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The Business Imperative for Open Contracting

This blog is based on OGP CEO Sanjay Pradhan’s remarks at the European Conference of International Association for Contract & Commercial Management (IACCM), Krakow

A Story from Ukraine – ProZorro & DoZorro

I want to talk to you about how opening government – in particular, opening public procurement contracts – generates powerful dividends for businesses which in turn necessitates business action to realize these dividends. And for this, let me begin with a story – a story of open contracting in Ukraine.

It was right after the Ukrainian Revolution of Dignity on the Maidan in March 2014. A group of reformers, including civil society activists like Yuriy Bugay, reformers in government like Deputy Minister Max Nefyodov, and private sector entrepreneurs came together to combat corruption in the system by overhauling the public procurement system.

In Ukraine, an entrenched system of corruption meant that powerful oligarchs had captured the public procurement process through shady deals. Ukrainian media told scandalous tales of extravagant public purchases, from multi-million-dollar kickbacks on huge infrastructure projects, to inflated prices on day-to-day expenses – fruits and vegetables being procured for $75 a kilo, and roads that cost the equivalent of US$3.75 million per kilometer constructed. An estimated twenty percent of spending in public procurement was lost due to corruption and limited competition

To overhaul this corrupt system, these reformers built an e-procurement system, ProZorro (“transparent” in Ukrainian). Built on open source software, the system makes it possible for government bodies to conduct procurement deals electronically in a transparent manner, while also making the information about these contracts easily accessible online, in open data standards, for anyone to see. The reformers then created a second generation platform, called DoZorro, wherein citizens can flag suspicious violations of contract implementation, which the government is obligated to take action on and respond to.

ProZorro came about through the collaboration among multiple stakeholders – “a golden triangle of partnership.” Government actors were responsible for setting general rules governing open contracting and disclosing contract information; businesses helped build the platform and support contracting authorities and suppliers while adding force to the coalition; and civil society was responsible for monitoring contracts and reporting suspicious transactions.

The early results for Ukraine over the past two years have been encouraging:

  • A survey of two hundred companies found that eighty percent of companies said that the new system positively impacted their business by: lowering administrative costs, saving time to participate in procurement, increasing quality of business decisions, or making new connections.
  • Another survey of three hundred entrepreneurs conducted by USAID found that 82% of entrepreneurs report partial to significant reduction in corruption from the use of the platform.
  • There was a fifty percent increase in companies, including SMEs, bidding for public contracts, attributed to greater trust in the system.
  • E-procurement is estimated to have saved the government over US $1 billion over two years. In one example, cancer patients received additional, free chemo due to savings from using ProZorro for the procurement of medicines.
  • The Dozorro platform, where citizens report feedback, has generated more than 133,000 visitors, and recorded 14,000 feedback reports since November 2016, including five thousand cases of suspicious activity reported by civil society. Around 50 percent of these cases have been resolved so far, including over 1,200 cases where tenders were changed as a result of feedback. In addition, twenty-two criminal charges and seventy-nine sanctions have also been issued.

Despite its legacy of entrenched corruption and the role of oligarchs, Ukraine is today considered a recommended model for e-procurement reform by the European Bank for Reconstruction and Development, and won a prestigious World Procurement Award in May 2016.

The Ukraine case demonstrates two important implications for private sector companies, such as in IACCM.

The Business Case for Open Contracting

The first implication is that there is a powerful business case for open contracting. In South Korea, transparent e-procurement generated $6.6 billion in efficiencies for businesses. In contexts where contracts are awarded based on bribes behind closed doors, honest businesses lose. For instance, the Brazilian construction company Odebrecht gave billions of dollars in bribes – through a dedicated “Bribes Department” – to top leaders in a dozen countries, in exchange for contracts to secure hundreds of projects. In all these cases, multitudes of businesses lost out on the possibility to compete and win contracts. Open contracting levels the playing field, and allows businesses to compete fairly and squarely for contracts, as we saw in Ukraine from the increase in private sector bidders and response from private entrepreneurs on reduced corruption from ProZorro.

The Imperative for Collective Action

The second implication of the Ukraine case is the importance of collaboration across stakeholders, so that government, civil society, and the private sector can play their unique roles. But collaboration is also important because there are powerful vested interests and entrenched networks of corruption that benefit from the status quo – these will resist any genuine opening of contracts.

For instance, in 2000, Peruvian President Alberto Fujimori’s head of intelligence, Vladimiro Montesinos, had created a vast network of corruption that encompassed leaders from all segments of society – political parties, businesses, media, legislature. A documented Harvard Business School case on Peru showed a network of corruption where bribes were given and taken in an enmeshed web of corruption.

Confronted with such powerful networks, individual stakeholders – small companies, ordinary citizens – feel helpless and hopeless. That is why we need coalitions of integrity from government, business, and civil society to join forces to overcome entrenched networks of corruption. We need complementary collective action – we need government and private sector to disclose contracts, and we need civil society, media, and parliaments to oversee contracts.

  • We need reformers in government, as in Bogota, Colombia, where they are pushing to disclose contracts and expose leakages.
  • We simultaneously need the private sector to follow the example of Newmont Mining in Ghana, which not only voluntarily published its contracts but insisted on open parliamentary validation.
  • We need engaged citizenry as watchdogs, as in Ukraine, where civil society – as well as tens of thousands of citizens – have used the DoZorro platform to track and flag problems with contracts.

OGP as a Multi-Stakeholder Platform for Action

The Open Government Partnership (OGP) provides a natural multi-stakeholder platform to bring together such coalitions and collectively commit to concrete actions through action plans.  Just to give you a quick background, OGP was launched at the UN General Assembly in 2011, and in just under seven years, ninety-six national and local governments have joined the partnership, along with thousands of civil society organizations. The private sector has been involved in specific countries such as the Philippines and Nigeria, but we want to scale up its involvement. Together, these stakeholders have come together to co-create over three thousand commitments in action plans to make governments more transparent, responsive, and accountable.

Open contracting is one of the most prominent, rapidly growing areas for commitments in OGP action plans, embraced already by thirty national and local governments across the partnership.  This is encouraging, but it is just the start.

3 C’s to Make Open Contracting a Global Norm

Our vision must be to make open contracting a global norm, so that corrupt leaders and companies won’t be able to strike backroom deals to enrich themselves, robbing ordinary citizens of vital public services and honest businesses of fair deals.

But to make open contracting a global norm, we need to overcome powerful vested interests. We need 3 C’s for the way forward.

First C – Credible action and compelling results. We need credible implementation of commitments to open contracting, and we need more governments to embrace open contracting.  We need compelling stories to convince and galvanize stakeholders around the globe to push for open contracting against formidable odds. ProZorro is an inspiring example, but if are going to make open contracting a global norm, we need more Prozorros!

So, I invite businesses to leverage the OGP platform in countries where they operate. This year, seventy-six national and local governments are working with stakeholders to co-create action plans. Companies should take part in these efforts to push for commitments to open contracting – and once adopted, push to move from commitment to credible implementation.

Second C: Coalitions.   As I have explained above, open contracting strikes at the very heart of politics.  It threatens powerful networks of corruption. We need collective action across multiple stakeholders to overcome powerful vested interests.

Third C: Courageous and Committed Leadership. Ultimately, we need courageous and committed leadership. We need leaders from government, civil society, and business who have the integrity and conviction to fight the good fight for integrity, persevere through formidable odds, and propel open contracting.

I have shared the business case for open contracting. But it is also important for business associations like IACCM to join forces because it is the right thing to do, for both society and integrity. For several years, I chaired and served as a Board Member for the World Forum for Ethics in Business (WFEB), which met annually at the European Parliament. The premise of WFEB is that businesses can be profitable AND ethical. WFEB was founded on the same principle of shared value that Michael Porter of the Harvard Business School has advocated – that businesses can be profitable while also tackling societal problems like corruption with other stakeholders. Businesses like IACCM should join forces as a collective to advance open contracting and join forces with reformers in government and civil society – including in OGP countries as they prepare action plans – to advance open contracting.

The real frontier for open contracting is to forge these coalitions of courageous leaders so they find collective courage and strength to fight through the formidable odds.  Let us forge these coalitions in every country where you are operating – and unleash an inexorable movement to make open contracting a global norm, to deliver on the precious promise that should reside in the very heart of government – that governments exist to serve their citizens rather than serving themselves, that their contract – their real social and moral contract – is only to benefit ordinary citizens, not the corrupt or the powerful.  

That is our collective fight. Join us in that fight.

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