Case grows for corrupt companies to be barred from government work

Bribers are barred from government contracts in many countries around the world. Flickr/kamshots

Following the latest round of Australian bribery allegations, Mathew Dunckley of the Australian Financial Review called for mandatory rules to bar those convicted of bribery from competing for public sector procurement contracts.

The Australian government argues existing integrity rules and processes for public procurement are sufficient. This was the position it took in 2006 and again in 2012 when pressured by the OECD to improve its foreign bribery disqualification processes.

But Australia is somewhat isolated in this argument. Other countries and even international financial institutions such as the World Bank have far more stringent barring rules that apply in addition to their normal procurement integrity processes.

The argument that all is well in Australia is undermined by allegations of bribery involving Australian businesses. Securency and Leighton are recent examples, but apparently a number of other leading companies are cooperating with investigators. Clearly all is not as well as held by the government.

That said, designing of a system of rules barring corrupt persons from public procurement – known as disbarment in the US – is a complex task.

Making debarment work

To begin with, it’s important to clarify the purpose of debarment rules. Should they primarily be aimed at punishment and deterrence?

Even though debarment may only be for a few years, it tends to be a death penalty for businesses that are heavily reliant on public procurement contracts. That risk would have a good regulatory impact because it would make management teams think twice before allowing bribes to be offered. But would that outcome necessarily be fair?

The nature of corporations complicates corporate punishment. Unlike humans, corporations can change their culture by firing the dishonest individuals and by implementing appropriate policies and procedures. Is it fair to sentence a company to death, if it has convincingly changed and the company that will suffer the consequences is only technically the same as the one that committed the offence?

This is especially important as we know the ones who may suffer most will be the company’s employees, shareholders and perhaps even creditors who had no involvement in the offence. Any such penalties would also need to be factored into the overall punishment for the offence itself to prevent excessive penalties.

Should debarment rather be aimed at preserving the integrity of both the procurement process and delivery under a contract?

A person that paid bribes in the past may undermine the current procurement process with similar behaviour or may prove unreliable and dishonest as a service provider. Procurement integrity rather than punishment is therefore the aim of the federal debarment processes in the US.

The key question for a US federal agency is whether that potential contractor is currently responsible, or whether it continues to present a risk that renders it unsuitable.

The contractor has the burden of proof to convince the agency and may offer evidence that it adopted appropriate remedial measures, for example that it improved its internal controls, cooperated with investigators and took disciplinary action against the individuals responsible. If the evidence convinces the agency, the contractor may be awarded a contract despite its past history. This may be contrasted with a punitive model, such as the World Bank model, where such evidence may have only a mitigating impact, shortening the period of debarment.

Integrity is king

Preserving procurement integrity, rather than punishment, is arguably a more appropriate objective for a debarment system. It assists to ensure responsible spending of taxpayers’ money. It also reflects business and taxpayer concerns and expectations. Awarding a public contract to a contractor that has been paid bribes or even been debarred by another country, will become increasingly difficult to sell to sceptical taxpayers.

Other issues to consider include triggers for debarment. For example, a company could be debarred when it is found guilty of a bribery offence or other integrity offences by an Australian court. Should it also be debarred if it is found guilty of those offences in a foreign court?

If foreign convictions are not recognised, local companies may complain about a lack of a level playing field. However, if foreign convictions are also recognised, will all of them be viewed equally?

Flickr/Propaganda Times

What about convictions handed down in countries where the rule of law is weak and where the contractor may allege that the prosecution was rigged? Or should the bribery allegations rather be investigated independently by the agency concerned or a central agency to make its own findings regarding culpability? That could address concerns regarding the integrity of certain foreign convictions, but could lead to international tensions if the Australian agency comes to a finding that differs from that made by the foreign court. This option of course also raises questions regarding capacity, costs and efficiency.

These are examples of some of the technical questions that need to be considered when designing a debarment system. There are also broader and more fundamental questions, such as its impact on competition and pricing. Debarment limits the pool of competitors and tends to increase the price of the procurement contract.

Public procurement processes are aimed at getting the best goods and services at the best price for taxpayer dollars. Corruption allegations have engulfed major service providers. What will be the cost to the public purse of excluding these providers from procurement processes? What are the best ways to balance integrity and cost concerns?

While these matters are complex, answers were found for other countries. The European Union adopted a 2004 procurement directive making debarment of those convicted of bribery and other offences compulsory in the European Union. The US has operated an extensive federal system of suspension and debarment for many years. The World Bank Group operates a cross-debarment process with other multilateral development banks in terms of which they recognise each other’s debarment actions.

Australia can therefore benefit from the experience of these countries and institutions. Importantly, if the debate about a debarment system starts in Australia now, it will benefit from parallel discussions elsewhere. The World Bank, the US and the EU are all currently debating improvements to their debarment systems.

It is time for a serious debate about debarment in Australia. Anti-corruption action is gaining traction internationally. Globally, political and business leaders are more committed to combating corruption than ever before.

The Australian rejection of OECD concerns regarding the lack of a clear and transparent debarment framework will therefore become increasingly difficult to defend internationally and domestically.

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