Tackling Corruption in Public Sector: an Indian Initiative

Photo Needamangalam Gopalaswami / Former Chief Election Commissioner of India / October 10th, 2013

Fighting corruption has been for decades a crucial challenge in the emerging world. In India, a recent experience shows promising outcomes: the replacement of old, time-consuming and discouraging complaint procedures by third-party consultation has given way to a bid-protest system which not only provides a better use of public spending, but also saves private businesses both time and money.

Corruption, it is said, is as old as mankind. In its different forms it has been a problem that the world has faced for long with constant efforts being made to reduce its impact, if not altogether eliminate it. Many countries have succeeded remarkably in this direction, especially where it affects the ordinary day to day transactions of its citizens with the State or its agencies. But in other spheres, especially business transactions, this scourge has continued to cause havoc. Further, many countries have successfully tackled the problem on the punitive side with swift and deterrent legal action against the offenders leading to a reduction in such crime through fear of retribution and a loss of reputation, but nothing much was done on the preventive side.

However in 1993 one highly motivated person, Peter Eigen, together with 20 other concerned citizens started a private initiative to prevent international organizations indulging in bribery and corruption especially in their dealings with poor countries. Thus was born Transparency International which in its 20 years of existence now has over 100 chapters all over the world with a focus on eliminating bribery and seeking transparency and integrity in business and governance. In India, with the formation of Transparency International India in 1997, the work of putting in place systems to contain corruption got a fillip.

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Signing the pact
Transparency International India started an advocacy campaign against corruption to begin with and established chapters in many states in India. More importantly in 2006 it embarked on a unique initiative in cooperation with the Federal Government of involving the civil society in promoting transparency in public procurement through a special instrument called Integrity Pact. The Integrity Pact received support of the Central Vigilance Commission, the agency entrusted by the Indian Government with the task of taking preventive as well as recommending punitive action against those indulging in corrupt or questionable acts.

How does it work? The public procurement agencies interested implementing the Integrity Pact in their organizations (known as principal) first enter into memorandum of understanding with Transparency International India, committing themselves to prevent corruption in their public procurement operations through the implementation of the Integrity Pact. The Integrity Pact commits the buyer and the potential bidder to total transparency in their dealings. Its implementation involves the signing of an agreement by the public procurement agencies, typically the public sector companies, and their vendors committing both the parties to observe the following principles.
First of all, the principal will oversee his employees’ behavior and exclude from the process all known prejudiced persons. In particular, none of his employees, personally or through family members, will in connection with the tender for, or the execution of a contract, demand, take a promise for or accept, for him/herself or third person, any material or immaterial benefit which he/she is not legally entitled to.

Equal access to information is also a key point. The principal will, during the tender process treat all bidders with equity and reason. The principal will in particular, before and during the tender process, provide to all bidders the same information and will not provide to any bidder confidential/additional information through which the bidder could obtain an advantage in relation to the tender process or the contract execution.

The bidder/contractor has responsibilities too: the manager’s personal commitment is crucial and the measures he commits to tale in order to prevent any misbehavior follow similar principles.

Overseeing employees’ behavior, first. The bidder ensures that not only himself but also none of the employees involved will directly or through any other person or firm offer, promise or give to themselves or to any third person any material or non-material benefits which he/she is not entitled to in order to gain any advantage to himself during the tender process or thereafter during the execution of the contract.

Second, publicity. The Bidder/contractor will not enter into any undisclosed agreement or understanding, whether formal or informal in respect of any issue that will have an impact on the tender, be it in regard to prices, specifications, certifications, submission or non-submission of bids or any other action that will restrict competitiveness. Publicity is not only about agreements, but also with payments. The bidder/contractor will disclose any and all payments made by him or to be made by him to agents, brokers or any intermediary in connection with the award of the contract.

Of course, it is asked the bidder/contractor to abide by and not to commit any transgression of the relevant anti-corruption laws.

Third parties
This shared responsibility is clearly the backbone of the Integrity Pact. But one would be naïve not to allow a third organization monitor the whole process. Considering that the local administration is involved, it would seem logical to give monitoring responsibilities to, say, a superior administrative level – a federal one for instance. But another way has been chosen to enforce the pact: the civil society.

The civil society’s role in the implementation of the Integrity Pact comes through the appointment of independent external monitors by the public sector companies. Retired officers with a high reputation for integrity are selected by the company and appointed as independent external monitors with the approval of the Central Vigilance Commission. The names of the independent external monitors are to be disclosed in the Notice Inviting Tender and vendors are encouraged to raise issues if any, on the entire process from the Tender notice stage to the stage of awarding the contract and further to its execution ending with the final payment. The independent external monitors will enquire into the complaint and give their recommendation to the management of the company.

What is the nature of their power? While the findings of the independent external monitors are recommendatory in nature, in the event of the company not accepting the recommendations, it is open for the independent external monitors to raise the issue before the Central Vigilance Commission whose decision shall be final and binding. Experience however shows that the acceptance of independent external monitors’ recommendations is more the norm. In deciding upon a complaint, the independent external monitors generally follow the procedure of letting both the parties make a presentation before them and after considering the merits and demerits of the submissions made by both parties, give their recommendations. The companies are advised to take a final call and also share the recommendations of the independent external monitors with vendors in the interests of transparency.

Unexpected effects
Now one may ask: what with the results? An in-depth examination of integrity pacts as legal tools for ensuring greater transparency and competition in the award of government contracts is yet to be conducted, but some specific effects have already been noticed both by academics and the press.

An unexpected and welcome effect of the implementation of the Integrity Pact has been the easing of conflict resolution. Indeed the Integrity Pact has become a very effective tool for conflict resolution. It has the salutary effect of keeping the actions of the principal under public scrutiny and therefore is a dampener to arbitrary decision making which is at the root of corruption. It also provides quick dispute resolution at very little cost and without delay which is welcome to both the principal and the vendor.

This is actually not only providing more efficiency in the allocation of public money, but also saving time and money for the contractants. Foreign observers, such as the World Bank, used to notice that complaint procedures in India generally required proof of criminal behavior on the part of government officials in award of government contracts, and the only other options for disappointed bidders was either to pursue remedies by complaining to government departments themselves, or to bring in litigation before the courts. The first option was carrying some risks – form making enemies to exposing one’s company’s fate to a judgment not entirely impartial and independent. The second option took time and money.

Another problem was the lack of procedural clarity and finality in decisions on complaints, which could be made simultaneously to various administrative levels. Both in theory and in practice, each one of these offices could start independent assessments and reach widely differing conclusions: a situation that could be somewhat cumbersome.

Though the Integrity Pact was first implemented as an anti-corruption tool, one must insist on two side functions that have developed into core features: it is also a bid-protest tool for dissatisfied bidders, and a dispute resolution tool, helping companies both to defend their case, while they tended to give up, and to save time and money when they decide to stand up. In this respect it is not only a promise to better employ and maybe save public money, it is also a cost-saver for private business, thus allowing the whole economy to benefit from greater competition.

While it is true that the External Monitors are people with high reputation for integrity and are public spirited persons but even so it would be unfair and unwise not to compensate them adequately for the time and effort they put in for dispute resolution. So they are offered an honorarium, that is about the same as that paid to an independent director attending a board meeting, along with actual of the travel and lodging costs, if any and is borne by the company with no burden on the vendors. A maximum of two independent external monitors are appointed for each public sector company except where the company has a large number of units or locations requiring more external monitors.

The question has been raised to replace the independent external monitors panels by specific courts, but to this date it has been decided to keep the experience going. One may argue against the frailty of a system built on individuals’ ethics. But it should be noticed that the experts have a personal reputation to defend, and no career to lead. Besides, one of the very effects of the Integrity Pact being the fastness and efficiency of conflict resolution, one would be better advised not to create a complex, maybe slow administrative body to deal with the complainers. If anything, they would understand the message.

E-tendering: when technology helps
Corruption should not only be understood through greed. It is also linked to social practices, to the way people behave in traditional societies – a gift-prone politeness that may not meet the standards of modern societies. But modernity offers solutions of its own. Another salutary step is the shifting to e-tendering procedures that further eliminate interaction between the principal and the vendors during the tendering process that is fraught with the twin dangers of corruption and favouritism. “Frequent vendor meetings” are held by the companies, with the external monitors also present, in order to inform and educate the vendors. The public agencies undertaking procurement of material and services are being encouraged to upgrade their systems to cater for e-tendering and also for such sophisticated processes as “Reverse Auction”. Transparency International India with its active advocacy and periodical meetings with companies, external monitors and other concerned parties is helping to change the scenario bringing in more transparency and accountability that have direct bearing on the strengthening of integrity.

The Integrity Pact has been designed as a tool to build transparency in public procurement, bidding or licensing process by both public institutions and private agencies. The expectation and hope is that a fair and transparent procedure for awarding contracts will not only ensure efficiency but also help in building public trust in the government and the private sector. The road to be traversed is still long but with these new initiatives there is hope that positive outcomes will follow in the fight against bribery and corruption in public procurement operations in India.

Some lawyers and activists have pleaded for further progress, pointing for instance the absence of any new pecuniary or criminal penalties, either on the principal or on bidders. But while the legal frame could certainly been improved, one cannot ignore the cultural and institutional change brought by the implementation of the Integrity Pact, which has been described by academics as the first formal, relatively independent bid-protest system in India for challenge of contract-award decisions. Economists would call this a disruption. Institutions, and not only technology, are a driver for change – and for growth.

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