Wednesday, September 5, 2012

How to reduce public procurement waste

The biggest waste of public resources probably comes from irregularities in procurement practices. When the bidding process is rigged, or there is none, not only does it cost more, but the job may be not be handed to the best person. The problem is that the checks and balances on procurement processes are costly and it is difficult to get complete enforcement. However, one can threaten with audits and possible punishment, and hope that will induce officials to be more careful. Does this work?

Stefan Litschig and Yves Zamboni discuss an interesting experiment from Brazil. There, local authorities take part in an audit lottery that gives them a 4-6% yearly probability of being drawn for an audit. That does not seem like a high probability of getting caught. However, for a one-time experiment, 120 counties were selected and told that 30 of them would be audited a year later. Did the 20 point increase in the audit probability have an impact? Oh yes, the probability of irregular procurement practices went down by 17-20%. The irregular provision of health services was not affected, either because it is more difficult to measure, or because potential punishment does not include jail. Conclusion: for better government practices, audit more frequently, randomly, and threaten jail.

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