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Publish or Perish

Private contractors cost taxpayers worldwide untold billions in corruption, inefficiency, and mismanagement. But the solution isn't getting rid of them -- it's showing the rest of us their paperwork.
December 22, 2010 |
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On Dec. 7, Nigerian authorities filed charges against former officials of Halliburton -- including one Richard Cheney -- for their involvement in a 10-year, $182 million cash-for-contracts scandal related to the construction of a power plant in southern Nigeria. The charges were ultimately dropped, but only after Halliburton agreed to pay $250 million -- and that's in addition to the $177 million Halliburton and its subsidiary KBR have already paid to the U.S. Securities and Exchange Commission to settle charges surrounding the same deal.

In defense of Halliburton, they're hardly the only contractors playing in legal gray areas -- you don't even have to move out of the infrastructure sector to find other examples. Enron was widely accused of wrongdoing in connection with the construction of the Dabhol power plant in India, a project that produced electricity at a cost four times higher than local producers. Meanwhile, Siemens paid $1.6 billion in fines to U.S. and European regulators to settle charges that it used bribes to secure public-works contracts around the world. Local companies also get in on the act. Surveys of Afghan firms suggest bribes to obtain government contracts are equal to an average of 3 percent of the total contract value -- in the Philippines, that figure is 10 percent. All that weak governance can have a big impact on prices and quality -- road rehabilitation financed by the World Bank, for instance, costs 50 percent more in countries where the average contract bribe size is above 2 percent than in less corrupt countries.

And even relatively clean countries have plenty of problems with contracting. The U.S. government's are legendary -- everyone's heard of the Pentagon's $640 toilet seats and $20 plastic ice-cube trays. In the aftermath of Hurricane Katrina, the Department of Homeland Security ended up paying contractors $2,480 a house to cover damaged roofs with blue tarps -- a job that should have cost closer to $300 per roof. A congressional report from 2006summarizing evidence from government auditors and elsewhere suggested that contracts with a total value of $745 billion had "experienced significant overcharges, wasteful spending, or mismanagement over the last five years."

Corruption isn't the only explanation for why contracting goes awry. Even relatively clean governments are hardly models of efficiency, and private competition can often deliver better for less. The problem is transparency. When a government contracts out work, the distance between the people delivering the services and the ultimate customer -- the taxpayer -- grows. Contractors have little incentive to save the rest of us money, and our ability to make sure they're doing it is too limited. If a contract is failing, it may well remain a secret between one or two bureaucrats and the company concerned. Government audit agencies might uncover a problem if they are alerted or perform a random investigation. But the rest of us can't hold contractors (or the officials who hired them) to account if we don't even know what's meant to be delivered.

There's an answer to these problems: Publish the contract. That would allow citizens, watchdog groups, even competing firms to see whether taxpayers are getting their money's worth. It would also considerably reduce the legal costs of contracting (because we wouldn't continually have to reinvent the wheel when it came to writing contracts in the first place) and allow the spread of better contracting practices.

Contract transparency is starting to catch on. Colombia's e-procurement website already regularly publishes the full contract for procured goods and services, along with contract amendments and extensions and a range of other documents from the procurement process to final evaluation. By 2008, five years after its launch, the site was getting nearly 5.5 million visitors a year. And Colombia is not alone: A number of state governments in Australia have a similar system in place, and Florida's Miami-Dade County sometimes publishes full contracts on its own procurement website.

It is no surprise that where greater contract transparency is introduced, there is evidence that costs fall. A World Bank infrastructure project in Bali, Indonesia that included transparency combined with audit and complaint mechanisms reduced prices for goods and works by 21 percent compared with non-project contracts with less disclosure. Complaints related to contracts disclosed have led to contractors returning fees. Contract transparency also allows for improved delivery. You only need one expert -- or an amateur with patience -- to uncover issues if they know what's meant to be delivered. That's an approach that has allowed NGOs monitoring schoolbook procurement and distribution in the Philippines, for example, to reduce textbook prices by half while increasing the speed and reliability of delivery.

The usual argument against greater contracting openness is that it would disclose contracting firms' trade secrets or invade the personal privacy of staff, that it would betray information vital to national security, or that it would simply be too much work. But the experiences of the governments that are already publishing contracts give the lie to these complaints.

First, the concern over trade secrets appears to be considerably smaller in practice than often predicted -- largely limited to a few high-technology sectors. But when it is an issue, such information can be placed in a contract annex that is not disclosed. That's the approach already taken in Australia's federal procurement system in anticipation of Freedom of Information Act cases. And where names are associated with fee rates, as it might be, the names can be blacked out -- although a recent Freedom of Information Act request connected with contracts for the U.S. Agency for International Development suggests that many contractors are willing to share such information.

When it comes to national security, it is a shame -- and surely no coincidence -- that some of the most egregious contracting outcomes involve defense procurements that are the most shrouded in secrecy (the V-22, anyone?). There are legitimate issues with sharing technology or capabilities in this area, of course, but it may still be possible to print redacted versions of contracts. And a lot of the poor contracting outcomes from the U.S. Defense Department have little or nothing to do with national security -- unless the technology behind the $20 ice-cube tray is top secret.

Finally, with regard to transaction costs, the Internet has made the marginal cost of publication close to zero. The most expensive online government procurement system a recent survey uncovered was the $27 million South Korean version used by 27,000 public-sector organizations. It could be easily adapted to publish contracts alongside tender documents. This hardly seems a high price to pay. Having said that, redaction to meet national security or trade secret concerns does take work. So some jurisdictions that have introduced contract-publication schemes limited disclosure to larger contracts. In Victoria, Australia, for instance, that threshold level is about $10 million. And to limit the level of effort required of bureaucrats, contractors should be asked to identify what information they think should be withheld and give legally sustainable reasons why -- officials can review these requests rather than going over the whole contract themselves.

The real question is a simple one, then: Why not make government contracts public? It is about time officials lived up to a simple maxim: Publish what you buy.

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