Innovative study provides first fact-based method for estimating direct cost of corruption in public procurement in the EU

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In a study entitled ‘Identifying and Reducing Corruption in Public Procurement in the EU’ PwC EU Services, together with Ecorys and the University of Utrecht, give the first-ever estimate based on objective data of the cost of corruption in public procurement in the EU and in the sectors that receive EU funding. The study was commissioned by the Anti-Fraud Office of the European Commission (OLAF). The aim of the study was to better understand the extent and types of corruption associated with public procurement. The EU has made public procurement a crucial and priority focal point in its fight against corruption. This is hardly surprising considering the enormous economic importance of public procurement contracts.

According to the figures of the Official Journal for 2010, government organisations, public sector bodies, and public utilities in Europe spent a combined total of €2,406 billion on public works, goods, and services, equivalent to 20% of EU GDP. Of course, not all government expenditure is subject to compliance with public procurement regulations, but according to the figures of the Tender Electronic Daily (TED), in 2010 €447 billion, or 19% of total public expenditure, was spent on contracts that do have to comply with these regulations.

The study’s findings were released at a conference organised by the European Parliament on Tuesday 1 October. EU Commissioner Algirdas Šemeta (Taxation and Customs Union, Statistics, Audit and Anti-fraud), one of the speakers at this event, welcomed that such an in-depth analysis has been carried out and said: “The study puts concrete figures to what we have long recognised as a threat to public finances and it confirms that once a procurement project is affected by corruption, the public losses increase substantially”.

Innovative research method

The TED database also provided key data for the study, which can justifiably be called innovative: thanks to a newly-developed research method, it is now possible for the first time ever to quantify the direct cost of corruption in public procurement in the EU, based on concrete figures and facts. Initial pilot trials with this method were carried out in 8 European member states (France, Hungary, Italy, Lithuania, the Netherlands, Poland, Romania, and Spain), and in 5 different economic sectors. Rudy Hoskens, Partner, Forensic Services at PwC, explains: “Via a meticulous analysis and comparison of 96 proven and suspected corruption cases with 96 clean cases, we were eventually able to identify 14 indicators, which in combination with each other provide a credible barometer for an elevated risk of corruption. By applying these indicators to randomly-selected public tendering procedures in certain sectors or product categories, it will be possible to detect signs of corruption and to estimate its financial impact.”

Corruption: an enormous drain on public finances

Monica Macovei, Member of the European Parliament, told the conference that she “asked for this study 2 years ago because there was a strong need to estimate the costs of corruption in public procurement other than the amount of the bribe. This way of identifying corruption and evaluating its costs through indicators and red flags is new and innovative and opens the door to tell the European citizens how much corruption takes from the public budgets and their own pockets when they pay for goods, services, constructions, etc.”

In the study, corruption is defined as an abuse of power for private gain. This study only looked at the immediate financial impact of corruption on national and/or EU budgets for public procurement contracts. The total direct losses in 2010 as a result of corruption associated with contract tendering in the 8 countries and 5 sectors covered by this study was between €1.4 and € 2.7 billion (2.9% to 4.4% of the total amount that was spent on public procurement contracts). Rudy Hoskens adds: “For the proven corruption cases and so-called “grey cases” – cases which did not lead to a conviction, but where there were indications of corruption – analysed by us, the direct impact on public finances was equal to 18% of the total budget of the projects concerned, of which 13% was definitely attributable to corruption. We also discovered that the relative size of project budget losses tended to be higher for smaller projects, although of course the absolute amounts were much larger with large projects.”

In relative terms, the direct financial losses are highest for corruption in public procurement contracts for education and training programs (loss of 44% of the relevant project budget), followed by urban development and construction of utilities (29%), rail and road infrastructure (20%), water purification and waste disposal (16%), and R&D (5%). The study showed that the risk of corruption was the highest for the public procurement contracts for staff training and education (23-28%) and sewage treatment works (22-27%).

Commissioner Šemeta’s message was clear: “Every public project affected by corruption is a project that does not reach its full objectives. It is an affront to taxpayers' money – whether funded from national budgets or EU funds.”

Types of corruption

In the 96 corruption cases studied, the researchers identified the following types of corruption:

  • Bid rigging: collusion or prior agreement between the bidders in a tendering procedure that the contract will be promised to one of the bidders, with or without the consent of the public official in charge of the tendering procedure.
  • Kickbacks: when a public official asks for or is willing to take a bribe of any sort. These bribes are then factored into the tendering procedure, including the administrative processing.
  • Conflict of interests: if a public official has a personal interest in the company that is awarded the contract.
  • Other: this includes cases of intentional mismanagement or incompetence, where the public official in question fails to adequately supervise or apply prescribed procedures, and/or condones or ignores any intentional mismanagement on the part of a bidding contractor.

Seeing is believing

“There are still certain areas of public procurement that are less transparent,” according to Hoskens. “In particular what happens in the period before and after the tendering procedure takes place. But the study has definitely proved its worth because we have developed a research method that has made it possible for the first time ever to determine risks of corruption, and the impact it would  have on public finances. However, the more data we are able to collect, and the more we are able to extend the study to other countries and sectors, the better we will grasp how corruption develops. This is essential because it will enable us to establish which measures are effective against corruption, and which are not.”

Nonetheless, the study has already made it possible to identify several measures that can have a positive impact, and which will contribute to the prevention and detection of corruption in public procurement:

  • Independent audits and evaluations carried out in accordance with EU standards;
  • Maximum transparency throughout the entire public procurement process;
  • Collection and storage of administrative data about public procurement contracts, bidders, projects, and contractors in order to enhance verification, investigation, and analysis;
  • Effective screening of contractors and beneficiaries;
  • Deployment and further development of technologies to identify signs of corruption, like the “red flag” indicators (see table 2) used in the study, which will help to detect and reduce corruption in a more effective way;
  • Application of corruption risk management procedures in relation to contractors, subcontractors, and other parties involved in the execution of a contract;
  • Specialised and properly-trained government staff who can share and exchange expertise on public procurement procedures with their colleagues in other Member States.

 

Table 1: Direct costs of corruption in public procurement

Table 2: the 27 red flags for corruption in public procurement

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Note to editors
A summary of the report can be downloaded here:
http://www.pwc.be/en/press/2013/2013-10-07-eu-public-procurement.jhtml


The complete report can be downloaded here:
http://ec.europa.eu/anti_fraud/policy/preventing-fraud/index_en.htm