Corruption in government purchases during pandemic

In pandemics and other emergencies, public procurement is even more exposed to corruption risks than is normally the case. In this blog post, CSC PhD Researcher Irasema Guzmán explains the risks and discusses key cases of emergency healthcare procurement being abused in the past, in Mexico and elsewhere.

Time is treasure during sanitary crises and pandemics. Many decisions must be made on how and what to spend. Every penny counts as it should be invested for prevention, detection and treatment, under threat of a virus spreading quickly and the potential collapse of the health system. Within this context, governments purchase under emergency conditions; hence, it is mandatory to buy fast, open and smart as there is a big opportunity for corruption to occur, with serious consequences for the treatment of patients.

In emergencies, there is high demand for certain items and as a result, short supply. For instance, many of us have found sanitizing gel to be overpriced; as soon as the population heard about the virus spreading, this item could hardly be found on the market. It also happens with necessary items in hospitals such as ventilators and personal protective equipment. Many companies in the business of producing cars or electronic gadgets have been asked to switch up their production lines to make healthcare items instead. As few companies are able to produce these goods, there is a high risk of bid rigging and collusion, i.e., a few firms colluding to decide who will win a contract. It also means that firms can conspire to set high prices. A lesson from the H1N1 swine flu is related to overpricing. The US pharmaceutical giant Baxter was accused of fraudulently overcharging for medicines as part of the Medicaid health programme which supports the poorest families in the United States. The company was found to have overpriced medicines by as much as 1,300%.

Secondly, an emergency requires purchases in the shortest time possible; for this reason, it is likely governments will purchase items by direct awards to firms instead of using fair competition procedures. In times of emergency, direct awards allow buyers to skip the long procurement procedure that usually involves firms competing with each other. But they also bring potential corruption risks; a direct award may benefit firms close to politicians’ circles that would not have won in more competitive conditions, and may be the subject of much lobbying. In 2009, during the H1N1 outbreak, Mexico acquired the vaccine directly from the laboratory Birmex instead of obtaining it from the firms that produced it, Sanofi Pasteur Inc. or Glaxo Group Limited. As a result, according to the Supreme Audit Institution (SAI), the Mexican government spent much more money than necessary, $118 million pesos (£5.6 billion), by the difference between the unit cost prices offered by the laboratories that produced the vaccine and the one who got the contract, Birmex. Therefore, there was a misuse of public resources and inefficient public spending.

Furthermore, there is a risk that suppliers may provide substandard equipment substituting lower quality components to reduce costs. In 2015, US prosecutors charged a man from Burkina Faso over a USD 12.2 million fraud after he misused international aid by buying 2 million anti-malaria nets at a very low cost and very low quality (without sufficient insecticide) from an unnamed Chinese company. The terrible consequence was to put people’s lives at risk.

Another risk is that supplies may not be delivered to patients. In 2010, the Mexican SAI found, in a revision of direct award contracts to attend the influenza H1N1 pandemic, seven amendments authorising extensions to companies of delivery due dates. That is, through such amendments, up to 160 additional days were granted for the supply of items.

Indeed, public infrastructure necessary to treat patients may not even be completed. After the influenza epidemic in 2009, the Mexican government decided to produce the vaccine in the country to reduce costs. In 2011, the firm Birmex was awarded a contract through an open international tender to adapt a manufacturing plant for the vaccine production. In 2013, the Mexican SAI found that this company spent more than 217 million pesos (£8.5 billion) in the construction of the plant, a cost overrun of 78 million pesos (£3 billion). The SAI also found improper payments authorised by contracting authorities that do not correspond to the aim of the contract. In 2015, Birmex agreed to finish the infrastructure through a public-private partnership (PPP) contract with the government. However, by 2017, the SAI found that the plant did not have the optimal capacity to bear the intended load; hence, it was agreed to demolish it and build a new one. The SAI concluded that these irregularities caused a major delay in the influenza vaccine production project (from 2009 until 2017) and involved a massive social cost with the final price 231.4% higher than had been envisaged when the PPP started in 2015.

Lessons from the past can inform improved policy. Evidence from procurement in pandemics shows that governments may not have purchased wisely and that emergency decisions involve potential corruption risks. The costs are high and clear: misuse of public resources and putting people’s lives at risk. It is possible to overcome this situation by improving accountability and disclosing procurement data. Open data allows tracking emergency spending: how governments decide which resources will be allocated to address the problem, how decisions are taken to purchase, which firms win contracts and whether the items are delivered in hospitals as planned. Furthermore, enforcement is needed. External audits are an ex-post instrument to track irregularities in expenditures and expose potential corruption cases, but we also need to punish actors involved in irregularities and transform ex-post actions to ex-ante policies to prevent corruption.

Posted in Governance
One comment on “Corruption in government purchases during pandemic
  1. mthabisimoyo says:

    Insightful article. Zimbabwe is one other case study on how Government right up to the Presidents family have looted coffers under the guise of Covid relief

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