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    Introduction

    This chapter will use a preliminary report published by the Transparency International Defense and Security Programme (TI DSP) through which they identified six key "red flags" categories in public procurement. Presence of these red flags in a procurement system can indicate that the process isn't achieving is potential Value for Money (VFM) and, more specifically, that it is more prone to corruption, inefficiencies and lack of transparency.

    The chapter will build the capacity of the learner to understand how to identify and react to these red flags. Specifically, on each page, it will:

    1. Explain the red flag and the rationale for it reducing VFM
    2. Present specific warning signs that make up this red flag
    3. Give recommendations on what is good practice to avoid or tackle these warning signs, particularly in relation to OCDS
    This chapter is based on the great work of the African Freedom of Information Centre and the TI DSP team

    Contents of this chapter

    1. Introduction
    2. Six red flag categories: A background
    3. Competition is (deliberately) constrained 🚩
    4. Favouring of a particular company 🚩
    5. Dubious relationships with politically exposed persons 🚩
    6. Unqualified or unsuitable suppliers 🚩
    7. Deviation from industry or market norms 🚩
    8. Anti-competitive companies 🚩

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    • Six red flag categories: A background

      The six red flag categories were identified through extensive use of interviews and case studies from 2014-2018. TI-DSP asked two principal questions: 

      1. What ‘red flags’ might have alerted officials, civil society or oversight bodies that more scrutiny was needed? 
      2. What specific data should be released in the future to help prevent the most common types of corruption, or facilitate its identification by oversight actors? 

      Analysis of these red flags can inform future reforms to the design of procurement processes by government officials, the conduct of due diligence checks by company and government actors, and the oversight activities of parliamentarians, journalists, NGOs, and law enforcement officials.

      For the purposes of this chapter, the six red flag categories have been extracted and adapted. These are: 

      1. Competition is (deliberately) constrained.
      2. Intervention in the procurement process that unjustifiably favours a particular company.
      3. The winning bidder can have a shareholder or other business relationship with a politically exposed person.
      4. Unqualified or unsuitable suppliers can win and deliver a contract. 
      5. The agreed terms of the award can deviate significantly from industry or market norms. 
      6. A company with a history of anti-competitive behaviour can win an award.


      • Competition is (deliberately) constrained 🚩

        The risk to VFM

        In a competitive market, too few bidders to an advertised tender, or a preference for a single bidder indicates that the full value of competition (cheaper goods works and services, innovation, efficient learning loops) is not being extracted through the procurement process. 

        There are of-course legitimate motives for restricting competition, For example, there may be only one supplier of a particular product, or the procurement could be extremely urgent. 

        In these instances, the justification should be objectively verifiable to the public or an oversight agency.

        Case study: overpaying for collusion in Honduras

        In Honduras, the NGO Transformemos Honduras (TH) revealed that a handful of Honduran companies controlled the medicines market. There were 214 companies registered to supply medicines but only 37 had ever won government business; 10 of these companies controlled 88 per cent of the market. 

        According to analysis by TH, the government overpaid for both medicines and medical equipment. The unit price of many medicines was more than one third higher than international averages calculated by the World Health Organisation (WHO). For example, chemotherapy drugs such as vinorrelbina, cisplatin and doxorrubicin were bought respectively at 34, 36 and 41 per cent above international averages. Basic medical equipment was also overpriced, with the sterilising soap Glutaraldehyde sold to the state at US$18.40/gallon, which was 83 per cent above the international average of US$10.66/gallon

        This is a clear example of how constrained competition can reduce the value of public procurements. 1





        • Favouring of a particular company 🚩

          The risk to VFM

          An official can use their formal or informal role in the procurement process to alter, or attempt to alter, the outcome in favour of a specific company. This may be because the official has intervened because they or someone in their political, social or business networks has an interest in the company, or that the company has paid the official for their help.

          In many cases, the favoured company will not appear to be the most qualified, or it will not offer anything that advances the public interest in it being selected. 

          In other words, it increases the likelihood that suppliers are not selected on merit and therefore will not carry out the contract with the utmost effectiveness


          Case study: Nepotism in Finnish health procurement

          An Executive Director of the hospital district in northern Finland was accused in 2013 for favouring companies that were owned or controlled by his son. In 11 instances over 8 years the Executive Director bypassed procurement legislation and directed major IT programme contracts to these companies (health care IT programmes are classified as medical equipment). 

          The deals were constructed so that other players had no chance to participate. Agreements were made in private face-to-face meetings. Actually, purchases were sometimes also delayed so that the family companies had time to prepare for the calls for tender. 1




          • Dubious relationships with politically exposed persons 🚩

            The risk to VFM

            Procurement officials and oversight actors should always take a closer look when a ministry does business with companies that have politically exposed persons (PEPs) as legal shareholders, as a conflict of interest can often arise. The presence of a conflict of interest is not a definite sign of corruption. But it does significantly heighten the risk that the official could use their entrusted power in ways that undermine the award’s integrity or potential returns to the state. In many jurisdictions, PEP-owned or managed companies are either prohibited from competing for government contracts or face higher levels of scrutiny. 

            Favouring companies and "bid-rigging" reduces the value competition brings to the procurement process and inevitably means that governments pay more for less (effective) works/services/goods.


            Case study: Bid-rigging in India

            Corruption was discovered in 2008 in five multimillion-dollar health projects financed by the World Bank in India. The program was aimed at combating tuberculosis, malaria and HIV/AIDS. Investigation uncovered procurement corruption, including bid-rigging. 

            Further, investigators discovered substandard HIV/AIDS testing kits, which may have produced incorrect results and exacerbated disease spread. Yet, Indian public officials have expressed a level of acceptance regarding the corruption allegations, commenting it is systemic in India. India is also a known for having a large informal health sector susceptible to corruption and informal payments for health services . 1




            • Unqualified or unsuitable suppliers 🚩

              The risk to VFM

              When a supplier that does not have sufficient technical, operational or financial capabilities wins an award, it is unlikely to be the best choice for effectively executing the contract.

              The supplier may have been allowed to compete or prevail for an illegitimate reason or through mismanagement in the procurement process. 

              Case study: AV-Pharma’s deadly tourniquets

              All operational combatants should carry at least two tourniquets at all times. Used to stop traumatic bleeding, tourniquets can prevent the loss of limbs or death from internal bleeding. A faulty tourniquet can be lethal. In autumn of 2015, the Ukrainian Ministry of Defence purchased 30,000 tourniquets from AV-Pharma. AV-Pharma had not been operating for long—the company started producing tactical medical products in 2014, one year before it was awarded the tender. While the tender was being arranged with AV-Pharma, military conscripts reported that AV-Pharma’s tourniquets broke when subject to pressure—on average in 60% of the cases where they were used. 

              The inferior quality of the purchased tourniquets was confirmed by the volunteers of the Medical Committee of the Association of People’s Volunteers of Ukraine. The Committee highlighted as problematic the low standards prescribed in the technical specifications and that testing had not been conducted into how the tourniquets would be used in combat zones. 1





              • Deviation from industry or market norms 🚩

                The risk to VFM

                If the terms of a final contract agreed between the procuring entity and a supplier depart significantly from expectations, past examples or industry norms, this should warrant extra scrutiny from oversight actors.


                Judging whether a procuring entity received fair value for a sophisticated weapon or piece of technology is not necessarily straightforward. Many deals are products of negotiation. Corruption is by no means the only reason why final terms may favour the winning company more than the government. For example, officials might not have done a good job managing the award process or calculating whole-of-lifecycle costs for a piece of medical equipment that requires frequent servicing and unique parts. They may have set terms too low or negotiated poorly, based on limited experience, information or negotiating power. Risks to VFM related to this red flag can be significantly higher when none of the reasons above are evident.



                Case study: Variations in medicine pricing

                The price of purchasing medicines varies enormously across the globe. In Ghana, the cost of Ciprofloxacin, an antibiotic used to treat pneumonia, is eight times the international reference price, according to data collected by Health Action International and analysed by Civio. 
                Although price inflation of 800 per cent is hardly good value, it is preferable to the cost of the drug in Italy or Kuwait where it is respectively 30 times and 100 times the reference price.13 Price disparities affect high-income countries too. The same study shows a US$1000 pill in the United States costs US$320 in Spain and US$554 in France.14 While comprehensive price comparison should take into account multiple and complex factors such as the volume of the purchase, logistics costs and exchange rate fluctuations, poor value for money can also be driven by corruption.1




                • Anti-competitive companies 🚩

                  The risk to VFM

                  A company involved in the award process, or an individual with an ownership interest in it, may have a reputation for, or a record of participation in, corruption, collusion or other relevant unethical misconduct. This could suggest that the company or individual has a propensity to engage in problematic business practices, or that officials treated them with favouritism. 

                  The level of scrutiny prompted by this red flag should depend on factors such as the reliability of the evidence or how often the company or individual has been accused.


                  Case study: Anti-competitive systems in Nigeria

                  Nigerian law mandates open competitive bidding for public contracts in which the lowest bid that meets a tender specification wins the contract. In total, the 40 PHCs were built by 40 different contractors, with no company used twice. However, 26 of the 40 contracts were awarded for the precise amount of 21,986,893 million naira (US$128,105), even though their budgets ranged from 23.8 million naira (US$144,588) to 47.5 million naira (US$288,568) and were, on average, 33 million naira (US$200,479). The common and exact price of 21,986,893 million naira (US$128,105) raises doubts about the competitiveness of the procurement process and whether the procedures were in accordance with Nigerian law. It is highly unlikely that 26 companies, bidding for 26 different contracts, dispersed across eight different States, all arrived at the same low cost bid. It is possible that the figure was a benchmarked average cost, but then attention simply turns to the huge disparities in budget. It is also possible that this figure reflects issues with the competitiveness and accessibility of the tenders and even market collusion, which all undermined value for money 1