This document discusses corruption in procurement processes for water and sanitation projects. It provides examples of corruption that occurred with the Lesotho Highlands Water Project, including bribery in contract awarding. Procurement is identified as being at high risk for corruption due to factors like its size, complexity, and competition. The document outlines stages in procurement where corruption risks are highest and provides some best practices to reduce corruption, including integrity pacts where bidders and governments pledge not to engage in bribery.

1. Module 4. Taking action
Session 4.2 Procurement best
practice and integrity pacts
Training Workshop
6-7 Apr 2010
Strengthening transparency, integrity and accountability IRC International Water
and Sanitation Centre

2. Types of corruption
• Bribes or kickbacks: payment of a fixed sum,
% of a contract or in-kind favours.
• Fraud: manipulation or distortion of information,
facts and expertise for private gain by people
entrusted to cater to the public good (purposeful:
does not include unwilling misconduct or
negligence.)
• Favouritism, clientalism, cronyism and
nepotism: use of entrusted power to provide
preferential treatment to friends, family, kin etc

3. Contents
• the Lesotho Highlands project: bribery in
procurement
• why is procurement a hot spot for
corruption and bad decision-making in
WASH?
• best practice examples in procurement
• the principles of integrity pacts

4. Lesotho Highlands
Water Project
“Massive corruption was discovered on the
LHWP in 1999, when more than 12
multinational firms and consortiums were
found to have bribed the CE of the project.
After the CE himself was found guilty,
three major construction firms were put in
the dock; thus far, three have been found
guilty and charged, and one has been
debarred at the World Bank” (IRN website,
2005)

5. Lesotho Highlands
Water Project
• Largest international water
transfer from Lesotho-
South Africa
• Construction contracts
awarded fraudulently
• Foreign companies paid
bribes through agents and
international accounts
• Successful prosecutions
of both givers and takers
set precedents Source: Earle & Turton

6. LWWP: implications
• Precedents from prosecution
– Jurisdiction can be taken where the impact is
felt
– Giver and taker are equally responsible
– Bribes are still illegal even if not acted on
after corrupt agreement reached
– courts could gain access to Swiss bank
accounts

7. Collusion in India
• “A group of [contractors] meet on the weekend in the office. We
have a list of contracts being offered by [the public W&S agency].
We draw names out of a bag to see who will be the winner for each
contract. That person decides what he will bid for the contract, and
everyone else bids something higher than that.”
• pre-determined winners of contracts reimburse the
losers for their bidding fees.
• values of winning bids estimated 15% higher than in a
competitive environment
Source (Davis)

8. Why a hot spot?
• Government procurement is10-15% GDP!
• High levels of procurement of products
and services in WASH
• Construction sector
• Complexity
• High levels of competition
• Tight operating margins
• Few other ways to develop advantage

9. Why a hot spot?
• Representatives
• Weak capacity to regulate and monitor
• Bribery (kickbacks), fraud (Collusion or
bid-rigging)
• Consequences: Higher costs, poor quality
construction and lack of sustainability

10. Corruption triangle
Source: Campen, pers. comm.

11. Prequalification, tendering and
contract negotiation
• Time consuming (average 2.5 years)
• Expensive ( 2 –10 % of the contract value)
• Strong competition
• Complicated administrative requirements
• Large impact (multi €M)
• Lot of paperwork
• Financial Guarantees (bid bonds, tender guarantees)
• No level playing field (information, ToR, tender docs)
• Bonus/award of the Sales Manager
• Contract negotiations
• Winner takes it all!

12. Implementation
• Profit driven
• Recover the initial cost (also of the project proposals
lost)
• Change of scope / variation orders
• Delays
• Claims
• Reporting/ Progress Control
• Payment of instalments
• Performance guarantees
• Permanent negotiations

13. Completion
• Reporting/ Approval
• Performance / Compliance/ Acceptance
• Installment/ Final payment
• Completion of the guarantees

14. Possible anti-corruption
actions
• (Some) firms (Givers)
– Active implementation of a no corruption policy
– Business Integrity Management System
– Joining international initiatives (WEF, FIDIC)
– Termination of corruption prone activities
– Blacklisting of clients, governments, partners
• (Some) clients/governments (Takers)
– Rules and regulations
– Sanctions (blacklisting of firms, legal actions, …)
• (Some) facilitators
– Starting public debate
– Rules and regulations
– Control
– Sanctions

15. Best practice examples
• Conflict of Interest Laws
• E-procurement
• Disclosure of Income and Assets
• Whistleblower Protection
• Business Principles for Countering Bribery
(BPCB)
• Business Integrity Management System
• Integrity pacts

16. Integrity pacts
• To reduce high costs of corruption in
public procurement
• binding agreement (pact) between the
awarding agency and bidders for contracts
• Companies pledge to abstain from bribery,
government agrees not to solicit bribes
• Disclosure of payments e.g. to agents
• Code of conduct and compliance
programme