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Eye of the Storm: Targeting Ethics in Procurement
By Paul Emanuelli
It’s like watching weather reports from the Caribbean. No sooner does one mess get cleaned up than a new one hits—or else one that we all thought was over and done with unexpectedly makes news again. The front-page, prime-time coverage of government buying scandals is enough to make the most stalwart public sector procurement professional feel like a moving target.
Yet all is not lost. If the massive media attention has had one good effect, it has been to turn people's minds to the kinds of rules and process improvements required to put a lid on improprieties in government procurement. Here's a look at some of the focal points for public-sector buying reform.
The cut and thrust of supplier competition, the ever-present threat of litigation, the increasing pressure to get value for money, the growing complexities of a round-the-clock interconnected global marketplace and the demand for faster and faster turnaround times can make the hours, days and months fly by in an ever-accelerating blur of relentless procurement cycles. Until a scandal hits.
Then, in split second, everything stops. Events are replayed in reverse slow motion under the white-hot glare of media scrutiny as the public spectacle of second-guessing and finger pointing begins. It’s enough to make the professionals who operate Canada’s high-stakes multi-billion dollar government procurement industry feel a bit like open targets on the shooting range of a new reality show. In the wake of the federal government’s sponsorship scandal and the City of Toronto’s computer leasing inquiry, the new reality is that the once sleepy subject of government procurement has gone front-page, prime-time and mainstream.
Things were undoubtedly simpler in the days before concerns over the integrity of government contracting influenced the outcome of federal elections and perceptions about business ethics impacted investor confidence. Yet those simpler days are gone. Today it’s no coincidence that major trade treaties like the WTO’s Agreement on Government Procurement, the North American Free Trade Agreement and the Canadian Agreement on Internal Trade all have government procurement chapters aimed at promoting open, ethical and transparent practices, and that statutes like the US Sarbanes-Oxley Act put a new premium on the accountability of publicly traded companies. The ethics revolution has arrived.
While isolated incidents should cast no shadow on decades of work performed by the procurement professionals who have quietly and steadily built a top-tier public procurement system in Canada, there is an increasing dissonance between that hard-earned reputation and public perceptions fuelled by a steady stream of sensationalistic media reports. If Canadian public sector procurement wants to maintain its good name, this growing credibility gap needs to be addressed and confidence in public sector spending reinforced. The following survey of local and international sources suggests seven steps that can serve to bolster confidence in the integrity of government procurement.
1. Proactive Leadership
Those who are responsible for public administration need to show strong leadership by allocating high priority and sufficient resources to corruption prevention. Hong Kong is an example of where this happened. As Jean Au Yeung, assistant director of Hong Kong’s Independent Commission Against Corruption states “government’s determination and support is the first and foremost factor in the successful fight against corruption.” In Hong Kong that determination was reflected by legislative action that placed a statutory duty on the Commission to proactively examine government departments and weed out any procedures that could be conducive to corrupt practices.
As Transparency International’s 2003 Global Corruption Report notes, failing to take such proactive steps can have a significant impact on the public purse. For example, the report provides World Bank statistics indicating that corruption accounts for nine per cent of Mexico’s gross domestic product. This outpaces the entire amount Mexico spends on public education. This should serve as a clear wakeup call. Those seeking to preserve our top-tier international status need to meet the ethics issue head-on to enforce public confidence before misperceptions become a self-fulfilling reality of spiralling inefficiency and waste.
2. Promoting a Culture of Ethics
Those in a position of leadership need to take positive steps towards promoting a culture of ethics in public institutions. As Hong Kong’s Independent Commission Against Corruption notes, there has been “a quiet revolution in public attitude towards corruption in Hong Kong. There has been a complete change in our culture, from one of tolerance to total rejection.” This culture of ethics needs to be nurtured across the polity and within our institutions.
Last year the Toronto Computer Leasing Inquiry released a nine-hundred page multi-volume background paper (“the Toronto Report”) that focused on procurement practices, conflict of interest, lobbying and municipal governance. One of its key recommendations was promoting a culture of ethics within public institutions. As the Toronto Report states, “it is widely recognized that public officials have a greater responsibility to uphold ethical standards to protect the public interest.” The report calls for the implementation of “values based procurement” and recognizes that “ethics-related values and principles are the essential foundation of public sector procurement in leading jurisdictions.” Promoting a culture of integrity requires a cohesive system that protects procurement professionals as they serve the public interest.
3. Independent Oversight
Independent oversight is a cornerstone of the rule of law. In government procurement both the courts and the Canadian International Trade Tribunal have been fulfilling this oversight role for years. An extensive body of case law has evolved to clarify the rules that apply to the tendering process. However, that legal oversight tends to apply once a public procurement process is initiated. It is less effective as a mechanism for monitoring activities that can occur behind closed doors. For example, while lobbying activities are recognized as a legitimate and crucial component of the democratic process, such activities tend to undermine public confidence when they are aimed at influencing the award of government contracts. This has given rise to calls for the implementation of independent oversight functions beyond those traditionally fulfilled by courts and tribunals.
As the US Center for Democracy and Governance states in its Handbook for Fighting Corruption, independent government offices such as inspector generals, ombudsmen and anti-corruption agencies “improve accountability by overseeing government operations. In general, they look into allegations of mismanagement and review administrative systems to ensure they adhere to anti-corruption procedures.” In addition to such arms-length oversight bodies, the Center also recognizes the need for legislative oversight of government activities, noting that such oversight “provides a powerful check on executive authority, enhancing accountability where a dominant executive branch might otherwise operate with impunity.” Such oversight is key to keeping executive power in check.
By way of example, in its November 2003 report, the Auditor General of Canada stated that from 1997 to August 2001, “the federal government ran the Sponsorship Program in a way that showed little regard for Parliament, the Financial Administration Act, contracting rules and regulations, transparency, and value for money.” The judicial inquiry announced in 2004 in response to that report is an example of the checks and balances that make executive activities subject to independent review. Making the operations of all government institutions subject to similar independent oversight can help bolster public confidence by serving as a deterrent against future irregularities.
4. Internal Checks and Balances
In addition to independent oversight, public institutions require internal checks and balances and a clear and enforceable code of conduct. In its Practical Guide to Corruption Prevention, Australia’s New South Wales Independent Commission Against Corruption recognizes that “a code of conduct is an important management tool which can positively shape the culture of an organization. Many organizations have found that adopting a clearly defined approach to ethical issues improves the organizationÂ’s reputation, helps to develop pride among staff and is good for business.” The guide calls for the broad implementation of such a code, stating that “significant cost savings can be made and loss of public confidence in organizations avoided if managers plan, develop and implement an integrated corruption prevention policy across their organization.” Doing so is good public policy and sound business strategy.
However, adequate protections need to be put in place to empower these policies. While the Australian guide notes that internal reporting systems account for a significant proportion of detected improprieties, it cautions that corruption in the public sector is significantly under-reported. There are a number of reasons for this, one of which is a widespread fear of reprisals among pubic sector employees. Transparency International’s 2003 Global Corruption Report comes to a similar conclusion, stating that “fear of retribution from employers or colleagues dissuades many from reporting cases of corruption.” By way of example, the report notes that South Africa addressed this problem in 2000 by passing its Protected Disclosure Act to protect “whistleblowers” from retaliation.
5. Clear Roles Definition
As the Toronto Report states, “experts and practitioners agree that a lack of internal clarity with respect to the relative roles and responsibilities of different players in the procurement process poses a high risk for both the integrity of the process and the likelihood of a value-for-money outcome.” A key element of such roles definition is clarifying appropriate delegation rules for government procurement staff and “hands-off” policies for elected officials. The report notes that in Toronto the “dividing line is blurred from both the political and administrative ends of the spectrum” and emphasizes the need to establish “an appropriate balance of roles and responsibilities between governors and managers that is accepted in theory and implemented in practice.” The City of Toronto has made strides towards addressing these issues. Other institutions would be well served to follow suit and create clear arms-length arrangements between elected officials and the professionals responsible for running day-to-day procurement operations.
6. Transparency
Transparency is another crucial requirement for protecting proper procurement practices. As Transparency International states “secrecy still strikes at the concerns of civil society everywhere, and most significantly it perpetuates an environment in which corruption can flourish unhindered.” Public institutions should therefore enhance confidence in the integrity of the public procurement process by providing full disclosure of their procurement practices.
Yet the transparency ideal is not always followed in practice. As the Toronto Report states, “lobbying has been generally pervasive at the City of Toronto in the wake of amalgamation and given the existence of large economic opportunities for outside interests. Lobbyists have been and continue to be a familiar presence at City Hall and in particular on the second floor where Councillor’s offices are located—a phenomenon known apparently in City circles as 'working the second floor’.” As the Toronto Report notes, “procurement/purchasing, along with development and public-private partnerships are the three areas subject to the most intensive lobbying of City officials.” While independent oversight is one element in addressing such issues, the report also calls for increased transparency in decision-making and for the full disclosure of all procurement policies, practices and guides in order to enhance consistency and accountability and protect against preferential practices or hidden policies.
7. Vendor Buy-In
Maintaining the integrity of the bidding system is a two-way process that requires buy-in from the vendor community. Economists might say that unfair procurement practices can lead to distortions in the marketplace, where inefficient vendors can survive and thrive on the largesse of improperly awarded public works contracts to the detriment of their more efficient competitors. Taxpayers might just say that there should be no sweetheart deals based on backroom connections. Either way, the bottom line remains the same. Government contracts should be awarded based on the norms of open and transparent competition.
Some institutions have started to build express vendor fair-play obligations into their procurement frameworks. For example, the Project Management Manual of the Danish Environmental Protection Agency recommends that contractors expressly waive the right to compete in downstream projects. This measure can help address potential unfairness arising when a contractor plays a role in shaping the rules of an upcoming competition and then actually enters the field to compete for that contract.
Lending institutions are also taking note. The European Investment Bank is the European Union’s financing institution, funding capital projects across Europe. It requires contractors who participate in projects that it finances to provide a covenant of integrity whereby directors, employees and agents pledge to avoid corrupt or fraudulent practices. Much like the Sarbanes-Oxley Act of 2002, these requirements turn ethical considerations into legal requirements aimed at the highest levels of business organizations. Those who do business with public institutions in Canada should provide similar integrity covenants and make ethics an express industry standard.
Moving Forward
As the Auditor General of Canada stated in the 2004 Report to the House of Commons, “programs and services that improve the well-being of Canadians need to be managed prudently if Canadians are to receive value for money spent.” Institutions that are serious about bolstering confidence in Canada’s government procurement system have a broad range of options at their disposal. Those options call for proactive leadership that fosters a culture of ethics, implements independent oversight, empowers transparent decision-making and requires widespread vendor cooperation. Right across Canada there are literally thousands of public institutions spending billions of dollars annually on public projects of all shapes and sizes.
The question is, will they step up and accept the ethics challenge?
Paul Emanuelli is a corporate commercial lawyer focusing on public sector procurement, tendering and information technology. He is the current chair of the Ontario Bar Association’s Public Sector Lawyers. This discussion is for general information and should not be relied on as a substitute for legal advice. Comments can be directed to paul.emanuelli@sympatico.ca.
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