#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.



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.



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.



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.

#19 - Stephan Litschig (Graduate Institute for Policy Studies)

Does an increased audit risk affect corruption practices?


Interview with Stephan Litschig, Associate Professor at the Graduate Institute for Policy Studies, GRIPS, in Tokyo. His research interests are in the area of development, public and political economics. His work has been published in the American Economic Journal: Applied Economics, the Journal of Public Economics and the Journal of Human Resources. He also serves as an Associate Editor of the Journal of Human Resources. Today’s talk is focused on his joint paper with Yves Zamboni called ‘Audit risk and rent extraction, evidence from a randomized evaluation in Brazil’.




I find your paper with Yves Zamboni very interesting and what I would like to know for us to start the conversation with was what led you to carry out this research.

The motivation was that we know that let’s say anecdotally, corruption is very prevalent in many countries but it is much less known what the people could do to reduce corruption. And by corruption what I have in mind in particular is in public procurement for example that public officials will take kickbacks in return for steering the contract to certain suppliers but I also have in mind a broader concept of corruption which is rents in the delivery of public services where the fact is that in many countries public servants don’t show up for work, teachers for example or health service providers. So the basic motivation is just that we know that procurement and service delivery in general could be better and then the question was can we change this by increasing the scrutiny that comes from the top basically, increased audit risk.


And why doing this in Brazil specifically?

So this was an opportunity I had come across the fact that in Brazil they have this peculiar way of auditing local governments which is done at random so there’s literally a lottery that is done that’s actually on television and so that, what that gives you is that it gives you comparable data on audit findings across Brazil, so for a large number of municipalities, and then I basically got in touch with this agency and wrote to them and proposed this and my current co-author was the one who picked it up and said “look, this is interesting, let’s do this together”. So it’s basically the fact that in Brazil they were doing a particular interesting way to conduct these audits and what we did with Yves we designed this study on top of this existing lottery where we added another layer that basically put aside a hundred and twenty municipalities during one year into a high audit risk group so these guys knew that, basically in the control group audit risk per year was something like 5% but if you were in this high audit risk group you had like a 25% chance to be audited over the subsequent year.


How was that selection done? Was that selection done by you or specifically was that a purposeful sampling or was it done at random saying “you guys in this year actually have a higher audit risk”?

Yeah, exactly. So it was purposefully at random if you want so, you know, they were already doing this random sampling using a literal lottery, like it’s the same machinery that was used for a money lottery in Brazil, that was very popular so they used the same machines, then we also used those machines to set aside a group of municipalities that, because it’s a random sample should have all observable and unobserved characteristics the same as those that were not selected. So then the idea is that if later on once the auditors go in and they find differences in the incidence of irregularities of matters of corruption this has to be because of the only difference between the two groups which is that they were exposed to ex ante higher audit risk.


And did they know that in advance, so were they informed?

Yes. So that’s an excellent point. So the overall lottery that was regularly done by this audit agency CGU was very well publicized so in that sense we could assume that they knew about it but to make sure that those that were put into this extra scrutiny high audit risk group, that they were aware of that, in addition CGU also sent them a letter and said “by the way, for one year you’ve been selected, you are one out of a hundred and twenty municipalities and at the end of the year we’ll take thirty of you to be audited according to our usual audit procedures”. So they did also receive a letter.


In terms of communication of information to those municipalities, so you guys sent a letter but if you’re looking into corruption to the municipality you’re looking into probably I would suspect multiple levels within the organisation, so did you expect the information about the higher audit risk to filter from the top down or just for that information to remain with the person or the persons that received it?

So we were agnostic about that, so the idea was that perhaps, so the mayor for sure would receive the letter…


Sure, yeah.

…but then some of the people in his cabinet would receive it, then, whether he would communicate this to, down to the health offices and all the teachers we were sort of, we didn’t want to micromanage that so we just said “okay, let’s just send this letter”. The key thing that changed was that objectively they were in a high audit risk group so we thought about this but we thought we don’t want to make this too artificial in a sense. Suppose the government would increase the audit intensity, right, they’re not going to send around lots of letters, they’re just going to do it, they might inform some people but we wanted to keep this as real as possible. But it’s true so what that means is that we don’t know how far the information travelled, that is a limitation.


In terms of findings, what were your main findings?

So we find that when we look at procurement outcomes we find that there is a reduction in both the share of the amount of audited resources that has evidence of corruption, so both in money terms but also when we look at it at the procurement process level and there’s something like 1,600 procurement processes that we have the data on and we find that at that level as well there’s a reduction in the probability that auditors find evidence of corruption. Now what does corruption mean? We basically use, so these auditor reports have been used before in the literature so we use existing corruption codings and one unambiguous example would be the auditors go in and they find that the firm that, you know, received the contract in fact doesn’t exist. So that [Pedro laughs], it’s scary but these things happen, you know. Other…


I know.

…other things that, right. Yeah, yeah, well, you know, some people are very surprised but I guess you’re more of an expert in this, in this area. But yeah, so other things are when they go in, the auditors go in and they find that the government paid more than what they had agreed to in the auction basically, without gaining any other compensation.


I was laughing because a few years ago in Portugal when we started collating the contract data, some people that I know in Portugal they cross-referenced data from that particular database, the contract database with information from the companies registry and they found that certain companies were being awarded contracts even before they existed. That’s why I laughed because I’ve seen that kind of stuff happening before!



So it’s not only Brazil, yeah.

No, I’m pretty sure. You know, so this, you know, I’m getting ahead of myself here but I think in terms of future research there is a lot to be done here, just sort of, just in terms of measuring how frequent does that happen in different countries in different contexts, I think we just know very little about that. And, you know, one reason for that that we know little about it is obviously data, data problems of merging different datasets but the other one is that in most countries the audit agencies would target sectors or firms where they think there’s a high likelihood of corruption and you end up with a very unrepresentative sample of things of what’s actually, what the state is in the overall country. The nice thing about Brazil is that because of this random sampling what we have here is basically a, you can think of it as a random sample so if we find for example that the incidence of corruption is something like let’s say 40% amongst restricted modalities, that’s one of our main findings, we can sort of confidently say that’s more or less what’s going on in the public sector at a local level in Brazil, as opposed to, you know, this reflects the tip of the iceberg or something like that. But, you know, to do that you need the random sampling and that’s, no other country in the world does that so if you want to do comparable studies across, just, you know, compare the incidence of corruption across countries you have to convince public officials to do things in a random way and that’s often very tough. But that’s, in terms of future research that’s sort of where I think this could go.


That’s one of the point that I would like to drill down a little bit further which is in terms of processes, which processes have you found out that were more likely to generate corruption or have corruption arise from them?

Yeah, so that was an interesting find is that for the first time in our study we have the detailed process level data which means that basically that process is it’s a given purchase, they vary a lot in terms of magnitude but what we know for each purchase is was it done through a modality that restricts competition in some way or not, which is an open auction and you specify in the call what you want and then anybody can pretty much apply. So we group modalities, there’s more than those two but we group them into two and the finding is pretty stark, is that, amongst let’s say public procurement auctions the incidence overall of corruption is much lower, something like 20% and it doesn’t change at all, whereas amongst modalities that restrict competition and give more discretion to the public official, the overall incidence in the control will be something like 40% and there we find the reduction, it only occurs there, something like 15 percentage points. So it’s only the modalities that restrict competition, that afford more discretion that, where this corruption seems to be going on and where it is affected by higher audit risk.


Does Brazil have financial thresholds in terms of determining which kind of modalities you’re going to use, if you’re going to use the auctions or you’re going to use the restrictive competition ones?



Or is it just done by case-by-case scenario?

No. There are thresholds and one of the things that the auditors look at and that we also, that is part of some of our corruption measures is in fact whether they basically fraction the purchase to avoid those thresholds. So there are thresholds.


Because that is fascinating, especially, or even in Europe because the financial thresholds in Europe are quite high so you only apply rules for contracts above 100 and something, for goods and services 100 and something thousand Euros if I’m not wrong or more, or even more if you’re a local authority. And I’ve always thought that it was not a very good idea, especially on corruption grounds but I’ve been writing about that area over the last few years and I’m going to revisit it again and you’ve just given me a new piece of the puzzle for me to work with which is actually where there is more discretion for public procurers we are creating the conditions to generate more corruption or at least make corruption more likely?

So that’s what our findings suggest for the first time that at least in Brazil in this particular context this discretion tends to be abused, okay. Now how externally valid is that? As you say I think that’s…


Yeah, we don’t know?

That’s research, we don’t know, that’s right.


Okay. But in that sense I’m writing about these ideas and obviously this area of public procurement from a legal perspective so I can afford the limited availability of data to try and shape my thoughts, although obviously I want it to be sustained by evidence and…?

Mm, and of course, of course.


Right, okay. So I’ve got a few extra comments for you.

Sorry Pedro, can I, because you asked and I’ve been going off topic I think so the paper is about procurement but if you don’t mind?


Yes, sure.

One of the things we also look at is this idea that when you increase the audit risk service providers are more likely to actually show up for work, okay. So there’s, it’s not corruption in terms of stealing but corruption in the sense of you’re paid to do a job and you don’t do it so, and the reason we can do that is because the CGU audits they include that as a standard procedure for them to basically also try to assess whether for example in health service delivery the officials, and these are going to be doctors and nurses but also going to be health workers that are supposed to visit the health facility users preventively, so the idea is that it’s cheaper to prevent than to cure but to, the prevention requires that these guys go out there and visit the families to find out whether someone is ill so that the prevention can actually take place and that’s costly of course for these agents. So what we looked at there or what the auditors looked at is they ask a random sample of potential service users in a given area they make household visits and they ask “are you receiving these visits from these preventative healthcare workers?” They also ask “when you go to the health post is it open when it should be open and when you go there is the doctor there?” These kind of questions so, and they ask some questions in control and treatment municipalities, okay. Now what we find on that front is that although in the control group there is not perfect performance in the sense that people do report that the health post is not always open as it should, the doctor is not always there, the increase in audit risk has no effect on that performance, on that compliance with your stipulated job requirements. In stark contrast to what we find in procurement, we find this reduction.

So what we, we were puzzled by this, it was we didn’t expect that but then what we do in the paper is we obtained a standard economic model and we see whether we can rationalise these findings. And one explanation for these results could be that when you get audited in procurement basically you can’t argue with those findings, you know. If the auditor finds that the firm that you awarded the contract to doesn’t exist there’s not much more you can say, whereas if the auditor goes in and he finds that people report that the doctors were not in the health centre when they should have been, the doctors are going to say “no, I was there” and the audit finding doesn’t generate that kind of hard evidence that would make people work. So we think that ex post we can rationalise our findings so the fact that health service providers might just not be worried by the audit because they can always say “well no, no, I was there” or “I was in another room” or “I was, I don’t know, I was visiting a family out in the field” so it just doesn’t generate the same kind of evidence. And so that, you know, what that, it just, I guess it also, it’s not, obviously it’s not clear how general the finding is but it raises this issue that the quality of audits can be useful to monitor certain things but not others. And then that has implications for audit design so perhaps the auditors can save these visits because at the end what’s being generated is not really useful that much.

Anyway, so I just wanted to mention that. I know this is a procurement audience but because the increased audit risk happened for everybody in the entire municipality and because the auditors look at these things as a matter of routine we thought that it’s useful to look at that as well, even though it’s a null result we think it’s interesting.


That is interesting and I was wondering as I was listening to you if it may be that the consequences are actually as far as I know very different in case you are found involved in corruption, actual corruption in a public procurement process or just not doing your work properly?

You’re exactly right. So there’s an additional reason which is that if you’re found stealing from any public procurement you can basically go to jail, whereas even if you’re convicted that you were shirking on the job you might lose your job at most.


At most, yeah.

You know, the sanctions are just less as well. So you’re exactly right, that will be another explanation. To be fair there’s also the explanation that as you said earlier, right, information might not have travelled to those guys, could be that the…


They did not know?

They didn’t know they were not aware of this audit thing and for them they were not treated in some sense. And, you know, we won’t know [laughter] so…


I’ve got another question here, a little bit more specific is that I think it’s on page 11 or 12 that you say that corruption or at least stealing less today does not imply that more can be stolen tomorrow, so you argue that because the federal funds cannot be saved for periods longer than the budget year that there’s no possibility that someone will not steal today so that they can steal more the next year because they’re just going to lose the budget?

Uh huh.


I agree with you, I think that is true but I was wondering if you found something within, any difference within the same budget year? Let me explain, what I’ve seen working with public procurement officials in different countries is that sometimes when we get close to the end of the budget year you still have some of your budget left and you need to spend it, you need to spend it and you don’t usually spend it in the best way possible, so that would increase the likelihood that someone would be tempted to take some money or be corrupted in one way or another. So what I’m wondering is if within the same budget year or fiscal year have you seen any differences or potential differences in terms of one is more, when is corruption more likely to occur?

Mm. It’s an excellent question but without data…


Without data, yes.

We are bit limited on that because we don’t know basically when the purchase was decided, you would need monthly data in some sense, right? You need to know when was, and that we just don’t have. I think for other countries, I think for Chile there’s actually a study that basically shows what you’re saying. Maybe you had that study in mind? But so …


No I don’t, I don’t. I would like to know more about it so if you know it just give me the information afterwards and I’ll look it up?

Yes. I don’t have the authors off the top of my head right now but this has been empirically documented. Now I think what they look at if I remember correctly is just, do they, so I’m not sure they actually have audit findings on these transactions, I’m not sure if they can say that it’s more corrupt if it’s spent towards the end of the year but things do happen that are special at the end of the year, that much I remember.


Okay, very well. One final question, next steps and future research plans in this area, do you have any? Do you think that you’re going to still revise the paper one more time or…?

Well the truth is that it’s not published yet so I’m sure I’ll revise it, that’s just, but that’s nature of the game and, you know, in fairness to the referees it usually gets better. But the paper is what it is. What I do find though is that academically people tend to, at least the referees I’ve got, they often say “well it’s not really surprising, we already know that an increase in audit risk will reduce corruption, it’s sort of obvious” and I think that’s just wrong and I think it’s actually, it hurts public policy because you just assume these things and you don’t study it. The fact is that we don’t, we know very little about the incidence of corruption in procurement and service delivery more generally across the world and then what works to reduce it, if it has worked in one context is it going to work in another one? We just have no idea. So I, there’s the, the short answer to this is that I think I’ll continue working on this topic trying to see whether more monitoring or other kind of monitoring or even also incentive schemes can improve service delivery and reduce corruption but I’ll have to find willing partners and that’s, you know, that is the, you have to work, to do this kind of stuff you need connections with governments and that’s, that is sort of the major constraint, okay. So I can say I want to do that, the question is going to be am I going to find governments that are willing to do that kind of stuff and I can just, all I can do is try. So that’s one.

Another area where this can go where it’s a little bit, a different question is the fact that public procurement has in recent years moved very much online so e-procurement where from a monitoring perspective what’s interesting about that is that there is much more information now about let’s say the awarding stage, right, so you can basically go online and see what kind of contracts are available for which you can bid, you can see afterwards, you know, who won, so there’s just much more transparency in the entire awarding stage and I have a project with two other co-authors where we try to see when, under this increased transparency in the awarding stage corruption or irregularities get shifted more towards the execution stage because in order to know whether the price agreed was actually the price paid or whether the quality was according to what was agreed or not, whether it was substandard quality in the execution, you actually, you still need an audit. This whole movement of e-procurement hasn’t changed the fact that we know very little about what’s going on in the execution stage and there’s our worry that just the focus of corruption might shift towards execution. So that’s just, you know, putting sort of a question out there that we’re working on but we haven’t, I don’t have any results but I think that’s, in the future that is interesting, So less or increased transparency at the awarding stage might actually shift, just shift things around and overall towards the execution and that, and overall you might not get much of a benefit. So that’s a worry that we have and we want to investigate that.


That’s a very good couple of points that you’ve made there for us to conclude the show on. I would just like to say that I agree with you that the more transparency that we have during the awarding stage, the more likely it is that whatever, let’s call it irregular behaviour or illegal behaviour taken by agents is going to move elsewhere. You are right in looking at the execution stage because execution stage unfortunately so far has not been subject to as much scrutiny as the award stage and that for me is a mistake. It’s a big, big mistake in terms of policy and I’ve been against that view of procurement, that procurement is only the award stage and not execution for many years. On the other hand something that you may not be aware of is that at least in Europe under the new EU Directives it’s now possible in variable terms unfortunately in my view for contracting authorities to have conversation with suppliers even before they open the award stage, so that means that there’s another, there’s another moment where corruption can occur which is actually before the award procedure. So even if you have let’s say an open procedure, so what you guys would call an open auction for example, if you have an open procedure, very transparent, very clear, you look at it, just at the procedure and you will not find any corruption but you don’t know that for example one of the bidders was told in advance what was going to be included there and for example shaped the actual award criteria.

Right, so the buyer can tailor the call to whatever they, and you’re saying this is legal in Europe?


What I’m saying is that it’s legal nowadays for the contracting authority to have conversations with suppliers before it launches a tender and the way that it is drafted in the directive it’s very, very liberal and way too much liberal for my taste.

Interesting. But so is this a change that’s happening?



Or are you, ah.


Yes, it is a change. I mean economic operators know but contracting authorities have been asking for this for many years, they say that if they are forced to use an open procedure, say an open auction, that is very difficult for them to know in advance what they really need and how to spec it out correctly so they need to talk with the market in advance, so if they talk with the market in advance the procurement is going to be better and I just say bollocks, you’re just creating the conditions for undue influence to occur. But that’s another area that is coming up at least as a potential area of research in corruption in public procurement.

Well very interesting. Thanks a lot for letting me know. Well, you know, let’s keep in touch. I mean clearly I have a lot to learn about what’s going on in Europe.


Okay. Thank you very much Stephan, was a pleasure talking with you.

Thanks Pedro. See you.

#16 - Guilherme Lichand (Harvard University)

Can a  little bit of corruption be good for your health?


Guilherme Lichand's Harvard page and his job market paper.



It’s great to have you here Guilherme. Your paper it’s fascinating and thought provoking. Why did you decide to look into the issue of corruption in the health sector and its potential downstream effects?

Great. The idea – not only in health, but more broadly – is that while we have increasing evidence of what tools can most effectively fight corruption (in particular, audits have been shown to significantly decrease missing government expenditures), we have much less credible evidence about what is the effect of those tools on the outcomes that corruption is supposed to detrimentally affect. The distinction matters, because bureaucratic performance has multiple dimensions; rent capture is just one of them. On the other dimensions we have, for instance, the quantity and the quality of public goods’ provision. So while, on the one hand, limiting the extent to which bureaucrats can capture rents should mechanically increase resources flowing towards public goods’ provision, on the other hand it might decrease incentives for bureaucrats to exert effort on those other dimensions. Theory predicts that the implications of deterring corruption on public service delivery should be ambiguous, and, hence, we try to understand whether deterring corruption helps or hurts public service delivery. That’s the prime motivation on the paper.


Any reason why you picked Brazil over any other country that you could have done this research on?


Brazil introduced an anti-corruption program nationally in 2003, so it provided a great opportunity to try to answer this question. First, because the programme was introduced right at the mid-point of the Mayor’s political term. The term is from 2001 through 2004, and the programme was announced exactly in January 2003. Second, because these audits are retrospective. Basically, when auditors go there, they follow the paper trail of every investigation, at least up to three years prior to the time of the audit. This way we have the data we needed to try to answer this question. That also takes us to the point of why health. The answer is, first – given the audit data that we needed to code – because we needed to restrict that attention to a particular area of public policies, because it is a huge amount of data. Second, because of outcomes – availability is very good at the municipal level for health. We have a lot of indicators at the municipal level that are measured for all municipalities every year, and that was really what we needed in terms of data requirements to try to answer this question.


What's the main finding of your paper?

On the one hand, we find that the program greatly reduced corruption – and by this I mean procurement manipulation, off-the-record settlements with vendors, and resource diversion. These kind of problems, according to the audit reports, are greatly decreased by the introduction of the program. But on the other hand, what happened is that the program also dramatically deteriorated the quality of health indicators – and by this I mean hospital beds per thousand inhabitants, immunisation coverage, or household access to piped water and proper sanitation, in comparison to other health indicators that involve much less procurement. So to anticipate the results, what basically happened is that, it seems, we thrown the baby out with the dirty bath water. The programme was a major institutional improvement in terms of transparency, but by focusing so much on corruption – both in terms of public opinion and administrative punishments –, what seems to have happened is that spending fell by so much that corruption per dollar spent has actually increased after the program.





So let’s break that down into sub-questions or comments. So the audit programme did reduce corruption so you guys were able to measure that, right, okay, so that is one element. So in terms of the let’s say, first degree objective of the programme it worked as it was supposed to work in terms of reducing corruption at least in absolute levels if not, as you were saying, in relative levels per spend.

So when we look at the percentage of investigations that were coded as corruption, looking at these audit reports, indeed it is the case that the baseline incidence of corruption is decreased by half. It is a major effect. Just to give you a sense, among those transfers that involved a lot of procurement – we look at how programs earmarked to specific spending, like buying hospital beds or contracting hospital reforms, those sort of transfers –, before the program, about 37% of our investigations were coded as corruption, some sort of the problems that I previously mentioned. After the program, that rate falls to about 12%, and this is the same rate for those audit transfers that did not involve procurement at all – like those earmarked to pay wages of doctors or local procurement staff. So, basically, the idea is that, as you said, if you just focus on corruption, then the program would do exactly what it was supposed to do: every investigation now had much less of this procurement problems that were very prevalent beforehand.


But on the other hand?

Yes, on the other hand... before we even tried to look at the mechanism, if we look at the outcomes – because, you know, corruption fell by so much you might think that health indicators would become much, much better after this –, what we find is that these health indicators (comparing again these two sets of transfers: those with a lot procurement and those basically with no procurement) become significantly worse. Just to give you a sense: in a cross-sectional comparison, the magnitude of the effect is equivalent to losing between half and all of the support of the federal government towards municipalities’ health budget. Because municipalities depend so essentially on federal redistribution to be able to provide those local public goods, this effect might mean that they have no budget left, and this is consistent to the effects when we look at spending. After we found these effects on the health indicators, we wanted to understand the mechanism. What was happening? Why was corruption going down but health indicators becoming worse? So we looked at two other dimensions of bureaucratic performance. First, quantity – proxied by spending. What we find is that using the same strategy, differential spending across the two sets of transfers fell by at least 50% after introduction on the program. This effect is consistent with the deterioration of the health indicators. And just by residual, since corruption fell by about 30 percentage points (the percentage of investigation coded as corruption), and since spending fell by at least 50%, this must mean that corruption per dollar spent must have increased by at least 20 percentage points. So that’s where this figure comes from.

We also look at quality: from these audit reports, we can also look at implementation problems. We find that, basically, infrastructure problems abound, infrastructure is no longer functional (or high quality), and also medication stock problems abound after the program. Because you’re not spending, then all these problems are coming about and this is consistent with the overall story that (i) either because bureaucrats can no longer capture rents they have less incentive to exert effort in these other dimensions or, (ii) and this is something we might talk more about, these procurement guidelines are so complex and the quality of these local procurement staff is so low that it’s now easier just not to spend and blame the federal government for not transferring resources than perhaps running into a procurement mistake and being labelled as corrupt.


We’ll address that in a minute. There was something that I was listening to you and I think it’s important to probe a little bit further there as well, which is it makes sense that the outputs or at least a proxy for the outputs, would go down if spend goes down as your analysis show so, you know, fewer beds per a thousand inhabitants, worse outcomes in terms of immunisation or the availability of medicines, all that makes sense because you’re talking about the health budget and how public procurement is really in the health system work. What I didn’t understand was the relationship with the access to piped water and as well to the waste treatment so how do you connect those two elements? Because if I get it correctly, is the audit then to the whole municipality or just to the Health Department?

So these audits look at overall expenses, it’s just that within health and education they look at the whole set of transfers whereas in other areas they look at a sample of the transfers. But the thing is, there are some health programmes (in Brazil at least) that are targeted to improving the connection to piped water, the quality of water and sanitation, and so when we choose indicators we look at what indicators the Health Ministry uses for monitoring and evaluation.


No, that makes sense now, it’s just that I wasn’t seeing the connection right immediately because the other ones are obvious and that one I knew that there must be a reason there, I couldn’t just find it. In terms of your analysis, you’ve done something that I find very interesting, is that you decide to separate the analysis in accordance with different procurement intensity so you’ve looked both at procurement intensive processes and procurements not intensive processes if it makes sense, why did you do that?

So you know the program involves random audits. So one might think that you could just look at the effect of the audits themselves on corruption and on these health outcomes to understand whether the mechanism we propose makes sense. Now, one problem with this is that, although we can indeed do exactly what I just said, most of the effects of procurement might perhaps have happened at the announcement of the program, even before any audits actually took place. So to understand the overall effect of the program we have to resort to a differences in differences strategy. We can compare (because we have the retrospective data), municipalities before and after both the Mayor and the local procurement staff learned they could be audited – so that’s one dimension of comparison. But if we just did these over time comparisons, many other things changed in 2003, so this is not enough to really pin down the effect of the program. So the idea is to look within municipalities, to different sets of transfers: those that involve a lot of procurement, and those that do not. The idea is that, first, the program should have had a differential effect across these transfers. Because most of corruption is linked to procurement problems, it should have had a higher effect on those transfers that involve a lot of procurement. And second, any differential in corruption across these two sets of transfers should have remained constant otherwise. That’s the assumption for relying on this strategy to try to pin down the effects of the program. We also use recent nearby audits as a complementary strategy (because they are random) for trying to assess the same mechanism. Roughly, the effects that we find are consistent. So both the overall effect of the program and those of audits themselves are in the direction of decreasing corruption, but also of decreasing spending by so much the health indictors actually become worse.


Yes, okay. Speaking about the audits, are they really random, i.e., is really a lottery or is this that the official claim from the system for the outside world is internally they pick who they want to do the audit to?

That’s a good question. This program is a joint venture with the National Lottery, so the draws are in television. Every two months or so (at least in principle), about sixty municipalities were supposed to be drawn. The first papers to exploit variation from this programme were by Claudio Ferraz (PUC-Rio) and Frederico Finan (Stanford). They try to understand if these audits are indeed random, so they look at a broad range of variables, political parties included, and they don’t find significant differences. Each municipality has a 1% probability of being drawn, they do it in this way every draw. What we had to do involved an extra step: to show that not only audits are random, but also that conditionally on municipality’s characteristics, recent audits that happened nearby are also random, so that we can exploit not only if a municipality itself is audited, but also if a neighbour is audited, it this raises the perceived probability of you being audited in the future – out of a behavioural mechanism – to look at the effects of interest.


Yes, the reason I was asking this is because in Portugal theoretically you are selected randomly to provide evidence about your tax situation and it was claimed originally to be a lottery but I mean the same people were getting the letters from the IRS, the Portuguese IRS, every year so it was very clear quite quickly that there was no lottery involved. What I did not know is that in Brazil actually it’s really a lottery and it’s done at least apparently above board.


Right. So there are many oversight programs in place, some of which are not based on random audits. The state tribunals do a bunch of audits which are motivated by either some event or even by a private investigation, so it’s an overlay of different institutions. This program specifically is based on random audits, and that’s what makes it nice at least for the investigation in this paper.


Yes, it makes perfect sense because if it’s random it’s one less variable or one less bias slash problem you may have with the data that could be influencing you.



Very well, moving onto another topic which is how transferable is this finding or these findings to other areas of public sector that are also subject to procurement analysis of expenditure, particularly areas that are very procurement intensive like say, for example, public works which is always usually the one that comes to mind? 

Our thought is that there’s nothing really specific, it seems, about this program in Brazil that would prevent the findings from being extended elsewhere. First, this kind of bureaucratic politics through which the federal government transfers resources that would fund the provision of local public goods, with a local bureaucracy which is responsible for running procurement before these resources can reach their final users – citizens – in the form of these public services, is the modal workings of public bureaucracy in the developing world, it’s seems to us. And there is evidence from other settings that are very consistent with this findings. There is a paper, from 2015, in the American Economic Review, for instance, about a program in Nigeria, showing that when it monitored bureaucrats on several dimensions of bureaucratic performance then they exert less effort in those dimensions; they try to divert efforts to dimensions that are less subject to monitoring. This is consistent with this idea that whenever you have this layer – bureaucrats that must procure resources before they can actually reach citizens –, you are subject to this kind of tension between actually procuring / spending, on the one hand, and on the other hand, making proper use of public funds. So the only difference that I can foresee is when, in some settings, resources are directly transferred to the end users. There is a paper, from 2004, with data from Uganda, in which they tried to investigate the effects of a newspaper campaign aimed at ensuring that the federal resources would reach schools. They claimed that, in Uganda, before the campaign, basically the modal transfer to schools was zero. So most schools were getting basically nothing out of what they should actually get. After the newspaper campaign, then citizens put pressure on the federal government, these resources are really going to the schools and then educational outcomes improve. But there you see the difference: there is this layer of bureaucrats having to procure which is not present, so I think that explains the difference, in my opinion. In any case, wherever you have bureaucrats, the same logic should apply.


It’s very interesting for two reasons, the first one is that effectively its principal agent relationship issue that is at hand and one of the things that I have noticed that is mentioned on your paper is that because taxes are collected centrally but spent locally that there is less emphasis or less say pressure from the actual supposed beneficiaries and taxpayers in that local area to actually make sure that the money is well spent, which is the difference with Uganda, it’s a big difference.  

That’s right. I mean, in Uganda, perhaps, in this particular sense that it’s not raised locally so that citizens have a lesser incentive to pay attention to it, I think this part is exactly the same. It is just that when you put it on the newspaper, then citizens have a higher incentive to monitor. There, this makes resources get to the schools; and that is where they should get at the end, so you’ve already done the job. In Brazil, there are other papers that show that when you put these evidence of corruption in the newspapers, citizens punish politicians. There is a paper showing that the probability of re-election falls by about 30% after – comparing two municipalities that are equally corrupt, but one was exposed just by randomness before the election, and the other after it. So citizens do take this information into account in both cases. It’s just that, in the Brazilian case, this is not enough. In Brazil, the only way a bureaucrat can lose their job and go to jail or have to pay a fine out of their own pocket is through this program. So you can imagine how high the stakes are for making a mistake or actually capturing rents whereas the upside of doing your job right and making sure the resources are properly spent, currently, is very low. The rewards from doing a good job as local procurement staff are very low, there are no incentives for public service delivery but there are very high punishments for corruption now.


That’s very interesting and it makes perfect sense. Another point I picked up  was that you were talking about, from a developing world perspective, and saying “oh this is how we organise let’s say the health sector or the way that procurement is done in the development sector”. Having said that, I mean the same thing happens in developing nations, I mean, for example, here in the UK, thinking about the health sector in England you have a number of different authorities, Health Authorities, which are called Health Boards, each one responsible for one, two, three hospitals. In Wales you can have the same structure with different people. In Scotland as well, in Northern Ireland the same as well in an even smaller number and in the countries that I know, Portugal, Spain and to a certain extent France and Germany, there is also a big effort to try and put the decision, the decision making even in procurement as low down the chain as possible and as close to the citizens as possible as well. So, for example, in Spain you’ve got regions as you have the states in Brazil, and the regions have or are responsible for their own health sectors. So I think that if your findings are indeed transferable they can be transferable not only in a developing world setting but also on a developed world setting as well.

I don’t have much to say about this; what I can say is that what we find is consistent with an old discussion from the 1960s. For instance, Sam Huntington said that during the process of development of the US and the UK, corruption was one of the main drivers of development. Professor Steve Kelman, from the Harvard Kennedy School, very often in the media emphasises that perhaps we might be over-monitoring – paying too much attention to complying with too rigid procurement guidelines, versus you know, paying attention more broadly to the quality of public services. So, you know, from the paper, there is a limit to what we can learn about other settings, but I think it is consistent with the more general discussion here.


Yes, picking on that and moving to the next question, one of the things that came to mind as I was reading your paper is that the fact that the bureaucrats, the civil servants, know that they are being monitored or can be monitored and can be audited and hence the change of practice and corruption goes on but also the delivery goes down as well with it, it maybe that even if those agents are not corrupt by themselves the fact that they know they are subject to more scrutiny and more accountability actually raises the stakes for them so if they can avoid doing a procurement process that is deemed risky or could be risky, as you said, it’s a question about incentives, if they don’t have the incentive to provide a good service they might as well avoid the risk of getting the fallout from anything going wrong even if it’s not, you know, directly corruption.


I think you may be perfectly right. We cannot fully attribute the results to the fact that local procurement staff can no longer capture rents to the same extent, such that there’s just less incentives to do everything else. In our paper, we are not able to separate between the two stories. Indeed, from speaking to both auditors and local bureaucrats, these procurement guidelines are so complex and, as I said, the quality of the local procurement staff is so low, in comparison, that it’s just easier not to spend and put the blame somewhere else for the lack of delivery than to run this risk of being mislabelled as corrupt from running into a procurement mistake. So the general message is that not only perhaps we should refine how to balance these incentives, as I’ve said before, but also try to raise the capacity of these local procurement staff. With any capacity building program, we shall see have positive effects on both spending and corruption, if it decreases the likelihood of these procurement mistakes. And also, perhaps, we could redesign the program to focus on larger transfers, because if you think about the rational decision to capture rents, the incentives are really there regardless of the probability of being caught for the really large transfers. And these are the ones for which the scare effect on spending from the risk of being audited is not going to matter much. Basically, if you think what the program is doing... if there is this component of being afraid of running into a procurement mistake that is scarring bureaucrats out of very small transfers – for which they probably wouldn’t have been corrupt anyway and, even if they were, the consequence of that for the public budget would be very small. So there is a question there of the actual design of the programme and also of capacity building at local level that I think these findings raise.


Yes, I think those issues are raised and raised a lot at the end of the paper and it’s certainly something that echoes what has been argued here in Europe and you think that in Europe procurement is very good and full of, people full of capacity, that is not the case. Even here in the UK there’s a huge distribution in terms of the quality of the contracting authorities and also the quality of the people that actually deal with procurement on a day-to-day basis and in fact here in the UK with the budget cuts over the last five years or so,  procurement capacity has probably gone down in most places because they’ve lost staff, senior staff, and they haven’t been able to replace that senior staff. So it’s very interesting because when people ask me “Where should they save money?” I say, “Well you should save money in procurement certainly”, but probably the best way in the long run to do it is to actually up-skill your staff to make sure your staff is competent and can deal with complex procurement guidelines which are always in Europe as probably as complex as the ones in Brazil. So it’s not only a problem in Brazil I would say.

Right, it makes sense. It always comes to mind to me, it’s not only about having higher-skilled people in your staff, but also about having models for basic projects and everything. For instance, one phenomenon we see there, just anecdotally (and I’d like to document this), is that when a capital city procures a complex public work, like a school or a big piece of urban infrastructure, a lot of the other cities copy, procure the same.



Because they don’t really have the skill to write the terms of reference. This is a very complex thing. So this just comes to show that you could do more. Of course it comes out of not enough skill from these local procurement staff in these other municipalities to do the same on their own. But, also, if either the state level or the federal level provided these basic projects as a public good, then they could use as a basis for what they actually did. That’s also an easier way, and you have economies of scale in doing this. Of course, at the local level you cannot do it but that would be a huge contribution that the federal level, for instance, might do besides just trying to do small training programmes at the municipality level.


Well, speaking anecdotally as well here in Europe the same thing happens which is I talk with procurement officers very regularly and they will say to me, “Oh yes, we’ve been using this, let’s say, this template that we got from our colleagues in a Council down the road”, and I just say, “Okay, so what quality control have you done on that?” “They’ve used it so I suppose it’s good”, yeah, right, okay, so.

So imagine if the federal government provided this template? That could be a huge contribution.


Yes, I agree with you, it’s a good idea, I never thought about that in that sense, I mean there’s been some attempts to try to do stuff like that or a little bit like that but very much on an anatomised basis and not on a very centralised and very controlled basis which I think would be necessary. Another thing that I think it’s relevant for the discussion, some colleagues of mine who are in Wales at my previous employer, Bangor University, they looked into the procurement practice of three small Local Authorities, so three small municipalities here in Wales and they found 600 people with buying power so with the capacity to buy stuff and obviously they were subject to rules, some of them are internal to each municipality, some of them are national and some of them come from you know from the, what we call the premium directives but I just ask myself how will three small Local Authorities be able to up-skill all these people to make sure that they are good enough, they just, even if bringing into the level that they’re just average procurers. Or is it possible, it’s pretty much impossible and the only way I can see it, is that if you actually reduce the number of people that are involved in these processes and you increase to a certain extent the transparency and the monitoring to make sure that you are actually capturing the information.  

Right, that almost comes down to the organisational aspect of it.



It might involve a lot of people, because these municipality in Brazil might be very complex, with up to 20 different secretariats. And that makes sense, because they’re responsible for so many local services. But it’s true that it’s impossible that you would think that each of these secretariats are going to be equipped with the best procurement staff, so you should expect that perhaps the secretariat of planning might centralise all the best staff in procurement and everyone has to run procurement through them. But it comes down to systems, and retention, etc. And, you know, the discussion is usually not there.


I agree, I agree, I fully agree with you. Well our half an hour is over so I’d like to thank you for this very enjoyable conversation we had, it was great. As I said you’re the first one from economics that we’ve had here in the podcast and I hope you’re not the last one before we finish the series.

Great, my pleasure.


Thank you very much for coming Guilherme.

Thank you. 

#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.



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.


#7 - Mihaly Fazekas (University of Cambridge)

Corruption in public procurement



Interview with Mihaly Fazekas, research associate at the Department of Sociology of the University of Cambridge. Mihaly is pioneering the use of "big data" in social sciences research settings and is part of two major research projects: ANTICORRP and DIGIWHIST. You can find his personal webpage here.




Let’s start with corruption in public procurement, that is probably your biggest area of interest. How can we measure corruption in public procurement?

Measuring corruption in public procurement is usually a difficult and challenging topic, and a lot of people before, a lot of scholars and policy people tried to measure it and measuring it directly is still pretty much impossible. I don’t think we will get any closer to directly measuring, however, there are two avenues to measure it indirectly. The first one which has received much wider attraction in policy and academia is looking at people’s perceptions or reported experience which is good in many ways, as long as people have experience with that type of corruption, but in public procurement, you can ask companies but they’re unlikely to really reveal if they have been part of a corrupt scheme of not.

The only alternative remaining, and this is what I have done with a couple of colleagues around Europe, is to develop proxies. Proxies are indicators of corruption risk, so basically this means that we can track a range of characteristics of companies, individuals behind companies and contracting entities, also the characteristics of the procurement process, the tendering process itself which are not unknown for being associated with corruption. Now, of course, a lot of the characteristics which we are measuring could be also associated with non-corrupt problems such as low state capacity or simply just, you know, problem with conducting the usually really complex procurement process according to legislation. So it’s really the challenge of finding those indicators, those proxies, which rather indicate corruption than anything else, any other problem. So what we have done, for example, is coming up with a set of red flags highlighting the outcomes of the procurement process which are associated with public procurement corruption and linking these outcomes with the characteristics of the process itself so that the input side of the process to signal corruption together, so kind of measuring the input and the output. Now to give you concrete examples, starting from a conceptual understanding, so we understand corruption in public procurement as a restriction on open competition with the purpose of awarding the contractor, pre-selective bidder, typically the same bidder than they are connected bidder over and over again. These translate into corruption risk outcomes in the procurement process as lack of competition, meaning a single bid submitted or a single bid considered on an otherwise competitive market, say school meals. And the recurrent institutionalised nature of corruption can be captured by the market share of a single company, so if the same company is winning over and over again from the same procuring entity while having no competitors on an otherwise competitive market, we think this is jointly signalling high corruption risk.

Now that is the output side. The input side can be characterised with a lot of red flags known from literature for over a decade now, for example, really short advertisement period or some other reduced lead time, so basically the number of days between publishing a call for tenders and the submission deadline for the tenders. Now if this period is really short, then the likelihood of having one company bidding only drastically increases this and often, in many countries, not in everywhere, but in many countries, this also means that the company will win is the company who has the highest market share anyway. So these input and output relationships together give us some indication of corruption risk.

How can you reach that conclusion?

You cannot reach that conclusion with certainty, but you can reach that, and draw a conclusion with a certain amount of probability. So that’s why it’s a risk measure we are applying and then to continue, basically you build up these relationships and individual indicators for every single tendering procedure, every single contract awarded, and then you put them together in a single score so that we can capture their core occurrence, so when they occurred at the same time, in the same tender. Now tenders vary for a lot of different things, you know, maybe it’s just Christmas period, no one bothers putting in a bid so that’s the same bidder winning the contract. However, if the aggregated information to characterise bidding companies or contracting authorities, so organisations in general, then we find that curious distribution of these red flags, that some organisations have a bidding activity with a lot more red flags than others. So when we take together that an organisation as a whole over a longer period, say a year or two, has a lot of red flags in its contracting activity, then our trust that this indicator is actually indicating corruption is increasing.

That’s any time you don’t get an actual clear-cut conclusion, unless someone says well, I’ve paid a bribe or I’ve received a bribe?

Yes, so we are not interested in bribes, not at all, and the reason is that corruption in public procurement is in its most dangerous form is barely down to bribes. What you find is a complex lab of consultancy firms, subcontracts, offshore accounts, maybe some cash as well to grease the wheels of the administration, but the big fish is playing true, seemingly legal channels. So that’s visible in Brazil in the Petrobras case which is just ballooning and ballooning, but hundreds and probably thousands of other cases all around Europe.

But the Petrobras case, if I may add, it does involve bribes, it does involve money ending up in the pockets of people that were making decisions.

Yes, but the big corrupt trend goes to party foundations and construction companies, bogus consultancy contracts, so that’s where the big money disappears.

That’s our focus. I’m not saying bribery cannot happen and bribery is not important, I’m saying that’s not our focus. Our focus is really this particular understanding of public procurement corruption, so restricted access to public resources with the goal of benefitting the particular company or a particular set of companies.  

How important is transparency in trying to stave off corruption in public procurement?

Transparency in public procurement is crucial for controlling corruption and then, you know, this is just a blanket answer we always say, well transparency is great for controlling corruption. We think it’s great, but you need actors who can act on that transparency and the good thing about public procurement and transparency and corruption is that if you have transparency on a market, and it’s an effective transparency so the actors can actually make use of the information, then typically there are companies and individuals who have the resources to act on that. So as soon as you open up a market by publishing a call for tenders in a centre of registry, then suddenly a lot more companies are bidding. There are examples of this, namely from Indonesia, Bangladesh or India. Their electronic procurement systems have been introduced recently and then you see that there are companies who entered the market. Now it’s not a panacea to corruption, but it does decrease the likelihood of corruption to occur and there are more companies to bid and especially when there are companies who are not local, who are not, by default, linked to local politicians and bureaucrats, bid.

But you’re talking about transparency ex ante, so before the procurement procedure starts, or during the procurement procedure?

During the procurement procedure, a call for tenders.

Yes. My point was on one hand that, but also on the other hand, ex-post transparency, so transparency for the contracts that have been awarded.

Yes, that’s also really crucial and that can add a lot to the fight against corruption if that information is used by audit bodies or similar society, so that’s one of the goals of DIGIWHIST, for example, that we try to make the whole bidding process, including the contract award and contract implementation, more transparent and giving simple tools to citizens and audit bodies to track risks and quickly identify those individuals, organisations and contracts which are at risk. So this is crucial because like it or not, as we stand now after many directives on public procurement and terms of national public procurement legislation, we often don’t know the basics. So if you ask the Minister of Economy in France or Germany or in the UK, they won’t be able to tell you a really simple answer to this question: who is the biggest supplier to the government? For example, in the UK, of the high-value contracts regulated by the EU directive, 43% of those awarded contracts have no contract value, 43%. So if you have such formal transparency but effectively known transparency, then what are we talking about? You have to get the basics right.

I’m on your side on this, but usually the conversation I have with pro-competition academics and also lawyers, is that especially the contract information after the contract is awarded, if it’s made public and if it’s made available, yes, it can be useful anti-corruption measures, but it also facilitates the life of entities…


…cartels and inclusive practices?

Yes, that’s true. There’s a downside of it.

So is there any way that we could try to minimise the downside?

Yes. If you used the information more efficiently then cartels will use that information. Once it’s public, there’s no way to control who’s using that information and it is documented. There is a known fact that it’s easier to maintain cartels, but it’s also easier to spot them. now as it stands now, there is like, maybe two or three competition authorities, excluding the UK’s CMA, who actually make use of procurement, micro-level procurement data systematically to track corruption risk. The South Korean Competition Authority is one of those exceptions and those of us going around the road and saying how great practice this is. Now if we push for transparency and we don’t use it for evaluating risks of collusion or corruption, then in fact, it can be negative overall, it’s true.

Thinking of transparency of awarded contracts, a few years ago, I don’t know if you were aware of this information, in Portugal we made it mandatory not only to use electronic procurement, but also for all contracts that were not subject to contract procedure, so transparent contract procedure, to be registered into a central repository. The compliance for it, as far as I know, is close to 80 to 90% of the contracts that needed to go there, so it’s a very high compliance rate, but what I found fascinating is some, let’s say, entrepreneurial “white anchors”, cross-referenced information from that database, the Public Contracts Database, with the information that is contained in the Companies Register which is also public by definition, and I found out that in some examples, or in some situations, companies that were yet to be incorporated were being awarded contracts and I found that fascinating. All it did was to take the data from the two data sets and combine it and see what it produced. So do we have any examples of using this kind of data that may yield an unexpected result?

Cross-checking and linking public procurement data and any special interest companies to Company Registry is part of what DIGIWHIST is doing in 35 countries, I mean 34 countries plus the European Commission’s own procurement activities. So yes, I mean this [?? 13.36] plan to do this and we are working on this as part of DIGIWHIST, particularly for this reason that often really simple things can emerge. Now I’m not saying that everything is as simple as that, for the very reason that as soon as the information is being used for tracking such risks, then the actors themselves change their practice. They become more sophisticated, but one of the really simple things we have seen is the politically motivated, seemingly politically motivated date of incorporation of companies. So we didn’t look at whether they were incorporated already when they got into a procurement contract, we didn’t see any red flag on that, but we have seen red flags, the winning chances of companies registered in the very first year or just before the new government came into power, was significantly higher than companies registered just a little bit before that. Now, of course, you would expect companies with more experience having higher winning chances, at least in the first few years of their existence, and in addition, we also found that companies registered when the same government was in power the first time, say 13 years ago, then their winning chances increased, but only once the government, the same government, came into power. So this is, you know, practically no economic theory can explain why those particular years made companies so successful. We could only come up with political explanations.

Speaking about the DIGIWHIST project, what are you trying to achieve with it and what’s going to be the outcomes?

First, we tried to set up an infrastructure, both for research and government accountability more broadly. So there is a lot of transparency legislation out there, a lot of data, but it’s either not linked or it’s in a horribly bad format. So what you have seen all around in Europe are individual procurement tenders in like HTML pages but there is no way you can tell everything like vary the data in a really simple way, like biggest winners or the average number of competitors for a particular company. So the first thing what you’re doing is scraping all this data, collecting all this data, cleaning it up, standardising it and republishing public procurement data in 34 countries plus the European Commission. Now then it’s linked to company data on financials, registering information, but also on ownership and also on the managers and boards and directors. Now this data is also linked to the list of political officeholders elected and appointed and finally, we link the data, the public side of the procurement data, to treasury information on contracting authorities, so how much money they receive from the central government, how much deficit they are making and so on and so forth. So really, really try to come up with a complex structured database which can be used for research as well as policing. Now on top of that, this will generate a lot of data, so on top of that, we have to come up with simple summary indicators which lay people, citizens, policymakers, can use in their daily activities.

We will generate a set of transparency indicators including data quality, a set of indicators on corruption risks and also, indicators on quality of public administrations or state capacity. Now this information we hold will be fantastic and all that, but our ambition is really to push for impact and policy change if possible. So what we will do, we put this information, the data and indicators, in a really compelling packaging, say, for example, a mobile app, that you can browse this information, you can directly access the risk scores and if anyone has any intention to blow the whistle, then whistleblowing reports can be attached to tenders. So the idea is that when all our, for whatever national body, receives a whistleblower report, then it has, on the one hand, big data, all the contracts, all the entities, the ownership ties, everything there. It has the risk scores generated by researchers and validated in a rigorous way, plus the usual insider information whistleblower share. So auditors and investigators will not only see what insiders want to share, but also see whether it’s important, whether any chance of going for these cases and whether there are, you know, large enough amounts involved to start an investigation. So this is really the tool which we hope will, on the one hand, revolutionise information in this domain, and also would hopefully allow losers to realise that they are losing out to public procurement corruption and mobilise them and help them form alliances to act, for example, companies who realise that they are losing out by not having access to certain markets.

That is fascinating and very ambitious. My concern with that is how you’re going to get access to the end of line data, especially the contracts, because other than Portugal, and I think Estonia and to a certain extent, parts of the UK right now, I’m not aware that countries inside the EU are collating that data in a streamlined, or at least in a consistent fashion, especially contracts with altered thresholds.

Yes, so we are not directly collecting contracts data. By the way, Slovakia is also…

Yeah that’s true, Slovakia is also in, you’re right.

Yes, so we are not collecting contracts data indirectly. We are collecting announcement data, call for tenders, contract award announcements, contract modification announcements, sometimes in some countries, contract completion announcements. So these are the official published documents which are, in central repositories, like Contractsfinder in the UK or the EU Standardised Electronic Daily.

But that’s precisely my point is that those sources of data are incomplete by nature.

But they’re incomplete in a particular way, right, because it’s regulated what is in there and what’s not there.

No, the point is, for example, let’s say the obligation of posting contract data, it has been EU directives for many, many years and if you look at the number of contract notices that are published on OJEU, so on tenders electronic data, and then you cross-reference it with a lot of information about those procedures, when they’re supposed to reach an end, only around 40% of the procedures, you know, the conclusion of the procedures actually registers on Tender Electronic Daily. So it means that either the procedure never reached to an end, it’s possible, but more often than not, it means that the contracting authority simply did not upload that information. So although you’re collating data that already exists in various different buckets, the underlying problem remains, and I know, for example, in Germany that there’s a huge problem in terms of trying to collate this data due to the way that devolution in Germany occurs and that the responsibility for this data to be collected, for example, does not rest at federal level but yes, at a lender level.

Mmm. So what was this 40%? I didn’t understand your calculation…

So my comment was that a set number of contract notices are published on the Tender Electronic Daily and that only 40% of that original number actually officially reach and end and there’s a contract award notice.

 No, that’s not true…

It is true. 

…it’s a much higher number. I think it’s around, the last time I looked at this was around 70 to 80%. I did have an email exchange with the [?? 21.28] who is creating some of this data and the percentage was definitely higher than 40% and this is a factual question we can clarify later by email, but even the 70% is really high, I agree, and that is due to three things: one is the lack of our capacity to link the contract offer announcements, and if you count, there’s an equal number of contract offer announcements which should have a call for tender but it doesn’t…

Correct, that’s true as well. the numbers match up. So our best hope is that they are there, it’s just not linked, so they can be linked with some kind of probabilistic matching which DIGIWHIST will do. The second point is what you mentioned already, that they start the procedure but it never ends because of whatever reason, or the third is that it’s not there even though it should be there. So that’s true, this is think is a real problem, but we don’t actually blame this collating the data and cross-referencing it to, for example, public budgets on the contracting authority level. We don’t know the extent of problems. So, for example, we have done some of this kind of cross-checking in Hungary and it actually varies from year to year. If you look at public procurement as estimated from agency budgets, so spending on investments and material costs, and public procurement is estimated from announcement data, taking into account the threshold effect. So I think the future and one of the goals of DIGIWHIST is to expose these problems because currently, no one is looking at this, no one is saying hey, hey, it’s like millions of years are missing and you know, like shouting around and we should fix this and I think that some people are working on this, but they could use a lot more publicity and a lot more direct exposure of these problems.

Personally I think that the data situation will change once e-procurement becomes mandatory, so that’s data gets collated centrally and automatically.

But that’s only for the above EU threshold contracts.

Correct, however, for example, in Portugal, you have to use e-procurement for all contracts that are subject to a contract notice. So, for example, if you want to use an open procedure below the thresholds you can do it, but you have to do it as an e-procurement exercise. So it varies from country to country, but that is one of the points that I think is going to change it, or it’s going to change the data collection later on.


The other one that may change is in terms of consequences, because it’s very clear for you, as a procurement officer, if you do not put a contract notice out that you should have, it’s very clear what are the consequences for you. So your contract may be annulled, you may be dragged over the coals, you may have problems with your line manager, so on and so forth. If you don’t put the contract award information online, there’s no consequence. Nothing happens to you.

Except for in Slovakia where the contract doesn’t enter into force until it’s published.

And also in Portugal and you see that once you change the incentives, you see that the compliance rate then goes to what I would expect to be the compliance rate also with the obligation to put out the contract notices in the first place.

Mmm, mmm.

Okay, very well. One final question, so you are an early career researcher and as far as I know, you finished your PhD last year, about a year ago, am I correct?

Yes, last February.

And you’re already a scientific coordinator for a very large project, about £3 million or €3 million worth, what is your experience with that? So what kind of advice could you give to an early career researcher that wants to work in that kind of field? 

My honest advice is wait a bit longer and plan it better.


I mean in general, the problem of research funding, I mean good researchers are not selected on management skills, they’re selected in their career based on ability to write compelling research papers and these are competitive processes. So big grants will lead to disaster unless you know the people really well because managing an organisation in multiple countries, which is often a precondition for your funding, for example, and managing a project which is typically on top of people’s everyday work, is really, really difficult. So I’m lucky because I have worked previously in other projects with most of the people who are part of DIGIWHIST, and I see the enormous advantage of knowing these people, trusting them, knowing their strengths and weaknesses, as well as knowing my own strengths and weaknesses. So unless you trust these people and you know that you can work together with them, even in difficult situations, then just wait. I mean ambition is a great thing, but you save a lot of your nerves and your time.

So effectively you’re saying be careful with whom you get in bed with in terms of projects? 

[Laughter] yes exactly, be really careful and because you are in bed with them for years.

Yeah I agree with you and that’s as much as I’ll say on the record. Thank you very much, Mihály for the interview.

Can I add one more thing if…

Sure, of course.

…I may? So like my new, you sounded a bit critical about the corruption measurement approach.

No, it’s my job to push you back.

Yeah, yeah okay. So just one more addition, so why we think it’s a valid indicator of corruption, a valid proxy of corruption, is that there is this internal logic and the build-up of indicator but there is a lot of external validity tests we have done, and those are the ones which convince people who are really critical. For example, if you aggregate our red flags to the country level, and then you see if, you know, whether Sweden looks better than Romania, so kind of roughly correlate the macro indices with Transparency International’s Corruption Perception Index or the World Bank’s Corruption Index, you get a really good feed around 0.5 and 0.7. That’s the linear correlation co-efficient. So basically, countries which are perceived to be corrupt, they tend to do a lot more of these red flags, for example, but also companies registered in tax havens, they are much more prone to the red flags as our corruption risk methodology defines them. So there is a lot of micro and macro evidence on external validity and this is, I think, one additional point when people, you know, thinking about using these indicators or not.

Okay, very well. Thank you very much for the clarification.

[Laughter] and thank you for pushing me back.

[Laughter] you can find me at my blog or on Twitter where I use two handles, @Detic for general discussion and @publicprocure for public procurement related topics. As for Mihály, you can find him on Twitter as well with the handle @mihaly_fazekas. As ever I am very grateful for the support of the British Academy Rising Star Engagement Awards.