Ensuring a maximum of competition in bidding should reduce the scope for collusion and reduce prices as much in construction as elsewhere –this involves not only ensuring competition within the process but also rules banning direct negotiation with firms on the basis of unsolicited proposals and strict controls on renegotiation.<sup>31</sup> Nonetheless, this does not in all circumstances indicate a preference for international competitive bidding over other techniques. Competitive bidding alone is clearly inadequate to ensure better outcomes. In the BEEPS data on construction firms, for example, there is also no relationship between town size (a proxy for the extent of competition) and the level of payments for construction contracts –this matches general corruption results suggesting that neither trade openness nor country size is robustly related to perceived corruption (Knack and Azfar, 2003), and there are numerous cases where international competitive bidding has proven inefficient.<sup>32</sup> To support the bid design process, whatever the level of competition, there is a significant role for benchmarking prices to provide guidelines for output-based pricing and also to provide a ‘red flag’ for overbidding. At the same time, it is important to note that efforts to compare construction pricing suggest considerable variation for the same output, only some unknown portion of which will be related to weak governance.<sup>33</sup> Procurement-related approaches might include contractual obligations and sanctions that prohibit and punish specific unethical practices and demand internal audits, matched by the right to carry out compliance audits and the creation of a project corruption hotline.<sup>34</sup> In this regard, there may be a role for rules based on Transparency International’s integrity pact model.<sup>35</sup> All bidders are required to disclose commissions and similar expenses paid relating to the contract, and they must agree not to bribe or collude. Sanctions are spelled out applying to violations of the agreement including blacklisting, contract revocation or forfeiture of bid bonds. Such a model has been utilized in Korea’s road sector and in a water project in Karachi, Pakistan (Lee and Larnemark, 2007). Companies that have previously broken laws, that do not have an internal system of 31 The survey of Norwegian firms cited earlier (Soreide, 2006) found that firms see efforts to obtain contracts through direct negotiation rather than competition as the most common form of contract bribery. It is worth noting that, with infrastructure concessions, there is evidence that contract renegotiation substitutes for direct negotiation, with 46 percent of competitively-awarded contracts renegotiated compared to 8 percent of contracts awarded through bilateral negotiations –this suggests the importance of contract clarity regarding triggers and implementation methods for renegotiation overseen by a neutral, transparent body (Guash, 2004).

32 In the case of school construction, for example bundling construction projects under one large ICB contract led to high prices, inadequate distribution of schools and construction delays --as a result, such approaches had been abandoned in favor of delegation to contract management agencies, NCB and community-based approaches by the 1990s (Theunynck, 2006).

33 In the case of transport, ROCKS data suggest the complexity, as we have seen.

34 Olken (2004) finds evidence that the threat of audits is a significant deterrent to corrupt activities in the case of an Indonesia road project reducing estimated levels of corruption by eight percent. A number of World Bank supported projects in Indonesia and elsewhere have supported the creation of project-specific hotlines that are well advertised and provide an independent and anonymous source for complaints. 35 <u>http://www.transparency.org/global_priorities/public_contracting/integrity_pacts. An expanded version</u> of the integrity pact process which is designed specifically for construction is called PACS (Project AntiCorruption System): http://www.transparency.org/tools/contracting/construction_projects.

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