Understanding tender corruption – part two

By Kavisha Pillay

The World Bank notes that public procurement is an area where the public and private sector co-operate financially and involves relatively few but high level transactions. Consequently, procurement officers have more to gain by sidestepping procedures and engaging in corrupt activities.

In Corruption Watch’s recent submission to the Constitutional Court in the case brought against the South African Social Security Agency by Allpay, which lost out on a R10-billion tender to distribute social grants, the civil society organisation states that tender procedures are necessary to “provide checks and balances in order to inter alia minimise procurement corruption”.

In the submission, Corruption Watch also noted that the Constitutional Court made it clear, in a 2011 case, that the government is constitutionally required to put in place mechanisms to tackle corruption. This is because corruption undermines the ability of the government to deliver on its obligations laid out in the Bill of Rights, including social and economic rights.

Because of the prevalence of corruption – not just in South Africa, but worldwide – in public procurement and supply chain management, Corruption Watch has made this form of corruption one of its focus area for 2013.

Procurement corruption has many forms

There are a number of ways in which corruption occurs in public procurement. They include :

Bribery – seen as the most common type of corruption, it can be understood as an offer of money, goods or services in order to gain an advantage. Bribes can be used to avoid red tape, speed up procedures and influence the allocation of tenders. Active bribery refers to the offence committed by the person who promises or gives the bribe, while passive bribery is the offence committed by the official who receives the bribe. Active bribery occurs on the supply side, passive bribery on the demand side.

A Corruption Watch reporter described the experience thus: “I tendered for land but was asked by the Mayor to pay a R1 000 000 bribe. I did not comply and needless to say I did get the tender for the land in the end. I prefer to stay anonymous as these people are very dangerous and I fear that they may hurt my family.”

Bid-rigging – takes place when companies conspire to fix the price for goods and services, purchased through a bidding process, to an affectedly high level. Examples of bid-rigging include :

• Excluding qualified bidders – qualified bidders are wrongly disqualified in order to promote a favoured bidder;
• Manipulation of bids – procurement officers tamper with bids after submission in order to ensure that a predetermined company is awarded the tender. This involves making changes to parts of bids or bid scores;
• Rigged specifications – procurement officer modifies the criteria in the requests for proposals to fit a particular company;
• Unbalanced bidding – procurement officer provides the favoured firm relevant information which is not shared with other participants in the bidding process.

Bid-rigging was pointed out in a recent tip-off to Corruption Watch: “The Treasurer, School Principal and Finance Officer have ignored the resolution of a school adjudication committee and School Governing Body and changed the amounts of the school tender without following procedures. They paid the contractor immediately after changing the amounts before he completed the job. These payments are unauthorised and irregular in terms of departmental prescripts and South African Schools Act since they should have been authorised by SGB Chairperson. They are also not allowed to change the resolutions of the School Governing Body. Please investigate”

Collusive bidding by contractors – contractors work together to co-ordinate markets, prices and production with the goal of increasing their own profits by reducing competition – this can be defined as a cartel. Examples of collusion include :

• Complementary bidding – occurs when competitors agree in advance who will submit the winning bid. Such bidding involves one or more of the following:
  • A participant in the bidding process agrees to put forward a bid that is higher than the bid of the appointed bidder;
  • A participant in the bidding process offers a bid that is known to be too high to be accepted;
  • A participant submits a bid that contains special conditions that are known to be undesirable to the purchaser;
• Bid suppression – occurs where one or more of the competitors agree to refrain from bidding so that one of the competitors, the appointed winner, can win the contract;
• Bid rotation – occurs when competitors take turns being the successful bidder;
• Market division – the conspirers may carve up markets in different segments and agree to not compete in each other’s segments.

In 2007, bread companies were fined by the South African Competition Commission for colluding with each other to raise the price of bread to between 30c – 35c per loaf.

Extortion – entails causing harm or threatening a person in order to gain something.

Fraud – involves some kind of deceit and manipulation or distortion of information by a public officer with the intention to seek personal gain.

A report submitted to Corruption Watch states that “*** the Deputy Principle at *** College purchased a software that costs R750 000.00 and it was never delivered. She did quotations herself without following tender processes. The service provider was paid but the software was never delivered.”

Nepotism – favouring friends and family when granting jobs or benefits. In 2013, Corruption Watch exposed nepotism at the JS Moroka Municipality when procurement officer Rabelani Thukwana illegally awarded a contract worth R24 000 to her husband.

Patronage system – takes place when local public office holders grant favours, jobs and contracts in return for political support.

Another report received by Corruption Watch highlights this practice: “My complaint is that a service provider named T*** was appointed even though their price was too high; more than R8 million. According to my information, T*** was disqualified from the tender process on the basis of their price but were somehow still appointed. The owner of T***, Mr xxx is a friend to the Strategic Executive Head in the Office of *** namely Mr yyy. Our suspicion is that companies which qualified to do the work were side lined in favour of T*** because both Mr xxx and Mr yyy stood to benefit. As a result of this process, Mr yyy was put on special leave by the City Manager pending the outcome of the investigation and possible disciplinary processes. There are rumours that Mr yyy is coming back to work because no evidence of wrongdoing was found against him. However, Mr yyy has got political connections by virtue of him being the XXX Deputy Chairperson in Tshwane.”

More definitions

Supply chain, procurement, transparency – these terms are mentioned often in the context of corruption. While this is not an exhaustive list, below we present definitions of some of the terms that crop up frequently:

Conflict of interest – arises when an individual with a formal responsibility to serve the public participates in an activity that jeopardises his or her professional judgment, objectivity and independence. Often this activity (such as a private business venture) primarily serves personal interests and can potentially influence the objective exercise of the individual's official duties.

Irregularities – these are deviations from the prescribed process. Corruption Watch’s Constitutional Court submission noted that small irregularities are often symptoms of larger problems, and that irregularities of all types act as red flags or indicators of corruption.

Procurement, specifically public procurement – the buying of goods and services by government organisations.

Supply chain – the network of all the individuals, organisations, resources, activities and technology involved in the creation and sale of a product, from the delivery of source materials to the manufacturer, through to its eventual delivery to the end user.

Tender – to invite bids for a project. It usually refers to the process whereby governments and financial institutions invite bids for large projects that must be submitted by a stipulated deadline. If a company puts work out to tender, it asks people to make offers to do the work.

Transparency – Transparency is the quality of being clear, honest and open. It implies that civil servants have a duty to act visibly, predictably and understandably. Transparency requires that decisions and actions are taken openly and that sufficient information is available so that other agencies and the general public can assess whether the relevant procedures are followed.

Coming up

The third, and final instalment of the Understanding procurement corruption series will look at the factors that influence opportunities for corruption in tender processes, the actors involved in this corrupt activity, red flags and signs of corruption in procurement, and the impact and damage of tender corruption.