school collapse related to corruption have also emerged in the aftermath of the 2008 Sichuan earthquake in China.

# **The Role for Greater Transparency and Oversight**

The current procurement and oversight systems of governments and donor partners are, of course, designed to reduce the impact of governance failure. That some of the examples of failure above were drawn from donor-financed government projects is evidence that existing procurement and oversight regimes may not always be enough to deter corruption. As further evidence, a recent survey of firms that bid on international contracts found that only 15 percent of respondents thought that tender rules were an obstacle to corruption.<sup>11</sup> Furthermore, procurement systems alone can never be enough to ensure quality delivery. The most competitive procurement based on the strongest designs can offer little defense against the lowest bidder skimping on delivery and bribing to cover up shoddy work. Indeed, Gresham’s law can apply to lowest-cost procurement outcomes when we cannot or do not measure quality.<sup>12</sup> Good contractors bid a reasonable price. Bad contractors can bid low despite the fact that work cannot be completed to standard at that price.<sup>13</sup> If we fail to monitor outcomes, such firms can get away with delivering poor quality.

And shoddy implementation may be a considerably larger problem from the point of view of development impact than is collusion or corruption that increases initial bid prices. Imagine a road project that costs $1 million to build but generates $320,000 in economic returns each year after construction for ten years. The project’s overall economic rate of return is about 30 percent (the average rate of return for World Bank transport projects exiting FY97-02). If the project had suffered from collusive bidding, and this had raised the price of construction by 20 percent, to $1.2 million, the project’s ERR would drop to 26 percent.<sup>14</sup> This is a significant decline, but it still leaves the project at more than double the ‘hurdle rate’ of a 10 percent ERR.<sup>15</sup> Imagine instead that the bidder agreed a contract price of $1 million, but used insufficient and substandard materials to build the road, spending only $800,000 on construction and pocketing the remaining $200,000. This reduces the road’s traffic capacity so that yearly economic returns fall by a quarter. It also shortens the useful life of the road to five years. This would reduce the overall ERR to 15 percent. The same financial level of corruption has a considerably larger economic impact in this case, reducing the ERR by

> 11 Soreide, 2006.  Regarding the World Bank, there is some evidence that Bank-financed procurements are sometimes being won by those firms with the greatest comparative advantage in bribery rather than leading global firms which can deliver the best product at the lowest price (Kenny and Musatova, 2009).

> 12 Thanks to Giovanni Casartelli for this observation.

> 13 Manelli and Vincent 1995.

> 14 This (and subsequent calculations) view the corrupt payment as a transfer but accounts for a (high) marginal cost of government funds lost to corruption of 1.50 (a fifty percent deadweight loss).

> 15 This is approximately the economic impact of poor road construction suggested by Olken (2007).

5