Playing fair in public procurement – a new age for Integrity Pacts?

The use of Integrity Pacts, in the context of public procurement, is not a new notion - having existed in one form or another since the 1990s; however, they are yet to find significant traction. This article explores the basic features of Integrity Pacts, their uses in the context of EU public procurement, and the possible future that lies in store. Above all, they could be a means of strengthening collective action in a post-Brexit, post-COVID world so as to raise standards and strengthen public trust in national and international governance.

In situations where public procurement laws are suspended or altered due to a state of emergency, for example during the COVID-19 pandemic, Integrity Pacts represent a potentially powerful route for collective action to enforce obligations to which tender parties have signed up; in circumstances where often under-funded national regulators lack the resources to pursue all potential wrongdoers.

What form do they take?¹

An Integrity Pact is at the heart of an approach to public contracting which commits a procuring authority and bidders to comply with best practice and maximum transparency. It is essentially a contract, documented in writing, establishing the rights and obligations of all the parties to a public tender process. The contract (or pact) extends not just to the procuring authority, the bidders and their sub-contractors but also to a third actor known as the monitor. The monitor is usually an independent and external civil society organisation which monitors the tender process against the commitments made by the other parties. The monitor commits to maximum transparency, and all monitoring reports and results are made available to the public on an ongoing basis.²

Integrity Pacts can be used in a wide variety of situations such as construction, engineering, architectural, supply and consulting contracts, as well as in state-related scenarios such as asset privatisation programmes, permits, licenses and so on.

Designing an Integrity Pact document is a key step of the tender process which takes place at the outset between the procuring authority and the monitor to ensure the Integrity Pact is tailored to suit the needs of the jurisdiction and process that it relates to. It is important to note that an Integrity Pact does not (and cannot) replace the applicable law governing the conduct of the tender process or the underlying contract. The importance of Integrity Pacts is that they typically contain standard commitments reflecting best governance practice, so as to drive up standards wherever in the world they are used.

Integrity Pacts typically include the following elements:

• an undertaking by the procuring authority that its officials will not demand or accept any bribes, gifts or payments of any kind as part of the tender process and maintain appropriate disciplinary, civil or criminal sanctions in case of violation;
• a statement by each bidder that it has not paid, and will not pay, any bribes in order to obtain or retain the contract;
• an undertaking by each bidder to disclose all payments made in connection with the contract in question;
• the explicit acceptance by each bidder that the commitments and obligations remain in force for the winning bidder until the contract has been fully executed;
• a set of sanctions for any violation by a bidder of its statements or undertakings;
• a mechanism for dispute resolution; and
• the identification of an appropriate monitor.

What are the benefits?³

At a commercial level, Integrity Pacts save taxpayers money, helping to ensure that infrastructure projects and other public works are delivered efficiently by reducing avenues for illicit gain. From a jurisdictional perspective, they also encourage institutional change, such as an increasing commitment to making data available in a truly open format, simplifying administrative procedures, improving the ability of regulators to be proactive in taking any necessary enforcement action and representing a welcome focus on the demand side of bribery. On a social level, Integrity Pacts provide enhanced public access to information, increasing transparency in public contracts. This in turn leads to greater public confidence and trust in governmental decision-making, reduced litigation over tender processes and more bidders competing for public contracts.

At a time when there has been concern over public tender processes being truncated or avoided altogether in light of the COVID-19 pandemic (e.g. to procure medical supplies), Integrity Pacts give the public and non-governmental organisations a way to determine whether best practice is still being followed notwithstanding any emergency changes to legal regimes governing procurement.

How do they increase trust?

Integrity Pacts increase trust from bidding companies because they require the procuring authority to pro-actively engage with all bidders; make information about the procurement processes and procedures publicly available at regular intervals; and react to requests from bidders. By being transparent about all tender processes, Integrity Pacts establish and strengthen trust in both the procuring authority and the procurement process itself.

How much money can they save?⁴

Integrity Pacts are designed to reduce the scope of and opportunity for financial crime, which by its nature is clandestine. It is therefore difficult to produce an exact figure on how much money Integrity Pacts save, both individually and globally. However if we look at Hungary, for example, it has been estimated that corruption in its public procurement system adds more than 20% to the cost of government contracts. 

There are several ways in which Integrity Pacts, and consequently the monitors, improve cost-effectiveness, including:

• more bidders participating in the tender with better quality and more competitive offers;
• fewer delays due to unsuccessful bidders contesting the procuring authority's decision (resulting in fewer costly court proceedings and consequently fewer delays); and
• fewer unsubstantiated change orders to the contract that decreases the total contracting sum.

How are they enforced?⁵

An Integrity Pact, as described above, is a legally binding document containing rights and obligations. Therefore, it is subject to the applicable contract law and, depending on the extent of the procuring authority's involvement and the national legislation, may also be subject to administrative law.

Different legal systems may have different requirements in the design and implementation of Integrity Pacts. What is most important is that the essential elements are maintained, that the principles of transparency and accountability are given due treatment, and the enforcement of the Integrity Pact as a legal document is ensured.

In dispute scenarios, the difference in the interpretation of Integrity Pacts between common and civil law jurisdictions does not create as much of an issue as would be expected, as legal solutions appear mostly the same even if resulting from different sources. Where differences do appear, they surround issues such as the notion of consideration, performance and damages.⁶

Where have Integrity Pacts been used and what were the results?

• Bulgaria - the Bulgarian Road Infrastructure Agency tendered the design and construction of a €128 million tunnel near Zheleznitsa village, along the Struma motorway, using an Integrity Pact, for which the monitor was Transparency International - Bulgaria.⁷
• Italy - the Ministry of Cultural Heritage is undertaking two major science and tourism projects, worth a combined €2 million, to preserve and rejuvenate Sibari (an Ancient Greek city), using an Integrity Pact. The projects are monitored by ActionAid Italy.⁸
• Poland – in 2016, the Polish Railways Line (PLK) announced a tender on the modernisation of a 44km section of railway connectingtwo Polish cities. Pursuant to this, the PLK signed an Integrity Pact with the Stefan Batory Foundation who agreed to monitor the EUR 130 million project, and the successful bidder was awarded the contract.⁹

Several countries have proactively endorsed the use of Integrity Pacts through recommendations adopted in their National Anti-Corruption Strategies, including Italy, Kenya, Malaysia and Romania.¹⁰ Some countries have gone even further: in India, Mexico and Pakistan, they have become a legal requirement for procurement above a certain value. It is unclear whether more countries will adopt Integrity Pacts as a mandatory requirement by law, as although there are advantages certain risks remain.

In the case of India, since 2016 at least 39 procuring authorities have used Integrity Pacts in their respective public procurement processes. According to certain sources, 96 percent of Integrity Pact Compliant Public Sector Undertakings feel that the Integrity Pact has helped in making the tender process more transparent. All of those surveyed felt that the procurement process would be negatively affected without the use of an Integrity Pact.¹¹ Practical examples support the notion that India is, and has been, taking Integrity Pacts seriously for some time – in 2014 its government unilaterally terminated a €556 million contract with the Anglo-Italian helicopter manufacturing company AgustaWestland for breach of the pre-contract Integrity Pact on the basis of allegations of bribery.¹²Though this would indicate that there has been a measure of success in India, the same risk and problems that plague all jurisdictions seeking to rely increasingly on integrity packs remain (see below).

What are the associated risks and possible problems?¹³

As with any contractual scenario where there are multiple bidders, there is a level of risk involved. Particular risks relevant to Integrity Pacts include:

• Conflicts of Interest - there is a risk of a conflict of interest between all parties participating in an Integrity Pact process: the procuring authority, the monitor, the bidders and their sub-contractors. For example, the proposed monitor in an Integrity Pact could hold undisclosed family or business relationships with potential bidders – which could encourage it to influence the tender process, or the monitorship of the successful bidder post-tender.
• Managing Public Information - in performing its duties, the monitor is given access to all bidding and contract-related meetings, as well as documents for screening. This makes it susceptible to political pressure, and to difficulties in protecting commercially sensitive proprietary information.
• "Window Dressing" - if Integrity Pacts are incorrectly or only partially implemented they can give an appearance of credibility, lacking in either a serious implementation strategy or the ability to be enforced. This makes them vulnerable to abuse or indifference.
• Bidder reluctance - Integrity Pacts are yet to find a mainstream audience. This may discourage potential bidders, which in turn damages their reputation in the market. ¹⁴

Integrity Pacts and EU Public Procurement – anything new?

The EU public procurement regime is well developed and often seen by non-EU countries as the high watermark in terms of contracting with the public sector.  The main procurement rules in respect of public contracts are contained in Directive 2014/24/EU (the "2014 Directive") and similar regimes have been established for utilities and concessions contracts.  These EU rules have been implemented by the Member States into their respective national laws: in the case of the United Kingdom, the EU regime has been transposed almost word for word.

In some respects, the principles and goals of Integrity Pacts (discussed above) are nothing new in the EU public procurement context.  Beyond the familiar principles of transparency, equal treatment and non-discrimination, the EU legal framework from the beginning has contained rules on the qualification criteria applicable to bidders wishing to participate in a regulated tender process.  The 2014 Directive continues these procurement policy objectives through the use of both mandatory and discretionary grounds for exclusion, tackling the issues at the core of an Integrity Pact:

• Mandatory exclusion – EU procuring authorities must exclude bidders convicted of a range of offences including: bribery, corruption, fraud, money laundering and terrorist financing;¹⁵ and
• Discretionary grounds – EU procuring authorities may exclude bidders where they "can demonstrate by appropriate means" that the bidder "is guilty of grave professional misconduct, which renders its integrity questionable" (emphasis added).¹⁶

However, it follows that a bidder suspected of corrupt conduct may still continue to take part in a regulated tender process where it has either: (a) not been convicted of a corruption-related offence giving rise to a mandatory exclusion; and/or (b) demonstrated a sufficient degree of "self-cleaning"¹⁷ to establish its reliability to the satisfaction of the contracting authority (see, for example, the extent of well-documented efforts by Siemens to combat what were institutionally corrupt procurement practices¹⁸).¹⁹  It is this potential legislative lacuna, coupled with the discretion afforded to procuring authorities, which calls for the greater use of Integrity Pacts in tender processes regulated by the EU public procurement rules, so that the monitor can police this gap.

Another consideration is that the decision to allow the participation of a bidder remains largely at the discretion of the contracting authority. Though the threat of challenge from other bidders would, in principle, act as a deterrent against questionable decision-making by a contracting authority, some tender parties may not be willing to challenge (particularly those interested in other contracts with that contracting authority), while others may not have the information required to do so.

Accordingly, the real issue may be less the "integrity" of the bidder, but more that of the procuring authority itself.  Though the effects of the EU rules will be keenly felt by bidders participating in the procurement, the rules are concerned primarily with imposing obligations on procuring authorities to conduct a transparent and non-discriminatory process.  Where the procuring authority is the entity accused of corrupt practices, commercially it takes a brave bidder to bite the hand that feeds it. Therefore, Integrity Pacts can raise the standards not only of the potential bidders but the procuring authority itself.

Future use of Integrity Pacts

The use of Integrity Pacts has gained traction in the European Union since 2015, in particular to safeguard against corruption risks arising from public procurement projects funded by the EU structural and cohesion funds. Integrity Pacts have been piloted in 17 projects – each in receipt of EU funds and cumulatively worth almost €1bn – across 11 EU Member States,²⁰ with each project incorporating some form of Integrity Pact into the contract documentation and monitored by an independent third party (see examples above).²¹ 

The European Commission is reportedly reviewing the outcomes of the pilot programme to feed into its overhauled "InvestEU" funding programme for 2021-27.  Both procuring authorities and bidders could therefore expect to see greater obligations in respect of Integrity Pacts as a condition for the receipt of EU project funding. 

A consequence of the COVID-19 crisis may similarly result in greater pressures being applied on procuring authorities and bidders to enter into Integrity Pacts prior to receipt of project funding, whether driven by EU or Member State requirements.  It is possible that future projects and initiatives meeting the public procurement thresholds might find an Integrity Pact string attached as a condition for the receipt of EU – or even Member State – funds to address the effects of the crisis.  In particular, such a development may be accelerated to the extent that procuring authorities currently are taking an overly generous interpretation of the flexibility within the procurement rules to sidestep formal tender processes as a result of the COVID-19 crisis.

From a procedural point of view procuring authorities must, when considering using Integrity Pacts, take care not to breach general principles of non-discrimination and equal treatment of bidders.  The point at which Integrity Pacts are concluded between the parties must also be considered; Integrity Pacts should be implemented from the beginning of the procurement process and be applicable to all tender parties. Breach of the obligations within the Integrity Pact may also demonstrate strong evidence in support of a decision to exclude a bidder later on in the process.

However, there has been little published critical analysis of the effectiveness of Integrity Pacts in securing anti-corruption compliance, even within the EU pilot.  In particular, there remain questions around the effects of a breach and enforcement.  As noted above, the procuring authority retains large amounts of discretion under the current framework, and bidders may not have confidence in national enforcement or judicial structures to achieve a fair outcome if they decide to challenge decisions.  Though the European Commission may instigate enforcement proceedings itself, such interventions are infrequent and cannot be relied upon by the tender parties.

There are also questions on whether the financial or political willpower remains to continue support for the use of Integrity Pacts moving forward, noting that a new European Commission has taken office since the introduction of the pilot. It seems that for Integrity Pacts to gain prominence in national systems, there ideally needs to be a coordinated supranational approach in terms of both implementation and enforcement.  Independent monitoring will be an extra financial, time and administrative burden on the procurement process which some procuring authorities (and indeed bidders) may be unwilling to bear, though it remains to be seen whether their operation could be made less onerous whilst still being effective in deterring and routing out corruption.

Brexit – an opportunity?

The rules underpinning the UK procurement regime are expected to be unaffected by Brexit in the short term.  Though there have been a number of amendments made to the UK procurement regime to take account of the practical effects of Brexit (e.g. concerning publication of tenders in the Official Journal of the European Union), as noted above, the EU procurement rules have been transposed into national law and, as such, will remain in place subject to any change by the UK legislature.  Indeed, the United Kingdom will accede to the WTO's Government Procurement Agreement after the expiration of the implementation period and has indicated its intention to maintain the same rights and obligations currently applicable under the EU Schedule – thereby achieving a base level for future alignment/divergence.²²

It should be noted that, as we again approach a potential "No Deal" scenario at the end of 2020, neither the UK Government's negotiating paper or draft Free Trade Agreement included any references to further alignment with the EU procurement regime.²³  The longer term development of the UK procurement regime may therefore take its own path, which could see the devolved nations of the UK (i.e. the governments of Scotland, Wales and Northern Ireland) assuming greater powers under purported "Common Frameworks".²⁴  Indeed, the development of a mandatory requirement for an Integrity Pact in a post-Brexit (devolved) UK procurement regime could offer the United Kingdom an opportunity to lead the way in anti-corruption efforts once more.

Where will Integrity Pacts take us in the future?²⁵

Though they have been in existence for many years, Integrity Pacts have struggled to find momentum, and the number of parties wishing to enter into them has remained low.  In the past, this may have been due to a lack of desire to contract into seemingly onerous transparency obligations, or a level of scepticism over their effectiveness.

However, in a post-COVID world, where collaboration and global solidarity has emerged as a point of emphasis, the idea of "collective action" is gaining more prominence in the anti-corruption field. Companies should consider how this will drive changes in behaviour and react appropriately. For example, public companies putting contracts out to tender may require potential bidders to enter into Integrity Pacts, or elements of them, as a standard requirement during the pre-contract process. This demonstrates that anti-corruption is at the heart of the procuring authority's values, driving up standards in the market.

On the other side of the transaction, potential bidders should be aware that the parties to the procurement process have an expectation that Integrity Pacts are signed and adhered to. This may require bidders to re-evaluate and (if necessary) investigate their own corporate practices to ensure they do not fall foul of the contractual obligations imposed by Integrity Pacts. Clearly, though current events have cast a social, economic and political downturn across the world, collective action through Integrity Pacts presents an opportunity to build and strengthen public trust in public procurement.