Annals of Public and Cooperative Economics 77:4 2006 pp.

431–452

CORRUPTION IN PUBLIC CONTRACTING

AUCTIONS: THE ROLE OF TRANSPARENCY
IN BIDDING PROCESSES

by
Frédéric BOEHM∗
Technische Universität Berlin, Germany
and
Juanita OLAYA
Rheinische Friederich-Wihelms Universität Bonn, Germany

ABSTRACT∗∗ : The paper discusses corruption in public

auctions and the role of transparency as a tool to prevent it.
First, we analyse where corruption occurs, emphasizing the im-
portance of considering the whole process, from deciding whether
to contract-out to implementing the contract. We then analyse
the effects of corruption on public auctions and argue that
corruption undermines their stated aims. Second, we discuss the
ways transparency can mitigate corruption and possible trade-
offs regarding competition and efficiency. As an instrument, we
focus on the Integrity Pact, a tool developed by Transparency
International, and analyse cases in Argentina (school supplies)
and Colombia (telecommunications), where transparency helped
to prevent corruption and collusion and, furthermore, was able to
enhance competition. We conclude with some policy implications.

∗ We wish to thank the participants of the workshop ‘Auctions and

Public Procurement’ organized by the Centre ATOM, Université de Paris
1, held on 15-16 April 2005 for their constructive commentaries and
suggestions. Moreover, we are grateful for the thorough revision by Cobus
de Swardt and by two referees of this journal. The ideas expressed in
this article constitute the personal opinion of the authors and in no
way comprise the position of Transparency International or any other
organization associated with them.
E-mail: fredericboehm@hotmail.fr; jolaya@transparency.org
∗∗ Résumé en fin d’article; Zusammenfassung am Ende des Artikels;
resumen al fin del artı́culo.

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432 FRÉDÉRIC BOEHM AND JUANITA OLAYA

1. Introduction

Auctions have been at the centre of public procurement process

reforms world-wide and play a key role in the liberalization and
privatization of public service sectors. Most, if not all, national
procurement regulations currently mandate open competitive bidding.
Besides enabling introducing market efficiency gains into public
procurement, auctions have also allowed introducing competition for
the market in situations of natural monopolies, where competition
within the market is not feasible (on ‘franchise bidding’ see Demsetz,
1968 and Williamson, 1985).
There are two categories of auctions: sealed-bid auctions (first-
price and second-price) and open auctions. Open auctions can be
divided into ascending (English) and descending (Dutch) auctions.
There are also differences between auctions where one indivisible
object is sold or bought, and where there are packages or different
objects. Further, auctions may be on price only, or on price and other
criteria such as quality (multidimensional auctions). 1 Ideally, auctions
enable skimming off the willingness to pay for a contract or object
whose value is unknown and entail an efficient allocation of resources
as well as a source of revenue for the government.
However, auctions are not carried out in corruption-free worlds.
In fact, the World Business Environment Survey, WBES (2000),
carried out by the World Bank, shows that about 60 per cent of the
companies admitted having given bribes. There are also increasing
numbers of reported cases of corrupt auctions. But because of the
secrecy surrounding corruption, reported cases can be seen as the tip
of an iceberg—the majority is likely to remain undiscovered.
Corruption, defined as the abuse of entrusted power for private
gain, can be used to manipulate auctions, and will thus directly
influence their outcome. Corruption can take the form of bribes,
fraud, embezzlement, extortion or favouritism (Andvig et al., 2000:
15–18). Vertical corruption describes when a bidder or potential

1 One further distinguishes between auctions with private-value and

with common-value. With private-value, every bidder values the object to
be sold differently and knows his valuation. With common-value, the real
value is the same to every bidder, but this value is unknown. A common
problem in such a setting is the ‘winners curse’: the winner wins the auction
because he over-estimated the value (see, e.g., Klemperer, 2004: chap. 1). In
public auctions this could, for example, lead to low tariff offers, due to (too)
low cost estimations and/or (too) high expected profits.

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bidder approaches the auctioneer (or vice-versa) to propose a corrupt

side-agreement in order to gain an advantage over other bidders.
Horizontal corruption, usually referred to as collusion, carteliza-
tion or bid rigging, means that bidders form a cartel to overcome
competition in order to fix prices or to divide the market in space or
time.
While drawing mainly on contract and transaction cost the-
ory, the aim of this contribution is twofold. First, we review the
corrupt opportunities arising in typical public auctions, emphasizing
in contrast to the majority of the literature its whole process.
We argue that the process-related approach is required if effective
countermeasures shall be designed. Second, we speak up for the
pivotal importance of introducing transparency as way to mitigate
the probability of corruption in auction processes in general.
The paper is structured as follows. Section two explores the
risks of corruption in auction processes and discusses the effects of
corruption on auctions outcome regarding competition and allocative
efficiency, i.e. whether the most efficient firm wins, horizontal collu-
sion, quality and prices in the market after the auction, and some
other issues. Section three presents transparency as a mechanism
to prevent corruption in public auctions, with a special focus on
the potential trade-offs between transparency and efficiency, and
transparency and competition. Finally, we refer to the Integrity Pacts
(IP) as developed by Transparency International (TI) and present two
case studies, Argentina and Colombia, where Integrity Pacts were
applied to illustrate some aspects of the impacts of transparency in
auctions as discussed in other parts of this paper. The paper concludes
with some policy-oriented guidelines.

2. Corruption in auctions – risks and effects

2.1 Corrupt risks in auction processes

To begin, a simple principal-agent-client model as in Figure 1

below can shed light on the actors and the corrupt interactions in an
auction. On the one hand, the auctioneer, because of his informational
advantage, can defraud his principal to collude with a firm and share
the profits or extort bribes from the firms, e.g. in exchange to let them
participate in the bid. On the other hand, the bidders can approach
the auctioneer and propose corrupt deals, or they can defraud the
auctioneer with false information or by forming cartels. The bidder

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Principal: POLITICAL/LEGISLATIVE
Government/Citizens CORRUPTION
Influence on decision whether to
contract-out/ change rules of the game

Fraud/
Embezzlement

Extor tion
Agent: Client:
Auctioneer Bidders
Bribe/Favour/
Fraud
Collusion

Figure 1 – Potential corrupt relationships in public auctions

can further intend to directly exert influence on the political principal,

e.g. in order to influence the decision whether to contract-out or not,
or to change the rules of the game.
In order to fully capture the corrupt risks in auctions, a
process related approach is indicated. Indeed, auction processes begin
long before the actual bidding starts and the importance of this
preliminary phase is pivotal. Savas (2000: 175) enumerates no less
than twelve steps, the actual bidding starts in step 10 (conduct a
fair bidding process) and closes in step 11 (evaluate bids and award
contract). Step 12 includes monitoring, evaluating, and enforcing
contract performance.
There are several ways through which corruption may under-
mine an auction process on each of these steps. Detecting them sheds
light on where countermeasures should set in. We will divide the
process into three stages: (i) before the bidding, i.e. the preparatory
phase, (ii) bidding and award, (step 10 and 11), and (iii) the aftermath,
after the award (step 12).
During stage one, that is, during the whole preparatory phase,
the risk of corruption is actually the highest, and a great variety
of corrupt ways to capture the process arise. Already the decision
whether to contract-out or not is prone to be influenced, since
this decision opens the way for potential corrupt gains to be made
(Boehm et al., 2005: 264). For example, needs and/or the evalu-
ation of the needs can be manipulated, and a project could be

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strategically under- or over-estimated (Bueb and Ehlermann-Cache,

2004).
Above all, at this stage corruption may be used to counteract or
even eliminate competition from the beginning on. But, as Klemperer
(2004: 131) notes, ‘the profitability of an auction depends crucially
on the number of bidders who participate’. For example, bribes may
be paid to be included in the list of pre-qualified bidders or to
exclude others. Also, a public agent may tailor tender requirements
and specifications to favour a particular firm, or to disadvantage
certain other firms. Insider information about evaluation criteria, the
reservation price of the government, or concerning other bids may be
bought from a tender official. 2 A strategic tailoring of the own bid
to cut out rivals is then possible. Last but not least, competition can
be undermined by imposing short-term deadlines, enabling thereby
only the participation of firms well prepared in advance – perhaps
also coming along with insider information (Boehm et al., 2005:
265).
The second stage, the bidding and award, is the phase usually
focused on by economic models. Opportunities for corruption during
the bidding, certainly also due to time constraints, are limited
compared to the preparation phase. The auctioneer could approach
the bidders shortly before the bids are placed and propose that the
firm, in case of being the winner, will only have to pay the second-
highest bid in exchange for a bribe. Such a case is examined by
Koc and Neilson (2004). Before the award, but after bids have been
placed, corruption is geared towards securing the award or lowering
the costs of winning. Basically, either the winner bribes to lower his
bid afterwards, 3 or a loser bribes to get the award without having
won. This possibility of readjusting bids after they have been placed
is considered, for example, by Menezes and Monteiro (2006), Burguet

2 Alain Metz, manager of Vivendi’s Générale des Eaux, for example,

irregularly received information about the list of bidders for a conces-
sion for building a water treatment plant in Milan from Massimo De
Carolis, who was employed by Vivendi as a ‘consultant’. Police investi-
gations found out, that he also planned to bribe political parties and
experts. In 2001, the contested contract was finally awarded to Ondeo
(http://www.againstcorruption.org).
3 In a first-price auction this could mean that the winner pays only the
second-highest bid. Note that under these premises, second-price auctions
are supposed to be corruption-free in formal models since the winner pays
the second-highest bid anyway, and the bribe would therefore not make any
sense.

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and Perry (2004), Lengwiler and Wolfstetter (2004), 4 and Compte

et al., (2005). Their findings regarding the effects of corruption on the
outcome of the bidding, however, vary considerably due to different
assumptions underlying their models.
But the corrupt favour may not only consist in adjusting bids,
it may also open the possibility of manipulating the evaluation of
contract proposals when both price and quality have to be evaluated.
Burguet and Che (2004) consider this possibility and underscore that
in particular the evaluation of new, innovative technologies creates
considerable room for subjective assessments, and that it is difficult
to prove a manipulation under such circumstances. A further source
of discretion arises, if the auctioneer has also the task to verify the
delivered quality. He may then award the contract to an arbitrary firm
and allows it to produce at a lower quality in exchange for bribes or
favours. Celentani and Ganuza (2002) consider such a setting.
During stage three, after the contract has been awarded, either
corruptly or not, corruption can arise during contract negotiations,
renegotiations, and during implementation. Corruption aims then
at lowering contract costs afterwards, for example, through changes
concerning the quality standards or through securing impunity
towards non-compliance. Corruption may also ease monitoring or
expected penalties. Further, corruption can be used to increase
revenues through inexistent or unsubstantiated claims or through
securing lucrative contract amendments. Corruptly obtained insider
information, conferring bargaining power, may be misused during
negotiations. Fraud, manipulation of invoices etc., can cover lower
quality or serve as an excuse to raise prices for services. These
practices, again, can be covered by bribes to the administration
in charge of contract monitoring. The various corrupt opportunities
during implementation and the analysis of the capture of monitoring
agencies are, however, outside the scope of this paper.
To conclude, risks of corruption in public contracting appear
during the whole process, not merely during the bidding stage.
Corruption during preparation undermines the rationale of the
process, even if the bidding itself remains ‘clean’.

4 Lengwiler and Wolfstetter (2004: 2) state that ‘corruption cannot work

in an open-bid auction simply because it lacks secrecy.’ This is oversimplified
and stems from neglecting to consider the whole process. Even open bids
have confidential stages or confidential pieces of information. Open auctions
may indeed hamper, but not fully eliminate corruption.

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Finally, what determines the probability of corruption in public

auctions? Rose-Ackerman (1999: 65), for example, states that ‘deci-
sions about what to procure are as important as decisions about how
to carry out the procurement’. The more a project, asset or product to
be procured is specific and unique, the higher the risk of corruption,
since scope for discretion is higher. Compte et al., (2005: 9) emphasize
as well that corruption may arise above all in complex contracts,
where ambiguities in the initial bids or the opacity of bid clarification
processes open the way for discretion and thus to corruption. 5
It is further important to consider the market structure in ques-
tion. Potential market power, for example due to high asset specificity,
entry barriers or natural monopoly cost structures, implies rents and
may thus provide incentives for corruption to win these profitable
contracts – especially when no effective regulation is in place, or
when regulation can be captured. The probability of corruption under
such circumstances will therefore be higher. However, also competitive
markets may present incentives for corruption. Du Marais (2004: 271)
notes, for example, that pressure by financial markets may increase
the propensity to engage in corrupt deals in order to survive in the
market. Corruption is then viewed as ‘self-defence’ by managers.

2.2 The effects of corruption on auction outcome

What effects corruption is likely to have on the outcome of public

contracting auctions? To answer this question, the first step is to
ask on what the outcome of an auction mainly depends. According
to Klemperer (2004: 130): ‘The theory that really matters most for
auction design is just the very elementary undergraduate economics
of relaxing the [. . .] assumptions of [. . .] (fixed) entry and (lack of)
collusion’. Both barriers to entry and horizontal collusion are known
to negatively affect the expected revenue and social welfare outcomes
of an auction. The second step is therefore to ask on the one hand,
what are the effects of corruption on entry, and on the other hand, what
are the links between vertical corruption and horizontal collusion – in
other words, does corruption facilitate cartels?

5 A possible strategy in complex contracts with resubmissions is called

‘low-balling’. A bidder submits a very low bid just to enter into negotiations
with the seller and then make use of his bargaining power in contract
negotiations and renewals. See the analysis of Oakland’s CATV Franchise
bidding experience by Williamson (1985: 352). For a critique of the low-
balling argument, see Savas (2000: 205).

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Corruption clearly constitutes an additional entry barrier,

affecting thereby competition in a negative way. Thereby, allocative
efficiency is undermined: it is no longer guaranteed that the most
efficient firm wins. Rather, it is the firm with the best corrupt
knowledge that has the best chance to win. Further, entry is not static
but dynamic and also depends on past auctions and the reputation of
the government. In part three of this paper we present evidence that a
relative certainty that there will be no corruption in an auction creates
incentives for firms to participate. The reasons may be manifold: the
firm may not dispose over necessary connections to political leaders
or relevant parts of administration to engage in corrupt practices,
the firm may lack knowledge in corrupt savoir-faire, or simply may
have higher risk aversion or ethical objections. In the worst case,
corruption in public auctions could lead to an adverse selection
of the firms willing and able to participate in an auction: where
corruption is pervasive and processes are characterized by opacity
and subjective discretion, it may well be that past corruption cases or
even only the existence of rumours drive honest firms to abandon the
market.
Now, does corruption facilitate cartels? Auction theory has
analysed in detail the negative effects of cartels on the outcome
of auctions. And, there is evidence that such collusive agreements
are often supported by corruption. An interesting example is the
case of collusion between the three major French construction firms,
Bouygues, Suez-Lyonnaise and Vivendi. The three firms allegedly
participated in a corrupt cartel for construction works in schools in
Ile-de-France between 1989 and 1996. The contracts that were shared
among the firms were worth about 28 billion Francs. Additionally,
this collusive agreement involved political corruption to stabilize the
cartel: 2 per cent on all contracts were paid to political parties in the
region. 6
A formal model that fits these observations comes from Compte
et al. (2005). The authors show that ‘a key effect of corruption in public
markets is that it undermines competition and facilitates implicit
collusion in price between competing firms’. Indeed, the auctioneer
is in a position enabling him to play the role of an enforcement
mechanism: he can oversee the cartel and, if necessary, punish
firms that breach it. Moreover, Lambert and Sonin (2003) make the
interesting point that the value of potential gains from bribery for

6 Le Monde, 12/10/1998, ‘Un système d’entente mis au jour dans

l’affaire des lycées d’Ile-de-France’, by Jacques Follorou

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a public agent is higher when firms collude. If he wants to extract

bribes, he has thus an interest in a collusion of the firms.
But there are other effects to be expected. First, because
the costs of corruption incurred by the dishonest firm have to be
amortized, it is likely that corruption will result either in higher
prices or in lower quality, and thus directly harm the users of the
service that has been contracted-out. 7 Moreover, there is a vicious
cycle between corruption and bad quality: if costs of corruption can
be compensated by lower quality, a way to come through with it is
to bribe the monitor or to engage in other corrupt actions, such as
fraud. Second, if the winner won through corruption, he may benefit
from economies of scale from his investments into corrupt knowledge
and relations, and continue with corrupt strategies during contract
implementation – perpetuating thereby the inefficiencies. Indeed,
if a firm has made successfull use of corruption, why not extend
this strategy afterwards? Finally, one should not overlook the fact
that corruption undermines the rationale and the reputation of the
state. The credibility of government decreases when corrupt auctions
become public and may arouse hostility of the general public vis-à-vis
often necessary reforms of public sectors through the introduction of
competition and private-sector participation.

3. Action against corruption – introducing transparency

3.1 Transparency – effects and trade-offs

Complexity and opacity are providing the required discretion

and secrecy to enable corrupt deals. Avenues to reduce corruption are
thus good, clear and enforced rules, effective sanctions, control and
audits, and last, but not least, transparency (see, for example,
Gardiner and Lyman, 1989). Here, we will focus on the use of
transparency as a tool to reduce corruption. Transparency can be
understood as the availability of information on the decision-making
process that public contracting implies. In economic terms,
transparency reduces information asymmetries and translates into
lower transaction costs for the stakeholders who benefit from that
information.

7 For an example of how corruption increases the tariff of a service, see

the case of water services in Grenoble analysed in Stürmer (2005: 21) and
Lobina (2000).

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Introducing transparency into a process hinders corruption

through various channels. First, it increases costs of concealment and
fraud associated with corrupt activities, while facilitates monitoring,
supervision and control of the contracting process, perhaps through
reducing information asymmetries and associated costs. It further
creates the possibility of being monitored outside the foreseen control
channels if information is publicly accessible, i.e. social control.
Second, it enables accountability of the participating parties and
increases thus both the risk of detection and the risk of being
punished, since a corrupt act will be easier to relate to a certain
individual. Transparency is thus one possibility to allow for
reasonable discretion and reducing the opportunities of corruption.
Rose-Ackerman (1999: 64) writes: ‘Systems that are more transparent
and accountable can afford to give procurement officers more discretion
than others with less accountability’. Third, transparency helps parties
to avoid the prisoner’s dilemma. That is, in situations where it is
unclear whether bribes are paid or not, the dominant strategy for
every bidder is to bribe as well or to leave the market, even though
the totality of bidders would benefit from a corruption-free auction.
Transparency mitigates information asymmetries and increases the
likelihood that other players will denounce corrupt activities. Hence,
transparency is further likely to have positive effects on entry by
signalling trust in the process.
For an auction to be transparent, its design needs to fulfil
certain requirements relating to information enhancing mechanisms,
fair treatment of bidders and the existence of records and registries
over the decisions taken (TI, 2003: 4). Moreover, there needs to be a
credible monitoring system in place that assures that these aspects of
the process design actually take place. Monitoring could be performed
through internal or external control systems, provided by a third
independent monitoring agency outside the executive system, or by
civil society, as described in the cases studies below. The advantage
of introducing civil society stems not at least from the introduction of
an additional player with diverging interests into the game (compare
this idea to the theory of interest group competition by Becker, 1983).
Taking the example of TI and analysing its incentives, it becomes clear
that TI has a reputation to defend and will be strongly interested in
effectively fighting against corruption.
But, the introduction of transparency faces tradeoffs. How does
transparency affect the efficiency of auctions? And, does transparency
hinder competition by opening possibilities for collusion? First, the
trade-off between transparency and efficiency results simply from the

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fact that on the one hand the introduction of transparency raises

some transaction costs, mainly those related to the production and
dissemination of information, while on the other hand, transparency
also reduces transaction costs of the process, since it reduces the
costs resulting from information finding for the bidders and control
agencies. Transparency therefore should be optimized in a way that
minimizes both corruption and the creation of costs and bureaucratic
burden. The question to ask is whether the costs of preventing
corruption outweigh the costs of corruption. Data from World Bank
WBES (2000) indicates that the costs of bribery alone in procurement
auctions amount in average to 12 per cent. It has to be kept in
mind, however, that there are important non-measurable costs of
corruption on governance, reputation, trust building, social network
cohesiveness, and conflict management. These costs cannot be valued
lightly vis-à-vis the costs of producing information with diminishing
returns to scale.
Second, when discussing the trade-off between transparency
and competition, it has to be kept in mind that a major problem
in many markets relevant for public auctions is precisely a lack of
effective competition. Infrastructure sectors such as water, electricity,
or telecommunications are usually characterized by only a couple of
multinational players; and the auctions attract only a few bidders. 8
Public procurement auctions may, however, be able to attract more
bidders.
On the one hand, transparency increases the costs of
corruption, by removing required opacity, and is thus able to restrict
opportunities for corrupt agreements. As discussed above, empirical
evidence and formal results show that corruption certainly is lethal
to competition. Moreover, corruption can be used to enforce horizontal
collusion, which also undermines competition. Following this line, it
can be argued that transparency stimulates competition through the
information supply effect it produces and by minimizing the risks of
corruption.
But, on the other hand, there are concerns coming mostly
from auction theoretic literature about the effects the information

8 Particularly in the water sector, it has been observed a few times,

that only one bidder actually showed interest. In the electricity sector,
Belgian Tractebel (subsidiary of Suez-Lyonnaise des Eaux), was under
investigation in 2002 on corruption charges for a project where Tractebel
was the only bidder, offering a total of 167.4 million dollars for two utilities
(see http://www.againstcorruption.org/newsitem.asp?newsid=5039)

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provided by a transparent process has on competition between the

bidders, because the information may be abused for anti-competitive
agreements. Ascending auctions, for example, provide the bidders with
information concerning the other bids, and could hence be labelled as
relatively transparent. But Klemperer (2004: 105) notes that precisely
this transparency facilitates bid cartels by providing a mechanism to
punish firms trying to break the collusive agreement. Indeed, through
the information provided, the members of a bid-cartel can easily
identify any defection from a bid cartel.
However, transparency allows just as much control from moni-
tors as from other bidders. If a collusive agreement were to be facili-
tated through transparency, it would also be due to a lack of effective
control. Further, Cramton (1998) argues that the information provided
in an ascending auction is a ‘two-edged sword’. Information may have
the undesired effect of enabling cartels. But information may, on the
contrary, also stimulate competition by creating a reliable process
of price discovery, reducing the winner’s curse 9 and allowing for an
efficient aggregation of items. Cramton (1998: 4) also emphasizes that
an ‘important implementation advantage of ascending auctions is that
the open bidding process is less vulnerable to corruption than is sealed
bidding’. 10
Ultimately, transparency certainly is an effective tool to
mitigate corruption. If it were to facilitate collusion among bidders,
would the solution be to have less transparent bids? And along these
lines, would opacity hinder collusive agreements between bidders?
The answer to both questions clearly is no. Moreover, in practice,
if anything, it appears that transparency will rather tend to enforce
competition among bidders than the opposite. In the following we will
provide empirical evidence for this conclusion.

9 See fn. 2. Du Marais (2004: 240–241) underscores moreover that an

open discussion and provision of information before the bidding will also
lead to a reduction of the ‘winner’s curse’ in common value contexts.
10 But the author also notes that where there is weak competition
at the beginning with only a few bidders and where there are ex ante
asymmetries, horizontal collusion will be particularly easy and a sealed-
bid auction probably the better alternative (Cramton, 1998: 10). This seems
to depict quite a few public contract markets, where bid evaluation is often
additionally complicated by the multidimensional award criterion ‘price and
quality’ (Cramton, 1998: 4).

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3.2 Case studies – integrity pacts in Argentina and Colombia

Transparency International developed a concept called the

Integrity Pact (IP) to prevent corruption in public contracting by
introducing transparency into these processes. The IP consists of
a process including an agreement between the government and all
bidders for a specific public sector contract, and is tailored to each
context. A legal document is signed containing rights and obligations
to the effect that neither side will pay, offer, demand or accept bribes,
or collude with competitors to obtain the contract, or while carrying it
out. Also, bidders will disclose all commissions and similar expenses
paid by them in connection with the contract.
Sanctions will apply when violations occur. They range from
loss or denial of contract, forfeiture of the bid or performance bond
and liability for damages, to blacklisting for future contracts on the
side of the bidders, and criminal or disciplinary action against public
agents. The sanctions are applied by the body designated within the
IP to do so. In many cases it is an arbitration court. The IP includes a
monitoring system for the contracting process. Lastly, the IP process
allows introducing special conditions in the bidding process such as
conflict of interest management systems or rules governing asset
declaration of government officials and bidders’ employers.
The idea of the IP is to allow companies to refrain from bribing
in the knowledge that their competitors are bound by the same
rules, by increasing the likelihood of enforcement, and by introducing
transparency measures into the contracting process – or by ensuring
that the existing access to information features will be used for
monitoring purposes. That is, the IP addresses directly the prisoner’s
dilemma mentioned above faced by the bidders.
The IP has been now used in approximately 14 countries, and
TI publishes a database where details of each case can be found.
In the following, we offer an overview of two of those cases: the
implementation of an IP in Argentina during 2003–2004, and in
Colombia during 1999–2000. They illustrate some aspects discussed
before. Indeed, both cases provide evidence on how transparency
enabled participation and thus greater and fairer competition.

School Book Supply in Argentina

The Ministry of Education Science and Technology in Argentina
opened up a process to buy 3,315,000 school textbooks for the
high school level. The text books where to be distributed among
the provinces in Argentina to 1,815,00 students of scarce resources

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in public schools. The procurement process took place for a first

attempt in 2002. The process was designed to have a competitive
pre-qualification stage where the books were to be selected by a
committee. During this stage, various publishing companies expressed
concerns regarding the evaluation criteria used to select the texts, the
qualifications of the experts involved in the selection process, as well
as the procedure within the provinces.
Based on these concerns, the process was later declared invalid.
For the second attempt, the Ministry invited Poder Ciudadano, TI’s
Chapter in Argentina, with the task of introducing transparency into
the process and guaranteeing fair participation from all interested
publishing houses (see Poder Ciudadano, 2004). TI introduced three
elements into the process: First, an IP among all participating
publishing companies and the Ministry was implemented. Second,
a public discussion of the text book selection criteria (terms of
reference) and of the bidding documents (procurement process design)
was arranged. All bidders were provided access to the draft bidding
documents and their discussion were facilitated within a workshop
especially designed for that purpose. Although the results of the
discussion were not mandatory for the Ministry, all suggestions for
changes were accepted and introduced. Third, rules to manage conflict
of interest among the selection committee members were established.
It consisted of a sworn declaration by all committee members includ-
ing research and academic history, teaching experience, positions held
in public agencies and private businesses, publications, relationships
with publishing companies (work, ownership, etc.) and the sources
of copyright royalties. These declarations were made public on TI’s
web site to allow participants to indicate conflict of interests and the
Ministry to exclude members that could not qualify.
In terms of process design, some important elements stand
out from this case. First of all, the existence of a pre-qualification
stage was designed to introduce competition into an otherwise non-
competitive bid. Second, the bidding process, because of the nature of
the goods to be procured, did not focus only on prices but primarily on
quality determined by the contents of the texts and their pedagogical
strengths. This selection was performed during the pre-qualification
process and was undertaken by the award committee members.
The introduction of transparency was reached at various levels
through (i) the intervention of a third party and independent actor
(TI Argentina) with a specific facilitator role, (ii) the agreement on
the ground rules included in the Pact and in the guidelines for
conflict of interest management, (iii) the availability and access to

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information equally guaranteed for all participants and the public and
in all relevant aspects of the process (including conflict of interest
situations), (iv) the involvement of the participants in the process
(workshop, discussion of terms of reference and conflicts of interest
situations), and (v) the enforcement of the agreed rules, for example,
through the effective exclusion of committee members in conflict of
interest situations.
The results, as reported by Poder Ciudadano (2004) are the
following: 48 publishing companies participated in the process and
signed the Integrity Pact. Participating bidders presented a total of
631 books, of which 51.66 per cent were among those recommended
by the committee, 19.96 per cent were not among those recommended
by the committee, and 28.33 per cent did not match the conditions
established under the terms of reference. Moreover, the contract
awards resulted in the following distribution: 48.21 per cent of
the participating bidders had at least one book selected, the two
publishing houses that had more books awarded covered 15.3 per cent
and 14.7 per cent of the total selection, respectively. Only two bidders
had only one book awarded (this is 0.3 per cent of the total selection)
and 3 bidders had contract awards for 2 books.

Social Telecommunication Services in Colombia

The Colombian Chapter of TI (Transparencia por Colombia)
has implemented more than 60 Integrity Pacts in a wide variety of
sectors. The case we present here is different from the Argentinean
one in many ways: first, the sector, telecommunications, is far less
competitive; second, it occurs in the context of a reform process to
open the market for competition. The telecommunications market in
Colombia was opened for private investment in 1993, allowing foreign
investors to have equal treatment with the domestic investors. We
look at a case where an IP was implemented within a bidding process
called ‘Compartel’, a rural communications project aimed at providing
access to telephone services in poor and distant rural areas. 11 In
particular, we focus on one specific instance within this project called
Compartel I. This bid took place in 1999 to contract the operators and
suppliers of 6500 public telephone access points.
The goals of the IP as spelled out by the Chapter were: (i) to
increase transparency of public bids, generating trust and credibility,

11 For a complete report, consult: http://www.transparenciacolombia.org.

co. We have selected here one of those cases and therefore this does not
reflect the whole of the experience.

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446 FRÉDÉRIC BOEHM AND JUANITA OLAYA

(ii) to create a voluntary cultural change among participants, aimed

at facilitating that their behaviour be close to ethical standards
and legal standards spelled out in Colombian law, (iii) to agree on
rules of the game contributing to a level playing field between the
contractor and the public agency, and (iv) to produce information on
corruption identifying vulnerabilities, common and special elements
among different bidding processes.
The Ministry of Communications invited TI-Colombia to imple-
ment the IP in the Compartel project when the terms of reference
were ready for the Compartel I process. Therefore, the process could
not start with a participatory discussion of the terms of reference.
The IP included the disclosure by the winner, under a confidentiality
agreement, of all payments made to third parties on the occasion of
the contracting process. Further, an ethics declaration signed by the
officials and advisors from the Ministry involved in the process was
implemented. This declaration included a range of prohibitions that
public officials should follow, regulating possible current and future
conflicts of interest. In the case of Compartel I, all bidders signed the
IP.
In terms of process design, two aspects stand out. First, the
intervention of a third independent party (TI Colombia) played a role
as facilitator of introducing transparency measures in the process,
including experts providing input on substantial aspects of it, such
as clarification of bid requirements. Second, the discussion promoted
by TI around the IP, its process and consequences enabled the
participants to talk about the risks in the process and to take
explicit steps against them. For example, the ethics declaration signed
by the officials contained measures guarding them from situations
concerning how they handled the information on the process – both
confidential information and information that legitimately would
concern other bidders.
Once the contract was awarded, there were no allegations from
any of the participants on violations of the IP or any acts of corruption.
The then monopolist Telecom participated competitively in the bids
and in one case was disqualified for presenting a bid without matching
the bid terms. When interviewing bidders who lost, they underscored
the key role the IP process played in encouraging them to participate
in the bids. 12 In one case, a bidder that had never participated in

12 Interviews performed by Juanita Olaya during 2001 for Transparency

International.

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CORRUPTION IN PUBLIC CONTRACTING AUCTIONS 447

government contracts before specifically expressed that the IP helped

him to ease some of the concerns he had to enter the market.
Clearly, in a less competitive sector like this, one finds that the
players are the same and only a few, even at the international level,
therefore the incentives to collude may be higher than in other sectors.
This may also be problematic in terms of corruption prevention as
the costs of whistle-blowing are higher, as in every market that is
less competitive. This does not mean that horizontal collusion is
encouraged, but rather that other measures to prevent it need to be in
place. The IP itself provides mechanisms to enforce sanctions in case
of breach, and the disclosure of payments to agents and others made
by the winners also increases the hurdle of corruption. However, in
this case there have been no signs of collusion or allegations of it.

4. Lessons learned and policy implications

Corruption undermines the rationale of auctions, that is, to

assign the contract to the most efficient firm. Instead, the contract
goes to a corrupt and ex-ante determined firm, thereby impeding the
forces of competition – the reason bidding was chosen in the first place.
So, what can be done to curb corruption in public auctions
and to guarantee that the competitive effects auctions are designed
for are not undermined? Due to the very diverse nature of public
procurement, ranging from the buying of paper clips to big infrastruc-
ture projects, detailed policy guidelines are impossible. We argued,
however, that one – if not the most important – check against
corruption is to introduce transparency into the process, and we
provided empirical evidence to support our view that transparency
helps promoting competition. The fact that in the Argentinean case
there were corruption allegations during the first attempt, and strong
response during the second attempt once reforms where introduced,
indicates that those bidders who were discouraged from participating
during the first round have reconsidered their decision for the
second one and entered into the bidding. Increased participation is
also observed in the Colombian case where bidders expressed that
transparency introduced by the IP played a key role in encouraging
participation. Moreover, both the Argentinean and the Colombian
Chapter reported during interviews that the IP enabled process
credibility and legitimacy, which can be observed, again, by the
number of firms, and also, counterfactually, by the absence of conflicts,
review requests or allegations after the process.

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Further, the award rates and distribution in the Argentinean

case indicate that there was no concentration or dilution of winning
bidders. In other words, there appear to be no evident symptoms
of side agreements. It can be argued that horizontal collusion could
not be enforced because the high rate of stakeholder participation
guaranteed that losing factions would denounce, given that they have
the power and protection to do so. This power is given through
the process design and the enforcement of process rules. In fact,
the Printing Industry Chamber issued a statement after the process
commending its transparency and cleanliness.
Optimal auction designs should thus consider measures to
introduce transparency into public auction processes on a regular
basis – although adapted to the special needs of the contract
or product considered. Given the ways in which corruption risks
appear and the empirical results of our case studies, the following
three points offer some general recommendations to be considered
in auction design and should be valid in any contracting-out context:

– Open public discussions and access to information. Discus-

sions with all stakeholders should be foreseen at the beginning
of the process since they clarify requirements, provide information
on the process and the object of the tender, and make favouritism
difficult. One should not overlook the fact that pre-bid information
accessible to all the bidders has other values beyond curbing
corruption. Ultimately, these public discussions also give the
process a democratic legitimization.
– Limit the discretionary power. Discretion is unavoidable but
also important since it allows for flexibility and may encourage
innovative solutions. But discretion paired with secrecy is the very
root of corruption, and transparency is able to remove secrecy.
This can best be done by providing information on the award
criteria and on the contract or product to be procured. Transparency
may further lower the monitoring costs, since external checks are
automatically provided. For example, scrutiny from civil society
may play a key role in mitigating corruption.
– Promote competition. Compte et al. (2005: 11) propose that
‘. . .promoting and even subsidizing the entry of an outsider, who
lacks connections to the local corruption network, can be quite
efficient to secure competition in procurement contracts’. Further,
as we saw in the Colombian case study, the introduction of
transparency into the process may raise the confidence of com-
petitors that otherwise would not have considered participating

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because they feared that the game was already played behind the
scenes.
The introduction of transparency into a bidding process,
however, is not without costs. Transparency may affect efficiency of
the process if it introduces unnecessary delays or produces costly
information that ends up being unused. This trade-off has to be
considered from the beginning on in designing transparent auction
processes. The benefits of introducing transparency depend thus on
the size of the contract and on the characteristics of the good to be pro-
cured or the service to be contracted-out. Do not use a sledgehammer
to crack a nut – it is a question of optimizing transparency.

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Corruption dans la mise aux enchères des contrats publics.

Le rôle de la transparence dans les processus d’enchères

L’article traite de la corruption dans les enchères publiques et du rôle

de la transparence comme instrument pour l’éviter. En premier lieu, les
auteurs examinent les cas où on observe de la corruption en soulignant
l’importance de considérer le processus complet, depuis la prise de
décision de passer un contrat jusqu’à l’application du contrat. Ils an-
alysent ensuite les effets de la corruption sur les enchères publiques et
démontrent que la corruption mine les objectifs déclarés. En deuxième
lieu, ils expliquent les façons dont la transparence peut atténuer la
corruption et les compromis possibles en ce qui concerne la concurrence
et l’efficacité. A cette fin, ils se centrent sur le Pacte d’Intégrité, un outil
développé par “Transparency International”, et analysent des cas en
Argentine (fournitures scolaires) et en Colombie (télécommunications),
où la transparence a aidé à prévenir la corruption et la collusion
et a en outre permis d’accroı̂tre la concurrence. Ils livrent quelques
implications politiques en guise de conclusion.

Korruption in Versteigerungsproze-Die Einführung

von Transparenz

Der Artikel behandelt das Problem der Korruption bei Versteigerungen

öffentlicher Verträge und die Einführung von Transparenz als eine

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452 FRÉDÉRIC BOEHM AND JUANITA OLAYA

mögliche Lösung. Im ersten Schritt zeigen wir auf, wo Korruption

auftreten kann und unterstreichen die Notwendigkeit, den gesamten
Prozess von der Entscheidung der Auftragsvergabe bis hin zur
Durchführung des Vertrags zu beachten. Dann diskutieren wir die
Effekte von Korruption und wie dadurch die angestrebten Reformziele
untergraben werden. Im zweiten Schritt zeigen wir, wie Transparenz
das Korruptionsrisiko verringern kann, gehen aber auch auf poten-
tielle Trade-offs bezüglich Effizienz und Wettbewerb ein. Als Instru-
ment zur Einführung von Transparenz konzentrieren wir uns auf
den von Transparency International entwickelten Integritätspakt und
präsentieren zwei Fallstudien aus Argentinien (Schulmaterial) und
Kolumbien (Telekommunikation), in denen Transparenz Korruption
und Kartelle verhindert und zugleich den Wettbewerb gefördert haben.
Zuletzt ziehen wir einige politikorientierte Schlussfolgerungen.

Corrupción en subastas de contratos públicós. El rol

de la transparencia en el proceso de licitación

El artı́culo analiza el problema de la corrupción en subastas de

contratos públicos y el rol de la transparencia como instrumento
de prevención. Primero, mostramos dónde se ofrecen oportunidades
corruptas y destacamos la importancia de considerar todo el proceso
desde la toma de decisión de contratar con empresas privadas hasta
la implementación del contrato. También analizamos los efectos que
la corrupcion tiene sobre la subasta pública y cómo puede minar
los objectivos declarados de la reforma. Segundo, discutimos de qué
forma una mayor transparencia puede ayudar a reducir los riesgos
de corrupción pero también posibles arbitrajes entre transparencia,
eficiencia y competencia. Como instrumento, nos centramos en el
Pacto de Integridad desarrollado por Transparencia Internacional
y presentamos dos casos, en Argentina (materiales escolares) y en
Colombia (telecomunicaciones), en donde una mayor transparencia
no solamente ayudó a prevenir casos de corrupción y colusión, sino
también logró incrementar la competencia. Concluimos con algunas
implicaciones polı́ticas.


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