Eliminating corruption in procurement through incentives

Economic Warfare - Part IV

This post is part of a series where incentive systems are used to achieve a public policy outcome and builds further on the key insight which is that crime requires trust between counterparties and without trust, there is no transaction (and no crime).

Government procurement is extremely bureaucratic to prevent corruption

It makes sense, procurement in general is corruption-sensitive and there’s no shortage of scandals here where political decision makers are found to be corrupt.

The practice however, isn’t just in the public sector. It’s very common in the private sector too where it’s not uncommon that personnel at the buyer get kickbacks from vendors.

I’ve heard stories of construction companies building a pool for the managers of their client companies, free of charge. Although I have only heard about this from large corporates that are so big that buying decisions are delegated down to lower management.

It absolutely makes sense to have defenses against corruption in procurement, but rather then using bureaucratic rule-based methods to combat it, in this post I propose an incentive-based approach that I believe would work better than the dozens of rules in place today.

In reality though, the “corruption” is still a cost to the company paying it and is often treated as an “investment” to win the client.

My proposed solution enables the company to recover this “investment” at the expense of the corrupt employee/politician.

Anti-corruption clawbacks

It would greatly increase the personal risk to the employees of the buyer by allowing the paying company to claim back the funds as damages after the contract is over, subject to them providing evidence of the corruption. Even if the company was clearly willful and complicit in the crime.

An implementation of this policy would be to

• Tilt the statute of limitations for the crime to the business favor.

  Set the statute of limitations for paying a bribe at 3 years and remove the statute of limitations for taking a bribe.

• Ensure confidentiality for the business

  The company paying the bribe would have to be allowed to come forward—disclose the corrupt arrangement and submit the evidence—without exposing itself to prosecution or reputational damage.

• Put gag orders on the receiver

  It’s important the companies that are in the business of winning business through bribes can maintain confidentiality as they are rarely doing that with just one client, if they can’t preserve their reputation then they would not come forward.

• Provide conditional immunity to the business

  If the business comes forward and the crime was not already known through other means than they should be immune from persecution. That means no charges, no press, and a chance to reclaim what was effectively a hidden cost of doing business.

This creates an incentive structure that harshly penalizes accepting bribes but allows the business paying them off the hook.

It poses a dilemma for the receiver, after all he is liable for the rest of his life while the business can betray him anytime and walk away scratch-free.

Especially in construction, businesses get into financial difficulty all the time and it’s just a ticking time bomb.

The consequence of such a lobsided risk situation is that employees and politicians will not accept bribes.

Which is the intended outcome.

As a consequence, many burdensome procurement policies that are placed on governments can be dropped as one could now assume the government is allocating its capital with good intent.

This will enable the market to function much more efficiently with less bureaucracy.

Although technically, it doesn’t prevent corruption. It allows one side to take advantage twice at the expense of the corrupt official and care must still be taken that there’s no close personal bond between the two parties that could be a stronger incentive to not betray the corrupt official.

In essence, it attacks the trust that underlies the crime by giving one party an overwhelming advantage to betray the counterparty.

For the record, all the examples of corruption I have heard from through hearsay. I have never witnessed nor participated in corruption personally.