Good Practice
Public Procurement Podcasts – Pedro Telles Talks to Stephan Litschig on Effect of Increased Audits on Corruption

Continuing his series of public procurement podcasts, Dr Pedro Telles of Swansea University, interviews Stephan Litschig, Associate Professor at the Graduate Institute for Policy Studies, GRIPS, in Tokyo. His research interests are in the area of development, public and political economics. His work has been published in the American Economic Journal: Applied Economics, the Journal of Public Economics and the Journal of Human Resources. He also serves as an Associate Editor of the Journal of Human Resources.

They talk about his recent joint paper with Yves Zamboni called Audit risk and rent extraction, evidence from a randomized evaluation in Brazil’. Telles is interested in the motivation behind the project.

We know that “corruption is very prevalent in many countries but it is much less known what the people could do to reduce corruption. And by corruption what I have in mind in particular is in public procurement for example that public officials will take kickbacks in return for steering the contract to certain suppliers but I also have in mind a broader concept of corruption which is rents in the delivery of public services where the fact is that in many countries public servants don’t show up for work, teachers for example or health service providers. So the basic motivation is just that we know that procurement and service delivery in general could be better and then the question was can we change this by increasing the scrutiny that comes from the top basically, increased audit risk.”

They discuss how a group of municipalities (120) were placed in a high audit risk group by being randomly selected, “these guys knew that, basically in the control group, audit risk per year was something like 5% but if you were in this high audit risk group you had like a 25% chance to be audited over the subsequent year … So then the idea is that if later on once the auditors go in and they find differences in the incidence of irregularities of matters of corruption this has to be because of the only difference between the two groups which is that they were exposed to ex ante higher audit risk.”

Telles asks about the randomness of selection and whether factors such as awareness of inclusion in the group dictated actions, and they go on to discuss findings. “So we find that when we look at procurement outcomes we find that there is a reduction in both the share of the amount of audited resources that has evidence of corruption, so both in money terms but also when we look at it at the procurement process level and there’s something like 1,600 procurement processes that we have the data on and we find that at that level as well there’s a reduction in the probability that auditors find evidence of corruption. Now what does corruption mean?”  Litschig goes on to explain, and cites examples of corruption found such as “… the auditors go in and they find that the firm that, you know, received the contract in fact doesn’t exist. So that it’s scary but these things happen … other things are when they go in, the auditors find that the government paid more than what they had agreed to in the auction basically, without gaining any other compensation.”

Telles laughs at this because he’s on familiar territory — he’s seen first hand evidence before of companies being awarded contracts before they even exist! One assumes this is the kind of corruption that is happening in plenty of other places too.

Telles is interested in which processes were found to be more likely to generate corruption or have corruption arise from them. “… So we group them into two modalities and the finding is pretty stark, is that, amongst let’s say public procurement auctions the incidence overall of corruption is much lower, something like 20% and it doesn’t change at all, whereas amongst modalities that restrict competition and give more discretion to the public official, the overall incidence in the control will be something like 40% and there we find the reduction, it only occurs there, something like 15 percentage points. So it’s only the modalities that restrict competition, that afford more discretion that, where this corruption seems to be going on and where it is affected by higher audit risk.” The discussion takes a turn towards financial thresholds and how they differ from Europe and what that means for the results.

There then follows a lengthy and fascinating exchange about cases of corruption as they extend to the wider community — corruption in a public procurement process, people (services) not doing their work  properly, if at all, and how that might be classified and discriminated against as ‘stealing from public procurement.’ A very interesting angle worth returning to – but you can read about it and more in the transcript on the public procurement podcasts website.