to design the new auction formats, then doing the work of collecting the data, analysing, possibly having multiple meetings, both with the contracting authorities and with the suppliers, are very time consuming activities. And so thanks to the ERC grant, I have now all the financial means to perform these activities. Hence, I was very happy to relocate back to Italy. Right now, I am in the Einaudi Institute for Economics and Finance, which is an institute created by the Italian Central Bank to be an excellence in the study of Economics, and here in this institute, several important researchers for the area of public procurement have affiliations, as well. Giancarlo Spagnolo and Elisabetta Iossa for instance.

 

Very well. So, if you could drill a little bit into the details of the grant, and the research, what are you actually going to be looking at, more specifically?

The premise is that when we think about contract procurement, two features are absolutely crucial. The first is that it is unavoidable that there is some cost uncertainty at the time of bidding. So regardless of whether the procurement is a very complex contract, for instance, for the construction of new military equipment, or whether it is a contract for something easier like repaving a road, there is intrinsic uncertainty. Even in repaving a road, typically the bidding takes place several months before contract execution, and what the weather condition, what the cost condition will be at the time of the execution of the contract, cannot be known for certainty by the firms at the time of bidding. Second, coupled with this intrinsic uncertainty with contract procurement, there is typically a difficulty to verify ex-post performance and to eventually enforce penalty in all those cases where things have not followed the original contract specification. This is a feature that makes contract procurement very different from the type of auction markets that the economics literature has extensively analysed, and for which a lot of important results have been established. For instance, if the auction entails a transaction that will clear right after the auction, think about the auction for a painting, in which individuals or firms bid, but then the transaction clears immediately, then the kind of problems and the kind of solution are extremely different, relative to those of contract procurement, and in particular, in contract procurement, this issue of the ex-post life of the contracts becomes crucial, and makes competition - which is the typical tool that we see as being so important and so effective in auction - a double-edged sword. Things can go pretty bad if competition is pushed and exacerbated in an environment with cost uncertainty and difficulty to verify performance, ex-post, because firms that are unreliable are willing to offer a low price at the time of the auction, might not perform as they should afterwards.

So what does the private sector do in the face of this? Well, a series of things. It can require financial guarantees, like bonding, letters of credit, and it can embed the decision maker to use some form of discretion in selecting bidders. So discretion in the form of contract, or awarding method, negotiations vs auction, or also - and this is typically the case - discretion in the use of past performance. Just think of a very simple example: when you’re renovating your apartment, the past performance of the firm that work with will certainly play a key role in your choice, and this is widespread in the private sector. Now, what is remarkable about public procurement, and especially European public procurement, is that the use of past performance is strictly limited. To be more precise, until very recently, until the latest round of European directives, the use of past performance was strictly forbidden in Europe. And this is peculiar, not just because it makes the public sector so different, relative to the private sector, and potentially it limits a great tool to prevent the problems that I was mentioning at the beginning, of poor performance, but also because it puts the European system at odds with the US public procurement system. In the US, in a nutshell, since 1994, there was a major reform of the Federal Acquisition Regulation, that put past performance of contractor at the heart of the system for selecting suppliers in federal procurement, and the main idea was exactly that of mimicking the good practices of private sector. Now, Europe is gradually moving towards something similar, but very, very slowly, and we are still far away. So what I want to study with this piece of research that I am now conducting is to what extent this reform tried by the US, and other possible reforms, based on the role of past performance in public procurement, can be an effective way to combine improvements in performance together with, still, the objective of limiting prices. And in particular, what I wanted to understand, and study with this research, is how to combine the use of past performance within system of awardings based still on auctions, on transparent auctions, and in particular,  how to change from  price only auctions, or scoring rule auctions, that do not include reputation, to price plus reputation auctions. So scoring rule auctions that included reputation. So how to measure reputation and how to include reputation into the scoring rule, and then quantify how this matter, how this approach could impact both the performance delivered and the cost of this potential improved performance. So this was the key idea of this piece of research, and the implementation of it is something that is still ongoing, but I have some preliminary results that, if you are interested, that I am happy to discuss.

 

And we will do that in a minute. Before we get to that, I would like to go back to something that you said about taking into account past performance being strictly limited. Yes, and no. It’s true that you cannot, in EU procurement, use past performance to assess the quality of a tender. You can use it, however, to assess the quality of a tenderer in a previous moment to the actual bidding. So, for example, if you have a restricted procedure, if you use a restricted procedure, you can use, and you can allocate significant points, number of points, to the performance of the economic operators coming to the auction, or coming to the procedure. With the open procedure, it’s a little bit more complex, especially now with the changes that have been introduced, but it can also be done in a certain way. So, from my perspective, and obviously I’m coming from a legal background, so from my perspective, what you’re suggesting could fit within the current rules, and the current rules exist for a very good reason, or a very reasonable reason, at least, which is to ensure equal access to the markets, not only to companies with a huge trading history, but also to companies that do not have a lot of trading history with the public sector. So that’s why you have this clear separation, and this clear rule based on the principle of equality, to make sure that companies or that tenders, at the tender stage, are analysed on as much of an equal ground as possible.

I have two answers. One is about what the current rules say, but the second is even more important, because you have mentioned what I think is really the greatest departure in the view between economists and legal scholars. So let’s jump absolutely into this, and great that you asked. Why you said, essentially, that the rule to limit the use of past performance is there for a good reason? Because you want to keep an open market. Now, this is absolutely, absolutely at odds with how economists see the problem. Why? Don’t we care about open market and new firms and preferential treatment? Of course we do, but the issue is that you are sort of tying the hands of these public administration in a way that is not realistic. In a sense, whenever you are specifying how past performance shall be used in a contract, you must also specify how firms with little or no reputation must be treated. Now, the fact that you are using a system that is based on reputation does not necessarily mean that you are going to say, “We are going to use past performance for those who have, and for those that they don’t have it, they cannot enter the auction.” You can say something completely different. You can say, “We are going to use past performance for the firms that have a past performance, and for those that don’t have it, we are going to give the maximum points, or the minimum points, or the average points, or points estimated in a certain way.”  This is what we call a design issue. It’s completely in the hands of the designer., You can think of the designer as whoever writes the law, the rules of the game. So, what happens to firms with no reputation, to new entrants, to firms that also have, maybe, little reputation, is the result of a designer’s choice. And so it’s something that can be optimised and tailored to the market. The most important thing, the only message that I want to communicate is that you don’t have to see that there is a necessary block created for new firms from the use of past reputation, because it’s fully a designer choice, what happens to new firms. So tell me if this sounds convincing to you or not, because this is really something which seems to be misunderstood in many discussions about past performance, like those on the potential implementation of a reputation system in the European Directives, and I’ve seen this in the debate around Article 57.

 

Yes. 

In which the European Directives 24 2014 has introduced some use of past performance, along the lines you were mentioning at the beginning of your remark, and I see that the point that you mentioned, the criticism that you mentioned, was really prominent there. And tell me if I manage to be clear or not, because this is a key point. It’s really a designer’s issue. So things should be decoupled. We should first decide if we want to use past performance, because, if we think it’s important. Then we can argue, “What’s the best way to treat new firms?”

 

I gave you the opinion, the general opinion from legal scholars, and why the rules are why they are. In my opinion, as time goes on, I think that you are on the right track in the sense that there is a lack of reputation being actually taken into account in a good way. That doesn’t mean that it’s quite easy to do within the logic of the system, which is to ensure that both new entrants, and older entrants, are not discriminated against, because even with the design, and yes, it’s a design issue, even with the design, it may be very difficult, in practice, to actually making sure that the compensation given to the new firms actually does not create arbitrage, because if it makes life a lot easier for new entrants, then what’s going to happen is that the existing companies, or existing economic operators, will create shell companies to actually be as fresh entrants into the market.

 Absolutely.

 

There’s a risk then if you think about how the system works in general, and I’ve mentioned this in previous podcasts, the public procurement rules in Europe exist not to enable great procurement. They exist to avoid really, really bad procurement. So avoiding corruption, avoiding making stupid mistakes, those are two of the key objectives of procurement, not to be economically efficient, because if you’re designing a system to be economically efficient in terms of public procurement, we might end up with something very different from what we have now. So my perspective, and my personal view, is that yes, we should be moving towards a system where reputation is taken into account. So, about a year, or two years ago, I remember writing a blog post suggesting that perhaps we needed something like the eBay ratings system, or Uber, where both parties of a transaction, at the end of a transaction, are compelled to provide feedback on the counterparty, on some sort of exchange that is public, and that anyone can consult, and you end up with a registry of reputation for both the contracting authority and the supplier. So we actually address the reputation issue from both ends. I haven’t written anything more specific about it, but that was something that I was thinking about, because even for a supplier, it’s important to know how reliable the contracting authority is, because…

 Let me tell you a story, if you want, exactly on this. So in Italy, following this directive, and the implementation of Article 57, in the Italian Public Procurement Code, there has been a lot of debate, and essentially the authority in charge of supervising the public procurement sector, ANAC, Anti-Corruption Authority, put forward a proposed system to monitor past performance by suppliers, and at the heart of this system, there was essentially the contractual performance measured in terms of percentage delay in time of execution, relative to contractual time, and percentage discrepancy in final cost of the procurement, relative to the contractual price. Now, the Italian firms complained, and complained in a very reasonable way, saying that many times, it’s the fault of the public administration if things cannot be completed at the condition that was originally promised.

 

That’s true.

 And this was extremely reasonable, and I completely agree with this point, and in this sense, they were saying, “We need also a rating system for public administration, and we need something different.” So the quarrel around this proposed implementation of this part of the directives in Italy was so strong that the supervising authority ended up blocking these proposal.

 

I think that is a pain point that we could address in public procurement going forward. Focusing back on your research, you said that you had some preliminary data to talk about. Can you tell us a little bit more about it?

 Absolutely. So it all started with a very interesting experiment. Essentially, in Italy, we have a very large public utility company that provides water and electricity to Rome and central Italy. This company is owned 51% by the municipality of Rome, and so, because of this, it has to follow the public procurement regulations, but also since it’s a public utility company, it is in a group of contracting authorities the Italian public procurement code calls “special sectors,” and special sectors have some degree of freedom in how they design procurement rules. In how they fine-tune the procurement regulation that they apply. So the CEO of this company was extremely worried about the performance in the contracts that they were awarding. They award, every year, about 300 million Euros’ worth of contracts to perform maintenance of their water pipe system and electricity network, and with these contracts, they were considering the prices that they were getting from bidders in the auction quite good, but they thought that quality was really terrible, and you have to think that, especially for electricity, this is one of the really dangerous areas. If safety standards are not respected, people might die, because they work with high tension and you can easily get electrocuted, and the consequences are devastating. So what they did is they started to think about a system, or a way to improve performance, and then they consulted Giancarlo Spagnolo, and through Giancarlo also me, and we started a collaboration on this very fascinating project about how to improve the performance while still being leading within the system of the Public Procurement Court. And so if you think about introducing reputation, there are really two separate pieces. The first answers to the question: what/how do I monitor? How do I construct a measure of past performance, of reputation? And you can think that you could use publicly available measures. For instance, you can use some ratings that are already out there, I don’t know, ISO 9000 certification, or some other publicly available ratings, or you can construct your own rating measure. The company, with regard to this first question, decided that they wanted to build their internal rating system, and in particular, they said that they wanted to experiment two sectors. They picked electricity, and they picked two sub-sectors within electricity. Public illumination, and the maintenance of electrical substations, and they said, “For these contractual classes, we can write down a list, that is exhaustive, of all the things that need to be done properly in the contract, both in terms of safety parameters and in terms of quality parameters, and what we’ll do is, essentially, we’ll have teams of our engineers from the contracting authorities that then will go and inspect the execution of these contracts along this list of parameters.” And in particular, they chose a list of 136 parameters, and they also decided that these engineers that were going to do the inspections were randomly drawn. So their pool of engineers was changing every time, according to this random draw, to limit the risk of corruption. And also which work sites were inspected was also the result of a random draw. This is because it’s costly, it would be costly to monitor many, many contracts. By introducing a drawing system, you have a smart way to give to every contractor a positive probability of being monitored, but without having the cost of monitoring every contract.

 

Of course.

And so they sent these people, and they started to monitor, and the results were devastating, because the results of the first three months of monitoring revealed that noncompliance was overwhelming. So these parameters were scored with a zero if they were found to be noncompliant and a one, if compliant. When the scores arrived for the first three months and they were aggregated up, noncompliance was 75%. So only on 25% of the parameters, on average, they were doing something that was as written in the contract, and this was very bad, because again there were, like, safety measures that were violated, putting people at risk of very serious dangers, and this was across all contractors, across all types of works in these two categories, across all parameters. So it was a very widespread phenomenon and this was very much confirming the fear of this company, that noncompliance to contractual elements was very common. These were things for which in principle these firms should have been, or could have been brought to court. But this was not happening. These were things for which, in principle, penalties that were written down in these contracts could have been enforced, but this was not happening. And so, the reason why it’s not happening would open a separate chapter, it’s related to deficiency of the court system that, for instance, in Italy is quite bad, but it’s also related to the general phenomenon that in business, you try to maintain a good attitude with your suppliers, as well as with your customer. And so this firm was feeling that if you started to bring suppliers to court, and to enforce penalties, it would have acquired a bad reputation, and it would have been harder for this firm to conduct business. It was not doing this, it was not bringing them to court, it was not enforcing penalties, but it was very worried about this poor performance.

Moving to step two, after we have designed a reputation system and you have some numbers that you can use to quantify reputation, you have to decide how to incorporate these reputation measures into your decision of future awardings. Now, this is where things become tricky with respect to the regulation. As we were discussing before, under the current EU directives, you could use this information in the stage of selecting which firms are admitted to participate in the auction. Still, you could not use this to select among the bids that are received. So this firm was a little bit torn about how to use the reputation system that it had designed for the selection of future contracts. What people at this firm did was that they announced to their suppliers, they were going to switch to a scoring rule auction that was giving 75% weight to price, and 25% to past performance, where past performance was a weighted average of those zero/one scores that I was mentioning before. So the system clearly was living in a grey area between what it was allowed and what was not allowed by European directive, and this forced the firm to delay the implementation as they were collecting opinions from legal experts, but this made the experiment even more fascinating. Why? Because for a year and a half, basically, the suppliers of the firm had been informed about this intended switch, but the switch was not happening. Why is this so interesting? Because as we were discussing at the very beginning, and your main concern about openness of the system, if they were to switch immediately to the new scoring rule system, we would have observed, in the data, a mix of effects, in part coming from the selection of new firms that are kicked out by the new system, and in part, like, price and quality effects linked to the response to this new system. Instead, what we have here in this beautiful experiment is this one year and a half in which suppliers have already incorporated that eventually the scoring rule system will arrive, and so earning reputation matters, because if they earn reputation today, when the new system will arrive, they can offer higher price and still win the contract because they have earned a good reputation that will be valuable to earn points, in the scoring rule formula. But today, they still don’t face any limitation to their entry and to their probability of winning related to their past performance, because for the space of a year and a half, they still have a first price rule that is in place.

So this allowed us, essentially, to study the effect of the announcement of this switch to reputation, so not the actual switch, but the announcement of the switch, on the behaviour of the contractors in terms of quality delivered, and price, and the results were quite stunning. So basically, in a nutshell, I told you 25% compliance before. After one year post the first announcement in which suppliers were informed about the intended switch, and they were shown the scoring rule formula that was going to be in place, quality, overall, and performance, increased to about 80% compliance on the parameters. So from 25% to 80%, which was absolutely great, and the change involved, essentially, all parameters and all firms that were part of this market.

 

Has that maintained over time, and has it also affected new suppliers that came in after the announcement, so they were not actually in the market during the announcement?

It maintained over time, and this 80% has remained more or less flat since then. Now, in terms of the selection of suppliers, what is interesting is certainly that we see that even the suppliers that were not performing well before the announcement of the switch to reputation, changed their behaviour. What we learned from this experiment is that we don’t have, necessarily, to think of markets with firms that are intrinsically good and bad, but there is very much a possibility for firms to be responsive to different incentives and to change, their, for instance, managerial practices in how much they value safety, and safety practices, and so on, and so we saw a change that is across the whole spectrum of firms participating in these auctions. In terms of entry and exit, we saw an exit of some firms, but in a way that, when we tried to benchmark with what happened in terms of the auction for the exact same sectors, but taking place in other multi-utility companies in Italy, and the exit rate that we observed for this firm running the experiment is an exit rate that is quite similar to the one of the other multi-utility company that did not run any experiment like this. In terms of entry, we see that there is some entry, but not much, in the period that we observed. Since only three new firms entered, from a statistical perspective, when you have such low numbers, it’s difficult to draw conclusions, because they don’t have any statistical power. So I would say with reasonable certainty that there is a great effect on behaviour, with the same firms changing. There is no effect on exit of firms. There is potentially some effect on entry. Potentially limiting a little bit entry, but it’s not clear how much.

 

Okay, so we need to wrap up the interview, we’re reaching the time limit. What’s next for you? So what are the next steps with your research?

There is one part that is still related to this experiment, that is, in a second part of the experiment, we were able to relate this performance also to the prices, and we observed that prices, in the initial phase, after there was the switch, they declined, probably because firms were competing very intensively to win contracts, because only by winning a contract you could be monitored and you could earn reputation, and afterwards, prices started to increase, which is compatible with firms passing through this higher cost of performing better, of delivering higher quality. But the passing of cost was not major, in the sense that, compared to the great increase in quality from 25 to 80%, the increase in cost was about 7%, relative to the price they were paying before.

 

And you could argue that is actually not an increase in price, it’s the price that it should have been, originally, if the quality was supposed to be the one that is in the contract.

We cannot say this for sure. We are not able, as economists, to measure what would be the cost of this quality. From the perspective of the firm we work with, we know that the firm is happy. It thinks that this is a very reasonable price increase for the higher quality. What we have done is a sort of exercise of trying to quantify the welfare produced by this reform, in terms of lives saved, so reduced probability of accidents, and by weighting this reduced probability of accidents with the value of statistical lives, which is a quantity that economists and also social scientists often use, and we saw that, indeed, the policy produced great benefits. So the benefits exceeded the cost by an order of several million Euros per year. So all this suggests that the policy was positive, but we don’t want to stop here, we want to keep on studying and understanding this system. So what comes next is that this company is trying to now understand how to restructure its system to be compatible with the new directive, again, Article 57, as we were discussing, and so how to switch to a system in which the reputation index is used to select firms that will participate, not to select bidders, and it will be very interesting to see how these two completely opposite systems perform, which are the pros and cons, but in terms of prices paid, and in terms of quality delivered. And so this will be, we believe, a fascinating way to learn about different methods of regulating this system. Of course, there are many other questions, because it’s quite arbitrary. Why 75% on price and 25% on past performance? Why those specific measures of past performance? This is really a broad area, and we have several interesting projects, mostly with Giancarlo Spagnolo, that we are pursuing in this area. On a slightly, still connected, but different part of my ERC grant my current research focus, is on the area of corruption, and the problems of criminal infiltrations into public procurement auction, and these are projects with Ray Fisman and Paolo Pinotti.

 

Thank you very much, Francesco, it was a pleasure having you.

 Absolutely, same for me.

#9 - Franco Peirone (University of Piemonte Orientale)

How can we minimise corruption in public procurement? A look into the USA, UK and Italy

 

 

Interview with Dr Franco Peirone, a Postdoctoral researcher at the Department of Business and Enterprise at the University of Piemonte Orientale in Novara, Italy. Franco’s carried out his doctoral research on corruption in public procurement and remains an active researcher in this area. It is no surprise then that the topic of the conversation is corruption in public procurement, in particular the experience in the USA, UK and Italy.

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Transcript

Thank you very much for accepting, and also thank you for accepting to speak at such a late hour. It’s almost like, as you said, a late night David Letterman Show.

It’s true, but it’s good.

Let’s start with a short introduction about yourself and your PhD research.

I started my PhD research at the University of Turin. Everything hasstarted during the economic crisis in 2011, I was just come back from the Maastricht University where I spent a period within the Erasmus Program, and the focus on Italy was really high, because everybody was scared about Italian historical deficiencies, such as corruption or inefficiencies in the public sector, so I tried to discover what really went wrong in the Italian public sector, and I decided to draw my attention on public contracts and corruption. To this end, I decided to focus on anti-corruption systems and particularly on an anti-corruption system that really works well, as the United States was, and for this reason, I spent a visiting period at the George Washington University under the supervision of great teachers, as Professor Schooner and Professor Yukins, and there I developed some conclusion about corruption, public procurement and public policy.

Once I came back to Italy in 2014, I was able to compare these two anti-corruption systems and focus more on corruption in public procurement. What does it mean? Which kind of frame we can think about it, and which is going to be the next direction of public procurement and anti-corruption tools? My PhD thesis, at the very end, really focused on compliance and ethics programs. They could be considered a broad and flexible anti-corruption tool. It is really interesting that anti-corruption programs, as compliance and ethics programs, moved from one legal system to another one, from the United States they have been spread all around the world and they have been implemented in Italy, in the United Kingdom, in Germany as well as in Japan and in Australia. It’s really interesting also noting that anti-corruption programs have been moved twice; there has been a double legal transposition, for instance, in Italy. From the United States to Italy, and from the private sector also to the public sector. So now we’ve got compliance programs both in public and in private sector in Italy. 

Let’s focus for a minute on those compliance programs. What do they entail? What’s included in them?

Compliance programmes are an interesting topic, because they bridge together criminal law, administrative law and public procurement law. Compliance programs were born in the United States legal framework for avoiding the corporate liability in case of an employee misconduct. The legal assumption at the basis of compliance programs is the criminal law principle of corporate liability. Due to that, if an employee commits a crime, he acts on behalf of the corporation, and if the crime can advantage the corporation itself, also the corporation has to face a trial. Corporations are therefore held accountable for the crimes committed by the employees unless an effective and compliance programs is implemented. To this end, a compliance programs consists in a set of tools such as code of conduct, training programs, auditing, reporting, disciplinary measures, directed to prevent and to repair the employee misconduct such as corruption, for example. By criminal point of view, a criminal law point of view, by adopting an effective and compliance programs, corporations may demonstrate to have used all the force needed to prevent misconducts or crimes such as corruption.

Do you apply the compliance programs before the crime occurs, or after the crime occurs as a means to reduce the impact of the crime?

Well this cuts in both ways. I mean, having a compliance program is both important having ex ante, that is before the crime is committed, because in this way you demonstrate that the crime has been committed by one employee of your corporation, but you have adopted all the needed preventive measures, but you can also adopt after the crime has been committed, so in this way you can demonstrate that you have adopted all the measures needed to repair, such as affronting payment to the victims or collaborating, cooperating with the prosecutors authorities. In this way, you can demonstrate to be a good corporate and obtaining lower fines, or be even absolved during the trial. It is interesting, this approach has been adopted by all the anti-corruption tools, all around the world, and there is no a great matter about which kind of responsibility the corporation is facing with. It’s no matter if it’s called criminal responsibility, rather than administrative responsibility, or something different. What is important is that all the anti-corruption legal tools take corporation as accountable for the crime committed, so all the corporations all around the world need compliance programs to prevent, or to repair, what has been done by its employees.

Okay, but what legal systems will actually demand the compliance programs? Is it just the USA, or do other jurisdictions also demand that?

No, lots of jurisdictions demand that. In Europe, it’s the case of Germany, Italy, United Kingdom, as I already told you. What’s important, and it’s really interesting is that the United States government has gone beyond. Interestingly they adopted compliance programs even in public procurement law, because through compliance programs, the United States government can select which kind of corporations it wants to deal with. The government use compliance programs as a benchmark for corporation reliability in government contracts. This has happened since 2008, the compliance programs have been implemented and required for federal contractors within the general legal framework for federal contracts in the United States. This is called responsibility determination. It’s a way to testify the integrity of the contractor, and for justifying this integrity, the government requires that a contractor has to have compliance programs.

So how is the assessment done? So you say it’s used by the federal government to assess a contractor.

Well, it’s done before getting the award, the Government looks if the corporation has implemented an effective compliance programs. The Federal Acquisition Regulations that are the general legal framework for this kind of government purchasing provides that before the award is done, the compliance program has to have implemented within itself a code of conduct, a training program, and especially such kind of measures that can prevent corrupting activities from the corporation in governmental contracts. So it’s the last stand that the awarding authority does before making the award. So in the United States the perspective is before evaluating the tender and just at the very end evaluating the contractor, because it’s a kind of cost-effective perspective. In this way, they are just going to give the award to really responsible contractors, who have implemented within themselves all the needed measures to prevent corruption.

So why don’t they do that at, let’s say, selection stage, like we have here in Europe?

This is a really interesting topic, and the legal thinkers from Europe and United States really discuss and argue about this. From their perspective, they do at the very end, because it could be perceived as an anti-competitive issue, stating who is a good contractor before and so will limit the competition if they will do this at the very beginning of the award selection, as we do in Europe. Another point could be that, by the United States government point of view, they think that in this way they can select the good contractor at the very end, and so it is really cost-effective because they just can pass to another contractor if the first one has not implemented the compliance program. It’s a really different perspective. I think the United States mood is not really the most objective way to award the contract, but at the very end it really complies with the law and ethics, because these compliance programs are really strict and the Governmental Accountability Office really takes care about integrity from governmental contractors.

That is the view in the US. You said before that the UK, and also Italy, they do have compliance programs. How do they compare with the American one?

Well, the implementation in Italy and in the UK have been really different, and I have chosen these two countries because they are both EU countries, but it’s a good way to show how it’s difficult and different implementing legal tools from a system to another one. Italy has adopted compliance programs in 2001 for regulating its corporate criminal liability, but the Italian implementation of the model has substantially failed, because several reasons. The legal tools for supporting the model, such as the code of conduct for the training programs, have been poorly realized in the Italian framework, and many Italian corporations have just copied the standard compliance and ethics program without adapting them to their specific needs, and last, the list of criminal conducts that the corporations have to avoid is really too extended. As a consequence, corporations cannot really focus on the white-collar crimes to prevent, such as corruption, and so the deterrence effect is really low in Italy. Lastly, the model has not been used by awarding authorities to stimulate governmental contractors’ reliability. They have been totally ineffective in promoting the integrity in public procurement.

So in your view, what should have been changed in the transposition from the USA to Italy?

Well I think what we should do is linking more criminal law, public procurement law and administrative law - this would be really a good step in promoting integrity in public contracts, if each kind of contractor will be proven and tested by its integrity within the supply chain, and with its commitment to integrity.

It’s really notorious that all the Italian corporations really have great problems with managing integrity within themselves, and training its employees to towards ethics and compliance with the law. By a legal point of view, as I say, the Italian model is really complicated because it is referred to such a kind of not-criminal liability of the corporation, because there is, after all, the criminal law principles that a corporation cannot be sanctioned by criminal sanctions, but must be sanctioned otherwise. This really shows that the legal principles can hinder the effectiveness of compliance programs. As I see, otherwise, as we were mentioning, the UK government has implemented the same tool in a really effective way, because they did not stick on with really difficult transposition of such kind of corporate liability. They have just set up a new, completely new criminal law provision that is the “failure to prevent bribery”. If a crime is committed within a corporation, the corporation is sanctioned just for having failed to prevent a crime, such as bribery, within themselves. This has been done within the Bribery Act of 2010 that has been considered the most advanced legal tool in fighting corruption, and the United Kingdom government have done really well, because it has also stimulate the corporation to commit themselves towards integrity, for example promoting the whistleblowing against other corporations or promoting the self-reporting during criminal trial. All this stuff does not exist in Italy, because we move in another, totally different criminal law context, which does not allow this kind of cooperation among corporation and public authorities. The overall approach in Italy is really bureaucratic, it’s really rigid, while in the United Kingdom, as I’ve seen, as I’ve studied, it’s really flexible and proactive, and it really helps to ensure integrity within the public and private relationships.

My question will then be, if that is the case, how can you be sure that the UK model would work in Italy well, when the American one didn’t?

 This is a really good question. Well, I think that the path, which at this point will be operating at the EU level, should be settled while implementing the new EU Directive on public procurement. We know that corruption is a really important point, as everybody has noticed, within the directive, because as we say at Article 57, we see corruption as a ground for exclusion, it could be considered corruption according to the national law of the tenderer, rather than the national law of the awarding authority, rather than the EU directive, the notion of corruption in directives on internal security, or according to EU convention against corruption. So the focus on corruption is really high. As I see, Article 57 could represent a step for all the awarding authorities in all Europe to evaluate corruption. So commitment to integrity for the corporations, no matter what the legal framework is at the basis of the national legal system. By operating at the EU-level the awarding authority, they can decide themselves if the corporation has effectively implemented a compliance program, if they have effectively committed towards integrity.

In your view, what should change at the EU level?

Well at the EU-level I think that it could be and should be improved the function of compliance and ethics program. Article 57 of the new EU directive really provides the possibility for the corporation and for the awardee to adopt the self-cleaning measures, but these self-cleaning measures have just been viewed until right now as a general provision that could be considered as an exception to exclusion, but cannot really push a corporation to act with integrity and complying with the law. I think Article 57 is an interesting starting point, but should be really implemented by the national legal system, giving more broad scope to compliance programs and where it is possible being required to the government a contractor as actually happens within the United States legal system.

Awarding authorities at the EU-level have a real important task right now. Being able to evaluate if a contractor could get the award because it complies with integrity and at the same time not being too much strict in evaluating the corporation if it’s not complying with a traditional scheme of compliance and ethics programs, because we know that these awarding authorities operate at a really low level, so they have not the same human resources or technical capacities to debar a company as happens in the United States legal framework. So it’s a really hard task, but I think the commitment to self-cleaning within the compliance and ethics program is the mood needed to merge together awarding authorities and corporations towards integrity within public procurement.

Do you think that should be then at the contracting authority level or at the member state level, or even at EU level? Because it’s one thing for you to, let’s say, block a company that has been accused of or been found involved in bribery actions as a contracting authority. It’s something different for the company to be sanctioned at the member state level or even at EU level.

Well, as I see, I think that what we can call the responsibility determination, I mean, verify if a contractor is good for getting the award, could be done at the awarding authority level. So each kind of awarding authority could be done for itself. Usually the awarding authority is the authority who knew more about the contractor, so should have the needed discretion for giving an award or not, according to Article 57, to the grounds of exclusion. What shall be instead done at the Member State level, rather than at the EU level, I think should be the debarment or the suspension of the corporation. In this case, a company, the corporation that has been debarred from an awarding authority, from a single Member State state, should be excluded from all the contracts from all the European Union awarding authorities. As I said, this is the same way they have done in the United States legal system. If a company has been debarred, let’s say, at the federal level, the same company cannot get an award at the state level. The debarment is automatic. So, as I see, we have started doing responsible assessment and it should be done at the awarding authority level without prejudice to the corporation, while a serious administrative decision as debarment it should be done at a higher level, maybe from a higher authority which should have extraterritorial jurisdiction, I mean operating in all the European Member States.

Very well. Speaking still on corruption, what should happen to contracts where corruption is found? Public contracts? 

Yes, sure. This is another topic I’ve dealt with during my PhD thesis, and starting from the United States legal system that has been my main reference, it’s really interesting noting that within the United States legal framework, the awarding authority has a really large discretion to terminate the contract if it’s proven that there awardee obtained the same contract due to corruption. There is no need for a criminal conviction for terminating the contract. It’s enough having a decision from the same awarding authority that certifies that the corruption has happened within the award. Nonetheless it is interesting noting that in many cases, especially in the most expensive contracts, even in front of corruption, awarding authorities prefer not to terminate the contract and going along with the original, even if criminal, awardee. This is the notorious case of Boeing, the case is also known as the Darleene Druyun Debacle, wherein a public official has manipulated the score in favour of Boeing and the company got the award. Well even in front of corruption, the needs of the military sector, in this case, the overall interest of the government, always prevail, and so the awarding authority preferred to continue the contract and not to terminate it, and continue with the previous awardee. I would like to underline that this happens also in Italy and also in other European Union Member States. The public interest to fulfil the contract always prevails. This also happens within the Expo case, that is a big case of public procurement corruption in Italy.

Which Expo? The Expo in Milan?

Exactly. Within Expo event in 2015 there was a big corruption scandal about the award of the public works for building the main pavilion, the main infrastructure in Italy, and even if it was possible to terminate the contract since they awardee had corrupted the award commissioned for such kind of public works. The supreme admissive judge in Italy decided the contract was to put on a compulsory administration that means that there is a legal expert coming from the State that managed the award, but the contract had not been terminated because the governmental authorities prefer not, they never want to terminate the contract, and this at the very end penalised the honest contractor because even in front of big corruption, they never get the award.

There are two different things here. One is a public interest in getting the job done, and I suspect that more often than not the contracting authorities don’t really care about the corruption, they just want to get the job done, because at the end of the day, that’s where their interests lie and also that’s where they’re exposed in terms of reputational risk. Whereas the corruption, it’s almost like, okay, so they’re corrupt but they’re still doing the job, so you need the job done. So it’s probably underplayed by the contracting authorities, in the decision makers’ heads, in their own framed set of values.

I absolutely agree with you, exactly.

So how can we change this?

Well, I have similar view to this regard. I mean, what could be done and what should be changed in this way it is preferring to terminate the contract and going on with another award. There are several contractual tools, they are called by Transparency International integrity pacts. Through these paths, adopted within the award, it is possible to provide that if the awardee has corrupted they award commission, and so the overall award has been corrupted. It’s possible to instantly terminate the contract and get the contract to the second economic operator within the award or to the other competing operators.

The thing is, it’s easy to do that if you catch the corruption, or you find the corruption and you’re that certain about it, which is not always easy, but if you do it straight away after you awarded the contract. If you’re six months or a year into the contract, you simply may not have the ability to go back to the second contractor because they may no longer be interested or have the resources to undertake that contract.

I totally agree. I think in this point is you really need better communication between criminal law and procurement law, because as we see in Article 57, for instance, we always need a final judgement about criminal conviction of corruption, and we know, at least in Italy, this really takes a lot of time, providing a final criminal conviction of corruption. What should be done, as it’s done in the United States, it is just relying on an initial decision by the awarding authority that something has gone wrong, something has been corrupted within the award, and so not waiting for the criminal conviction but evaluating if the integrity of the awardee is questionable, this could be done even at the EU level according to Article 57. It provides that a tender may be excluded where its integrity is questionable. I think this could be done also once the contract is awarded, and if the integrity of the awardee is questionable, terminate the contract as it’s possible according to Article 73 of the same directive, and so letting the second economic operator scored get the award.

Again, that still depends on a very quick finding that the tender is questionable and the tender is subject to those problems.

Absolutely, and I think this is far more better than waiting for a criminal conviction. It’s always a the decision that the awarding authority should take timely and should take, of course, with hearings and notice and comments from the awardee. Well the other path is waiting until the contract is done, discovering after that the corruption has been made, and then giving relief to the second economic operator, and this is going not to promote integrity with public procurement, but it is going to be an economical and a financial loss to the awarding authority: also to give relief to the second economic operator. So the damage is doubled at the very end. You have paid a corrupted contractor and then later you have paid an honest contractor because he didn’t get the award that he had deserved, by the way.

Very well. I think we are up to the limit of our time. Thank you very much, Franco.

 Thank you very much, Pedro, it was really interesting and thank you for your time.