Could Contract Transparency Be Bad?

This blog was originally published by the Omidyar Network here.

The Omidyar’ Network’s annual conference on transparency, Open Up? Is titled “Boundaries of Openness and Privacy.”  We’ll launch the Center for Global Development’s Working Group on Contract Publication report at the conference, and during the discussions around that report we came across one possible boundary –could there be such a thing as too much of a good thing when it comes to transparency in procurement?

The CGD Working Group, made up of civil society, public and private sector representatives, was put together to discuss issues around the proactive publication of the complete texts of government contracts.  We know it can be done, because a bunch of countries including Colombia, Georgia, Slovakia, and the UK are already doing it.  And there is mounting evidence that proactively publishing contracts can make a difference to development outcomes.   If it is part of a broader Open Contracting agenda covering the rest of the procurement and delivery cycle and involving the private sector and civil society, proactive contract publication can increase competition, reduce prices and improve delivery of services as well as ensure countries are benefiting to the full from their natural resources. (Initiatives like the Constriction Sector Transparency Initiative and the Extractive Industries Transparency Initiative show the way). 

The Working Group was initially tasked to discuss issues around commercial and national security alongside privacy concerns with full publication.  Our broad conclusion was that these were sometimes legitimate issues, but they involved a minority of contracts and could be dealt with using a redaction and confidentiality process that would not place an undue burden on firms or government officials. 

But an additional issue came up during the group’s deliberations: could publishing contracts help firms collude? 

Collusion involves bidders agreeing to bid a certain price, or not bid at all on certain tenders so that governments end up paying more for (worse quality) services or getting less for the sale of national resources like mineral or spectrum rights.  The winning bidder either shares some of their excess profits with other firms to compensate them for submitting bids destined to fail, or agrees to submit no bid or a losing bid in the next round of tenders so the next firm in the cartel gets a chance.

Collusion is a big issue in government contracting: cases have been uncovered in government contracting involving school milk sales,  mobile spectrum auctions and road construction amongst numerous other cases.  And colluders find it much easier to form a cartel if they know who they should be colluding with and then, after the cartel has been formed, if they can check to see if their fellow bid riggers follow through on the deal. 

That suggests procurement transparency could actually help collusion.  For example, if details of the bid process including the names of bidders and their bids are made public up front, that will make collusion more straightforward.  The OECD thinks this is a serious enough issue that its Guidelines for Fighting Bid Rigging in Public Procurement suggest a central aim should be to “design the tender process to reduce communication amongst bidders.”  It proposes e-bidding, eschewing bid-conferences, and “wherever possible under the legal requirements governing the award notices”, to “keep the terms and conditions of each firms’ bid confidential.”

In the Working Group, the broad consensus emerged that there may be grounds for some level of upstream procurement secrecy: if bid documents are available to all for anonymous and free collection or download, if procurers avoid bid conferences and non-anonymized communication with potential bidders, and if bids are submitted electronically or otherwise impersonally (by post), neither firms nor procurement agents need know who else might bid until after bid closing. 

But once the contract is awarded, it would be obvious to cartel participants if their collusive arrangement had held regardless of subsequent publication of that contract.  And, in the long term, publishing contracts would allow competition authorities and watchdogs to better monitor potential collusion: a large enough database of contracts regarding similar projects could help uncover contract price inflation linked to cartel activity or corruption.

Perhaps the entire procurement process shouldn’t be completely open.  On the upstream end, there might be grounds for some secrecy around bidders.  On the downstream end, some contracts will need to be redacted.  But at the moment the vast majority of countries are still a long way from the boundaries of what can be published around government contracting. 

We’ll discuss the Working Group’s report Publishing Government Contracts: Addressing Concerns and Easing Implementation at Open Up?  We’d love feedback then –or before, or after—on the issue of collusion as well as other pros and cons of full, proactive, contract publication.