Achieving better results from public sector institutions

Submitted by Linda Van Gelder

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After a year of intensive consultation among development partners and with technical experts within the World Bank, I am pleased to announce that the World Bank Approach to Public Sector Management (2011-2020) has been agreed by the Public Sector Governance Board (the internal body that maintains professional standards on PSM and governance work within the Bank).

The Approach focuses on Public Sector Management (PSM) as a vehicle to overcome development challenges from budgeting to service delivery, reflecting both research findings and practitioner experiences. It is far-reaching–in its focus on the range of development outcomes that hinge on Public Sector Management–and pragmatic–in its emphasis on fitting reforms to country contexts. It also orients the Bank towards understanding PSM as a problem-solving endeavor, not a goal in its own right. The Approach charts a course for PSM work that combines the experience of public management experts with sound empirics and detailed diagnostics of the immediate context–including political economy realities–to find the most promising and sustainable method for easing binding constraints to improved public sector performance. It sets a learning agenda to systematically import lessons from research, while simultaneously laying a stronger empirical foundation for the discipline in the future. The Approach offers some clear directions for the Bank's operational work, its approach to research, and its staffing and structures. Importantly, it commits the Bank to reviewing progress annually.

Our agreement on this Approach does not mean an end to the debate. As we note, PSM is a challenging reform area in which to offer assistance. Sustainable institutional change often requires that thousands of public agents alter their behavior, and political incentives may be aligned against improving public sector performance. 'What works' in PSM reform is highly context-dependent and explicit evidence remains limited. We will continue to seek guidance and to encourage an open debate as we gain more experience in implementing this Approach.

The Anatomy of Corruption in Public Procurement

Public procurement presents significant risk under the U.S. Foreign Corrupt Practices Act (FCPA). Cases like Siemens Argentina, Siemens Venezuela, Johnson & Johnson, and Tenaris highlight the risk. Large amounts of money are at stake when the government procures things like roads, computer systems, oil extraction services, medical equipment, power stations, and textbooks. Companies must interact directly with government officials. And government officials have pockets of discretion that can give rise to manipulation of the process. When corruption is involved, procurement decisions are no longer based on price, experience, and quality.

I investigated corruption and fraud for The World Bank for several years in multiple countries known for high corruption risk. Almost every one of these investigations involved an expensive public procurement that The World Bank was financing in whole or in part. This financing is what gave The World Bank the jurisdiction to investigate and proceed against companies and businesspeople that we had found to have engaged in wrongdoing.
Public Procurement is Common
Government procurement is more common than one might think. It has been estimated to account for 14 to 20 percent of a country’s GDP, which would be between $8.16 trillion and $11.65 trillion worldwide each year. In Mexico, for example, the federal government spent about $53 billion in 2008 on public procurements, constituting about 18.4 percent of Mexico’s GDP. In 2009, it spent about $78 billion.
Common Corruption Schemes in Public Procurement
Through my experiences in private practice and at The World Bank, I have seen several common corruption schemes in public procurements. Internal compliance officers should be especially vigilant when their companies engage in this area of work. Here are some common issues to watch for.

Sometimes procurement officials require that bidders hire “consultants” as a way to funnel money back to the officials. This formed the basis of one Baker Hughes action and several of the Siemens actions.
Sometimes companies will disguise direct payments to procurement officials as something else. In the Johnson & Johnson case, the company funneled money to procurement authorities at state-owned hospitals by using sales agents to award “civil contracts” to doctors, purportedly to conduct trainings for the company that never actually happened.
Sometimes companies hire “experts” that, with or without the company’s knowledge, previously worked for the procurement agency itself. These individuals still have contacts in the procurement offices. Maybe they even designed the actual specifications of the tender at issue.  As former officials, they know how to game the system.
Sometimes improper payments, if made during the project design phase, will influence procurement authorities to narrowly design a project’s specifications to benefit the company making the payments.
Sometimes project designers proactively seek to include complicated technical features in the tender. The more technical, the more room an official has to use discretion in the selection process to favor one bidder over another.
Sometimes companies gain access to confidential information, such as getting to see the tender specifications before they are officially released. In the Tenaris case, the company obtained access to competitors’ confidential bid information and then revised its own bids accordingly to win.
Sometimes procurement officials might choose to fully vet the bid of one company while giving a less rigorous review to the bid of another. In this way, companies that are unable to show appropriate qualifications and experience or the ability to deliver the appropriate product are still able to win the contract.
Sometimes companies will learn early on that a government is considering the procurement of goods and will then seek to “entertain” procurement officials before the tender process even begins. During these periods, actors are able to develop complicated schemes to transfer improper payments and direct contracts in return.
The World Bank does a good job in its publication, “The Most Common Red Flags of Fraud and Corruption in Procurement,” of highlighting other red flag in procurement. For example, when a procurement authority does not select a lowest bidder, repeatedly awards contracts to the same bidder, or changes the contract terms and values after the process concludes, investigators know to take a closer look.

High Alert Needed
Compliance officers should be on high alert when dealing with procurements. The above themes can help in structuring their own compliance measures to respond to risk.
In addition to being mindful of these corruption schemes, companies should also be mindful of the books and records and internal controls violations that can be associated with them. They should put mechanisms in place to ensure that management authorizes any use of agents, third parties are fully vetted and trained, transactions are accurately recorded in the books, backup documentation is maintained to justify expenses, and justification is maintained for the amount of fees paid to agents.
Companies should also make sure they know and follow the rules of public procurements. Almost every country has in place detailed rules that govern this activity. The World Bank requires countries to follow Procurement Guidelines for projects it finances. Companies should understand when they can and cannot interact directly with officials. They should know when it is appropriate to revise or clarify their bids. They should know and comply with timelines for submitting their bids, submitting clarification questions, and expecting procurement decisions.

 
@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis

GTI Applauds World Bank on Improved Disclosure Policy, Though Significant Weaknesses Remain

For immediate release – 3 November 2009

The Global Transparency Initiative (GTI) today released its analysis of the World Bank’s new draft disclosure policy, Toward Greater Transparency Through Access to Information: The World Bank’s Disclosure Policy. The analysis concludes that while the revised policy will bring greater transparency to the Bank, it still falls well short of the standards set out in the GTI’s Transparency Charter for International Financial Institutions, as well as its Model World Bank Policy on Disclosure of Information.

The GTI analysis, provided in advance of an anticipated 17 November 2009 meeting of the Bank’s Executive Board to consider the draft policy, recognises a number of important advances in the Bank’s proposals. The Bank is poised to take a major conceptual step by accepting the principle that all Bank information should be available to the public unless it falls within the scope of the regime of exceptions. Other positive commitments include:

§  disseminating more materials in advance of Board meetings;

§  releasing the summaries of Board meetings;

§  launching a proper system for processing requests for information; and

§  establishing an independent appeals body.

Unfortunately, the proposed exceptions to the presumption of disclosure threaten to severely undermine these positive developments. Governments and third parties, such as Bank contractors, would be able to veto the release of almost any information they provide to the Bank. The draft policy also provides nearly absolute protection to internal information through a “deliberative process” exception, viewed as so central that it is posited as an independent principle in the policy, instead of being included as an ordinary exception.

The GTI recognises that certain interests need to be protected through exceptions, for example to protect personal information, health and safety. However, it recommends more nuanced and precise harm-based tests to protect legitimate interests such as relations with other States, the commercial interests of third parties, and the free and frank provision of internal advice.

Also troubling is the proposal’s assertion that the Bank’s disclosure policy trumps national right to information laws. Among other things, this would restrict access to the statements made by country representatives such as the Executive Directors in official World Bank meetings.

"The GTI congratulates the Bank for making some very important strides forward in the new proposed policy," said Toby Mendel, Senior Legal Advisor, ARTICLE 19. "However, the very wide exceptions being proposed could really undermine the policy. The Bank should make a strong commitment to openness, as many of its members have in their national right to information laws."

Bruce Jenkins, a consultant with the Bank Information Center, noted that while the revised policy is an improvement from previous iterations, it is not without significant weaknesses.  He stated that"the Bank has taken major steps forward, including expanded routine disclosure and a first-of-its kind independent appeals body. However, it then partially claws back these gains through heavy-handed limitations, such as the withholding of draft information that would undermine more participatory decision-making processes."

The GTI calls on the World Bank to revise the draft Policy so that it is better aligned with the standards set out in the GTI Transparency Charter. It is ready to offer any assistance to the Bank to achieve this goal.

NOTES TO EDITORS:

• The GTI Analysis is available at:  www.ifitransparency.org
• For more information please contact: Toby Mendel, Senior Legal Counsel, a19law@hfx.eastlink.ca, +1 902-431-3688, Toby McIntosh, FreedomInfo.org,  tmcintosh@bna.com, +1 703-887-5197 or Bruce Jenkins, consultant, Bank Information Center, +1 202-329-6875.
• The GTI is an independent network of organisations that works around the world to promote access to information held by international financial institutions.