Lousy Deal

Shorter lines and better service. That is what the customers of the national tax service in a large Latin American country were promised when a multinational computer firm was given a $250 million contract to automate the service’s operations.

The winning bid included a $30 million subcontract for “software design services” that were to be performed by a local firm.
But the local firm existed only on paper. In fact, the $30 million was headed for overseas accounts held by senior officials in the tax service, executives from local technology companies, and other individuals who helped arrange the deal. By the time the fraud was detected, it was too late to recover most of the money.

The $30 million had once belonged to the country’s citizens, of course. The money had been paid as taxes by people who hoped it would be spent wisely on urgently needed public services. But this assumption—that government is striving to get the best possible value when it spends public funds—is rarely correct in the countries of Latin America and the Caribbean today. The rough outlines of the hypothetical fraud described above, based on several real contracts that have made headlines in recent years, are depressingly familiar to the region’s people. The amounts may not always be so spectacular. But when governments or public institutions buy goods or services, it can seem as if inefficiency, fraud and abuse are the norm rather than the exception. 

Until a few years ago, problems with government purchases were not very high on the public agenda. It has always been difficult to detect such abuses and gauge their cost to taxpayers. The sheer volume of the transactions, the mountains of paperwork, the multiple and overlapping layers of bureaucracy—all conspire to discourage rigorous oversight and control. Besides, in countries where more than 80 percent of the public budget goes to salaries, pensions and social security benefits, worrying about how the remaining 20 percent is spent could seem pointless. In the worst cases this led to a fatalistic assumption that public procurement is one of the perquisites of political power, an internal affair that each succeeding government is allowed to handle as it sees fit.
In recent years, however, indifference has increasingly been replaced by indignation. Possibly because of the greater openness bred by maturing democracies, this once-neglected issue has been dragged into the middle of the public square. “There has never been a time in the world when there was so much scrutiny of public sector officials and public sector life in general,” says Jorge Claro de la Maza, recently retired chief of the IDB’s Procurement Policy and Coordination Office. “Public service used to be secretive and low quality. Now people are demanding that it be transparent and of a higher quality. The public at large is performing a watchdog role on public affairs.”

The result of this new scrutiny is a seemingly endless succession of scandals. The administrator of a public hospital is caught paying three times the retail price for disposable diapers from a supplier who, it turns out, is a member of his family. A legislator is found to have given lucrative “consulting” contracts to associates who never showed up for work. A new paved road ends up costing a municipal government 150 percent more than the original estimate, but two years later it is full of potholes because of shoddy construction. The examples are legion, and no country is immune.

Public outrage is fueled by a growing awareness of the real costs of the problem. IDB figures indicate that Latin American and Caribbean governments typically spend between 10 and 15 percent of their gnp on goods and services, for a regional total of around $250 billion per year. “If the inefficiency of the state—and only the inefficiency, not the fraud—is forcing governments to pay a surcharge of 15 to 20 percent, then the region could be saving anywhere from $40 billion to $50 billion per year by doing things right,” says Claro. Another way to look at the magnitude of these squandered resources is to consider that most countries could double their spending on health and education if they could recover the 15 to 20 percent of the public budget that is lost to flawed procurements.

But financial savings are not the only benefits to be reaped from ending fraud and inefficiency in public procurement. Unlike traditional efforts to reduce government expenditures—such as cutting public-sector salaries—savings derived from reforming public procurement do not usually have a steep social or political cost. On the contrary, a government that can show it has saved taxpayer money by procuring high-quality goods and services at the lowest possible prices will probably fare very well in the next elections.

Inefficient by design? Given the political and economic rewards of cleaning up public procurement, why has so little progress been made? Part of the answer is that the status quo can be very attractive to the companies and individuals that are profiting from government business under the current system. “I don’t know if [the system exists] by design or by default,” says Claro. “But the truth is that it’s a very lucrative process for a lot of people.”

The design varies considerably among the region’s countries. But according to Claro and other observers, public procurement systems in Latin America and the Caribbean have certain recurring problems. One is the quality of the laws that govern public procurement. In most cases the legislation is old and no longer in tune with modern business practices and concepts. Many countries will not allow sealed bids to be sent via express mail, for example, because the law says bidders must deliver them in person. Procurement laws also tend to be overly specific and complex. “I was recently in a country where each procurement requires 17 separate official clearances,” says Claro.

Ironically, many of the countries with the most complex laws have not taken the crucial next step of publishing regulations that spell out how exactly the law is to be applied. Indeed, most countries do not even have a regulatory authority in charge of public procurement. “When I visit the countries I find that I have no counterpart,” says Claro. “There is no one with the overall responsibility of formulating procurement policy, interpreting the legislation, proposing new rules or gathering information about government purchases as a whole.” The officials in charge of handling procurements, with few exceptions, have no specialized training and little professional prestige.
The result in many countries is the worst of both worlds. Overly specific legislation begets arcane requirements, blizzards of paperwork and bureaucratic bottlenecks. On the other hand, the absence of clear regulations, a central regulatory authority, and specialized officials encourages inconsistent and arbitrary procurement practices among different government entities. To get things done in this kind of environment, “people have to grease the skids,” says Claro. Bribes, commissions, phantom subcontracts and other maneuvers become an almost necessary part of doing business with the government.
Above all, what stands out is the absence of information. In most countries it is nearly impossible to have an overall idea of what goods and services are being purchased, at what price, by what government entities, and from which contractors and suppliers. Outside audits, if they are performed at all, are done after the fact, and usually only as a result of public outcry over an especially egregious abuse.
In fact, Claro thinks stronger auditing and post-facto controls, while important, will not solve the procurement crisis. Though it may seem obvious, he thinks the only solution is to raise the political profile, the authority, and the technical capacity of those in charge of the procurement process.

One city’s experience. This is not as hard as it might seem. Consider the case of the City of Buenos Aires, an urban behemoth with a public budget of well over $3 billion ( See article "Come see for yourself" ). When Adalberto Rodríguez Giavarini was named treasury and finance secretary for the city in early 1996, he found a situation that broadly fit the description above. Rodríguez, who recalled his experience at an IDB seminar on procurement held in Washington in 1998, said he and his staff immediately determined that the city was paying surcharges averaging 30 percent on its procurement budget of roughly $1 billion.

With a strong mandate to find immediate savings, Rodríguez assembled a highly qualified team and took several surgical strikes at the procurement system. First, he eliminated “closed procurements,” where only a limited number of companies were allowed to bid for a contract, and greatly expanded commercial advertising of upcoming contract opportunities. The result was an immediate surge in the number of companies submitting bids, and a corresponding drop in prices paid by the city.
Second, Rodríguez created a single, centralized account to pay for all procurement contracts. His team set up a database of “reference prices,” based on frequently updated averages of market prices for goods ranging from office furniture to sewerage pipes. Before awarding a contract, procurement officials now had to justify accepting any prices above the reference price. At the same time, the city decentralized the purchasing side of the procurement process. Why? Because letting each division within the city government control the purchases of the goods and services that it needed eliminated several layers of bureaucracy and made the procurement process more agile.

These changes began to yield concrete dividends almost immediately, Rodríguez said. When the city of Buenos Aires requested new proposals for an expiring contract to provide food services to 29 metropolitan hospitals, 34 companies offered competitive bids. The new contract was awarded for just under $32 million, or 47 percent less than the $59 million paid to the previous contractor for the same services.
Comparable savings materialized as the city awarded new contracts in other sectors. Rodríguez said Buenos Aires saved 37 percent on food services for public schools, 45 percent on garbage collection and public lighting maintenance, and 60 percent on contracts to run communal kitchens. Overall, the city saved $200 million in the first full year following the procurement reforms.
The irony, of course, is that the reforms that produced these savings were neither radical nor particularly innovative. What made them a success was a political decision to prioritize procurement, both by giving it strong and competent oversight and by centralizing key information about contracts and prices.
In this respect, the Buenos Aires experience goes to the heart of a long-standing debate over how best to stamp out procurement abuses. On one side are experts who claim that too much centralization is the source of procurement corruption in many countries, because it puts too much discretion in the hands of a small number of unaccountable bureaucrats. They argue that local jurisdictions are more likely to be responsive to taxpayers and that procurement should consequently be decentralized as much as possible.
Critics of this approach argue that local officials often do not have the skills and experience necessary to run efficient procurements. Indeed, the IDB’s Claro warns that decentralization can actually increase corruption if it is not accompanied by effective local-level training and controls (See interview to Mr. Claro de la Maza)
But the Buenos Aires example shows that these two perspectives are not mutually exclusive. By combining centralized oversight and control of information with decentralized purchasing decisions, governments can both reduce corruption and increase efficiency. While political and bureaucratic resistance to such an approach can be considerable, these barriers are being gradually eroded by the growing influence of information technology and, more specifically, of the Internet.

The online imperative. Once a rarity in Latin American government offices, computers and the Internet are quickly becoming standard bureaucratic work tools. Although they do not necessarily increase efficiency, these technologies do reduce the logistical and financial barriers to sharing information. Sensing an opportunity, a few of the region’s governments are pushing their agencies to put procurement-related information onto the Internet—even as they leave purchasing decisions in the hands of individual entities.
Mexico was first in this regard, launching in 1996. Since then, some 25,000 companies have downloaded procurement documents from the site, at the rate of about 150,000 requests per month. Users can find past or upcoming procurement opportunities, track the proposal evaluation and award process, read clarifications and amendments, and learn who won a contract and at what price. Companies that purchase technical specifications online save 30 percent over the price charged for printed versions. Starting this summer, users will also have the option of submitting bids electronically and handling virtually every aspect of the procurement process via electronic mail. According to Mexican government figures, approximately 40 percent of the federal administration’s procurement budget is now handled through Compranet.
Antonio Schleske, head of the Mexican federal government’s procurement policy division, says Compranet is now offering customers the option of conducting procurement transactions entirely through the website. Speaking at a recent seminar on transparency and development held at the IDB’s Washington, D.C., headquarters, Schleske described digital signature and authentication technology that makes such “paperless” transactions safe and secure.

Now, several other Latin American and Caribbean countries are also hitching their procurement reform efforts to the Internet. Last year, Brazil ( and Chile ( launched sites, and the Argentine government has announced plans to do so this year. In a recent interview Gastón Concha, coordinator of the Chilean government’s public procurement reform project, said the decision to use the Internet was based on a diagnostic study conducted several years ago. “The study found that even though Chile’s procurement system did not have a serious problem with corruption, it was not very transparent. There was very little information about government purchases, and a lot of it was very inaccurate.” The study also concluded that Chile’s procurement system was not drawing enough bidders to ensure optimum competition, leading to inefficiency.

The study led to an overhaul of procurement laws and regulations that has put the Internet at the center of Chile’s procurement system. “We decided that the Internet would give us the broadest possible reach, both by increasing the number of potential suppliers and letting each citizen see how the government’s funds are being spent,” Concha said. “The software you need to use the Internet is practically free and it is not proprietary, which makes it easier for small and medium-size firms to participate.”

Chile opened the doors to its procurement website last year, even though a law regulating the use of the Internet for such activities is still being debated in its Congress. Some 700 private companies have signed up to use the service so far, according to Concha, and nearly $700,000 worth of goods have been purchased through the system by the 25 government agencies that are currently participating. Concha says the government hopes to sell $2 billion worth over the Internet by 2002, but he acknowledges that a great deal of “missionary work” among reluctant government ministries will be required before that target can be met.
Ironically, one of the frequent reasons for resistance is the added competition that results from exposure on the Web. “Many procurement officials were used to simply calling three providers, as required by law,” he says. “Now, they have to process 50 offers for each procurement. So we’re working on ways of filtering the offers so that we can weed out the inappropriate ones early on.”

There are other obstacles. To fully capture the efficiency of the Internet, procurement offices need the ability to accept official documents electronically. Digital signature technology, which allows such documents to be authenticated and handled securely, is already being used by some Chilean government offices to conduct some transactions electronically. But a law that would make such transactions legal is still a long way from being passed, according to Concha. So for the time being, the Internet will be used only to inform citizens about procurement—and not necessarily to speed up its execution.
Will exposure on the Internet eliminate abuse in government procurement? Obviously not. Strong political leadership, clear regulations, better training and concurrent auditing are all required to end this unfortunate legacy. Indeed, if these other improvements don’t occur, procurement sites on the Internet might ultimately have a merely cosmetic effect on the problem. But simply by letting taxpayers know what the government is doing with their money, these new initiatives are making it harder for procurement abuses to remain under cover of darkness.