On the importance of open data in public procurement

Long time readers of the blog know where I sit in the divide of more or less data being made available about procurement processes (more, of course). Having said that, I’m not impervious to the competition law arguments regarding the impact more data has on cartel formation/stability. But overall, my gut feeling is that we would come ahead especially in systems where competition authorities are effective and can use that mountain of data effectively, something that should not be taken for granted.

But let’s look at what can be done with that mountain of data then, and a good example for it can be found in Chile, where the NGO Observatorio Fiscal has been collaborating with ChileCompra in developing a risk model for public procurement:

“Red flags” are indicators of elevated procurement risk at any stage of the procurement cycle  – though they alone do not establish impropriety. Widely-used red flags include unusually short tendering periods, relatively few bid submissions, unreasonable bid bond requirements, and wide gaps between estimated and awarded contract amounts. 

This approach goes in line with my view that making more contract data raises the probability of foul play being identified, even if well after the fact, even if it may not be possible to nail the practice in the bud (or it might as the process gets refined). In essence, it can work the same way as anti-doping samples which can be checked against new techniques/newly discovered agents well after the fact.

By increasing the likelihood of discovery of malpractice, such practices will become more difficult to pull off. They won’t go away and will force rogue agents to come up with news strategies. That should be expected and has always been part of the cat and mouse game of law enforcement in some sectors (money laundering anyone?). Arguing we should not make the data available as it will lead to ‘better malpractice’ is akin to saying we shouldn’t have mechanisms to spot counterfeit money for example, lest the fake banknotes become ‘better’.

The alternative of collating the data and not making it public is not great in my view either. Someone, somewhere will have access to it and with the reasonable likelihood of public sector staff moving to the sectors they’re regulating/overseeing, there’s the risk either the data itself or the enforcement strategies used to leak sooner or later. Making both public does not make the problem go away fully of course, but provides us with a couple of potential advantages. First, as we’re seeing in Chile it allows for some civil society NGOs to stay on top of the game and help on the discoverability of malpractice. Second, by recognising the inherent limitation of the approach it takes away the complacency blanket that regulators/overseeing bodies could hide under and forces them to up their game or face reputation damage. The downside is that it makes the work for malfeasants easier since they would have access to the data and the mechanisms used by enforcement, allowing for the easier development of countering strategies. That is true but leads us down the rabbit hole of “security through obscurity.” And it is well known how the culture of algorithmic secrecy adopted by Google regarding its search engine rankings has led to the creation of a burgeoning SEO industry

So my take is that, moving to more ex-post transparency will change the playing field and we will end up better off overall, even though in specific sectors/markets we will actually be worse off.


UK publishes anti-corruption strategy update

The UK adopted in late 2017 a anti-corruption strategy for the 2017-2022 period. One year on from the publication of the original strategy, an update has just been released.

Reducing corruption in public procurement and grants was and remains a key objective of the strategy, but whereas the original strategy included some loftier ambitions, the update provides some information on how the strategy is being pursued.

Some of the information is interesting to say the least, such as attributing an increase in 31% of the number of notices being published on ContractsFinder to a specific single Procurement Policy Note and that the open contracting standard work appears to be ongoing but without any firm commitments on the deployment of the open contracting data standard for example.

The CMA cartel screening tool also gets mentioned (and I think correctly - brownie points for it to be available on GitHub) as does the National Fraud Initiative and its work with local authorities to identify risk factors.

Going forward, the bit I am personally more interested in is buried under goal 3 - greater confidence in efficient and legitimate contract management an area that is sorely lacking attention. Not necessarily only regulatory attention, but also that of the practical type. The update mentions a Contract Debarment trial that was successfully completed in June 2018 and that a preferred approach will be forthcoming in 2019. Contract debarment is an area fraught with practical difficulties and one I think needs to be tackled centrally and not at authority level.

Finally, the update also promises specific guidance on how to apply exclusions in public procurement in December 2018, so that means within the next couple of weeks. This is once more welcomed but in all honestly should have been produced in 2015 or 2016 soon after the Public Contracts Regulations 2015 came into force

New project on Curbing Corruption in Government Contracting

Liz David-Barret and Mihaly Fazekas have a new research project called Curbing Corruption in Government Contracting, funded by the Department for International Development Anti-Corruption Evidence Programme. The project aims to look at how corruption can manipulate procurement and strategies to identify variables, patterns and trends that may indicate a corruption risk.

As the project evolves, it will be possible to find on the website working papers, policy briefs, datasets and a stream of blog posts on their work. You can find them as well on Twitter.

Interview with Francesco Decarolis about reputation and corruption in public procurement

Episode #31 of the best (and only?) podcast about public procurement is up. This time the interviewee is Francesco Decarolis from the Einaudi Centre for Economics and Finance and we spent some quality time talking about reputation and corruption in public procurement, including how a contracting authority nudged contractors to take their reputation more seriously.

Francesco was awarded a coveted ERC Starting Grant and will be doing in depth research in this area for the next few years.

Is public procurement becoming less competitive in the EU?

Excellent article on The Economist:

Governments use competitive bidding in procurement both to obtain the best service for the lowest price, and to prevent cronyism and graft. The fewer the bids, the higher the risk of bid-rigging, says Mihaly Fazekas, a corruption expert at Cambridge University. Single-bid contracts are the worst, but even a drop from eight bidders to four increases the risk of collusion. Experts see the drop in the number of bidders per tender as a worrying sign.

Great plug for Mihaly Fazekas and Spend Network on the article.

Shame the piece only focus on contracts above thresholds, which as mentioned in some of the graphs only represent about 26% of all EU procurement spend. Whatever is happening beneath the surface is surely not better.

Links I Liked [Public Procurement]

1. European Commission publishes final version of its much awaited Notice on the notion of State aid as referred to in Article 107(1) TFEU. Albert's comments are here.

2. UK Government consults on changes to how councils publish procurement data. Consultation is available here.

3. Doubts over Thames garden bridge as Sadiq Khan probes £175m project. Great writeup. This is a textbook example of legalising the folly of pre-procurement contacts between economic operators and contracting authorities. Only the best connected will benefit from this approach which is in effect not distinguishable from lobbying.

4. Judge forces Spain to change its tender specifications for the new high speed rail rolling stock (Spanish only). And rightly so as the original version of the awarding criteria reserved marks for local train building. For the UK Government to take into consideration next time a tender for rolling stock is put out and that other countries are not playing by EU rules.

5. Uncovering Corruption Is a Risky Endeavor in Spain. Very hard to read and in line with my experience in the country (but that may be availability bias on my part).

 

Some thoughts on UK Government open contracting push

The British Government announced yesterday its plans to adopt a UK Open Government National Action Plan 2016-18 (NAP) which includes significant changes to procurement practice, aiming to make contracting "open by default."

I am fully supportive of some of the ideas being pushed by the Government, namely the use of the Open Contract Data Standard by the Crown Commercial Service or the interdisciplinary (and international) Anti-Corruption Innovation Hub. The fact that a national government is willing to push the boundaries in these matters and looking to make its work more accessible to citizens is an approach worth praising.

There is however a big fly in the ointment on yesterday's announcement: the idea of making procurement procedures transparent during the procedure itself. This approach is going to be tested with the High Speed 2 project (HS2).

Making procedures transparent (as they are happening) is bad for at least two reasons. First, it has implications for competition as fosters collusion between tenderers. Second, in politically charged projects like HS2, lobbying groups will have a field day with the information available.

As for my first reservation, it has been well established that providing more information about tendering helps collusive behaviour. In general, I am in favour of disclosing contract information after the procedure has ended since I believe the trade off between facilitating collusion on the one hand but improving market access, reducing rent seeking and increasing accountability on the other actually leaves us better off (most of the time). The problem with making information during the procedure public is that it does nothing for the competition upside and increases the risk of foul play during the procedure itself. In other words, at least with information being made public after the end of the procedure any negative effect on competition may only strike future procedures, it will not affect the one which has just concluded. Not so if we make information available during the procedure.

I first came across this issue of information being passed among economic operators during a procedure when doing my PhD on the use of competitive dialogue in Portugal and Spain. It was plainly obvious that confidentiality safeguards (which only hamstrung the contracting authority) were not foreclosing bidders from talking to one another. And once they start talking during a procedure, it is just a question of time until at least some actions are coordinated.

The second problem is probably less widespread and likely to arise always in a reduce set of circumstances. Having said that, the fact the pilot will be run on HS2 is actually good - if any project can go wrong due to pressure from lobbying, its HS2. Again, I am usually a cheerleader for more transparency and not less, but this is an area where the added transparency will simply embolden those who do not want certain projects to succeed.

Bottom line, I am all in for more transparency after public procurement procedures have finished, even if there is a price to be paid in markets where collusion is likely, but certainly not so while contracts are being tendered.*

*If the Government wants to improve "live procurement practice", perhaps it could look into the Swedish Competition Authority and its role intervening in changing procurement procedures while they are live if bidders lodge complaints.

Paper of the week: Does corruption have positive effects?

Intro

One of my objectives for 2016 is to summarise/comment an interesting paper per week here on the blog. Some will be related with procurement, some won't. The first paper is "Is Corruption Good for Your Health?" (Job Market Paper) by Guilherme Lichand, Marcos Lopes and Marcelo Medeiros. Available here.

That is pretty much the premiss under which the authors decided to look into how corruption affected outcomes in the Brazilian health sector. One would expect that a crackdown in corruption (via the use of random audit checks) would lead to better outcomes. That, however, depends on what metric success is being measured on.

Prima facie, introducing spot checks does reduce corruption by a significant amount, particularly when checks were done to any organisation within a 75km radius. Downstream, however, the effects are much different.

Using proxies such as hospital bed numbers per thousand inhabitants, immunisation coverage and access to piped water/sewer, Lichand, Lopes and Medeiros show that the Brazilian audit programme led to a marked reduction on those metrics. In procurement intensive processes/sectors, the audit programme led to less money being spent in the actual public goods that were supposed to be delivered. In fact, the reduction is so dramatic that the end result is a higher relative corruption per dollar spent than before the start of the programme.

The authors point out that perhaps without the incentive of corruption and corresponding rent extraction, public officials do not have the incentive to actually procure the public goods in the first place. If that is the case, then some corruption is indeed needed to ensure the final outcomes are as good as they can be. Furthermore, as correctly highlighted, since the taxes are collected centrally but the procurement/disbursement made locally there is limited oversight by tax payers (furthering the agent-principal issues).

There may be, however, a concurrent or alternative effect at play which the authors have not been able yet to set aside. By increasing the likelihood of discovery it may well be that the fear of being caught changes the attitude of even honest officials. Why? It is all about incentives and how complex procurement rules are.

If you are an honest civil servant and there is a significant downside when something goes wrong (being fired, as corruption is apparently the sole reason under which Brazilian public officials can be fired) and not significant upside when things go well, what do you do?

Well, you do not do anything that increases a risk of facing the consequences of an accusation of corruption.* As you cannot be fired for being a poor civil servant, you effectively allow the downstream outcomes to become worse as to avoid the risk of being charged with corruption accusations. In consequence, any discretionary spending will not be spent unless you are very comfortable in defending your decisions. Any excuse is good enough to put the brakes on a decision to procure.

Within a legal framework perceived as complex by officials, this attitude may lead as well to "gold plating" of procurement, ie using more complex procedures than strictly necessary "just in case". These tend to be longer and suck up more resources from the market and the contracting authority, thus contributing to the overall decrease in spending levels identified by by Lichand, Lopes and Monteiro.

I have interviewed Lichand for the Public Procurement Podcast, and the interview will be up in the coming weeks.

*Yes, being accused is different from being convicted. But that mud sticks and as we have seen in other settings, when there is a vested interest to find something wrong - particularly if procurement rules are complex to start with - people will find problems. When you have an anti-corruption unit conducting audits, its metrics and incentives are to find corruption.

Links I Liked [Public Procurement]

1. Lord Carter's report on NHS procurement is out. Apparently it recommends a deep cleaning. Or a good scrubbing.

2. 18F tests GitHub for reverse auctions for small pieces of coding work. Contracts start at $3499 and contractors bid down the price and are only paid if they deliver the code on time and with the expected quality. I think this is an incredible idea, but one of commenter has already put the finger where it hurts: potential collusion. However, in liquid markets such as web design/website coding, I think we'll be better off overall.

3. Abby Semple writes about the living wage in public procurement.

4. Corruption in Malaysian public procurement?

5. Albert writes about the definition of body of public law and illegal presumptions in restrictions of competition in public procurement.