Government as a Driver of Better Business Practices
This post, written by David Wyld, originally appeared on Public Spend Forum.
All too often, government procurement efforts are seen as lagging behind those found in the private sector. Whether it is in terms of using the latest technology or adopting new business practices, the public sector is seen as a reactor to trends, rather than a driver of change.
The Center for Responsible Enterprise and Trade (CREATe.org) has recently released a white paper titled “Government Procurement: Driving Responsible Business Practices.” In the report, CREATe.org calls on government leaders to change this mindset and recognize the power that public procurement has in promoting better business practices throughout the economy, and the potential to partner with the private sector in bringing about positive change.
From the perspective of Pamela Passman, CREATe.org’s President and Chief Executive Officer: “Governments spend on average 10-15% of GDP on procurement, at an annual rate of U.S. $4 trillion, and as such, have vast influence on how contractors and millions of suppliers conduct business. The increase in government procurement rules (for contractors and even subcontractors), particularly around anti-corruption, counterfeits and piracy, require new levels of diligence and compliance to mitigate risks.”
In the U.S. alone, federal acquisition spending totals well over half a trillion annually. As in most every country around the world, this makes the federal government the largest procurement spending organization in the land—by far. And with the wide swath of federal contracting, with hundreds of thousands of firms being direct contractors and subcontractors (Lockheed Martin alone has more than 40,000 subcontractors on its federal work), this puts governments collectively—and the federal government in particular—in a position to leverage and drive change. The CREATe.org white paper states:
Given the sheer size of global government spending, government procurement practices inevitably influence the broader market. Recognizing this, governments often seek to leverage their vast purchasing power to drive improvements in industry practice more broadly by requiring suppliers to adhere to responsible business practices….They (public procurement leaders) both advance the government’s own interests as a purchaser (and policy maker) and help drive broader change in responsible corporate practices.
The CREATe.org white paper details startling cases, involving not just the federal government but from governments around the world, where public procurement—and often public safety—has been compromised in cases involving corruption, counterfeit parts, and IP (intellectual property) theft. The report is well-worth seeking out for this purpose alone, as it details cases involving serious misconduct by both public and company officials in each of these areas, providing cautionary tales from very recent instances that involve thousands of parts and hundreds of millions of dollars in almost every case. Take for instance the following well-publicized cases of public corruption cited in the white paper:
- In April 2012, three contractors pled guilty to conspiracy to commit bribery in a scheme involving U.S. Naval officers in North Island, California. In exchange for bribes of more than $1 million in checks, gift cards, electronics, and other products, Naval employees allowed the contractors to circumvent the bidding process and avoid competition for contracts worth millions of dollars. The Naval employees also signed off on items that were never delivered and made payment for fictitious work orders.
- The EU Commissioner for Home Affairs, Cecilia Malmstrom, recently stated that an estimated €120 billion is lost to corruption in government procurement each year throughout the 27 EU Member States. The anti-corruption group Transparency International has drawn a linkage between this corruption and the European region’s ongoing fiscal crisis.
- In February 2010, BAE Systems, one of the world’s largest defense contractors, paid penalties of approximately $450 million to the U.S. Department of Justice and the UK Serious Fraud Office to resolve corruption claims and charges that it had conspired to make false statements to law enforcers about its anti-corruption undertakings. The BAE activities at issue included arms sales in Eastern Europe, the Middle East, and Africa.
- In 2007, Baker Hughes Inc., a Texas-based provider of oil field products and services, agreed to pay more than $33 million to settle bribery charges in connection with energy contracts in Kazakhstan, Indonesia, Nigeria, and Angola, including charges that the company paid $5.2 million to two agents knowing that some or all of the money was intended to bribe government officials in Kazakhstan.
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