Corruption in public procurement and private sector ...

OTASC 7 (2) pp. 167–188 © Intellect Ltd 2010

Journal of Organisational Transformation and Social Change Volume 7 Number 2 © Intellect Ltd 2010. Article. English language. doi: 10.1386/jots.7.2.167_1

HELENA LINDSKOG, STAFFAN BREGE AND PER-OLOF BREHMER Linköping University, Linköping, Sweden

Corruption in public procurement and private sector purchasing ABSTRACT

KEYWORDS

This article points out similarities and differences between purchasing by the public and private sectors outgoing from concepts of procurement processes and buying centres. It also analyses corruption issues in both sectors’ purchasing activities. The focus is on public procurement within the European Union (EU), where member states have to follow the European Community directives for public procurement.

public procurement private sector purchasing corruption procurement processes buying centres

1. BACKGROUND Public procurement is a large part of any country’s economy, independently of its geographical location, political inclination or level of development. It can be considered as a special case of business transactions between organizations. The most important difference between public procurement and private companies’ purchasing is a stricter jurisdiction and the main reasons for that are to protect tendering companies from unfair treatment and to avoid corruption, bribery and the misuse of power by public procurers in general. Corruption is a global issue that undermines the rule of law, citizens’ democratic rights and loss of public resources. Public procurement is an area particularly sensitive to corruption, and many states have special anticorruption programmes to fight it. It can involve tendering mostly domestic

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Helena Lindskog, Staffan Brege and Per-Olof Brehmer

instead of international companies with effect on price levels, but it my also build closer relations between the actors (Arrowsmith 1998). The European Union’s (EU) legislation on public procurement aims to achieve fair treatment without discrimination, thus, also to avoid corruption.

2. PURPOSE The literature on public procurement has typically different kinds of legal perspectives, whereas the literature on purchasing is mainly focused on the private sector. Therefore we see a need to give theoretical contribution to public procurement from a business perspective. The purpose of this article is therefore to describe and analyse public procurement from a business point of view and to make comparisons with purchasing in the private sector. More specifically, we will • • •

present a generic model of the public procurement process from the buyer’s perspective, identify and analyse differences and similarities in public procurement and private purchasing with a special focus on the procurement process and buying centre approaches, discuss the dangers for corrupt behaviour in public and private (business) purchasing and make comparisons between private and public sector purchasing.

This study is limited to the EU countries.

3. PUBLIC AND PRIVATE SECTOR PROCUREMENTS

3.1. Public sector and its characteristics The public sector is dealing mainly with service delivery to citizens and enterprises. Private companies dominate production of almost all goods. However, since we are moving towards a service-producing economy, more and more private companies are selling services as part of their total offerings (Vargo and Lusch 2004). Their production pattern is becoming more similar to that of the public sector. Furthermore, today, many earlier typically government-provided services have been wholly or partly privatized. In this sense, the distinction between the private and public sectors is becoming more blurred. To provide the best possible service at the lowest possible price is the driving force for the development of the public sector, and not profitability. Therefore, competition is not necessary within the public sector. Instead, there are many opportunities to exchange information between public agencies. The public sector organizations as well as private companies can range from one person to several thousands of employees. Public organizations can be very local, like kindergartens, or with the responsibility to cover the whole nation, like ministries. Similarities and differences between private and public sectors’ organizations are summarized in Table 1 below. Public procurement can have different roles in addition to getting the best deal, including the achievement of economic, social or political objectives.

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Corruption in public procurement and private sector purchasing

Item

Private

Public

Competition Size of organizations Geographical dispersion - Local - Regional - National - International Production - Goods - Services Profit driven Openness/transparency Contacts with customers

yes 1–10,000+

no 1–10,000+

yes yes yes yes

yes yes yes yes (few)

yes yes yes no (limited) vary

no yes no yes many

Table 1: Comparison between public and private sectors characteristics (after Lindskog 2004).

3.2. Placing public procurement in the context of business relationships The table of Figure 1 puts public procurement (B2G) in a broader context. It shows relationships between main organizational and economic entities that are directly and/or indirectly involved or dependent on B2G. The main bodies are: companies/businesses (B), public agencies/government (G), citizens (Ci) and consumers (Co). The relation Government/Public Authority/Agency-to-Citizen (G2Ci) is often compared with the relation Business-to-Consumer (B2Co). On the one

Agency G

Agency G

Business B

B2G B –selling G -buying

Business B

Citizen Ci

G2B Service delivery to companies

G2Ci Service delivery to citizens

Consumer Co

B2B B – selling B – buying

B2Co B – selling C - buying

Citizen Ci Consumer Co

Co2Co Co – selling Co - buying

Figure 1: Private and private sectors business and businesslike relationships. Source: Own elaboration.

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1

The winner’s curse – a tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased.

hand, it is true that a company decides what kind of products to produce and in which way they should be marketed, sold and delivered. On the other hand, the consumers can choose freely between suppliers on a competitive market. An enterprise can also decide not to sell to some consumers/customers by not having business in specific regions or applying special conditions for buying their products such as requiring credit information, a certain age and so on. The situation is not the same in G2Ci. Seldom can a citizen freely (i.e. at negligible transaction cost) choose a country to live in and it is practically impossible for the government to renounce somebody’s citizenship and refuse to ‘do business’ with its own citizens by not giving them services stipulated by the law. The relationship between government and citizens is one of symbiotic dependency as citizens choose politicians and by doing so they decide what should or should not be delivered. However, it is also important to stress similarities. An agency responds to citizens’ needs and acts as a company that responds to customers’ needs. But at the same time the agency is limited in its acting by citizens’ democratic rights. The relationships G2B and G2Ci are important as citizens and businesses and other organizations put requirements on government for delivery of the public sector’s services at the best possible level and to the lowest possible cost, which in turn puts requirements on what should be purchased. The quality of many of the services delivered by the public sector is directly dependent on the products and services purchased by the public agencies. Another example of business relation is Consumer-to-Consumer (Co2Co), which now is growing fast on the national and international arenas through the usage of the Internet and different forms of social network/media. One international example is eBay. The relation between companies – Business-to-Business (B2B) – has also often been compared with the relation between government and companies – Government-to-Business (G2B) or Business-to-Government (B2G). The essential point for all B2B transactions is to get the best possible deal. A win-win situation is preferred so as to avoid an unbalanced contract that can result in either the winner’s curse1 or too high profits and dissatisfaction on the buyer’s side from the feeling of being cheated. For a company it is necessary to purchase to produce and afterwards sell its products for a profit. For a public agency, it is necessary to procure, which in most cases is financed by taxes, to produce and deliver services to citizens, companies and fellow agencies. The necessity to follow the national public procurement laws based on EC directives that in their turn are based on the fundamental pillars for public procurement in the EU has several implications. • • • • •

How public procurement process is carried out? What are the roles of different stakeholders? What are the procurers’ obligations? What are the rights of tenderers? What risks can procuring organizations take?

3.3. Public procurement jurisdiction Public procurement is in almost all situations and countries regulated by a specific legislation that is stricter than for the private sector purchasing activities.

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The private and public sector purchasing is in many ways similar, but the organization of the private buying process is not stipulated by law, and the suppliers that find themselves unfairly treated in a tender process have no legal jurisdiction to rely on. The closest similarity between public and private purchasing is probably in the acquisition of large investment, often called project purchasing or project marketing/selling (see Ahlström 2000; Bonnacorsi et al. 1996; Gelderman et al. 2006; Gunther and Bonnacorsi 1996; Roodhooft and van der Abeelle 2006). For members of the EU, it is mandatory to implement the EC procurement directives.2 The underlying legal basis for the EC procurement directives is contained in the Treaty of Rome from 1957. The main principles of this treaty that carry over to the procurement directives aim to

2

The latest EC directive on public procurement from 31 March 2004.

1. increase transparency of procurement procedures and practices throughout the community, 2. allow the free movement of goods, services, capital and people between member states, 3. develop effective competition for public contracts, 4. standardize specifications, 5. provide advance information of procurement needs to the marketplace. All public procurements in the EU have to follow five fundamental principles. Non-discrimination – all discrimination based on nationality or by giving preferences to local companies is prohibited. Equal treatment – all suppliers involved in a procurement procedure must be treated equally. Transparency – the procurement process must be characterized by predictability and openness. Proportionality – the requirements and qualification requirements must have a natural relation to the supplies, services or works that are being procured. Mutual recognition – the documents and certificates issued by the appropriate authority in a member state must be accepted in the other member states. Similar principles for public procurement are also valid in many countries outside EU. The European public procurement law prescribes that a number of procedures shall be followed: Open procurement procedure stipulates for the procuring entity to publish a call for tender-notice in the Tenders European Daily (TED). Interested suppliers can obtain the tender documentation (Request for Proposal, RfP) and are free to submit tenders. Restricted procedure is similar to the open one but the number of tenderers is restricted. Potential suppliers request participation in the procurement and the procuring entity makes a selection of suppliers based on the selection criteria specified in the RfP. These suppliers may submit tenders. Negotiated procedure can be used in exceptional cases for procurements of goods and services. Negotiated procedure is initiated in the same way

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as the restricted procedure. The tender-notice in TED must stipulate the possibility of negotiations. Following evaluation of received tenders, the procuring entity can negotiate with all or a number of the tenderers.

4. CORRUPTION Corruption is defined by Transparency International (2009a) as the abuse of entrusted power for private gain. Corruption can be classified as grand, petty and political. Grand corruption is defined as acts committed at a high level of government that distorts policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good. Petty corruption is defined as everyday abuse of entrusted power by lowand mid-level public officials in their interactions with ordinary citizens, who often are trying to access basic goods or services in places like hospitals, schools, police departments and other agencies. Political corruption is defined as manipulation of policies, institutions and rules of procedures in the allocation of resources and financing by political decision-makers, who abuse their position to sustain their power, status and wealth. Corruption has several negative effects on the society, the economy and individuals. It creates mistrust towards public officials and political decisionmaking as well as undermines the economical development as it increases unproductive costs for both private and public sectors.

4.1. Measuring corruption There are no straightforward methods to measure corruption due to the illicit nature of the issue and imprecise definition of what exactly should be considered as corruptive behaviour. Transparency International publishes every year Global Corruption Barometer with a Corruption Perceptions Index (CPI). It is based on an extensive questionnaire with interviews in almost all countries in the world. The CPI is based on areas of interest such as abuse of power for private gains, experience from public service providers, corruption in the private sector, in land management, in different institutions and so on. Special focus is on perceived corruption in political parties, parliament/legislation, business/private sector, media, public officials/civil servants and judiciary. Scores are then calculated from the perception results on a scale 0–10, where no corruption at all is given 10.

4.2. Measures to fight corruption One of the most common methods to fight corruption is accountability. Accountability means that individuals, agencies and organizations (public, private and civil society) are held responsible for executing their powers properly. In theory there are three forms of accountability. • •

Diagonal accountability is when citizens use government institutions to elicit better oversight of the state actions, and in the process engage in policy-making, budgeting, expenditure tracking and other activities. Horizontal accountability subjects public officials to restraint and oversight, or ‘checks and balances’ by other government agencies (i.e. courts,

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•

ombudsmen, auditing agencies, central banks) that can call into question, and eventually punish, an official for improper conduct. Vertical accountability holds a public official accountable to the electorate or citizenry through elections, a free press, an active civil society and other similar channels.

Another method is to have a code of conduct that consists of statement of principles and values that establishes a set of expectations and standards for how an organization, government body, company, affiliated group or individual will behave, including minimal levels of compliance and disciplinary actions for the organizations, its staff and volunteers. One of the methods more and more in use is debarment – procedure where companies and individuals are excluded from participating or tendering projects. Governments and multilateral agencies use this process to publicly punish businesses, non-governmental organizations (NGOs), countries or individuals found guilty of unethical or unlawful behaviour. Situations involving conflict of interest, for an individual or the entity for which they work, whether a government, business, media outlet or civil society organization, mean that the individual is confronted with choosing between the duties and demands of their position and their own private interests. In many countries procurement reformers and anti-corruption advocates are rightfully taking a holistic view in approaching procurement reform and anti-corruption initiatives. Such holistic approaches include • • •

Devising higher ethical standards for procurement officials Requiring asset disclosure for public officials of a certain rank or in a particular position Passing freedom of information laws (Matechak 2002).

4.3. EU policy on corruption There is a big diversion on perceived corruption between the EU member states. The latest CPI from 2009 shows the highest confidence 9.3 for Denmark and 9.2 for Sweden, and the lowest 3.8 for Bulgaria, Romania and Greece (Transparency International 2009b) (Figure 2). EU policy on corruption has three related but distinct objectives 1. ‘Initially, the policy was directed at protecting Community finances, in partial response to the widespread corruption that appeared to characterise EU institutions’ [Williams, 2006] ‘It is now an integral part of EU internal and external trade policy . . .’ 2. ‘to provide Member States’ citizens with a high level of safety in an area of freedom, security and justice, devoid of criminal activity, corruption, fraud, terrorism etc [. . .]’ 3. ‘relates to the liberalisation of the internal market, [. . .] The elimination of corruption facilitates competition by ensuring that corrupt practices do not hinder trade by interfering with transparent and open conduct of international trade [. . .] Corruption also increases the cost of economic activity thereby reducing the optimal use of resources.’ The fight against corruption is a priority of the EU’s political action in the context of building an Area of Freedom, Security and Justice. Since 1995,

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Rank

Country/Territory

CPI 2009 Score Surveys Used Confidence Range

1

New Zealand

9.4

6

9.1–9.5

2

Denmark

9.3

6

9.1–9.5

3

Singapore

9.2

9

9.0–9.4

3

Sweden

9.2

6

9.0–9.3

5

Switzerland

9.0

6

8.9–9.1

6

Finland

8.9

6

8.4–9.4

6

Netherlands

8.9

6

8.7–9.0

8

Australia

8.7

8

8.3–9.0

8

Canada

8.7

6

8.5–9.0

8

Iceland

8.7

4

7.5–9.4

11

Norway

8.6

6

8.2–9.1

12

Hong Kong

8.2

8

7.9–8.5

12

Luxembourg

8.2

6

7.6–8.8

14

Germany

8.0

6

7.7–8.3

14

Ireland

8.0

6

7.8–8.4

16

Austria

7.9

6

7.4–8.3

17

Japan

7.7

8

7.4–8.0

17

United Kingdom

7.7

6

7.3–8.2

19

United States

7.5

8

6.9–8.0

20

Barbados

7.4

4

6.6–8.2

21

Belgium

7.1

6

6.9–7.3

22

Qatar

7.0

6

5.8–8.1

22

Saint Lucia

7.0

3

6.7–7.5

24

France

6.9

6

6.5–7.3

25

Chile

6.7

7

6.5–6.9

25

Uruguay

6.7

5

6.4–7.1

27

Cyprus

6.6

4

6.1–7.1

27

Estonia

6.6

8

6.1–6.9

27

Slovenia

6.6

8

6.3–6.9

30

United Arab Emirates

6.5

5

5.5–7.5

31

Saint Vincent and the Grenadines

6.4

3

4.9–7.5

32

Israel

6.1

6

5.4–6.7

32

Spain

6.1

6

5.5–6.6

34

Dominica

5.9

3

4.9–6.7

35

Portugal

5.8

6

5.5–6.2

35

Puerto Rico

5.8

4

5.2–6.3

Figure 2: Corruption perceptions index scores for 2009 showing 25 EU member states and the least corrupt New Zealand, the most Somalia. Source: Transparency International 2009a, CPI Report.

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Rank

Country/Territory


37

Botswana

5.6

6

5.1–6.3

37

Taiwan

5.6

9

5.4–5.9

39

Brunei Darussalam

5.5

4

4.7–6.4

39

Oman

5.5

5

4.4–6.5

39

Korea (South)

5.5

9

5.3–5.7

42

Mauritius

5.4

6

5.0–5.9

43

Costa Rica

5.3

5

4.7–5.9

43

Macau

5.3

3

3.3–6.9

45

Malta

5.2

4

4.0–6.2

46

Bahrain

5.1

5

4.2–5.8

46

Cape Verde

5.1

3

3.3–7.0

46

Hungary

5.1

8

4.6–5.7

49

Bhutan

5.0

4

4.3–5.6

49

Jordan

5.0

7

3.9–6.1

49

Poland

5.0

8

4.5–5.5

52

Czech Republic

4.9

8

4.3–5.6

52

Lithuania

4.9

8

4.4–5.4

54

Seychelles

4.8

3

3.0–6.7

55

South Africa

4.7

8

4.3–4.9

56

Latvia

4.5

6

4.1–4.9

56

Malaysia

4.5

9

4.0–5.1

56

Namibia

4.5

6

3.9–5.1

56

Samoa

4.5

3

3.3–5.3

56

Slovakia

4.5

8

4.1–4.9

61

Cuba

4.4

3

3.5–5.1

61

Turkey

4.4

7

3.9–4.9

63

Italy

4.3

6

3.8–4.9

63

Saudi Arabia

4.3

5

3.1–5.3

65

Tunisia

4.2

6

3.0–5.5

66

Croatia

4.1

8

3.7–4.5

66

Georgia

4.1

7

3.4–4.7

66

Kuwait

4.1

5

3.2–5.1

69

Ghana

3.9

7

3.2–4.6

69

Montenegro

3.9

5

3.5–4.4

71

Bulgaria

3.8

8

3.2–4.5

71

FYR Macedonia

3.8

6

3.4–4.2

Figure 2: Continued

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Rank

Country/Territory


71

Greece

3.8

6

3.2–4.3

71

Romania

3.8

8

3.2–4.3

75

Brazil

3.7

7

3.3–4.3

75

Colombia

3.7

7

3.1–4.3

75

Peru

3.7

7

3.4–4.1

75

Suriname

3.7

3

3.0–4.7

79

Burkina Faso

3.6

7

2.8–4.4

79

China

3.6

9

3.0–4.2

79

Swaziland

3.6

3

3.0–4.7

79

Trinidad and Tobago

3.6

4

3.0–4.3

83

Serbia

3.5

6

3.3–3.9

84

El Salvador

3.4

5

3.0–3.8

84

Guatemala

3.4

5

3.0–3.9

84

India

3.4

10

3.2–3.6

84

Panama

3.4

5

3.1–3.7

84

Thailand

3.4

9

3.0–3.8

89

Lesotho

3.3

6

2.8–3.8

89

Malawi

3.3

7

2.7–3.9

89

Mexico

3.3

7

3.2–3.5

89

Moldova

3.3

6

2.7–4.0

89

Morocco

3.3

6

2.8–3.9

89

Rwanda

3.3

4

2.9–3.7

95

Albania

3.2

6

3.0–3.3

95

Vanuatu

3.2

3

2.3–4.7

97

Liberia

3.1

3

1.9–3.8

97

Sri Lanka

3.1

7

2.8–3.4

99

Bosnia and Herzegovina

3.0

7

2.6–3.4

99

Dominican Republic

3.0

5

2.9–3.2

99

Jamaica

3.0

5

2.8–3.3

99

Madagascar

3.0

7

2.8–3.2

99

Senegal

3.0

7

2.5–3.6

99

Tonga

3.0

3

2.6–3.3

99

Zambia

3.0

7

2.8–3.2

106

Argentina

2.9

7

2.6–3.1

106

Benin

2.9

6

2.3–3.4

106

Gabon

2.9

3

2.6–3.1

Figure 2: Continued

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Rank

Country/Territory


106

Gambia

2.9

5

1.6–4.0

106

Niger

2.9

5

2.7–3.0

111

Algeria

2.8

6

2.5–3.1

111

Djibouti

2.8

4

2.3–3.2

111

Egypt

2.8

6

2.6–3.1

111

Indonesia

2.8

9

2.4–3.2

111

Kiribati

2.8

3

2.3–3.3

111

Mali

2.8

6

2.4–3.2

111

Sao Tome and Principe

2.8

3

2.4–3.3

111

Solomon Islands

2.8

3

2.3–3.3

111

Togo

2.8

5

1.9–3.9

120

Armenia

2.7

7

2.6–2.8

120

Bolivia

2.7

6

2.4–3.1

120

Ethiopia

2.7

7

2.4–2.9

120

Kazakhstan

2.7

7

2.1–3.3

120

Mongolia

2.7

7

2.4–3.0

120

Vietnam

2.7

9

2.4–3.1

126

Eritrea

2.6

4

1.6–3.8

126

Guyana

2.6

4

2.5–2.7

126

Syria

2.6

5

2.2–2.9

126

Tanzania

2.6

7

2.4–2.9

130

Honduras

2.5

6

2.2–2.8

130

Lebanon

2.5

3

1.9–3.1

130

Libya

2.5

6

2.2–2.8

130

Maldives

2.5

4

1.8–3.2

130

Mauritania

2.5

7

2.0–3.3

130

Mozambique

2.5

7

2.3–2.8

130

Nicaragua

2.5

6

2.3–2.7

130

Nigeria

2.5

7

2.2–2.7

130

Uganda

2.5

7

2.1–2.8

139

Bangladesh

2.4

7

2.0–2.8

139

Belarus

2.4

4

2.0–2.8

139

Pakistan

2.4

7

2.1–2.7

139

Philippines

2.4

9

2.1–2.7

143

Azerbaijan

2.3

7

2.0–2.6

143

Comoros

2.3

3

1.6–3.3

Figure 2: Continued

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Rank

Country/Territory


143

Nepal

2.3

6

2.0–2.6

146

Cameroon

2.2

7

1.9–2.6

146

Ecuador

2.2

5

2.0–2.5

146

Kenya

2.2

7

1.9–2.5

146

Russia

2.2

8

1.9–2.4

146

Sierra Leone

2.2

5

1.9–2.4

146

Timor-Leste

2.2

5

1.8–2.6

146

Ukraine

2.2

8

2.0–2.6

146

Zimbabwe

2.2

7

1.7–2.8

154

Côte d´Ivoire

2.1

7

1.8–2.4

154

Papua New Guinea

2.1

5

1.7–2.5

154

Paraguay

2.1

5

1.7–2.5

154

Yemen

2.1

4

1.6–2.5

158

Cambodia

2.0

8

1.8–2.2

158

Central African Republic

2.0

4

1.9–2.2

158

Laos

2.0

4

1.6–2.6

158

Tajikistan

2.0

8

1.6–2.5

162

Angola

1.9

5

1.8–1.9

162

Congo Brazzaville

1.9

5

1.6–2.1

162

Democratic Republic of Congo

1.9

5

1.7–2.1

162

Guinea-Bissau

1.9

3

1.8–2.0

162

Kyrgyzstan

1.9

7

1.8–2.1

162

Venezuela

1.9

7

1.8–2.0

168

Burundi

1.8

6

1.6–2.0

168

Equatorial Guinea

1.8

3

1.6–1.9

168

Guinea

1.8

5

1.7–1.8

168

Haiti

1.8

3

1.4–2.3

168

Iran

1.8

3

1.7–1.9

168

Turkmenistan

1.8

4

1.7–1.9

174

Uzbekistan

1.7

6

1.5–1.8

175

Chad

1.6

6

1.5–1.7

176

Iraq

1.5

3

1.2–1.8

176

Sudan

1.5

5

1.4–1.7

178

Myanmar

1.4

3

0.9–1.8

179

Afghanistan

1.3

4

1.0–1.5

180

Somalia

1.1

3

0.9–1.4

Figure 2: Continued

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the institutions have developed a comprehensive anti-corruption strategy that involves activities in different public sectors. One area of special interest is public procurement, due to the volume of economical resources involved, which makes it a tempting area for corrupt behaviour (after Medina Arnaiz 2006).

5. BUSINESS-TO-BUSINESS AND BUSINESS-TO-GOVERNMENT From the buying process perspective, public organizations’ buying activities can be compared with companies’ purchasing activities including the distinctions in buying goods and/or services, outsourcing or in-house production with the related discussion about ‘core’ business, competencies and processes. Rainey and Bozeman (2000) compare in their extensive study public and private organizations in the United States. One of their conclusions is that there are two main areas that differ between public and private organizations: personnel procedures and purchasing processes. Two main aspects of organizational buying are analysed below: • •

the buying process characterized by buying phases; the buying centre characterized by roles.

5.1. Organizational buying process Wind and Thomas (1980) define the buying process ‘From the time at which a need arises for a product or service, to the purchase decision and its subsequent evaluation, a complex of myriad activities can take place’. Many researchers (Robinson et al. 1967; Webster 1965; Wind and Thomas 1980) have been working on modelling the organizational buying process. Robinson et al. (1967) present a conceptual framework of the industrial buying process with eight phases, that is also adapted by Kotler (1997). 1. anticipation or recognition of a problem as well as awareness of possibility to solve a problem by purchasing, 2. determination of the characteristics and quantity of the needed item, 3. description of the characteristics and quantity of the needed item, sometimes in close contacts with suppliers, 4. search for and qualification of potential sources regarding suppliers’ organization, buying situation and so on, 5. acquisition and analysis of proposals – vary depending on the complexity of required item and market situation, 6. evaluation of proposals and selection of suppliers and often negotiations, 7. selection of an order routine, 8. performance feedback and evaluation of how the bought product or service solved the initial problem. 5.1.2. Public procurement buying process

Buyer’s public procurement process can also be presented showing the dependencies between different categories as in Figure 3. The categorization was carried out by using axial coding (Goldkuhl and Cronholm 2003; Strauss and Corbin 1998) and was based on an investigation of the public procurement process of telecom services (Lindskog 2008).

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K1 K0 K2

K4

K3

K5

K0 – Anticipation of need to start K1 – Market investigation - suppliers K 2 – Market investigation – users K 3 – Collection and analysis of needs K 4 – Development of RfP K 5 – Evaluation of tenders K 6 – Decision taking and contract signing K 7 - Administration of the contract

K6 K7

Figure 3: Categorization of the process of public procurement (after Lindskog 2008). Categories: K 0 – Anticipation of need to start a procurement process K 1 – Market investigation – suppliers: Public agencies can have contacts with manufacturers, operators and standardization organizations in the pre-study and market investigation phase. It is important to make use of this possibility to avoid unrealistic or costly requirements as well as to miss important future services, solutions or functions ‘in the pipeline’. K 2 – Market investigation – users: To find information of what others already have done in similar types of procurement. To meet other public agencies, private companies and/or users’ associations in the own country or abroad and learn from their experiences in procurement can be a very efficient way to develop RfPs and to avoid repeating errors committed by others. K 3 – Collection and analysis of needs: This is an internal activity to understand what is needed in detail. Collection and analysis of needs often start with an analysis of the current situation and sometimes with a formulation of a vision and a strategy to realize this vision. The vision can concentrate on ‘core’ activities, improvement of the service level towards citizens and businesses, increased efficiency and reduction of costs. K 4 – Development of RfP: This is the central activity for the public procurement. The RfP cannot be changed after being published and it includes mandatory and non-mandatory requirements and evaluation criteria. K 5 – Evaluation of tenders: Tenders that do not comply with mandatory requirements are rejected and most of the evaluation will be concentrated on non-mandatory requirements and prices following the evaluation criteria. As a result one or several suppliers are chosen for decision taking. K 6 – Decision taking and contract signing: Decision taken by the procuring organization is valid only after giving during the stipulated time the possibility for the losing tenderers to make (a court) appeal if they consider themselves being mistreated. 180

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K 7 – Contract administration: This is a continuous activity throughout the contract duration, including control of delivery, ordering, payments of bills, execution of penalties for non-delivery or poor quality. The categories K 1, K 2 and K 3 often take place in parallel. From the start of K 4 – development of RfP – contacts between possible suppliers and the procuring organization must cease in order not to exclude the companies from bidding. The RfP has a central role in public procurement, as this document, which cannot be changed after being published, is the base for what will be the result of the whole procurement, as well as the legal reference in case of any dispute. The RfP must be correct from the juridical point of view. However, that is not enough as the RfP can be formally correct and still include badly formulated requirements. The tabula rasa approach is the most common for public procurements. It means that each public procurement is treated as a new task (Kotler 1997; Robinson et al. 1967), but all the existing knowledge and gained experiences from earlier procurements is used to have the most adequate RfP and to get the best deal. Limited contacts between buyers and tenderers put high demand on the procuring organization to structure the requirements of the purchased service or equipment because published ‘request for proposal’ cannot be changed. Consequently, the seller cannot change a sent proposal and only under some special circumstances supplement additional information. In contrast, private companies do not reveal their needs and detailed requirements by publishing them openly visible for everybody. What mostly characterizes the private market is active sellers looking for opportunities to sell their products or services. Negotiations, changing of terms, prices, requirements, adding extra functionality, reducing the number of licenses and so on can occur up to the last moment of signing a contract. To reveal detailed results such as special terms or prices is often not considered to be beneficial to both sides. 5.1.3. Comparison between public procurement and private sector buying processes

The buying processes of B2B and B2G have similar structures and the eight phases (Kotler 1997; Robinson et al. 1967) can be easily compared with eight previous categories as shown in Table 2. The distinctions between different phases in the private purchasing process are not strict and the phases can easily overlap. It is possible to have contacts with different suppliers during the whole process. It is possible to add or take out features and requirements and all parts of the specification can be negotiated. The situation is very different for the buying public agency, especially considering the central role of the RfP and possibilities to have contacts between selling and buying parties. 5.1.4. Corruption in public sector and buying process

The risk of corruption can have different origin and is dependent of the type of product and service that is to be procured. The risks exist in almost all the phases of the buying process, as shown in Table 3. Transparency, control and monitoring during the whole procurement process is necessary. At the same time it is important to distinguish between cases of corruption and cases of inefficiency, lack of knowledge or capacity. 181

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B2B

B2G

Private sector buying according to Robinson et al. (1967) and Kotler (1997)

Public sector buying process according to Lindskog (2008)

Phase 1 Anticipation or recognition of a problem

K 0 – Anticipation of need for starting a public procurement process

Phase 2 Determination of the characteristics and quantity of the needed item Phase 3 Description of the characteristics and quantity of the needed item Selection of an order routine Phase 4 Search for and qualification of potential sources Phase 5 Acquisition and analysis of proposals Phase 6 Evaluation of proposals and selection of suppliers

K 2 – Market investigation – users K 3 – Collection and analysis of needs

Phase 7 Selection of an order routine Phase 8 Performance feedback and evaluation

K 4 – Request for proposal development

K 4 – Request for proposal development

K1 – Suppliers market investigation K 5 – Evaluation of offers K 5 – Evaluation of offers K 6 – Decision-making and contract signing

K 7 – Contract administration

Table 2: Comparison between B2G and B2B buying processes.

B2G Public sector’s buying process according to Lindskog (2008) K 0 – Anticipation of need for starting a public procurement process K 1 – Suppliers market investigation K 2 – Market investigation – users K 3 – Collection and analysis of needs

K 4 – Request for Proposal development K 5 – Evaluation of offers

K 6 – Decision-making and contract signing K 7 – Contract administration

Examples of main risks of corruption in different phases of public procurement process Creation of need without any rationale other than own gains Meetings with suppliers give also opportunities to receive ‘gifts’ Pre-study is carried out by the same person/organization that later is involved in tendering process Request of proposal requirements are in favour of a specific supplier and not real needs Information given to the tenderers in order to influence, for example, negotiations Evaluation criteria not clear Subjective evaluation Decision made on unclear grounds Not reporting problems, changes in performance, quality

Table 3: Risks of corruption in different phases of public procurement buying process.

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5.2. The buying centre model Generally speaking, a buying centre can be a group of employees in an organization who are responsible for evaluating products and services and making purchase decisions. The concept of the buying centre was introduced by Robinson et al. (1967) and defined as ‘Individuals who are related directly to the purchasing process, whether users, buying influencers, decision makers or actual purchasers.[. . .]’ In a business environment for major purchases, there is a need of having input from various parts of the organization. Typically, the main roles distinguished in the buying centre approach are • • • • •

End-users for whom goods or services are purchased Influencers who try to affect the decision Deciders who make the final decision Buyers who arrange the transaction and are responsible for the contract Gatekeepers, anyone who can control the flow of information.

These five roles were originally proposed by Webster and Wind (1972). •

Initiators, persons that initiate the idea or a purchase as added by Bonoma (1982).

5.2.1. Public procurement stakeholders

Public procurement can suit other than purely utilitarian and economic goals and have an agenda written by politicians. It can involve societal, environmental or other political issues. Examples of such goals are new EU directives for the public procurement that impose a procuring organization to specify and take into consideration environmental and social requirements that are harder than the national law, and this law need not be followed by private companies. In the domain of telecommunications, campaigns such as ‘Broadband to every household’, deregulation of previous monopolies and forced competition can have a potentially high impact on public procurement. The main stakeholders in public procurement (following Lindskog 2006) are ◦

Politicians Politicians are elected by citizens and responsible towards them for their decisions and initiatives. Their voters in the next election evaluate politicians’ achievements. The political decisions depend on their party’s current policy. • •

◦

◦

Central government They formulate visions and take overall responsibility for the whole country. The execution is delegated to the authorities. Local government They are responsible for the local authority, community

Agency designated to procure on behalf of other agencies Agency that has been assigned by the central government to procure and sign framework contracts for specific functions or equipment on behalf of other agencies. Agency

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The authority’s overall goal is to deliver the best possible service to the lowest cost. • • •

◦

Agency management Management is responsible for running and making decision in the agency corresponding to the company management. Procurement department The procurement department is responsible for buying activities at the agency. End-users/employees End-users are employees that will use the specific function, service or equipment that is procured.

Citizens and businesses The general public, citizens and businesses are agencies’ customers. Stakeholders and the buying centre roles are interrelated. Different stakeholders can take the buying centre’s roles.

5.2.2. Public and private buying centres

The Initiators in the concept of the buying centre are the first to recognize the need (Table 4). The Initiator is often either the end-user or the buyer. There are two main situations for purchasing: the need of new solutions or products recognized by the end-user and the need of re-purchasing, recognized by the buyer. In case of a straight re-buy, you go from the recognition of the need to The buying centre’s roles according to Webster and Wind (1972), Robinson et al. (1967), Bonoma (1982) End-users for whom goods or services are purchased

The buying centre’s roles for B2B

Stakeholders in the public procurement, B2G, according to Lindskog (2006)

For example, office staff

Influencers who try to affect the decision

For example, engineers, researchers, product managers For example, CEO

End-users-employees and sometimes agencies’ customers (schools, hospitals, roads, etc.) Citizens, labour unions or employees

Deciders who make the final decision Buyers who arrange the transaction and are responsible for the contract Gatekeepers anyone who can control the flow of information Initiators persons that initiate the idea or a purchase

For example, purchasing agent For example, administrative assistant For example, sales staff, researchers

Often agency management, sometimes politicians in case of local government Mostly employees from procurement departments or specially designated agencies Virtually non-existent because of insight policy and registration of all incoming information Procurement department’s employees in case of expiring contracts, Politicians to realize their visions End-users in need of new functions, equipment or service Customers/clients requesting better service level towards them

Table 4: Comparison between buying centre’s roles and public procurement stakeholders. 184

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purchasing. In case of recognition of a need of new solutions or products, the members of the buying centre will attempt to identify multiple suppliers. For the suppliers, it becomes a key activity to get an opportunity to present their products and solutions, and start a dialogue with the buyer and other members of the buying centre. The decision process for big or strategic purchasing in the public procurement often has many stakeholders including political decisions being intertwined with business. That gives several opportunities for corruption. 5.2.3. Corruption and buying centres

The public sector buying centres often have more stakeholders with a more complicated structure and division of power. This makes it an attractive area for corruption by trying to influence some of the individuals or groups participating in the buying centre. This is one of the areas that, for example, the EU pays special attention to using debarment or exclusion of companies or individuals in tendering for public contracts as a means of fighting corruption, this applying to those that have been convicted of corruption, fraud, money laundering or been defined as criminal organizations.

6. CONCLUSIONS

6.1. Differences between public procurement and private sector purchasing Despite differences, the public procurement buying process is in general similar to the company buying process. The eight-phase model for the private sector buying process matches quite well the eight categories found in this research. The differences mainly depend on the fact that public procurements have to follow the public procurement law that imposes more rigorous procedures, making the RfP role central, as it cannot be changed after being published. This implies that all categories before and including the development of the RfP are crucial. The main difference is that the search for potential sources must be done before publishing the RfP. In general, the public procurement process is much less iterative, as all discussions must take place before the start of the work on the RfP. All essential technical and organizational requirements as well as evaluation criteria must a priori be decided and published because of the restrictions from the public procurement law. Companies that have been involved in pre-studies or development of any part of the RfP must be excluded as potential tenderers. Another important difference is the possibility for the losing tenderers to appeal (in the court) if they consider themselves being mistreated by the procuring organization or if the procuring organization did not comply with the current national public procurement law or any of the five fundamental public procurement principles for EU countries. The buying centre model can easily be applied in the public procurement context. The main differences are the politicians’ and governments’ pronounced policy roles, which goes back to the raison d’être for the government (serving the citizens) compared with private companies (profit) and smaller amount of gatekeepers due to insight and transparency in government dealings. The buying centre for the public sector organizations is often more complex with double responsibilities – political and administrative – especially in the case of big volume or strategic procurements. 185

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6.2. Public and business procurement and the risk for corruption Risks of corruption are discussed outgoing from two presented models for purchasing activities: procurement processes and buying centres for public and private organizations. The purpose of the juridical framework around public procurement is to guarantee fair treatment and to prevent any type of ‘irrational favouring’ that in extremes can, for example, be bribes. There are several examples from the juridical literature on this subject (Arrowsmith 1998, 2005). When private companies carry out procurements of similar types, they neither need to give any account of the logic behind their choice of suppliers nor the steps in the procurement process need to be shown. That gives a bigger structural scope for arbitrary decisions. However, this does by no means imply that corruption is excluded within the private sector. Also many companies try to avoid nepotism and ‘friendly’ corruption by changing purchasers for the specific suppliers every few years. Most companies have also strict rules for taking presents/gifts. The decision process for big or strategic public procurements often have many stakeholders and politics and business may be intertwined. Such a constellation gives more opportunities for corruption. Private companies have typically smaller and less complicated buying centres that also results in lower risks for corruption. On the other hand, however, in general, the risk of corruption is higher when only one person is responsible. The most important demarcation line is not between public and private but in cultural and political differences. Already, the CPI investigation (Transparency International 2009a) shows that the confidence in the EU member states ranges from 9.3 as the highest to 3.8 as the lowest. One of the most important elements on fighting corruption in purchasing and especially public procurements is to have a political commitment that gives a good example and does not tolerate any forms of even petty corruption.

REFERENCES Ahlström, M. (2000), Offset Management for Large Systems – A Multibusiness Marketing Activity, Linköping University, Studies in Management and Economics, Dissertation. Arrowsmith, S. (1998), ‘Towards a Multilateral Agreement on Transparency in Government Procurement’, International and Comparative Law Quarterly, 47, pp. 793–816. ——— (2005), The Law of Public and Utilities Procurement (2nd edition), London: Sweet & Maxwell. Bonaccorsi, A., Pammolli, F. and Tani, S. (1996), ‘The changing boundaries of system companies’, International Business Review, 5: 1. Bonoma, T.V. (1982), Major Sales; Who Really Does the Buying?, Harvard Business Review, May–June, pp. 11019. Gelderman, C.J., Ghijsen, P.W.T. and Brugman, M.J. (2006), ‘Public procurement and EU tendering directives – explaining non-compliance’, International Journal of Public Sector Management, 19: 7, pp. 702–714. Goldkuhl, G. and Cronholm, S. (2003), ‘Multi-grounded Theory – Adding Grounding to Grounded Theory’, Proceedings of the 2nd European Conference on Research Methods in Business and Management (ECRM 2003), Reading, UK.

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Gunter, B. and Bonaccorsi, A. (1996), ‘Project marketing and system selling – in search of frameworks and insights’, International Business Review, 5: 6. Kotler, P. (1997), Marketing Management Analysis, Planning, Implementation, and Control (9th edition), New Jersey: Prentice Hall. Lindskog, H. (2006), Ethical Considerations of Outsourcing of Call Center Function in the Public Sector. Proceedings of 9th QMOD (Quality Management and Organisational Development), Liverpool. ——— (2008), Process of Public Procurement of Telecom Services – the Buyer’s Perspective. Proceedings of 7th ISOneWorld Conference, Las Vegas. Matechak, J.P. (2002), Fight Corruption in Public Procurement. Center for International Private Enterprise, CIPE: Washington, July. Medina Arnaiz, T. (2006), Grounds for Exclusion in Public Procurement: Measures in the Fight against Corruption in European Union. Proceedings of IPPC 2 Conference, Rome, July, pp. 331–52. Rainey, H.G. and Bozeman, B. (2000), Comparing Public and Private Organizations: Empirical Research and the Power of the A Priori, Journal of Public Administration Research and Theory, 10: 2, pp. 447–69. Robinson, P.J., Faris, C.W. and Wind, Y. (1967), Industrial Buying and Creative Marketing, Allyn and Bacon Inc.: Boston. Roodhooft, F., and Van den Abbeele, A., (2006), ‘Public procurement of consulting services: Evidence and comparison with private companies’, International Journal of Public Sector Management, 19: 5, pp. 490–512. Sheth, J.N. (1973), A Model of Industrial Buyer Behaviour, Journal of Marketing, 37: 4, pp. 50–56. Strauss, A. and Corbin, J. (1998), Basics of Qualitative Research. Techniques and Procedures for Developing Grounded Theory (2nd edition), Sage: Newbury Park, CA. Thai, K.V. et al. (2004), Challenges in Public Procurement. PRAcademic Press: Boca Raton, Florida, USA. Transparency International (2009a), Global Corruption Barometer 2009, International Secretariat: Berlin, Germany. ——— (2009b), The Anti-Corruption Plain Language Guide, International Secretariat: Berlin, Germany, July. Vargo, S. and Lusch, R. (2004), Evolving to a New Dominant Logic for Marketing, Journal of Marketing, 68, January, pp. 1–17. Webster, F.E. (1965), Modeling the Industrial Buying Process, Journal of Marketing Research, 2, pp. 370–76. ——— (1991), Industrial Marketing Strategy (3rd edition), John Wiley and Sons: USA. Webster, F.E. and Wind, Y. (1972), Organizational Buying Behavior, Prentice Hall: Englewood Cliffs, NJ. Williams, S. (2006), The Mandatory Exclusions for Corruption in the New EC Procurement Directives, European Law Review, 31: 5, pp. 711–734. Wind, Y. and Thomas, J.R. (1980), Conceptual and Methodological Issue in Organizational Buying Behaviour, European Journal of Marketing, 14, pp. 239–286. Websites: http://ec.europa.eu/idabc www.europarl.eu.int/experts http://web.worldbank.org www.avropa.nu www.esv.se http://ted.europa.eu/ http://www.transparency.org http://www.cipe.org http://www.atkearney.com

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SUGGESTED CITATION Lindskog, H., Brege, S., & Brehmer, P-O. (2010), ‘Corruption in public procurement and private sector purchasing’, Journal of Organisational Transformation and Social Change 7: 2, pp. 167–188, doi: 10.1386/jots.7.2.167_1

CONTRIBUTOR DETAILS Helena Lindskog, Ph.D., is an expert and senior lecturer at the Department of Management and Engineering, Linköping University, in Sweden. She has 25 years of experience in the field of information technology and telecom within both private and public sectors concerning issues related to general advising, strategy, leadership, training and procurement. She has been technical director for STATTEL-delegation (responsible for procurement of telecommunications for the Swedish public sector), secretary in governmental commissions, Swedish representative to the European Commission and standardization organization – ETSI, evaluator of research programmes, adviser to public administrations, business developer at Ericsson with the user perspective always in focus and author of a book Time-rich and Time-poor – The New Classes of the Society. Contact: Department of Management and Engineering, Linköping University, SE-581 83 Linköping, Sweden. E-mail: [email protected] Staffan Brege is professor of Industrial Marketing and head of the division of Industrial Marketing at Linköping University. His research is mainly focused upon issues within the areas of B2B marketing and business development, including topics such as relationship marketing, value-added strategies, industrial services, outsourcing and functional sales. Professor Brege is the author of ten books and some 25 articles in refereed journals. He also works as a consultant in strategy and marketing and is at the moment a member of five company boards. Contact: Department of Management and Engineering, Linköping University, SE-581 83 Linköping, Sweden. E-mail: [email protected] Per-Olof Brehmer is Associate Professor in Industrial Marketing and head of the Department of Management and Engineering, Linköping University. He received his Ph.D. in Logistics Management from Linköping Institute of Technology. His research topics are value-creation strategies, industrial services, ICT effect on competitiveness and especially strategies for innovations and service development in knowledge-intensive industries that shift their competitive power from products to services. He is currently working in a three-year research project on service development and innovation in international companies. He has been research leader for research projects in collaboration with industry concerning value-creation strategies, industrial services and industry competitiveness. Contact: Department of Management and Engineering, Linköping University, SE-581 83 Linköping, Sweden. E-mail: [email protected]

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