Integrity Pact in Public Procurement

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Integrity Pact in Public Procurement

Integrity Pact in Public Procurement


Report : Integrity Pact in Public Procurement Research Consultant : Mr. Shuva Kanta Sharma Ms. Isha Gharti, Assistant Researcher {Scott Wilson Nepal (SW Nepal) Pvt. Ltd.}

Published : Kathmandu, November, 2015

Publisher : Transparency International - Nepal (TI Nepal) Chhakkubakku Marga, New Baneshwor Kathmandu, Nepal Phone: 977-1-4475062, 4475112 Email: Website: FB/Twitter: tinepal Hotline: 1660 01 22211

Support : Royal Norwegian Embassy, Kathmandu, Nepal

Copyright : Transparency International - Nepal (A National Chapter accredited by Transparency International) All Rights Reserved.

ISBN : 978-9937-9068-1-4

The views and opinions expressed in the report do not necessarily correspond with those of Transparency International - Nepal


Integrity Pact in Public Procurement

Preface We are pleased to release this report which reviews procurement laws and practices and proposes to introduce Integrity Pact (IP) in public procurement. Openness, transparency, accountability and integrity are benchmarks for a clean procurement process. Integrity Pact is a TI tool that helps beneficiaries with integrity and quality based public procurement. A transparent, fair and open public procurement can address the issues of embezzlement, fraud, kickbacks, bribery and facilitation payments in public procurement. 60 percent of Nepal’s national budget is spent on public procurement, a staggering 650 million rupees which inevitably invites omission and commission, and leakages. There are certain public procurement processes that are prone to corruption and irregularities - need

assessment, demand determination, preparation phase, process design and bid documents preparation. This report introduces IP an anti-bribery pledge/tool that can make the bidding process transparent. The IP demands independent external monitors (IEMs) in public procurement besides other remedial measures. We acknowledge the effort of the study team of Scott Wilson Pvt. Ltd led by Mr. Shuva Kant Sharma. We express our gratitude to the Royal Norwegian Embassy for funding this study. Our gratitude to those who supported this research in one way or another.

Bharat Bahadur Thapa President

Integrity Pact in Public Procurement



Integrity Pact in Public Procurement

Executive Summary Public procurement continues to one of the most lucrative areas for corruption. In Nepal, despite laws, rules and regulations against corruption and malpractices in public procurement, corruption in public procurement is increasing steadily. About 60% of the allocated budget of the GoN is spent in procurement. And losses from corruption are estimated at between 10% and 25%, and in some cases as high as 40 to 50%, of the contract value. Public entities in Nepal have been cited to be functionally inefficient. Corruption, political interference, lack of professionalism, overstaffing, and obsolete technologies have all contributed to the poor performance of these entities. In this context, Transparency InternationalNepal (TI-N) has this commissioned report to contribute to frame a plan to implement an Integrity Pact in public procurement by assessing current procurement laws and prevailing practices. TI-N believes that the implementation of an integrity pact in public procurement will contribute to greater transparency, accountability, efficiency and reliability in Nepal’s public procurement processes.

Integrity Pact The Integrity Pact is a tool developed by Transparency International to help governments, businesses and civil society fight corruption in public contracting. It consists of a process that includes an agreement between a government or government agency (‘the authority’) and all bidders for a public sector contract, setting out rights and obligations to the effect that neither side will pay, offer, demand or accept bribes; nor will bidders collude with competitors to obtain the contract, or bribe representatives of the authority while carrying it out. An independent monitor oversees Integrity Pact implementation and ensures that all parties uphold their commitments; an Integrity Pact brings transparency and invaluable oversight to all stakeholders in a contracting process. The Integrity Pact clarifies the rules for bidders, establishing a level playing field by enabling companies to abstain from bribery through providing assurances that their competitors will also refrain from bribery, and that government procurement, privatisation or

licensing agencies will commit to preventing corruption (including extortion) by officials, and to follow transparent procedures. Integrity pacts are legallybinding contracts, breaches of which trigger an array of appropriate sanctions, including loss of contract, financial compensation and debarment from future tenders. These acts as powerful disincentives to corrupt behaviour, ensuring integrity pacts are never simply goodwill gestures. Rather, they enable governments to reduce the high cost and the distorting impact of corruption on public procurement, privatisation or licensing, and deliver better goods and services to citizens.

Implementation An Integrity Pact may be suitable during some or all stages of the project; ideally, it should be applied to the full range of project activities and should cover all the phases of each contracting process. At the absolute minimum, the Integrity Pact should start during the prebidding stage of a contracting process and continue until contract signature. A key advantage of an Integrity Pact is that it is a tool that can be implemented within the ordinary authority of contracting officials and bodies, with the support of civil society (one or several NGOs). The experience of TI chapters implementing integrity pacts is very diverse and in constant evolution. The distribution of responsibilities between the authority and the implementing NGO is arranged between them for each integrity pact. Therefore, it is not possible or desirable to offer a fixed formula for Integrity Pact implementation. The process is always a learning experience and there is no onesize-fits-all recipe that can be copied from one context to another. Implementation must be supported by a comprehensive communications strategy: bidders and potential bidders, contractors and sub-contractors need to understand their rights and responsibilities under the integrity pact; regulators, government agencies and other government departments also need to understand the Integrity Pact and how it works so that they can provide support and participate accordingly; and citizens (the public) in general and communities with a stake in the project need to

Integrity Pact in Public Procurement


know an Integrity Pact is in place, how it operates, what participation mechanisms it offers and how they can be used. Civil society organisations can play various roles in the implementation of the integrity pact: as initiators, facilitators, lead implementers or as monitors. At the very least, they are essential in providing channels of accountability from the monitor to the public. Implementation also requires capacity, resources, leadership, commitment and credibility– as well as the ability to convene different audiences. A range of actors can support Integrity Pact implementation, promotion and communication, such as government agencies, industry associations, civil society organisations, donors and multilateral organisations. In implementing an integrity pact, the authority (with the support of a civil society organisation) assures that all activities foreseen in the Integrity Pact process are actually carried out: the selection of the project and the contracting processes where it will be applied; the design of the Integrity Pact process according to goals and circumstances; the choice of implementation arrangements; monitor selection, and –once all is ready– putting the Integrity Pact to work throughout all contracting stages. TI’s experience indicates that the pre- and post-bidding stages bear high corruption risks which are often overlooked, hence the utmost importance of considering these stages under the Integrity Pact implementation process, and of having it in place early on, and measures to ensure the transparency and accountability of the contracting process.

Integrity Pact’s role in project success A successfully implemented Integrity Pact means that a contracting process was undertaken in a transparent and accountable manner, free from corruption and from delays caused by trouble, confusion and lack of transparency. The social, economic and development goals of the project are achieved – or at least not impaired by corruption. As a side effect, trust in government and government officials is increased, and the reputation of all participants improved. If corruption does occur, it is detected and eliminated from the process: when tools such as integrity pacts that are designed to track corruption do find it, they perform their job effectively.

Integrity Pact for Nepal In Nepal, corruption appears to be spreading and institutionalizing in an increasing number of sectors


Integrity Pact in Public Procurement

including public entities which indicates a need for an independent anti-corruption tool as the Integrity Pact which will enable companies to abstain from bribing by providing assurances that their competitors will also refrain from bribing, and government procurement, privatisation or licensing agencies will undertake to prevent corruption, including extortion, by officials and to follow transparent procedures and it enables government to reduce the high cost and the distortionary impact of corruption on public procurement, privatisation or licensing. Integrity Pact when implemented in public procurement in Nepal could cover the entire project from start to finish and should include these key features: n Integrity Pacts in public procurement in Nepal should involve solemn pledges on the part of public enterprise’s staff to foreswear being involved in corrupt practices. It also involves establishment of public grievance mechanism as well as an effective monitoring and evaluation system within municipalities. n Public hearings which are good instruments for enabling stakeholder participation, providing necessary information on the process and contributing to the legitimacy, credibility and transparency of the bidding should be a key feature of Integrity Pact in public enterprises of Nepal. n Key stakeholders and government organisations’ inclusion in monitoring along with civil society can be effective in reducing public procurement in public enterprises n Training and awareness activities (Integrity Pact and principle of procurement) for procurers and bidders before the commencement of Project. n Increased role of media in public awareness regarding procurement laws and processes as well as a watchdog. n E-bidding should be further promoted and strengthened. Integrity Pact becomes more effective with other tools and practices supporting wider completion and transparency. Integrity Pact should ideally start at need assessment of procurement in public entities and should include Integrity Pact monitoring assisted by civil society and public hearing. Similarly, the preparation stage should include, public hearings, discussions with potential bidders and stakeholders, contract selection and award phase, contract implementation and final audit should also include monitoring.

Contents Preface .........................................................................................................................................................................III Executive Summary....................................................................................................................................................... V Abbreviations/Acronyms ........................................................................................................................................... VIII CHAPTER 1 Introduction.................................................................................................................................................................. 1 CHAPTER 2 Overview of Public Procurement in Nepal................................................................................................................... 3 2.1 Public Procurement........................................................................................................................................... 3 2.2 Legal Framework............................................................................................................................................... 3 2.3 Procurement Principles..................................................................................................................................... 4 2.4 Overview of Public Procurement Process in Nepal............................................................................................ 4 CHAPTER 3 Integrity Pact.............................................................................................................................................................. 11 3.1 Background..................................................................................................................................................... 11 3.2 Purpose........................................................................................................................................................... 11 3.3 Key Elements.................................................................................................................................................. 11 3.4 Applications of an Integrity Pact...................................................................................................................... 12 CHAPTER 4 International Experiences with IP.............................................................................................................................. 15 4.1 Practice of Integrity Pacts in TI Chapters........................................................................................................ 15 CHAPTER 5 Relevance of Integrity Pact for Nepal........................................................................................................................ 19 5.1 Background..................................................................................................................................................... 19 5.2 How, When and Where IP can be Implemented in Nepal................................................................................. 19 5.3 Key Features of IP in Nepal............................................................................................................................. 20 5.4 Role of Different Actors................................................................................................................................... 20 5.5 Process of IP Implementation.......................................................................................................................... 21 5.6 Potential Challenges in IP Implementation....................................................................................................... 22 CHAPTER 6 Conclusions and Recommendations......................................................................................................................... 23

Integrity Pact in Public Procurement


Abbreviations/Acronyms CIAA

Commission for the Investigation of Abuse of Authority


Central Vigilance Commission


Extension of Time


Fiscal Year


Financial Administration Regulation


Global Corruption Barometer


Government of Nepal


Integrity Pact


Karachi Water and Sewerage Board


Mutual Legal Assistance


Public Procurement Act


Public Procurement Monitoring Office


Transparency International Nepal


Worldwide Governance Indicator


Integrity Pact in Public Procurement

Chapter 1 Introduction The Government of Nepal (GoN) has issued detailed rules and instructions to guide public and private agencies through each stage of procurement through acts, rules and regulations. These include the Public Procurement Act, Public Procurement Regulation, Good Governance Act, etc., for purchasing of goods, procuring of works, and employing of consultants. These are supplemented with guidelines issued by various agencies including Public Procurement Monitoring Office (PPMO), Commission for the Investigation of Abuse of Authority (CIAA), Auditor General’s Office, etc. However, Public Procurement remains one of the most lucrative grounds for corruption and malpractices as public procurement procedures are often complex, transparency of the processes is limited, and manipulation is hard to detect. Additionally, only few people are aware of public level corruption and motivation for complaints to authorities are low and people perceive wasted public money not as theirs, but of the government. A cardinal principle of public procurement is to procure the material/services/works of a specified quality, at the

most competitive prices and, in a fair, just and transparent manner. To achieve this end, it is essential to have strong legislation with effective implementation, so that this vital activity is executed in a well-coordinated manner with the least time and cost overruns. Transparency International Nepal (TI-N) is aware that current public procurement in many private and public sectors of Nepal is flawed, and is treated as a downstream, clerical, buying and selling function and, therefore does not attract standard goods, professionalism and competent staff to deal with the meager resources with integrity and transparency. This report seeks to contribute to frame a plan to implement Integrity Pact (IP) in Public Procurement by assessing current procurement laws and prevailing practices in Nepal. TI-N believes that the implementation of IP in public procurement will contribute to greater transparency, accountability, efficiency and reliability in Nepal’s public procurement processes by providing greater understanding of the nature and extent of Nepal’s deficiencies of integrity in institutions.

Integrity Pact in Public Procurement



Integrity Pact in Public Procurement

Chapter 2 Overview of Public Procurement in Nepal 2.1 Public Procurement “Procurement” refers to the acquisition for consumption or investment in goods or services. This includes a wide range of items that include pencils, bed sheets, aspirins for hospitals, gasoline for government cars, acquisition of cars and trucks, equipment for schools and hospitals, machinery for government departments, other light or heavy equipment for construction, real estate, advisory and other services (from the construction of a hydroelectric power stations or roads to the hiring of consultants for engineering, financial, legal or other advisory functions). Procurement, therefore, is the preparation, awarding and implementation/administration of contracts for goods, works and other services and thus covers not just the narrow selection of a contract partner by a purchasing body and the actual entering of a contract between the two, but the entire process from needs assessment through preparation, awarding and implementation/ administration of contracts for goods, works and other services such as consultant services of a technical, financial, or legal nature. “Public procurement” refers to all contracts between a government (government departments, publicly owned corporations and other agencies) and companies (public or private) or individuals. Public Procurement in Public Procurement Act (PPA)1 defines as acquisition of Goods, Works and Services, through expending from the public purse by all n Government Offices n Constitutional Bodies n Statutory bodies n Public Enterprises – Majority owned by the Government n Local Government

2.2 Legal Framework Nepal has a robust legal framework to address corruption, particularly in prosecuting and sanctioning those involved in corruption, reforming the bureaucracy


through appropriate governance measures, making public officials accountable and checking financial irregularities. According to anti-corruption lawyers, the Public Procurement Act, 2063 B.S. (2007), Public Procurement Regulation, 2064 B.S. (2007), Good Governance Act, 2064 B.S. (2007), Financial Procedure Act 2055 (1999), Revenue and Government Contract Act, 1963 amended in 1968, Construction Enterprise Act 1999, the Right to Information Act 2007, the CIAA Act 1992, the Audit Act 1991, Prevention of Corruption Act 2002, the AntiMoney Laundering Act 2008 and over a dozen Acts on watchdog institutions, procurement procedures, National Vigilance Centre, revenue investigation department and anti-money laundering provide adequate legal framework to check corruption. Various initiatives have been undertaken in Nepal to fight corruption and abuse of authority under the auspices of the government, nongovernmental bodies, and anti-corruption activists. They range from prevention-measures, reform-processes to awareness raising and advocacy schemes. Nepal is officially pursuing a policy of zero-tolerance on corruption. Legal provisions criminalize corruption in its various forms including bribery, active or passive, money laundering and fraud. Leaders of government, routinely speak out against corruption. Five different Heads of Government, pledged publicly during commencement of their administration to be active in controlling corruption and abuse of authority. Nepal is a signatory to the UN Convention against Corruption. Various notable legal provisions with amendments and institutions, which specifically focus on controlling corruption - are in place. Yet corruption is widely perceived to be increasing, and impunity widespread. An attempt to address corruption in the private sector has been undertaken through law. Laws regarding various acts such as undue business influences, bid rigging, cartel formation, collective price fixing, syndicate and exclusive dealing and tied selling as corrupt practices and provisions were made to check them.

Public Procurement Act 2063 B.S. (2007)

Integrity Pact in Public Procurement


Additionally, the CIAA has devised a scheme of cleaning from the inside and emphasized specifically four areas for good governance and anti-corruption. The anticorruption body aims at changing policies, to bring about effective monitoring of public services besides drawing 80 percent of areas including the defense sector under its scope. It received 11,298 complaints in 2012-13 and settled 6,672. The CIAA registered 93 cases at the Special Court, during the period. Of them, it won 76 cases. It had handled 5,466 cases during July 2012 - June 2013 period.2 The Right to Information Act 2007 gave citizens the right to public information within fifteen days of requesting any government body or public company. Amendments brought about in the Special Court Act 2007 required the Court to pursue corruption-cases vigorously. The Procurement Act 2007 contributed to consolidating the move to make proper use of public money. These three measures undertaken in 2007 are considered notable in the fight against corruption. In addition, Acts including Privatization Act and Revenue Leakage Control Acts provide additional legal framework to check corruption. There is a legal provision in the country to make governance people-oriented, accountable, transparent and participatory. It aims to create an environment in government offices that does not promote corruption. The Anti–Money Laundering Act 2008 and amendments over the years and in mid-2013 sought to check specified corruption. An Anti-Corruption Strategy and Work Plan were introduced for building a prosperous Nepal through good governance and a corruptionfree governance system. However, the Plan could not be implemented effectively and adequately. The government’s commitment is weak, and was further exacerbated by political instability resulting in frequent changes in government leadership.

2.3 Procurement Principles The application of the principles of integrity, transparency, accountability, fairness and efficiency in all decisions concerning public investments and purchases will minimise corruption and maximise the economic, financial, social, environmental and political benefits of public procurement. a. Integrity Integrity has different meanings. In procurement, processes with integrity are those that are honest and in compliance with the respective laws, that the best available, most suitable technical expertise is employed in a non-discriminatory manner, that is fair where open


CIAA Annual Report, 2013


Integrity Pact in Public Procurement

competition leads to a quality product at a fair price (value for money), and that the product takes into account the legitimate aspirations and concerns of all stakeholders (Curbing Corruption Public Procurement, TI, 2006). b. Transparency Transparency means that laws, regulations, institutions, processes, plans and decisions are made accessible to the public at large or at least to “representatives” of the public so that processes and decisions can be monitored, reviewed, commented upon and influenced by stakeholders, and decision makers can be held accountable. c. Accountability Accountability means that governments, public (government-owned or–controlled) institutions or corporations and individual officials, on the one hand, and companies, company executives and agents or other individuals acting on behalf of companies, on the other hand, must be accountable for the correct and complete execution of their tasks and duties and for the decisions and actions in their area of responsibility. Procedures enabling full accountability should be systematic and dependable. d. Fairness, Economy, and Efficiency Contract award decisions should be fair and impartial. Public funds should not be used to provide favours to specific individuals or companies; standards and specifications must be non-discriminatory: Suppliers and contractors should be selected on the basis of their qualifications and the merit of their offers; there should be equal treatment for all in terms of deadlines, confidentiality, and so on. Procurement should be economical. It should result in the best quality of goods and services for the price paid, or the lowest price for the acceptable, stipulated quality of goods and services; not necessarily the lowest priced goods available; and not necessarily the absolutely best quality available, but the best combination to meet the particular needs, and the published specifications. The procurement process should be efficient.

2.4 Overview of Public Procurement Process in Nepal The GON is the largest procuring (goods, works, and services) institution in the country. About 60% of the allocated budget of the GON is spent in procurement activities.3 GON annual

procurement has been estimated as $650 million.4 Nepal’s annual budget (for FY 2013/14) is about $5.17 billion (1 US$ ≈ 100 Rs), of which 46.7% is allocated as development expenditure and 53.3% as regular expenditure. Only 69.6% of the budget is expected to be met through its own revenue and14% by foreign assistance with a projected deficit of 17%. Few activities create greater temptations or offer more opportunities for corruption than public sector procurement. A loss from corruption is estimated at between 10% and 25% and in some cases as high as 40% to 50%, of the contract value.5 a) Phases in Procurement The phases of procurement in Public Enterprises and other Public Procurement in Nepal can be generalized as follows: Figure.1- Phases in Procurement Need Assessment/ Demand Determination

services to be procured, (b) prepare cost estimate, (c) prepare procurement plan, (d) have (the head of the public entity) the responsibility of carrying out all the activities relating to procurement by fulfilling the procedures referred to in the Act, (e) select the procurement method based on the conditions and cost estimate as prescribed. ii. Process Design and Bid Document Preparation: This stage includes prescribing the qualification of bidder or proponent, specifying quality, quantity of goods etc. iii. Contractor Selection and Award: This phase includes evaluation of quotation, bid examination and evaluation, which includes examination of legal requirement, examination of completeness of bids, evaluation of technical aspects, evaluation of commercial aspects, evaluation of financial aspects, special evaluation of bids for construction works, determination of lowest evaluated bid, post-qualification examination, preparation and submission of bid evaluation report. iv. Contract Implementation: This phase includes signing contract with the best bidder, contractor or consultant after careful evaluation process .

Process design & bid documents preparation

v. Final Accounting and Auditing (Where Applicable): This phase includes auditing after the completion of project. b) Corruption in Public Procurement

Contractor selection and award

Contract Implementation

Transparency International (TI) defines corruption as “the misuse of entrusted power for private gain”. “Private gain” must be interpreted widely, including gains accruing i.e. to an economic actor’s close family members, political party and in some cases to an independent organisation or charitable institution in which the economic actor has a financial or social interest. The most common forms of corrupt activities during the phases of procurement are as follows: i. Need Assessment/Demand Determination

Final Accounting and Auditing (Where Applicable) i. Need Assessment: According to procurement law at this stage, a public entity shall (a) prepare a description of goods, construction works and


‘Yearly Report of Public Procurement Monitoring Office,’ PPMO, 2013


‘Curbing corruption in public procurement,’ Asian Development Bank 2006


Adhikari, op.cit

q Need assessment is not carried out properly q Site visits, market study, etc are not carried out q Annual Procurement Plan, Master Procurement Plan are not made or made with very little study

Integrity Pact in Public Procurement


q Standing lists are not made or made with little effort q Invitation for bids are made in a way that best favours a particular bidder

q The grounds for the selection of the winner are not made public (transparency of bid evaluation).

q The investment or purchase is unnecessary. Demand is induced so that a particular company can make a deal but is of little or no value to society

q Excessive (unnecessarily high) price as a result of limited or non-existent competition.

q The investment is economically unjustified or environmentally damaging q Goods or services that are needed are overestimated to favour a particular provider

q Winning bidders/contractors compensate bribes and other extra-payments with poor quality, defective or different specifications than those contracted. Faulty or subspecification work execution, requiring early repairs or expensive correction.

q Conflicts of interest (revolving doors) are left unmanaged and decision makers decide on the need for contracts that impact their old employers

q Contract renegotiation or “change orders” introduce substantial changes to the contract, often in small increments that can be decided by the site engineer

ii. Preparation Phase/Process Design and Bid Document Preparation

q Price increases during execution through “change orders” reflecting changes in specifications or cost increases, facilitated often by collusion between corrupt contractor and corrupt control official.

q Bidding documents are not made or made without proper specification q Bidding documents or terms of reference are designed to favour a particular provider, so that in fact, competition is not possible (or restricted) q Goods or services needed are over- or underestimated to favour a particular bidder q Unnecessary complexity of bidding documents or terms of reference is used to create confusion, to hide corrupt behaviour and make monitoring difficult q Design consultants prepare a design that favour a particular bidder q Grounds for direct contracting are abused. iii. Contractor Selection and Award Phase q Decision makers are biased (bribes, kickbacks, or conflict of interest are involved). q Bidding process is obstructed q Carteling q Selection criteria are subjective in ways that allow biases to play a role and remain unattended. q An advantage to a particular bidder is granted through the exchange of confidential information before bid submission or during the clarification period. Clarifications are not shared with all the bidders. q Confidentiality is abused and extended beyond legally protected information, making


monitoring and control difficult.

Integrity Pact in Public Procurement

iv. Contract Implementation Phase

q False or non-existent claims are filed. q Contract supervisors or monitors are “bought” or are not independent and willing to justify false or non-existent claims q Contract renegotiation is allowed or performed introducing substantial changes that render the bidding process useless v. Final Accounting applicable)




q Accounting and payment takes place under the responsibility of government staff and auditing is done by external agencies. q Corruption risks are associated to biased or ‘bought’ decisions that allow for: q Acceptance of false certificates or cost misallocations. q Duplicate invoicing for goods and services is allowed. q Fraudulent or false certification of the project’s successful completion. c) Impact of losses from Corruption in Public Procurement The ultimate goal of public procurement is to satisfy the public interest. Like any government action should be. In this sense, good procurement should satisfy the needs of the people, should be fair to businesses, should save (and avoid waste !) of public funds. Good

public procurement is a good tool to implement public policy in all areas, and should be an instrument for good governance and therefore good government. In this sense, good procurement will contribute to the government’s legitimacy and credibility. On the contrary, corrupt (bad) public procurement will increase poverty and inequality by diverting funds away from social needs; it will engender bad choices, encouraging competition in bribery rather than in quality or price. For companies, corrupt procurement will provide an unfair, unstable and risky competitive advantage and will create a sort of market-entry cost or non-tariff barrier, at least for those companies who do not wish, or cannot afford to bribe their way. These will have a serious financial, economic and environmental impact. It will impact on health and human safety, on innovation, erosion of values, erosion of trust in government, damage to honest competitors and pose a serious danger to overall economic development. In addition, corruption has a multiplier effect. If unchecked, the negative effects often get bigger after a corrupt practice takes place. In most cases, the amount, that is embezzled, is the money intended for investment in the community. When investment money is taken out of the circulation, the amount deprived to the community is greater than the amount gained by the embezzler. When a government official takes a Rs100 bribe, social investment is reduced by as much as a Rs 4 to Rs 800 resulting in a decrease of wealth to society.6 Similarly, when embezzled money sent out of the country and put in a foreign bank, then it does not contribute to the national economy; it only helps the country of the offshore or foreign bank.

second and third trimester instead of the first one as required. Of those awarded in the third quarter, 905 contracts amounting to Rs. 4.889 billion were awarded in the month of Asadh (June/July) alone, the last month of the FY raising doubts as to the quality standards of works. Piecemeal Cost Estimates - Article 8(2) of the Public Procurement Act, 2063 (2007) restricts conversion of a contract into piece of works or services that put limits to competition in procurement. Contrary to the legal provision, cost estimates were made in 729 pieces of infrastructure construction and procurement of goods, amounting to Rs. 811 million under 13 ministries. As a result, procurement work was not cost effective to the GoN. n Direct Purchase: According to Public Procurement Regulations, 2064 (2007) Rule 85, there is a provision for direct procurement of construction work, the amount not exceeding Rs. 5 lakhs and direct purchase of goods of not more than Rs. 3 lakhs. But, 276 Offices under 19 entities made direct purchase of goods, construction works, other services and machineries, from time to time, amounting to Rs. 1 billion 307 million, that limited competition. No justification was provided to procure goods and services by causing limits to competition and against economic and legal norms.

Experts consider that the laws, rules and regulations regarding procurement are comprehensive, however; implementation has been very weak. The following are some of the examples of how prevailing practices undermine law:

n Inability to complete works on schedule: Due to non-compliance disclosure provision of the Public Procurement Regulations 2064 (2007), Rule 60 (ka), a bid of one contractor is opened and evaluated for a number of contract packages at a time and a single contract agreement makes for multiple packages. This often results, due to unmanageable work load, a situation where the contract is not completed within the estimated time. For example, the Division Road Office, Hetauda, made an agreement with a cost estimate of Rs. 367 million to complete 7 construction works in two years, an ambitious target.

n Time of Contract: Rule 20 (9) of the FPR, 2064 (2007) clearly mentions that approval of a contract should be completed within the first trimester of each FY. The report (see footnote 8 below) notes that out of total of 5,139 contracts amounting to Rs. 22.92 billion issued by 21 GoN Ministries, 85.72% were awarded in the

n Approval of Lowest-quoting Tender Documents: According to Public Procurement Regulations 2064 (2007), Rule 65 (2 and 3), there is a provision of asking for clarification by the tender document evaluation committee if the bidder quotes a minimum rate, and can accept the quotation by taking 8% of the quoted amount as

d) Prevailing Laws and Practices7

Bartle, Phil ‘Corruption and the Multiplier Effect,’ Community Empowerment Collective, 2007


The data given below are based on 51st Annual Report of the Auditor General 2014, CIAA Annual Report 2014, PPMO Annual Report and Key Informant Interviews


Integrity Pact in Public Procurement


additional performance guarantee and may reject the quotation if the clarification is not satisfactory. The extent to which the quotes are low from their estimates is, however, very worrying. For example, in the FY 2014/15, the Division Road Office, Surkhet received 147 contracts amounting to Rs. 367 million with quotes less upto 86.93% while that for the Division Road Office, Kathmandu for 146 contracts in the range of Rs. 1 million to 10 million was upto 51.24%.. These low quotations are often attributed to low quality of public construction works. n Termination of Contract: Article 59 of the Public Procurement Act 2063 (2007) has a provision for the termination of contract agreement and its remedy. The Armed Police Force, Border Security Office, Sindhupalanchowk, published a tender notice; and it was found that the agreement was made with the contractor for the supply of food at a minimum cost of Rs. 2.23 /day/person. After the termination of the contract as agreed, without attempting to make a new agreement with those ranked as second and third in the tender attempt, a fresh tender was called, and a supply agreement of food amounting to Rs. 15 million at Rs. 157.26 /day /person was made. As a result, it was found, that in a year, the total financial burden to the government, amounted to Rs. 15 million. n Users Committee: Public Procurement Regulations 2064 (2007), Rule 97, provides that services of user committees can be taken for works estimated costs upto Rs. 6 million; and in construction, use of heavy machines is not allowed, and work involving complex technical aspects should not be allowed. However, this was not followed in a large number of projects and procurements. For example, Sunsari-Morang Irrigation Project allocated work amounting to Rs. 96 million to 8 user committees with 105 contracts. Similarly, it was found that the Offices of DDCs in Solukhumbu, Rasuwa, Rupandehi, Kathmandu, and Kaski contracted work amounting to Rs. 175 million to 8 user groups; and Dhobikhola Corridor Improvement Project, contracted work amounting to Rs. 253 million to 23 user groups, some with cost estimates that exceeded Rs. 6 million. This shows that time and again agreements were made repeatedly with specific user groups by splitting the estimated cost within Rs. 6 million, or even exceeding this legal threshold. n Project Duration: There is also a tendency of keeping the duration of the project to less than 15 months, without considering the nature and


Integrity Pact in Public Procurement

activities of the project to be executed because of the (a) provision of the PPA. As per the provision (Sub-section 55.1 of the PPA), in contract duration exceeding 15 months the competent authority may adjust price. Due to this provision, public entities are putting contract durations to less than 15 months, to avoid price adjustment. As a consequence, Extension of Time (EOT) and dispute become unavoidable, and (b) late release of the budget or late starting of procurement, the duration available for construction or delivery of goods/services remain very short to fulfill the contract before the end of the fiscal year, complicating the closure of the contract. These problems arise because of poor procurement planning and unethical behavior of staff involved in procurement planning and procurement decision-making. n Bidding Rate: Similarly, public construction works, procurement, repairs and maintenance are found to be accepted from individuals, firms or companies bidding higher rates, than what was quoted; and in case of physical infrastructure projects, sub-standard construction have been found, or even fake bills and vouchers have been submitted for securing payment without undertaking actual construction work. n Non-Compliance: Some construction work have been carried out without following requisite maps, drawings and designs as per pre-determined objectives, but by simply estimating and approving the work based on allocated budget of the project. Procurements have been made without following the procedures mentioned in the Public Procurement Act and practices such as making direct procurement at the end of the year without tender calls were observed. In some cases, payments were made after revising expenditure liabilities without furnishing reasons for their increments or legitimacy for revising cost estimates of the plans, programs or projects; or without undertaking technical audits of the work completed as per pre-determined norms and standards or, after verifying the substandard work as completed ones. n Unauthorised Approval: There have been cases where quotations and tender calls have been approved by unauthorized employees under the prevailing laws, misuse of verification order against the spirit and intention of the law; goods have been procured and construction work carried out through an unhealthy process. n Intimidation, Collusion and Carteling: There are indications of increasing public procurement

malpractices, including intimidation, collusion and forming cartels amongst bidders in Nepal at the central and district levels.8 This often manifests in bidders being blocked from bidding because of intimidation and the use of physical force by injdividuals and groups. Other forms of malpractices are also abundant, and include: q Procured materials are not stored as per bills and receipts q Absence of proper inventory and records management q Direct purchases by splitting cost estimates q Increase in liabilities due to cancellation of tender

q Approval of substantial low bidder compared to the estimated costs resulting in noncompletion of work in time q Most government officials are setting a tradition by seeking a signing charge or fee before approving contracts. n Absence of elected representatives in local bodies: The Chief of the Commission for the Investigation of Abuse of Authority (CIAA) has revealed that the level of corruption is higher at the local level because of the absence of elected representatives in local bodies. He also mentioned that 90 percent of the development budget is distributed among the parties and officials, and only 10 percent goes to the people (Annual Report, CIAA, 2014).

Asian Development Bank, Nepal Country Portfolio Review 2012, pp.8, Background Papers included in Ministry of Finance, Nepal Portfolio Performance Review 2012, January 2013.


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Integrity Pact in Public Procurement

Chapter 3 Integrity Pact 3.1 Background Curbing corruption in any country requires a strong legal framework, proper implementing bodies, adequate law enforcement, good moral values and procuring principles in public and private sectors, international anticorruption convention, necessary corruption prevention stratergies, internal and external control system (audits, monitoring) whistle blowing mechanisms, etc. Among them Integrity Pact initiated and advocated by Transparency International is an efficient anti-corruption tool. The Integrity Pact (IP) was designed and launched by Transparency International in the 1990s, with the primary objective of safeguarding public procurement from corruption. It has been formulated as a tool that can be used by a government agency, indeed, any procurement body, in its procurement practice. The Integrity Pact has already been implemented in several countries and in large-scale infrastructure projects ranging from telecommunications to public transport. The IP is intended to accomplish two primary objectives; n To enable companies to abstain from bribing by providing assurances that their competitors will also refrain from bribing, in government procurement, privatisation or licensing agencies will undertake to prevent corruption, including extortion, by officials and to follow transparent procedures; and n To enable governments to reduce the high cost and the distortionary impact of corruption on public procurement, privatisation or licensing.

3.2 Purpose The goal of the Integrity pact is to reduce any (and almost ensure) chances of corrupt practices in procurement through a binding agreement between the agency and bidders for specific contracts. The Integrity Pact is a specific tool used to build transparency in public procurement. By declaring up-front that the procurement, bidding or licensing process will be free of any form of corruption, both public institutions and private agencies open up their operations for public

scrutiny. The establishment of a fair and transparent basis for awarding contracts not only ensures efficiency but also helps in building public trust in the government and in the private sector.

3.3 Key Elements The Integrity Pact is a binding agreement between the agency and bidders for specific contracts in which the agency promises that it will not accept bribes during the procurement process and bidders promise that they will not offer bribes. Under the IP, the bidders for specific services or contracts agree with the procurement agency or office to carry out the procurement in a specified manner. The essential elements of the IP are enumerated below: n A pact (contract) among a government office inviting public tenders to supply, construction, consultancy or other service contract, or for the sale of government assets, or for a government license or concession (the Authority or the “principal”) and those companies submitting a tender for this specific activity (the “bidders”); n An undertaking by the principal that its officials will not demand or accept any bribes, gifts, etc., with appropriate disciplinary or criminal sanctions in case of violation; n A statement by each bidder that it has not paid, and will not pay, any bribes; n An undertaking by each bidder to disclose all payments made in connection with the contract in question to anybody (including agents and other middlemen as well as family members, etc., of officials); the disclosure would be made either at time of tender submission or upon demand of the principal, especially when a suspicion of a violation by that bidder emerges; n The explicit acceptance by each bidder that the no-bribery commitment and the disclosure obligation as well as the attendant sanctions remain in force for the winning bidder until the contract has been fully executed; n Undertakings on behalf of a bidding company will be made “in the name and on behalf of the company’s “Chief Executive Officer”;

Integrity Pact in Public Procurement


n A pre-announced set of sanctions for any violation by a bidder of its commitments or undertakings, including (some or all): q Denial or loss of contract; q Forfeiture of the bid security and performance bond; q Liability for damages to the principal and the competing bidders, and q Debarment of the violator by the principal for an appropriate period of time. Bidders are also advised to have a company Code of Conduct (clearly rejecting the use of bribes and other unethical behavior) and a Compliance Program for the implementation of the Code of Conduct throughout the company. IP is also a strong monitoring system that provides for independent oversight and increased government accountability of the public contracting process is one of the key features of IP. In most cases, monitors are members of civil society or experts appointed by (and reporting to) the TI Chapter and its civil society partners. The independent monitoring system aims to ensure that the pact is implemented and the obligations of the parties are fulfilled. The monitor performs functions such as: n Overseeing corruption risks in the contracting process and the execution of work; n Offering guidance on possible preventive measures; n Responding to the concerns and/or complaints of bidders or interested external stakeholders; informing the public about the contracting process’s transparency and integrity (or lack thereof).

3.4 Applications of an Integrity Pact n Companies can abstain from bribing, safe in the knowledge that: A) Their competitors have provided assurances to do the same, and B) Government procurement, privatisation or licensing agencies will follow transparent procedures and undertake to prevent corruption, including extortion, by their officials n Governments can reduce the high cost and distorting impact of corruption on public procurement, privatisation or licensing in their programmes, which will have a more hospitable investment climate and public support. n Citizens can more easily monitor public decision-


Integrity Pact in Public Procurement

making and their government’s activities. a. Who can use it ? The Integrity Pact can be used by government officials and agencies, private companies (the bidders) and civil society. The initiative to include pacts in a public contracting process can come from any of these actors. So far, integrity pacts have been led by civil society -mainly through the TI chapters, sometimes with other civil society partners- which allow them to share the experience of past projects. b. When can an Integrity Pact be used ? Integrity pacts are adaptable to many settings. They are flexible tools that can be applied to: n Construction contracts; n Goods and services supply contracts; n State asset privatisation programmes (the buyer/recipient of state property); n Consultants (engineering, financial, architectural, for example); n State licences or concessions and extraction rights (oil or gas exploration and production, mining, fishing, logging, for example); n Government-regulated services such as telecommunications, water supply and waste collection services. Whenever possible, an integrity pact should cover the entire project from start to finish; needs assessment and justification, bidder pre-selection, bidding, awarding the contract and implementation. c. How do Integrity Pacts work ? n The starting point is an agreement for the implementation of the pact between the government procuring agency and the civil society organisation leading the monitoring. This agreement confirms the political will to implement the pact, defines the contracting processes and describe the activities, roles and responsibilities of each of the parties involved. n Maximum transparency at every phase of the contracting process leading to the award of the contract and the project’s implementation. Public hearings and the internet help provide public access to all the relevant information including: needs assessment, design, bidding documents, pre-qualification of contractors, bidding procedures, bid evaluation reports, contract terms and conditions, contract implementation and supervision reports. n The content of the Integrity Pact should be





agreed upon by the civil society organisations and the government. As a contract between the government office inviting the public tender and the bidders, it should be one of the bidding documents. The civil society organisations must select the independent monitor(s): The monitor should be highly respected, people of unquestionable integrity, who possess professional expertise in the area of the contract. The monitor should not have any links to the procuring agency or bidding companies. The monitor preferably reports directly to the civil society organisations. Monitors should have free access to all relevant government documents, meetings and officials, and to all documents submitted by the bidders. They should review the tender documents, the evaluation reports, the award selection decision and the implementation supervision reports (technical as well as financial). Monitors regularly inform the leadership of the government office of any corruption risks or possible irregularities detected. The monitors should suggest preventive/corrective measures to all parties. Where any corruption risks or possible irregularities are reported by the monitor to the government office and no steps have been taken (or such steps are inadequate) within a reasonable period of time, then the Monitor is entitled to inform the public and/or the public prosecutor’s office about this situation. In addition, the civil society organisations must be entitled to withdraw from the pact process and explain in a public statement the reasons for the withdrawal.

d. How much do Integrity Pacts cost ? How can they be financed in developing countries ? The cost of implementing an IP varies depending on the implementation arrangements, the activities included in the process and the complexity of the bidding procedures it applies to. Government agencies may be able to absorb some of these costs, particularly because human resources and fixed costs may already be accrued in the agency’s budget or it may obtain inter-agency support to increase capacity. NGOs and other organisations require detailed costing of their infrastructure and coverage of their administrative costs. In some cases, monitors may be able to deliver their services as volunteers, on a pro bono basis or at a reduced fee (for example, if the monitor is a retired government official who already receives a pension), but this will most likely be the exception. Under any implementation model, the biggest portion of costs is normally allocated to the monitor’s fees and expenses. Costs of an IP can usually be split

into two parts. Firstly, the management of the Integrity Pact, often undertaken by a civil society organisation, and secondly the hourly wages and expenses of the independent external monitor. In the past, these monitors have received anything from US$50 to US$150 dollars an hour for their work. The time spent varies with the various stages of the process, with highlights during the vetting of the invitation to bid, the tenders submitted, the evaluation and then again change orders during the execution. In some cases, the monitor is more than one individual. In order for monitors to be effective in their duties sometimes two people are required. For instance, one being an engineer with the technical expertise is necessary to monitor, and the second a lawyer familiar in the relevant legal basis of the project and procurement in general. This will drive up costs, but will help ensure the IP is effective. In selecting the contracting processes within the project, start with the procurement plan/pipeline and pre-select the processes for which to implement IPs. e. Take into account these criteria An IP only makes sense in projects that feature bidding processes (competitive, open or restricted). It is of little use in direct contracting processes or single source contracts. Other transparency measures can be introduced in those processes. The point of the IP is the environment it creates for the relationship between the bidders and the authority, as well as among bidders. If there is only one contractor, there is little value added by this tool. In large-scale projects which have a relatively high number of separate contracts, IPs can be applied to every contract. If it is not possible to include them all, select the most vulnerable. If there is a single main contractor, provide for checks on sub-contractors by including a clause covering subcontractors in the main IP or by implementing IPs to those subcontracting processes. If this is too complicated, it may be better to use other tools to ensure transparency in the subcontracting processes. f. What wider benefits does an Integrity Pact bring? n Enhanced access to information, which increases the level of transparency and integrity in public contracting. n Greater confidence and trust in public decisionmaking – foster changes in the perception of citizens & bidders about the absence of corruption in public procurement. n Less litigation on procurement processes.

Integrity Pact in Public Procurement


n Contract values that match or are below original budget estimates reducing the cost of public contracting n More bidders compete for public contracts n Induce greater media coverage of anticorruption activities resulting in increased public awareness. n Encouragement of institutional changes such as the introduction of e-procurement systems, simplification of administrative procedures, use of bidders’ rosters, effective regulatory action, and new practices by public officials such as using codes of conduct or ethics agreements. g. How IP contribute to project success ? n Ideally, the IP should cover each contracting process, starting with the preparation of the earliest stages: the needs assessment, the consideration of alternative choices and contract planning before the bidding starts. If not, a dishonest consultant can misdirect the entire preparation process for the benefit of some contractors or suppliers.


Integrity Pact in Public Procurement

n Ideally, the IP should extend until contract execution, meaning it should cover the implementation of the main activity (the execution of the construction or supply contract, especially compliance with all contract specifications agreed and all change and variation orders); indeed, for projects such as big dams or complex water supply infrastructure, protection by the IP should continue until the infrastructure is operational and all associated investments (such as the relocation of local communities or other compensation projects) are completed. n At the absolute minimum and only as an exception, when the above is not possible, the IP should start during the pre-bidding stage and last until contract signature. n Ideally, the entire project cycle should be subject to transparency and accountability measures that facilitate successful project completion. The IP may be suitable during some or all phases of the project, depending on the contracting processes involved and the types of contracts to be awarded.

Chapter 4 International Experiences with IP 4.1 Practice of Integrity Pacts in TI Chapters Integrity Pacts in a complete form have been used and are currently in use in: Argentina, Colombia, Ecuador, Germany, Mexico and Paraguay, as well as in Indonesia and Pakistan. They have been introduced as a general model in certain sectors (Construction in China), groups of public institutions (public enterprises in India) or local governments (Milan, Italy).

adapt to many local legal structures and requirements as well as to the different degrees in which governments are willing to proceed along the lines set forth here. Nevertheless, TI’s experience is that these lines contain the essentials that must appear in an IP in order to be designated as such and supported by TI.

Essential elements of the IP (e.g. monitoring) are being used to detect corruption in public contracting elsewhere, among them, Bulgaria, Romania, Czech Republic, Serbia, Guatemala, and Peru. In total, over 15 countries through the efforts of TI national chapters have implemented or adapted versions of Integrity Pacts.

Public hearings are a key element of pacts in Argentina. Poder Cuidadano, (TI- Argentina) along with several municipal authorities, organises public hearings to increase credibility and prevent corruption in public procurement. They provide a platform for the responsible authority to convene with citizens, businesses, experts and representatives of the opposition and present the details of the particular project and the procurement provisions.

A global overview of experience indicates that the concept of IP is sound and workable. One of the strengths of the concept seems to be that concept is flexible enough to

a. Argentina

Box 1: Combination of Public Hearings and Integrity Pacts to ensure transparent procurement in Argentina Poder Ciudadano (Transparency International - Argentina) has played a leading role in introducing innovative changes in the way municipalities function. Poder Ciudadano has combined the use of public hearings and the Integrity Pact to demonstrate that cities can save substantial sums of money through this process. This process was first tried in the city of Morón, a municipality of over 350,000 inhabitants, located in the centre of the Buenos Aires Metropolitan Area. When Poder Ciudadano offered their Programme for Transparent Contracting to 40 local governments in the Province of Buenos Aires, the Mayor of Morón was the only one to express an interest in Poder Ciudadano, monitoring the bidding for this public contracting decision from start to finish. Under the previous government, Morón had become synonymous with corruption and administrative chaos. In the previous contracting of a waste collection service, the municipal officials were known to have been the owners of the company chosen to deliver the waste collection service. This created an atmosphere of distrust and suspicion among the citizens. In order to promote civic participation and transparency in this important decision-making process, and to support the Mayor’s initiative, Poder Ciudadano implemented its Programme for Transparent Contracting. This was the first time that this programme, which included the Public Hearing and the Integrity Pact, was implemented in Argentina. The programme combines two components: a) Holding a Public Hearing where the responsible authority convenes citizens, businesses, experts, and representatives of the opposition to express their objections and suggestions about the planned terms of the contracting; and b) Signing an Integrity Pact, wherein the government and all businesses competing in the bidding share a contract of reciprocal control to prevent the payment of bribes between the bidders and the municipal authorities.

Integrity Pact in Public Procurement


Phase 1, Public Hearing: The municipal authorities agreed to discuss the draft tender document with the bidders and interested citizens in an extraordinary session of the City Council. Poder Ciudadano monitored the preparation of this public hearing and ensured maximum coverage in the print and electronic media, at both local and national levels. In addition, a group of independent local experts (lawyers, engineers, economists, etc.) proposed by Poder Ciudadano were invited to review the documents and present its opinions at the public hearing. The draft tender document was put on the website of the Municipality and was available in print from the office of Poder Ciudadano. Phase 2, Integrity Pact: Poder Ciudadano introduced the IP concept to the respective bidders very early in the process, so as to insure that the new rules were established before interested parties had the opportunity to enter into alternative arrangements. All four bidders accepted the conditions imposed by the IP without objection, and signed in September 2000. The IP contained important mutual commitments made by the city and the bidders, including the following: n A formal and voluntary no-bribery commitment by the bidders not to bribe or collude; full disclosure of all payments; to report any violations by other bidders during the bidding and during contract execution. n A commitment to guarantee full transparency of the documents; public disclosure of the award and the major elements of the evaluation and reasons for selecting the successful bidder; and resolution of any conflict by national arbitration. n A corresponding commitment by the Mayor of Morón (on behalf of all officials in his office) not to demand or accept any bribes, and to prevent the extortion and acceptance of bribes by other officials. n Heavy sanctions by the government office against any official or bidder violating the non-bribery commitment: including damages to the municipality in the amount of 10% of the contract value and blacklisting for 5 years. n Public disclosure of the award decision, including the major elements of the evaluation and the reasons for the selection of the successful bidder. The results of the implementation of the tool are the following: n Savings: The value of the contract was reduced by 35%. The Spanish company chosen offered better service for less money. n Transparency: A forum was created where the bidders, external experts and the interested public presented comments and objections regarding the nature of the service wanted, and the terms for the bidding, before being confronted with the consequences of the decision-making process. n Consensus: Critical decisions about the service and the process of the bidding, e.g., the arbitrator, were made by consensus. n Better Service: The involvement of citizens and external experts resulted in the changes described above, and in the extension of the tender documents to include environmental concerns including a recycling plan for the collected waste (Pilot Plan). n More Control: The signed Integrity Pact provided an important control mechanism for the losing bidders to monitor how the winning bidder addresses the terms of the contract, and the establishing of an independent arbitrator for cases of complaint. n Confidence and Empowerment: The implementation of the tool opened up a closed and stigmatised public institution and empowered the citizens of Morón to monitor the meeting of the terms of contract.

At the hearings, participants can make objections and suggestions which are taken into account and incorporated into the process where appropriate. b. Colombia Transparencia por Colombia introduced pacts in over 60 major procurement processes, in different sectors. Colombia built on their experience with pacts and evolved to a new tool -Anti-Corruption Agreements- for


Integrity Pact in Public Procurement

some specific sectors. The practice is to discuss the corruption risks that may arise during a contract process with bidders beforehand. This process has secured the cooperation of all participants from an ethical point of view. Measures to prevent the identified risks are agreed upon between all parties and incorporated into the pact document that is signed between the bidders and the authority, as well as an ‘Ethics Declaration’ adopted by the relevant public officials involved.

c. Germany

h. Mexico

Schönefeld International Airport, a project worth €2.4 billion, provides a very high profile use of a pact in an effort to reduce corruption, TI Germany was approached by the company in charge of the project (Flughafen BerlinSchönefeld GmbH) and together they established a pact which suited the German legal context. The adapted pact model was applied to all project contracts, starting at the early stages of project design and implementation. The selection of a suitable monitor was crucial. The monitoring has included contract execution and will be in place until the airport is officially opened.

Transparencia Mexicana has implemented pacts in over 100 contracts, worth approximately US $30 billion in total. The chapter’s has emphasised the use of independent monitors, known as a “social witness”. In 2004, the Public Administration Authority issued a decree whereby the role of social witnesses has become mandatory for national level contracts above a certain threshold.

d. India TI India’s advocacy efforts resulted in the Central Vigilance Commission (CVC) issuing Directive 008/CRD/013, which refers to the implementation of integrity pacts as ‘standard operating procedure’ in procurement contracts of any major government department. To date, over 39 Public Sector Undertakings (PSU), or state-owned companies, have signed a Memorandum of Understanding (MoU) with TI India and apply the Integrity Pact accordingly. e. Indonesia In Indonesia, the pact has been adapted and applied to local government contracts in up to 20 districts. As the main beneficiaries, the general public holds the lead role in monitoring the implementation of integrity pacts to ensure the quality of the output. f. Italy In Italy, the pact has been introduced mainly at the municipal level. Milan City Council, was the first authority to adopt the Integrity Pact in 2002. In 2009 the Italian Association of Municipalities, the Minister of Public Administration and TI Italy have signed a protocol promoting the use of pacts by municipal administrations. In Italy the introduction of the pacts is preceded by training to all managers and employees engaged in their application on best public procurement practices to prevent corruption and the role the Integrity Pact plays. The Italian Integrity Pact model does not provide for Independent External Monitoring, instead it relies on the control mechanisms of the Court of Auditors. g. Latvia In 2005, TI Latvia and the Latvian Ministry of Culture agreed to apply an integrity pact to the contracts of three major construction projects for a national library, a concert hall, and a contemporary art museum. TI Latvia was appointed as an independent external monitor to guarantee transparency and provides public reports on the process.

i. South Korea The Korean pact model emphases the protection of whistleblowers and the creation of an ombudsman system to carry out independent external monitoring. The TI South Korea chapter conducted a survey on integrity pacts in the Public Sector in 2003. In Korea, since the Dongsak district office introduced the system in public construction and commodity procurement contracts in 1999, IPs have spread to local self-governing bodies (local governments) including Seoul Metropolitan City, Jeju-do, Gyungsangnamdo, government bodies (central government) including the Ministry of Education, the Ministry of Justice, the Ministry of Defense, and public companies including the Korea Agricultural Rural Infrastructure Corporation. j. Pakistan TI Pakistan introduced integrity pacts in 2000, in the Greater Karachi Water Supply project (K-III) implemented under the responsibility of the Karachi Water and Sewerage Board (KWSB). TI Pakistan monitored the bidding process for the design and supervision of the project and recommended a series of procedures that were maintained for the remaining contracts of the project, which was completed ahead of schedule at a total cost US$10 million less than initially estimated. In 2004, the Government of Pakistan enacted the Public Procurement Rules. It is now mandatory for bidders to sign a pact for any contracting process with a value above a given threshold. The new legislation does not provide for the participation of an independent monitor. k. United Kingdom Integrity pacts have also been adapted and implemented with particular focus on the defense sector. TI UK offers stakeholders of the sector an introduction to integrity pacts; templates and guidance, documents for practical implementation of the tool, the role of the Independent Monitor and an overview of experience to date with defense integrity pacts as well as an assessment of how the tool assists in the fight against corruption.

Integrity Pact in Public Procurement



Integrity Pact in Public Procurement

Chapter 5 Relevance of Integrity Pact for Nepal 5.1 Background Recent surveys on corruption show a rather gloomy scenario for Nepal, in which corruption appears to be spreading and being institutionalized in an increasing number of sectors. The reports of Transparency International’s Corruption Perceptions Index (CPI) over the past few years indicate an increase in corruption in Nepal. Nepal slipped 10 positions on Transparency International’s Corruption Perceptions Index in one year. With a CPI of 29, Nepal ranked 126th among 175 countries, ahead only of Bangladesh and Afghanistan in South Asia. The Maldives’ score and ranking have not been included in the TI’s report. Nepal, with a score of 31, was ranked 116th last year.9 Most of the six dimensions mentioned in Worldwide Governance Indicator (WGI) Report in 2011 also indicated corruption as a problem in Nepal. Nepal scored 29 in Voice and Accountability; 6 in Political Stability, No Violence; 23 in Government Effectiveness; 26 in Regulatory Quality; 17.37 in Rule of Law and 24 in Control of Corruption.10 Corruption was mentioned as one of the critical challenges facing the Nepali economy in a 2013-survey. It was described as challenging for the private sector because of weak governance, political instability and energy crisis. According to TI-Global Corruption Barometer (GCB) -2013, 57% respondents said that corruption had increased significantly in Nepal over the past two years. 69% indicated corruption as a very serious issue in the public sector. 42% observed that personal contacts are important in getting things done. 34% found a few big entities influencing the government decisions to suit their business interests. Only 12% thought the government’s actions against corruption were effective.11 Regarding corrupt institutions, the GCB mentioned political parties as the most corrupt (77%). They were followed by public officials/civil servants (66%) and police (58%). Other institutions found to be corrupt were: the legislature (51%), judiciary (51%), business/private sector (30%), military (27%), educational system

(21%), NGOs (20%), medical and health services (17%), religious bodies (16%) and media (14%).12 Additionally, as mentioned earlier there are already many organizations, acts, regulations and other legal provisions on procurement. Yet, corruption in public procurement is on the rise. In this context, public procurement could benefit from a tool such as the IP that is participatory and allows external third party members to scrutinize a procurement process. This tool has been tried and tested in many countries with different levels of success to enable companies to abstain from bribing by providing assurances to them that their competitors will also refrain from bribing, and government procurement, privatisation or licensing agencies will undertake to prevent corruption , including extortion, by their officials and to follow transparent procedures and enable governments to reduce the high cost and the distortionary impact of corruption on public procurement, privatisation or licensing. This will gradually result in better quality of goods, works and services for the public. It will bring more transparency in the procurement process and would help alleviate corruption. Such transparency, in turn, calls for an extensive and easy public access to all the relevant information including design, justification of contracting, pre-selection and selection of consultants, bidding documents, pre-selection of contractors, bidding procedures, bid evaluation, contracting, contract implementation and supervision. It will help the organisation improve its image as one having fair and transparent practices. It will also help procure goods, works and services in the best rate possible. Furthermore it will result in lower levels of corruption that will help in the overall economic development of the country.

5.2 How, When and Where IP can be Implemented in Nepal IP when implemented in public procurement in Nepal could cover a range of projects covering their lifetimes.

Corruption Perceptions Index Report 2014 Worldwide Governance Indicators (WGI) Report in 2011 11 TI-Global Corruption Barometer, 2013 12 Ibid. 9


Integrity Pact in Public Procurement


It is important that the application of IP is commenced in sectors or areas where there is keen interest among the direct stakeholders (e.g. government officials, bidders, etc) to use IP. When this is affirmed, the IP can cover different stages of the procurement process, including needs assessment and justification, bidder pre-selection, bidding, awarding the contract, etc. In the present context, the IP can be used in disaster management, relief, and reconstruction. Since the government is likely to relax many of the procurement procedures to expedite procurement, IP can be a tool that can help reduce corruption and unethical practices through mutual consent of the actors and civil society.

5.3 Key Features of IP in Nepal The Integrity Pact (IP) was developed and tested by the TI-Nepal as early as the 1990s. The Bhaktapur Municipality, signed a pledge to use IP and this was widely publicized with other Municipalities also showing keen interest to do so. This led to the organisation of regional workshops in all five development regions, each with more than 100 participants from both the private and public sectors. However, actual use of IP and its impact is not clear and documented. In 2002, all the local elected bodies were dissolved and there have been no elections so far. This resulted in a setback to implementation of the IP. However, recently, on the occasion of International Anti-Corruption Day, an Integrity Pledge was signed by Ncell, the first of its kind by a foreign investment company (telecom operator), with TI Nepal as a witness. The pledge signing took place on December 8, 2014 in Kathmandu. However, no further information is available on its implementation and results, so far. IP can be adapted to suit local conditions and priorities and can be harmonized with existing laws. Broadly, an Integrity Pact application in Nepal could have the following features: n IP in public procurements should involve solemn pledges on the part of staff to foreswear being involved in corrupt practices. It then discourages the participants to engage in corrupt practices. n When IP is accompanied with an effective public grievance mechanism and an effective monitoring and evaluation system, it becomes more effective as this allows more scrutiny of the process as


Integrity Pact in Public Procurement

well as opportunities for voices to be expressed freely. One form of public grievance mechanism could be the Public Hearings. A public hearing allows stakeholder participation, sharing of information relating to the procurement process and contributing to the legitimacy, credibility and transparency of the bidding process. Key stakeholders and government organisations’ inclusion in the monitoring along with civil society can be effective in reducing ethical gaps in public procurement. n Training and awareness activities (IP and principle of procurement) for Procurer and Bidders before the commencement of Project helps to have smooth procurement process and make the IP effective. n IP effectiveness is enhanced with increased role of media in public awareness regarding procurement laws and processes.

5.4 Role of Different Actors n Contracting Agencies: These can be the best initiators, can perform as lead implementers and are necessary parties to the IP. It is not ideal that they implement IPs on their own; rather it is encouraged that they do so in coalition with others, particularly civil society organisations. By working with others, they overcome problems associated with the absence of independence and credibility, and can address conflicts of interest that could emerge by being party to an IP and sole implementer at the same time. n Key stakeholders: They can be initiators, facilitator or monitors n Government Agencies (e.g. PPMO): These can be excellent initiators and can also serve as facilitators or monitors. n Civil Society: Civil society in general is an important ally and stakeholder. Many TI chapters around the world have played a powerful role as initiators, facilitators and lead implementers of IPs, supporting government authorities in their efforts; some have also performed as monitors or have served as an ‘umbrella’ to the monitoring function, to ensure independence by selecting monitors and serving as their reporting channel. n Media: Public awareness regarding procurement laws and processes as well as a watchdog.

5.5 Process of IP Implementation a. IP and Stages of Contracting Process Figure.2- IP and stages of Contracting Process

Need Assessment


Contract selection and award phase

IP Starts (Transparency, monitoring and accountability assisted by Civil Society and Public Hearings)

IP (Public Hearings, Discussions with potential bidders and stakeholders)

IP (Contract execution, transparency monitoring and accountability)

Contract implementation

IP (Monitoring)

IP (Monitoring)

Final Accounting and audit

b. During the needs assessment stage (policymaking/project planning) This stage should be thoroughly transparent to allow all stakeholders to contribute to the investment selection, location and design process, and to focus public attention on any economic, financial, environmental, social, civil or human rights concerns. This is also the ideal stage where IP could start in the following manner: n Before the preparation and design of the contracting process, the results of the needs assessment should be made public; for highimpact investments, the results should be publicly debated and discussed n In many cases, consultants are hired for this contracting stage and the next key issues include the transparency of the process by which they are contracted and the independence with which they operate (possible conflicts of interest). An IP can be introduced in the consultant-hiring process to address these issues n Enabling public (civil society) participation at this stage of the decision-making process will ensure

that public concerns are fully reflected. This could take place through public hearings or other means of open consultation, such as use of the internet, the publication of documents, etc. This generates accountability, allowing stakeholders to assess the need of the project, and to identify necessary and unnecessary elements of the goods, services or investments c. During the preparation and contracting phase Several activities to increase transparency and accountability can take place before the actual bidding stage and can be implemented simultaneously as part of the IP process as they do not exclude or substitute one another. For this purpose, public hearings can be good instruments for enabling stakeholder participation, providing necessary information on the process and contributing to the legitimacy, credibility and transparency of the bidding. Public hearings can be open, semi-public or targeted.

Integrity Pact in Public Procurement


Private or confidential meetings are not allowed as they do not entail a participatory or information-sharing component. d. Public hearings prior to the bidding stage Open public hearings support to facilitate citizens and stakeholders input into the decision-making process as a whole. This allows the participation of all the stakeholders and is helpful in facilitating project communication and participation, and in ensuring inputs from various stakeholders (including bidders, communities and possible project beneficiaries). This eventually helps in undertaking a transparent procurement process. e. Activities during the bidding stage n Signing the Integrity Pact IP signatories should have the authority to sign and commit the organisations, agencies and companies they represent, as well as to represent themselves personally. It is also important that signatories include both highlevel officials and managers of government agencies and companies, and staff and employees involved in the day-to-day operations of the project and the contracting process. n What if some bidders don’t sign ? Normally, all bidders should sign the IP and those unwilling to do so should not be allowed to participate in the bid. This prevents an uneven situation where certain bidders are bound by some rules while others are not, creating imbalance and unfairness that weakens the process and could also jeopardise the project implementation. n When should Integrity Pacts be signed ? At the latest, an IP should be signed the moment each bidder presents a proposal in the tendering process. In a two-stage contracting processes where there is a prequalification phase, the IP should be signed at the moment of applying for prequalification.


Integrity Pact in Public Procurement

f. Activities after the bidding stage Once the bidding process is over and the contract has been awarded and signed, the main activity of the monitor under the IP is to oversee that the contract execution is in line with the obligations set out in the IP. Corruption risks at this stage are often underperformance or sidelining of the agreed clauses leading to incomplete or poor quality performance. The activity of the monitor therefore remains highly relevant during this stage.

5.6 Potential Challenges in IP Implementation a. Lack of real political will: Governments should make clear commitments to demonstrate that a pact is not just a show of transparency. Civil society must follow-up closely to ensure government compliance. b. Political changes: Building relationships and securing commitment at several levels of government ensures that changes in political positions do not undermine a pact. c. Limited technical expertise within TI Chapter or civil society group on the sector covered by the contracting process: External experts can support the technical review of the procurement process. Local independent experts are important, but international experts should fill in if none are available. d. Insufficient access to timely and reliable information on the contracting process: There should be clear provisions on how and when information should be disclosed, and specify that non-compliance will be a cause for civil society’s withdrawal from the monitoring. e. Insufficient interest of the media to report on the results: The media typically likes stories about scandals more than stories on anticorruption efforts. Efforts can be made to build an alliance with a strong actor within the media who understands the concept of the pact, will champion its work and report on the results of pacts. Training of journalists is another option.

Chapter 6 Conclusions and Recommendations Nepal has various laws and regulations to ensure free, fair and effective procurement. However, in the absence of robust implementation of these laws, corruption is rampant in public procurement. Public procurement process is complex and involves a large number of stakeholders and processes. Briefly, these are: need assessment. demand determination, preparation phase, process design and bid documents preparation, contractor selection and award phase, contract implementation phase and final accounting and auditing phase (where applicable). When this is carried out in an unsupervised and corrupt environment, this itself becomes a fertile ground for corruption. TI Nepal seeks to strengthen the application of an Integrity Pact in Nepal by assessing current procurement laws and prevailing practices related to public procurement in Nepal. Understandably, controlling corruption requires strong laws and law enforcement agencies, good moral values and procuring principles in public and private sectors, international anti-corruption convention, sufficient corruption prevention strategies, internal and external control system (audits, monitoring) whistle blowing mechanisms, etc. The IP is a binding agreement between the agency and bidders for specific contracts in which the agency promises that it will not accept bribes during the procurement process and bidders promise that they will not offer bribes. Under the IP, the bidders for specific services or contracts agree with the procurement agency or office to carry out the procurement in a specified manner. IP is applied in different manners in 15 countries. Given the growing concern over rising corruption, Nepal can also benefit from the use of IP. The IP application often comes with solemn pledges by those engaged in procurement processes to foreswear being involved in corrupt practices and to include key stakeholders for monitoring, use public hearing in various stages, and involve media and civil society in the process. It is also important the application of IP alone is not the panacea to ending corruption, which is so complex in itself and widespread as well. We broadly recommend that IP application as well as other complementary initiatives to curb corruption consider the following: n Many public entities have not yet created a

n n



procurement unit despite the provisions that it establish a procurement unit or assign the responsibilities thereof in order to carry out procurement related activities. Those public entities that have created a procurement unit are also lacking experienced, efficient and skilled staff preventing effectiveness in public procurement. Public as well as private organization should establish a functioning, well equipped and efficient procurement unit and hire public procurement personnel having high moral integrity and positive attitude who can prevent undue intervention and influence of corrupt political parties/politicians in procurement decisions and develop competent public procurement personnel possessing high moral integrity and positive attitude. A good understanding of public procurement laws by staff is also fundamental. Strong political will is essential to eradicate corruption from its roots. Effective and result oriented public procurement requires (a) real need based project identification and formulation, (b) requirement based budget allocation, (c) preparation and adherence to procurement plan, and (d) experienced and skilled human resource. Adequate and timely availability of the budget ensures effective implementation of procurement laws. Timely release of budget ensures prompt initiation of procurement process reducing the need to resort to last minute purchases or shortcutting of legally stipulated procedures. Initiation of e-GP, e-bidding will ensure good governance by discouraging collusion and make public procurement proceedings transparent, accountable, and competitive. The main objective of e-bidding is “better value for money” by fostering access, competition, impartiality and transparency and by allowing control by civil society. Among the benefits that have been observed with these systems are: q Increased efficiency; q Enhanced transparency; q Public access (in Mexico, universities, chambers of commerce, business; associations and NGOs are under contract to observe and monitor the processes);

Integrity Pact in Public Procurement


q Better risk management; q Higher levels of integrity and ethics; q Significantly better access to government procurement q Small and Medium Size Enterprises (SMEs); q Better access for non-local (provincial) bidders; q Corruption avoidance; q Cost savings (average 20%) compared to traditional procurement. n Public audit is also an important tool to increase transparency. In a public audit, audit reports are presented to the public where cash and inkind transactions are made public. Clarifications on issues raised and decisions in case of embezzlement can also be made during the event. These events allow the projects to maintain


Integrity Pact in Public Procurement

greater transparency, accountability and receive feedbacks for improvement. Penalisation of corrupt activities and of individuals is of foremost importance. The systems of monopoly, syndicate and carteling have constrained public’s right to have competitive business operations. Therefore, the existing laws against these practices should be robustly implemented to prevent negative impact of these systems on the economy. n Present provisions are inadequate for competitive, transparent, participatory, disclosure in the prevailing laws. Thus, amendments of these acts are required. n A reorientation in focusing to address corruption is necessary. This could be to tackle corruption early on in the process before a corrupt practice takes place instead of fighting with the corrupt, which could be a long and endless battle.

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