Does regulating government procurement reduce corruption?

August 10, 2020 12:45 PM
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REUTERS/Denis Balibouse

Governments everywhere purchase vast amounts of goods, services, and public works from private firms. From buying pencils for administrators to providing airport security to building hospitals, the world spent $11 trillion on public procurement in 2018, amounting to 12 percent of global GDP.

Public procurement represents more than one-tenth of national output in high-income countries, including 24 percent of GDP in Switzerland, 21 percent in the Netherlands, and 18 percent in Singapore. Governments in developing countries also procure a large share of their expenditures. Kenya, for example, procures 26 percent of GDP.

But public procurement is also the world’s biggest source of corruption, fraud, and abuse, including bid rigging, cost overruns, favoritism toward politically connected bidders, lack of transparency, collusion between politicians and firms, and simply bad choices.

Estimates presented in a PIIE Working Paper suggest that between a tenth and a quarter of the money governments spend on public procurement ends up in bribes. There is a wide variance in the estimates on bribes in the procurement literature, ranging from 8 to 25 percent.[1] At the border between public and private sectors, procurement is particularly vulnerable to misconduct. Private companies have strong incentives to bribe public officials to increase payments, to cut out competitors, or to accept inferior quality. Procurement contracts face the same challenges of renegotiation and nonverifiable quality as those that bedevil private contracting. But unlike private buyers, public agencies often lack the incentives and administrative capacity to handle these challenges. 

The Working Paper argues that corruption is reduced by regulatory constraints on the behavior of procuring entities both by law and in practice. A database developed with the help of the World Bank for the first time enables some scrutiny of this problem and how it differs across countries. Corruption in public procurement is a universal problem, not just confined to poor countries, and ironically poor countries have more laws against it than rich countries—but evidently more ways to get around the law.

To find the sources of misuse of public money, the paper investigates regulation in public procurement, using a hypothetical study of a road resurfacing contract, in 187 countries. It distinguishes between procurement laws and procurement practices and measures them in terms of how much discretion they allow procuring entities in selecting and managing contractors. It then evaluates the relationship between the two as well as their effect on procurement outcomes, which include typical problems in the process of procurement (e.g., corruption, favoritism, collusion, and absence of competition) as well as in the project itself, the product of procurement (e.g., delays, cost overruns, and low quality).

In general economists and legal scholars see laws and their enforcement as complements—laws are more effective in countries with better judiciaries, bureaucracies, and the like. But in procurement regulation, we find the opposite: Laws and enforcement capabilities are substitutes. Rules are helpful when governance quality is low (i.e., countries with weak bureaucracies need strict laws to regulate them) but harmful when it is high (i.e., countries with strong bureaucracies can lay off laws a little). If bureaucrats are accountable, rules that restrict their discretion do more harm than good. When bureaucrats are not accountable, rules limit their misconduct. This message can be applied to the design of institutions, particularly regulation of government.

In sum, the evidence shows that laws are not the same as practice and mandating a procurement policy does not mean that it will be put into practice. Laws predict practice and practice predicts outcomes, but laws do not predict outcomes: Government capacity must be factored into the analysis. In better-educated and well-governed countries, procuring entities follow good practice even without legal requirements and achieve good procurement outcomes no matter what rules they have on the books. In poorly educated and misgoverned countries, practice is weak despite extensive laws meant to govern procurement, but the rules are helpful in limiting misconduct in these countries.

Note

1. See extensive literature cited in the Working Paper.

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Simeon Djankov Senior Research Staff

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