An Objective Corruption Risk Index Using Public Procurement Data

In order to address the lack of reliable indicators of corruption, this article develops a composite indicator of high-level institutionalised corruption through a novel ‘Big Data’ approach. Using publicly available electronic public procurement records in Hungary, we identify “red flags” in the public procurement process and link them to restricted competition and recurrent contract award to the same company. We use this method to create a corruption indicator at contract level that can be aggregated to the level of individual organisations, sectors, regions and countries. Because electronic public procurement data is available in virtually all developed countries from about the mid-2000s, this method can generate a corruption index based on objective data that is consistent over time and across countries. We demonstrate the validity of the corruption risk index by showing that firms with higher corruption risk score had relatively higher profitability, higher ratio of contract value to initial estimated price, greater likelihood of politicians managing or owning them and greater likelihood of registration in tax havens, than firms with lower scores on the index. In the conclusion we discuss the uses of this data for academic research, investigative journalists, civil society groups and small and medium business.

Corrupt Contracting: Partisan Favouritism in Public Procurement. Hungary and the United Kingdom compared.

For politicians seeking to use a clientelist approach to achieve political and private gain, i.e., to prolong their hold on power and maximize personal profit, control of government contracting is a key tool. We theorise that politicians wishing to exploit government contracting for such ends will seek to increase their influence over three stages of public procurement – policy formation, implementation and monitoring – but that their efforts can be constrained by institutional controls and checks. We examine these influence strategies and institutional constraints by comparing one young democracy and one mature democracy, Hungary and the United Kingdom. Developing new procedural and outcome indicators of corruption risk in contracting, we use a change of government as a natural experiment to analyse partisan favouritism in procurement. We find that, in Hungary, where political influence is systematic and far-reaching, 50-60% of the market is dominated by favoured companies, compared to only 10% of the UK market.

The Anticorruption Report. Volume 3: Government Favouritism in Europe

This volume reunites the fieldwork of 2014-2015 in the ANTICORRP project. It is entirely based on objective indicators and offers both quantitative and qualitative assessments of the linkage between political corruption and organised crime using statistics on spending, procurement contract data and judicial data. The methodology used in the analysis of particularism of public resource distribution is applicable to any other country where procurement data can be made available and opens the door to a better understanding and reform of both systemic corruption and political finance. The main conclusion of this report is that public procurement needs far more transparency and monitoring in old Member States, where it is far from perfect, as well as new ones and accession countries, where major problems can be identified, partly due to more transparency and monitoring.This policy report is the third volume of the policy series “The Anticorruption Report” produced in the framework of the EU FP7 ANTICORRP Project. The report was edited by Prof. Alina Mungiu-Pippidi, PhD from the Hertie School of Governance, head of the policy pillar of the project.

Print and e-book versions of all full reports can be purchased here.

Reviews for this publication

Public infrastructure projects and other types of government procurement almost everywhere in the world suffer from favoritism and corruption, if not outright criminality. The spoils always go to the people with the right connections, wealth, or the willingness to use or threaten violence. This is among the most difficult aspects of governance for scholars to study: those who talk don’t know, and those who know don’t talk. This slim volume summarizes detailed studies of favoritism in Bulgaria, Croatia, Hungary, Italy, Romania, Turkey, and Ukraine. A final chapter shows how criminal organizations in many countries—including Mafia-like groups in Bulgaria and Italy—infiltrate national and EU-level public spending projects. Each chapter is packed with a remarkably rich set of charts, graphs, and statistical analyses that capture how much corruption exists and how it works. These succinct and eye-opening quantitative estimates of what really goes on beneath the surface of government make for indispensable reading and should straighten out anyone who doubts that the powerful always find ways to reinforce their influence and wealth, even on the “cleanest” of continents.

Andrew Moravcsik, Professor of Politics and International Affairs, Princeton University in Foreign Affairs

Report on Hungary on institutions in public procurement for the infrastructure sector

This report aims to document and to investigate the extent and the determinants of government favouritism in EU funded infrastructure development. It uses a variety of qualitative and quantitative research methods. While predominantly relying on the analysis of contract-level quantitative data on Hungarian public procurement, it also provides a discussion of the institutional framework and particular cases based on document analysis and interviews.It finds that public procurement of infrastructure from national or EU Funds is a hotspot for corruption in Hungary just like in the other countries investigated by ANTICORRP Work Package 8. However, corruption is not pervasive everywhere and even high-level political influence has it limits. While the economic environment has varied greatly, public procurement spending on infrastructure followed a political logic with elections, EU funding cycles, and political power games playing a crucial role. It has proven to be one key public resource up for grabs for corrupt elites. Controls of corruption in public procurement in general are weak: not only is effective transparency very limited and declining rapidly since 2010, but also institutional remedies are likely to be controlled by the current governing party.As a result of extensive public resources available, weak controls, and a complex regulatory environment facilitating close cooperation between bidders and public bodies, corruption is widespread in infrastructure provision. Political connections, far from having a uniform impact, are effective in facilitating rent extraction only when organisational integrity is weak and both the bidders and contracting entities are politically controlled. In micro-cosmoses of high integrity, political connections are ineffective at best, but may even handicap companies.

The Splintering of Postcommunist Europe

There are two radically different versions of the postcommunist narrative. One tells the triumphal tale of the only world region in which the reforms recommended by the “Washington consensus” worked. The other and more realistic account speaks of a historic window of opportunity that lasted for only a quarter-century, during which efforts by the West and patriotic elites of Central and Eastern Europe managed to drag the region into Europe proper, leaving Europe and Russia pitted against each other along the old “civilizational” border between them. This essay argues that while Institutional choices matter in the postcommunist world, geopolitical and civilizational boundaries still set the horizons of political possibility.

Waging Battle on The Anticorruption Frontline

ruslanThe demand for good governance is on the rise everywhere, from Kiev to Sao Paulo, Paris to New Delhi. But has any measurable progress been made recently? Do we know which countries are succeeding and why? Do anticorruption experts and policy makers understand public concerns about corruption?

The Anticorruption Frontline, the second volume of the FP7 ANTICORRP project policy report launched last week at the Hertie School of Governance in Berlin, finds less than encouraging answers to these questions: Despite increased effort to fight corruption worldwide, there remains little progress on the ground. Even in countries which have shown improvement, the use of public office for private gain remains an issue. Public opinion surveys tracking concerns about corruption are frequently misunderstood – by those being surveyed as well as those proposing anticorruption policy solutions.

New research by Prof. Alina Mungiu-Pippidi of the Hertie School of Governance shows that decreased confidence in the EU, especially in Western and Southern Europe, is linked closely to citizens’ perceptions of their national government’s ability to control corruption. This confidence has been eroded in the wake of the euro crisis, most markedly in countries with the worst growth performance. Central and Eastern Europe, however, remains the last bastion of trust in EU institutions, which is perceived largely as a counterweight to untrustworthy national institutions.

Two European case studies from The Anticorruption Frontline illustrate that EU funding regulations and anti-corruption legislation alone are no panacea for the rampant favoritism inherent in extant particularistic systems. Despite an improved Bulgarian anticorruption rating according to most accepted measures, findings from the Center for the Study of Democracy on Bulgarian governance show that the avoidance of market competition in areas such as public procurement remains the rule rather than the exception. In another chapter, Mihaly Fazekas’ unique data mining method on the awarding of EU structural funding uncovers systemic corruption in Czech, Slovak, and Hungarian public contracting methods.

Such preferential treatment – and its inherent abuse of power – is one of the most insidious forms of corruption facing the world today.  Further case studies from The Anticorruption Frontline include deeper analysis of Qatar and Rwanda, two countries singled out for their improvements on anticorruption measures, yet both of which still exhibit favoritism in public procurement, as well as a look into the corrupt bed of Ukraine‘s gas market, exposed in the wake of 2014’s uprising. As every case in the book makes clear, traditional measures of corruption often fail to measure the existence and subsequent impact of such exploitation of public trust for private gain.

The Anticorruption Frontline argues that further EU regulation is not the solution. As a multidimensional phenomenon, fighting corruption requires tailored policy approaches as well as sustained support in areas such as improving transparency and strengthening civil society. The answer instead may lie in a transition from EU co-financing of large public projects – where the risk of corruption is higher – to a more universal and non-discretionary allocation of EU funding, such as an Europe-wide unemployment benefit scheme.

The Anticorruption Frontline is available for purchase via Barbara Budrich Publishers.

Top Berlin Airport Official Accused of Bribery

Barely six months into his contract as Head of Technology for the Berlin Brandenburg Airport (Flughafen Berlin Brandenburg GmbH (FBB)), Jochen Grossmann has been accused of demanding a half a million Euro bribe from a prospective contractor. This is only the latest in a long list of problems for the airport which is now estimated to be as much as €6 billion over budget and at least five years behind schedule (the FBB has actually declined to set a new opening date). Harmut Mehdorn, FBB CEO, has admitted that even more irregularities in the awarding of contracts could be found.

The notion that there might be more corruption in such a large-scale infrastructure project would come as no surprise to anti-corruption researchers. Indeed, recent research by the FP 7 ANTICORRP project showed that big infrastructural projects are prone to high levels of corruption. The concluding chapter of The Anticorruption Report Volume 1, Controlling Corruption in Europe stated: “Spending on new infrastructure projects, for example, allows the channelling of government resources to favourite companies either directly or through local or regional governments producing unnecessary outputs with high costs.”

While the corruption allegations are nothing new for a large infrastructure project, they are interesting in Germany which is usually held up as an example of good governance. The second chapter of the same ANTICORRP book placed Germany in a group of countries with relatively low risk of corruption, where control of corruption has largely been achieved and occasional incidences of corruption are handled successfully. Thus far, the case of the airport appears to be one where such incidences are being addressed quickly and publicly.

The FBB signed an Integrity Pact with Transparency Germany in 2005 and engaged local public procurement expert Professor Peter Oettel (Oettel is honorary professor at the Technical University Berlin and was former Head of the Department of Structural Policy for the city where he was responsible for overseeing public procurement) to work with TI in monitoring contract awarding for the airport. According to the FBB, this was the first time a German company took such a step, however, according to Transparency Germany; it took nearly a decade to convince the company to sign the pact.

The FBB also has an ombudswoman, an anti-corruption officer and an anti-corruption task force. The FBB reported the suspected corruption to public prosecutor in Neuruppin who then conducted a search of the office of two accused associates as well as the private premises of the chief suspect. The public prosecutor has described the situation as a “classic model of corruption in business dealings.” The task force is comprised of: legal experts, examiners from the FBB, outside legal experts, anti-corruption experts and a representative from Transparency International (TI) who will now review all the contracts awarded by Mr. Grossmann.

The bribery allegation against Mr. Grossmann, which emerged near the two-year anniversary of the cancelling of the open date, is the second publicised incident of corruption involving the airport in a little over a year. Last April, three men were charged with corruption after bribes were paid by firms wanting to secure airport contracts.

Corruption in public procurement will continue to be a key research focus for the ANTICORRP project, with the result of research on the impact of EU funds on control of corruption due later this year. A study released late last year by ANTICORRP researchers  Mihály Fazekas and István János Tóth compared public procurement processes involving EU funds and national funds in Hungary, Slovakia and Czech Republic and found that up to 1/3 of EU funds are touched by corruption.

Anatomy of grand corruption: A composite corruption risk index based on objective data

Although both the academic and policy communities have attached great importance to measuring corruption, most of the currently available measures are biased and too broad totest theory or guide policy. This article proposes a new composite indicator of grand corruption based on a wide range of elementary indicators. These indicators are derivedfrom a rich qualitative evidence on public procurement corruption and a statistical analysis of a public procurement data in Hungary. The composite indicator is constructed by linkingpublic procurement process ‘red flags’ to restrictions of market access. This method utilizes administrative data that is available in practically every developed country and avoids thepitfalls both of perception based indicators and previous ‘objective’ measures of corruption. It creates an estimation of institutionalised grand corruption that is consistent over time and across countries. The composite indicator is validated using company profitability and political connections data.

Corruption manual for beginners: “Corruption techniques” in public procurement with examples from Hungary

This paper develops 30 novel quantitative indicators of grand corruption that operationalize 20 distinct techniques of corruption in the context of public procurement. Each indicator rests on a thorough qualitative understanding of rent extraction from public contracts by corrupt networks as evidenced by academic literature, interviews and media content analysis. Feasibility and usefulness of the proposed indicators are demonstrated using micro-level public procurement data from Hungary in 2009-2012. While the prime value of this broad set of indicators is the possibility of combining them into a robust composite indicator of high-level corruption, the high degree of detail also reveals that many regulatory interventions have succeeded in changing the form of corruption, but not its overall incidence.

EU Funds Curse? New evidence on the reciprocal impact between EU funds and corruption in CEE

Finding an accurate measure of corruption is a problem that has puzzled anti-corruption researchers for some years now. In the framework of the ANTICORRP project, researchers are currently trying to produce a new generation of indicators which allow comparisons across countries and time while being more concrete and specific than the first generation which are based on perception aggregates (for instance the Corruption Perception Index).

This new European paper takes an important step in that direction by using a technique known in audit studies as data mining. Under this method, researchers look for deviations from an ordinary, normal pattern to identify corrupt behaviour. In this paper, Fazekas et al.[i] use a newly created database of public procurement procedures in Central and Eastern European countries to reach three objectives:

    1. Create an instrument based on data mining to assess procurement risk which can be used to estimate across countries and time (to see, for instance, if reforms are working);
    2. Compare corruption risks of EU funded and national public procurement as well as estimate the value of EU funds allocated in a particularistic way; and
    3. Make recommendations on how to monitor EU funds more effectively.

Fazekas et al produced a series of studies [ii]  developing new corruption measures, of which “Are EU funds a corruption risk? The impact of EU funds on grand corruption in Central and Eastern Europe” is only the first to have major findings. These are as follows:

  • The authors prove that public market domination by certain companies or bids won by single bidders are significantly related to irregularities in the procurement process. They furthermore infer that an early sanction of such irregularities would be able to curb corruption. Using a database of over 120 000 public procurement procedures in the Czech Republic, Hungary, and Slovakia they look for anomalies on two sides of each procedure: 1) at entry, unusual processes (e.g. an exceptionally short bidding period) and 2) at exit, unusual outcomes (e.g. the winning bid had no competition, or the winning company frequently wins bids, both indicating favouritism). Using inferential statistics they manage to link the former to the latter.
  • Fazekas et al. use their analysis of procurement process anomalies to calculate a corruption risk index (CRI) which expresses the probability of particularistic allocation of public procurement contracts. Particularistic resource allocation implies that prior explicit rules of spending are bent in order to benefit a closed circle while excluding others. Comparing CRI of EU funded and similar nationally funded procurement contracts, they assess the effectiveness of EU institutions to curb corruption. They find that EU funds represent higher corruption risks in Czech Republic (3%) and Hungary (8%) than comparable national spending, while in Slovakia EU funds are less risky than national funds (13%). Although Slovakia has a much higher level of corruption than the two other countries to start with.
  • In order to better gauge corruption risks in EU funds, the authors calculate the expected value of public resources allocated in a particularistic way by combining the probability of particularism and the value of procurement spending. They estimate that throughout 2009-2012 particularistic resource allocation affected 0.94% of GDP in Czech Republic, 1.15% of GDP in Hungary, and 1.61% of GDP in Slovakia. In total, they argue that the funds affected by particularism may reach up to 1.2% of their combined GDP which is an impressive figure especially when compared to the total amount of EU funds allocated to these countries: 3.3% of their combined GDP.
  • Despite coming with theoretically better legal protection attached, EU funds proved a double liability for public procurement as presented in this paper. First, because as the first ANTICORRP policy report, “Controlling Corruption in Europe” already warned, EU funds stimulate discretionary public spending (as compared to more predictable rule based spending, for instance on pensions). Second, because they seem to be targeted more by rent seekers resulting in a higher risk of funds being captured by a ‘favourite’ company.

Estimated value  of national and EU funded public procurement disbursed in a particularistic way, by country, % of 2009-2012 total GDP

grandcorruption_cee_graph

Source: PPC

Note: In order to arrive at an approximate  total public procurement spending figure, spending values based on announcements in the National Public Procurement Bulletins were approximated to total public procurement spending estimated by the OECD based on the system of national accounts (OECD, 2013). As the total public procurement spending figures are upper bound estimations and the proportion of EU funding within public procurement spending not reported in the National Public Procurement Bulletin is unknown, figures in the graph may be overestimations. 

Given the high risks, what can the EU do to better protect its investment and ensure that funds are disbursed in a more competitive and transparent manner?  The ANTICORRP policy team offers the following recommendations:

  • Introduce an EU-wide, real-time monitoring mechanism of EU funds spending designed to detect systematic fraud and corruption in public procurement using data mining techniques.
  • Increase national civil society capability for monitoring governance and controlling corruption at both national and local levels especially with regard to EU funds.
  • Consider re-allocating EU funding from discretionary investment projects which typically constitute high corruption risk, towards non-discretionary spending such as education.


[i] Mihály Fazekas, Jana Chvalkovska, Jiri Skuhrovec, István Janos Tóth, and Lawrence Peter King, (2013), Are EU funds a corruption risk? The impact of EU funds on grand corruption in Central and Eastern Europe. Published as through the Corruption Research Centre Budapest as CRCB-WP/2013:03 and through the European Research Centre for Anti-Corruption and State-Building as WP No.39 

[ii] Key publications are: Fazekas, M., Tóth, I. J., & King, L. P. (2013). Anatomy of grand corruption: A composite corruption risk index based on objective data. CRCB-WP/2013:02, Budapest: Corruption Research Centre.

Fazekas, M., Tóth, I. J., & King, L. P. (2013c). Corruption manual for beginners: Inventory of elementary “corruption techniques” in public procurement using the case of Hungary. CRCB-WP/2013:01, Corruption Research Centre, Budapest.

Fazekas, Mihály, István János Tóth, and Lawrence Peter King. 2013c. “Hidden Depths.The Case of Hungary.” In Controlling Corruption in Europe vol. 1, ed. Alina Mungiu-Pippidi. Berlin: Barbara Budrich Publishers, 74–82. ERCAS WP 37.

 

Are EU funds a corruption risk? The impact of EU funds on grand corruption in Central and Eastern Europe

Fazekas et al explore the impact of EU structural funds on institutionalised grand corruption in three countries where corruption is systemic – Czech Republic, Hungary, and Slovakia – between 2009-2012. They examine whether EU funds have contributed to weakening institutional quality in terms of wasteful public spending and increased ‘legal’ corruption conducted through public procurement. By exploiting a unique pooled database containing contract-level public procurement information for all three countries they are able to systematically examine corruption risks associated with EU funding at the micro-level. The authors also develop a composite corruption risks indicator based on the incidence and logical structure of ‘irregularities’ in individual public procurement transactions.

Fazekas et al. ultimately claim that EU funding impacts institutionalised grand corruption in CEE in two ways: first, by providing additional public resources available for corrupt rent extraction; second, by increasing the controls of corruption for the additionally allocated funding. Their preliminary calculations indicate that the first effect increases the value of particularistic resource allocation in the three countries up to 1.21% of their GDPs, while the second effect decreases the value of particularistic resource allocation by up to 0.03% of GDP. However, the latter beneficial effect is entirely driven by Slovakia, which has a high national corruption risk level; while in Czech Republic and Hungary this impact is even negative. The authors conclude with several policy recommendations calling for a radical improvement of the monitoring and controlling framework.

Are EU funds a corruption risk? The impact of EU funds on grand corruption in Central and Eastern Europe

Fazekas et al explore the impact of EU structural funds on institutionalised grand corruption in three countries where corruption is systemic – Czech Republic, Hungary, and Slovakia – between 2009-2012. They examine whether EU funds have contributed to weakening institutional quality in terms of wasteful public spending and increased ‘legal’ corruption conducted through public procurement. By exploiting a unique pooled database containing contract-level public procurement information for all three countries they are able to systematically examine corruption risks associated with EU funding at the micro-level. The authors also develop a composite corruption risks indicator based on the incidence and logical structure of ‘irregularities’ in individual public procurement transactions.

Fazekas et al. ultimately claim that EU funding impacts institutionalised grand corruption in CEE in two ways: first, by providing additional public resources available for corrupt rent extraction; second, by increasing the controls of corruption for the additionally allocated funding. Their preliminary calculations indicate that the first effect increases the value of particularistic resource allocation in the three countries up to 1.21% of their GDPs, while the second effect decreases the value of particularistic resource allocation by up to 0.03% of GDP. However, the latter beneficial effect is entirely driven by Slovakia, which has a high national corruption risk level; while in Czech Republic and Hungary this impact is even negative. The authors conclude with several policy recommendations calling for a radical improvement of the monitoring and controlling framework.

The Anticorruption Report. Volume 1: Controlling Corruption in Europe

The first volume of the Anticorruption Report series provides a comprehensive analysis of causes and consequences of corruption in three European regions, presenting corruption risks for several European countries and concrete policy recommendations on how to effectively address those risks.

Print and e-book version of the report can be purchased here.

Hidden Depths. The Case of Hungary

This report investigates corruption risk of EU funds spending in Hungary within the framework of the Public Procurement Law. Its finding is that in spite of what is a tight regulatory framework EU funds are likely to fuel the abuse of public spending. Even though public procurement using EU funds faces considerably more stringent regulation, their use poses much greater corruption risks when compared with funds procured domestically and corruption risks are particularly pronounced for large projects. The report also argues that large-scale institutionalized corruption in Hungary may be widespread and driven primarily by political cycles. Such corruption, often labeled “legal corruption”, typically involves neither bribery nor collusion between lower level bureaucrats and private individuals; rather, it operates through contractual relationships which benefit the highest echelons of the political and business elite. There are a small number of new anti-corruption initiatives of the new government which entered office in 2010, but while they might indicate a positive step towards higher public sector integrity, their results are yet to be seen.

Hidden Depths. The Case of Hungary

This report investigates corruption risk of EU funds spending in Hungary within the framework of the Public Procurement Law. Its finding is that in spite of what is a tight regulatory framework EU funds are likely to fuel the abuse of public spending. Even though public procurement using EU funds faces considerably more stringent regulation, their use poses much greater corruption risks when compared with funds procured domestically and corruption risks are particularly pronounced for large projects. The report also argues that large-scale institutionalized corruption in Hungary may be widespread and driven primarily by political cycles. Such corruption, often labeled “legal corruption”, typically involves neither bribery nor collusion between lower level bureaucrats and private individuals; rather, it operates through contractual relationships which benefit the highest echelons of the political and business elite. There are a small number of new anti-corruption initiatives of the new government which entered office in 2010, but while they might indicate a positive step towards higher public sector integrity, their results are yet to be seen.

Freedom of Information Law Amendment Restricts Access to Information in Hungary

Last April, the Hungarian government presented in London its official implementation plan for the commitments taken as part of the country’s joining the Open Government Partnership multilateral initiative for improving government transparency and accountability. Only a week later, however, an amendment to the freedom of information law, in force since 2012, was proposed by the ruling party Fidesz and threatened to severely restrict civil society’s access to public information in the country.

The amendment was proposed during a special Parliament sitting on April 30th and was approved by the Parliament in less than 48 hours. In its essence, the amendment states that only the State Audit Office and the Government Control Office may hold enough data to conduct large audits, and allows government bodies to deny “excessive” data requests by the public. Moreover, it requires citizens to justify a “legitimate interest” for some kinds of information requests, such as the ones involving access to court cases or personal information on public officials. These dispositions were seen as a great threat to civil society initiatives focusing on the disclosure and processing of large databases with government information, and the vagueness of the wording, not specifying what may be considered as a large audit, a legitimate interest or an excessive request, leaves great leeway for arbitrary interpretation and resistance of government departments to making certain information available.

Civil society organisations reacted strongly against the amendment. According to Miklós Ligeti, legal director at Transparency International Hungary, “this amendment is the first step down a slippery slope, at the bottom of which is full state control of public information. It heralds a dark age for democratic governance in Hungary. The law will now allow government officials to get away with bias in their actions and could see corruption go unseen and unpunished in future”.

Transparency International Hungary, public spending watchdog K-Monitor, the Hungarian Civil Liberties Union and investigative reporting website atlatszo.hu declared that they would quit an anti-corruption working group coordinated by the Ministry of Justice in protest to these restrictions on access to information. Civil society groups also claimed that the amendment seems to be a reaction for increased pressure for disclosure of information on bids in a tender for tobacco retail licenses, which allegedly benefited government party loyalists. The government maintains a monopoly on the retail of tobacco and can grant concessions to run tobacco shops, but the criteria for assessing the bids are kept secret, as are the names of applicants and the names of those who evaluate the bids. Many argue that this may have been used by the ruling party to favour their supporters and strengthen their position for next year’s parliamentary elections.

After the approval in Parliament, the amendment was sent to President János Áder, but he did not sign it and sent it back to Parliament for reconsideration. Nevertheless, freedom of information advocates and civil society organisations had expected him to ask for a ruling from the Constitutional Court on the constitutionality of the law.

(The picture featured above is from telegraph.co.uk and is credited to Alamy.)

 

Research Project Finds Signs of Political Influence in the Hungarian Public Procurement Market

As part of on-going efforts to monitor the Hungarian public procurement market and understand corruption, market shares and contract volumes of public procurement contract winners have been analysed by the research team at the Corruption Research Centre, Corvinus University of Budapest. The goal of the analysis was to determine what impact the change of government in 2010 has had on the public procurement market, and especially to explore whether there is substantive evidence for the common claim that politically connected firms control large parts of the Hungarian public procurement market. The new government implemented large scale personnel changes already in 2010, so if political connections matter for winning public procurement contracts, we should see drastic changes in companies’ market shares after the elections.

Preliminary results indicate that companies with the largest market shares in the public procurement market in 2009, that is, before the change of government, have greatly diminished in their market share by 2011, whereas the market share of the biggest companies in 2011 was insignificant prior to the change in government. Thus, the market share of companies with major public procurement orders before and after the change of government seems to have changed in opposite directions.

Statistical data analysis of all firms with public contracts between 2009 and 2011 also confirmed the significant effect of the change in government on the public procurement market, and thus the potential political influence over market performance of companies. With the help of a standard economic model, changes in the total contract value of almost 4,000 companies in the public procurement market in 2009 and 2011 were estimated. This econometric model takes into account company size, the location of company headquarters, the main public procurement market, and market concentration. The results show that companies with the largest total value of awarded contracts in 2009 performed significantly worse than anticipated by the model, while those with the largest total value of awarded contracts in 2011 performed above prediction. These results strengthen the hypothesis that, aside from the economic logic, political factors also played a role in determining the dynamics of public procurement markets in the period 2009-2011.

Furthermore, the companies performing considerably worse or better than what the standard economic model predicts tend to win public procurement contracts under conditions deemed to carry higher corruption risk than those companies whose performance fits a standard economic logic. They are more likely to have no competitor, tender in a non-open procedure, face extremely short submission periods, and their contracts are more likely to be modified after contract award.

Even though these results are only preliminary and much further research is needed, they have already spurred considerable media attention in Hungary, as they put into context numerous reports criticising individual companies for exploiting their political connections in order to win public procurement contracts.

 

(contributed by Mihály Fazekas, PhD student at University of Cambridge and participant in the public procurement research programme at the Corvinus University of Budapest)

 

Corruption Research Centre at the Corvinus University of Budapest Monitors Public Procurement

(contributed by Mihály Fazekas, researcher at the Corvinus University of Budapest)

 

While Hungarian authorities publish announcements on the country’s public procurement activities in line with the 2004 EU Directive, this information is not available in a structured format for those who would like to gain insights going beyond any individual announcement (e.g. tracking how much a company won in a given period). In addition, information is not checked before publication by any public authority resulting in multiple errors in the announcements such as typos, missing information, inconsistencies.

In order to improve the current situation and to advance effective corruption control in Hungary, the Corruption Research Centre systematically collects data appearing in the Official Public Procurement Bulletin from 1996 until recent times (quarterly updates). The information is downloaded in a structured database and data quality is enhanced by correcting obvious errors and inconsistencies. For example, a large amount of information on the value of contracts awarded appears written out by letters rather than numbers often ignoring basic grammar rules. We also assign to contract winners their unique tax IDs which allows for tracking companies’ activities over time regardless of changes in their names or addresses.

Using the database constructed from official data, semi-annual monitoring reports are published by the Centre in order to inform citizens of general public procurement trends as well as shed light on specific issues. As these reports have spurred significant media coverage they succeeded in initiating discussions with some important stakeholders. In the February 2012 report, for example, we uncovered the list of the biggest issuers of tenders and companies winning most tenders, which prompted protests from some of them claiming that data was falsified. While referring to exact published announcements could resolve some of the controversy, it also became clear that multiple versions of the same announcements are published in the Official Bulletin without clear reference to each other (e.g. a corrected version of the announcement may appear without clear reference to the obsolete original announcement). This clearly causes significant legal uncertainty for ordinary citizens even in the case of simple questions such as how much a concrete awarded contract was actually worth. In order to alleviate this problem the Centre now explores potential corrections and multiplications among announcements to improve data reliability.

A common theme throughout the reports of the last two years is the strength of competition in Hungarian public procurement. A simple metrics which we monitor recurrently is the contracts awarded when there was only one bidder. Surprisingly to us and to many journalists picking up our findings, about 50% of all contracts were awarded without any serious competition in the last years, without any sign of improvement lately.

Among our future priorities, making the whole dataset publicly available features high. Once data reliability is firmly established and quality improvement possibilities exhausted, the Centre’s database will be able to fully serve the wider public. In addition, after establishing contact with our Czech and Slovak colleagues working on public procurement data a joint report is planned for early 2013 exploring cross-country differences.

 

TI Releases New Study on Corruption Risks in Eastern European Countries

A new report released by Transparency International (TI) examines the main corruption risks in four Eastern European countries, namely Czech Republic, Hungary, Poland and Slovakia. According to the study, reforms to strengthen democratic institutions and the anti-corruption legal framework in these countries, undertaken largely as part of their accession process to the European Union, have not been successful in minimising corruption risks, and the danger of political influence over fundamental control institutions remains.

The report points out that some of the institutions resulting from those reforms have in fact been weakened or entirely abandoned by dominant political actors after the accession. According to Miklos Marschall, Deputy Managing Director at Transparency International, “the laws and institutions against corruption in the Visegrad region will remain empty shells without a meaningful commitment to transparency. Most important is that high level public servants and politicians declare their assets and interests, public institutions must be independent from influence and there needs to be better checks on party financing”.

TI’s new report, based on national surveys assessing the strength of the anti-corruption frameworks of these four countries, captures some important similarities and differences in the region. Among the common risks identified in the study are weaknesses in party financing regulation and vulnerabilities related to corruption in the business sector. Nevertheless, some of the positive aspects raised are related to the relative independence and leeway of civil society and media and the importance of investigative journalists and bloggers in exposing corruption in these countries.

For more detailed information on the report, please read the press release “Post-communist institutions failing to stop corruption in Visegrad countries” on transparency.org.

 

A Diagnosis of Corruption in Hungary

How corrupt is Hungary? What type of corruption? How did it evolve during the years? Was there a period when it was more corrupted and what happened to change that? What were the civil society responses? Did the political context allow for more anticorruption measures to be enforced? This report answers all these questions and more.

A Diagnosis of Corruption in Hungary

How corrupt is Hungary? What type of corruption? How did it evolve during the years? Was there a period when it was more corrupted and what happened to change that? What were the civil society responses? Did the political context allow for more anticorruption measures to be enforced? This report answers all these questions and more.