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OECD: Corruption in the Extractive Value Chain

May 13, 2016
Categories: Anti-corruption, Corruption, Government Procurement

At the 2016 Integrity Forum in Paris, the Organization for Economic Cooperation and Development (OECD) released its ‘Typology of risks, mitigation measures and incentives in the extractive chain’ report. The report analyzes patterns characteristic to corruption and encompasses a wide range of inter-connected policy areas, including procurement, licensing, tax matters and public financial management. The OECD developed the report on the basis of 131 concluded and ongoing corruption cases across a number of OECD countries. The report maps out the corruption schemes themselves, as well as the vehicles of corruption utilized in the execution of the schemes.

One area is which the report offers practical solutions to combatting corruption for both the private and public sectors, is in the area of public procurement.

Trillions of tax dollars are spent each year when public agencies procure goods and services.  This includes everything from essential infrastructure such as airports, roads, bridges to other services such as healthcare and education.  Too often, funds are diverted from these services for corrupt ends.

As Transparency International has noted, “Contracts to suppliers can be awarded without fair competition. This allows companies with political connections to triumph over their rivals. Or companies within the same industry can rig their bids, so each gets a piece of the pie. This increases the cost of services to the public. We’ve found that corruption can add as much as 50 per cent to a project’s costs.”

According to the OECD report, 57% of concluded foreign bribery cases between the years of 1999 and 2014 concerned issues of public procurement.

Top risk factors and recommended measures of mitigation

The OECD report identifies the predominant sources of corruption risk as well as best practices for risk mitigation.

Insufficient capacity for budget planning and execution

Particularly at the local level, lack of access to comprehensive and transparent budgetary information and revenue estimation and collection may result in poor cash planning and predictability of funds and systemic overestimation of revenues (World Bank, 2007). Additional weaknesses may include the lack of clear definition and segregation of roles and responsibilities among officers in charge of budget formulation and execution.

  • Mitigation measures: put in place transparency and accountability mechanisms, as well as a transparent and robust authorization process for spending, segregating roles in the authorization process.

Lack of transparency of public procurement processes

Corruption may arise from the lack of open, publicly advertised and competitive bidding for the selection of contractors and subcontractors.

  • Mitigation measures: favor public procurement and investment through open, competitive and transparent tendering procedures; Digitalize public procurement processes as a way to increase transparency, limit direct interactions between officials and potential suppliers, facilitate the detection of bid rigging cases; Debrief bidders on how the award decision was made. Set clear ethical standards and codes of conduct and provide certification and regular training for procurement officials. Perform regular audit and assessment of public expenditures through an independent control authority.

Inadequate control and monitoring by central authorities

Ineffective and insufficient state control and monitoring over local governments’ revenue administration may contribute to corruption, or, on the other end of the spectrum, overly rigid allocation rules may provide little leeway for local authorities to respond to unexpected or urgent needs, thereby incentivizing them to commit irregularities.

  • Mitigation measures: control and monitor decentralized resource revenue expenditures, one mechanism of control being the establishment of collective decision-making bodies involving national, provincial and/or municipal delegates; Prepare guidelines for the use of resource revenues at the local and community level.

Mismanagement of extra-budgetary allocations

Extra-budgetary allocations include those made to resource-related funds, special investment vehicles (e.g. regional development or targeted funds) or state-owned extractive companies. Risk factors specific to state-owned enterprises include: the lack of clear definition of their ownership structures and fiscal role, the lack of compliance with international accounting standards and inclusion of their financial information in the national budget (NEITI, 2011), and the lack of regular and independent audits.

  • Mitigation measures: ensure reporting and oversight of financial flows between state-owned enterprises and the state. This may involve establishing clear reporting requirements, commissioning audits of the state-owned enterprise by skilled independent professionals, and making results available to citizens.

 

Please find the report in full, available here.  For more information on corruption risk factors and prevention, please visit CREATe.org.

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