Developing countries stand to lose millions of dollars if they do not get this math right.
The United Nations estimates that corruption, bribery, theft, and tax evasion cost developing countries about $1.26 trillion each year. That is almost twice the gross domestic product of all of Asia. These are sobering numbers indeed.
Nobody accurately knows just how much, but a fairly large part of the loss will be from lapses in public procurement. For example, in Bhutan—a country that stands out in Asia and the Pacific as being perceived to have low levels of corruption and mismanagement in the public sector—almost 20% of total irregularities in 2014 at the national level were due to what the Royal Audit Authority calls ‘lapses in procurement norms’ (see figure). In the past six years since the latest data is available, this is an average of almost 15%.
If in Bhutan—where these issues are rigorously enforced—lapses in procurement amount to 15% of total irregularities, the number is bound to be higher in other countries.
This is why ADB considers risks in procurement as one of three governance risks to be factored in while assessing the risks to development effectiveness in all its country partnership strategies and in investment programs. Governments across the world have now begun to take a closer look at how they can improve their procurement systems. Here are three of the more important issues they will need to keep in mind.
- Openness in procurement. Being transparent about procurement matters has turned out to be the single biggest governance issue in recent years. The greater the degree of openness, the more there is a complementary tendency for the system to be managed properly. This openness refers to what the opportunities are for tendering bids, who the bidders are for individual projects and works contracts, and what the specific rules and regulations are for all players in this market (this need for a level playing field is an important consideration in ensuring that the system is trusted by all parties). This transparency allows the public to hold to account government officials that are entrusted with managing public procurement. One of the more frequently used tools to do so these days is e-procurement, which allows governments to make procurement transparent and efficient. Another way is through a dedicated entity (such as the Public Procurement Monitoring Office in Nepal, directly under the Office of the Prime Minister) that monitors and publicly reports procurement lapses.
- Government commitment. Being tough with adhering to the rules and instituting penalties, as mandated by law, demonstrates government commitment toward procurement effectiveness. If there is one weakness that the system will capitalize on, it is the perception of lack of credible commitment on the part of government when lapses in management are made public. In countries where there is no procurement law in place (and public procurement is governed by other acts, such as a public finance act) it is claimed there is less room to manoeuver than in countries where such as an act is in place. However, credible studies are still needed in less-developed-country settings to lend credence to this claim.
- Capacity building. Ensuring that public sector officials at the local level have the necessary awareness and skills to carry out procurement tasks according to the law continues to be one of the most serious issues that national governments face. The issue of procurement lapses is equally severe at the local government level (albeit the total level of irregularities will be lower at that level). As countries continue to decentralize functions and resources to local governments, there will be increasing pressure on these local level entities, many of whom will not possess adequate resources to manage their procurement processes efficiently, effectively, and in a transparent and accountable manner.
This is a powerful concoction – the pressure to devolve more authority and functions to local governments, but not necessarily be in a position to support complementary measures such as building capacity so that procurement processes are better managed. As the experience of even a relatively well-performing system as that evident in Bhutan demonstrates, not getting this equation right will prove to be costly; countries stand to lose millions of dollars if they do not get this math right.