Procurement, Greater Discretion Does Not Equal Greater Corruption

A PAPER BY DECAROLIS, FISMAN, PINOTTI AND VANNUTELLI SHOWS THAT THE INTRODUCTION OF GREATER DISCRETION IN THE SELECTION OF PRIVATE CONTRACTORS IN PROCUREMENT RESULTS IN AN INCREASED RISK OF CORRUPTION ONLY IN CONTEXTS ALREADY VULNERABLE TO THE PROBLEM

Reforms to the Italian Procurement Code, that began in 2008 with a corrective to the Code, continued with the adoption of the 2014 European Public Contracts Directive and most recently with the 2023 reform of the Code and have introduced increasing discretion in the selection of private companies. But what has been its impact on the companies, prices and contract execution?
 
Shedding light on the issue was the paper “Rules, Dicretion and Corruption in Procurement: Evidence from Italian Government Contracting” by Francesco Decarolis (Bocconi University, Department of Economics), Raymond Fisman (Boston University), Paolo Pinotti (Bocconi University, Department of Social and Political Sciences) e Silvia Vannutelli (Northwestern University).
 
Discretion in public procurement is limited in standard (open or restricted) procedures based on the lowest price criterion, especially when conducted by applying automatic exclusion of anomalous bids. On the other hand, discretion increases significantly with the use of negotiated procedures, which allow for a targeted selection of firms by inviting only a few to a tender that is not necessarily publicly announced, and with awards based on the criterion of the most economically advantageous offer. Specifically, discretion concerns both the definition of the criteria and weights for the award, with the risks associated with"tailor-made" tenders and the evaluation of subjective elements, such as the artistic value or functionality of the work. In both cases, there is a risk of biased use of discretion, primarily through corruption.
 
According to data collected by Decarolis et al., out of 44,000 companies that won contracts, 11,000 have reports of corruption-related crimes, for a total of 110,000 crimes attributed to 55,000 people. It should be noted that this measure does not indicate the actual criminality of a company but serves as a rough indicator of risk by contract category and geographic area, considering the possibility of bias on individual companies.
 
The paper highlights a significant problem in awards through negotiations, but only when limited to selected groups of companies, and when the criterion of the most economically advantageous offer is adopted. These modes increase by about 1.5 percent the likelihood that a company whose owners or managers are reported in the Ced-Sdi Inter-agency Information System will win the contract, indicating an increased risk of corruption. This increase is significant, especially considering that the average risk of corruption in tenders is between 12% and 16% over the period analyzed.
 
The analysis also shows that the effect of discretionary procedures and criteria varies significantly depending on local institutional vulnerability. In fact, risks are greater in the presence of areas prone to the presence of criminal organizations, public officials active in procurement already reported in the Sdi, and previous corruption scandals. In contrast, increased discretion is not problematic in municipalities less exposed to such vulnerabilities.
 
In addition, municipalities with greater criminal activity use discretionary procedures less frequently, perhaps due to greater attention from authorities and the media. As a result, the prevalence of suspected corrupt firms among contractors in areas with a strong criminal presence stems from the risks associated with such contexts, rather than from more frequent use of these discretionary procedures in such contexts.
 
In conclusion, the introduction of greater discretion in the selection of private contractors in procurement does not result in a generalized increase in corruption risk, except in specific contexts already vulnerable to the problem. Finally, the paper shows that business-to-business competition allows the state to benefit from discretion while limiting the risk of abuse.
 
Francesco Decarolis, Raymond Fisman, Paolo Pinotti, Silvia Vannutelli, “Rules, Discretion, and Corruption in Procurement: Evidence from Italian Government Contracting”, NBER Working Paper No. 28209, DOI: https://www.doi.org/10.3386/w28209
 

by Valentina Gatti