First response: procure medical supplies at any cost (and risk)

The coronavirus or COVID-19 pandemic forced governments to respond to an unexpected global health crisis with drastic and immediate measures. In order to speed up the purchasing times of vital medical supplies and equipment, contracting authorities are using existing framework agreements with suppliers to expedite delivery. But given the unprecedented scale of the crisis, this alone is not enough.

The relaxing of existing national procurement laws, which most countries are introducing in light of the pandemic, allows public buyers to purchase much-needed medical and personal protective equipment (PPE), such as masks, gloves, goggles, face shields and ventilators quickly, in large quantities and with little bureaucratic red tape.

In most cases, these relaxed measures are time-bound with a narrow scope and limited purpose suited for an emergency response.

Specifically, looser measures may include changes to existing contracts, particular exceptions, rapid but limited modifications to contracts, notice of performance changes, applications for subcontractors, and waivers of receivables due to failed contractor performance.

Relaxed rules may also result in procurement tenders that go unpublished, which under normal circumstances, raises big red flags.

Looser restrictions in times of crisis also have support from regional and international bodies. The European Union recently published revised procurement guidelines for countries during the coronavirus, inviting European member states to: substantially reduce deadlines to accelerate open or restricted procedures; include a negotiated procedure without publication; and consider direct awarding under certain circumstances.

While relaxing procurement rules can help governments respond more quickly to a growing health pandemic, there are also significant risks associated with looser restrictions.

Do relaxed measures foster greater corruption, which in turn can cost additional lives?

To better understand the plethora of corruption risks, it is important to analyze the broader health landscape and the consequences of an expedited procurement process:

When every country in the world is scrambling to buy the same medical supplies in similar mass quantities, demand can outweigh global supply. This creates a situation where countries are competing with each other for scarce medical resources.

In addition, contracting authorities often face restrictions on medical exports imposed by many developed countries trying to limit critical supplies moving overseas – fifty-four countries by latest count, according to a recent study from the University of St. Gallen in Switzerland.

With many ventilators produced in the developed world, a large quantity of which come from EU member states, the presence of export restrictions is particularly problematic. With restrictions on ventilators and other specialized medical equipment, it is difficult for many developing countries to purchase these critical supplies.

When it comes to more generic PPE, such as googles and face masks, the opposite is true. Since the pandemic began, production of these items has moved to developing countries to help lower costs. However, several manufacturers have shut down factories in developing countries and quarantined workers, which puts medical supplies like face masks in even higher demand.

The scarcity of medical supplies also creates unnecessary competition among contracting authorities within countries, including between central purchasing authorities, national ministries, national agencies, regional governments, and publicly owned companies.

Instead of working together to procure supplies, in this scenario, states and provinces within a given country end up outbidding each other for the same masks, ventilators, or gloves. Suppliers also seize this opportunity to raise prices and negotiate commitments, sensing greater profits elsewhere.

The less coordinated and weaker states and provinces are in their purchasing power, the higher the corruption risks become. “It’s an eBay-style bidding war,” declared the Governor of New York Andrew Cuomo, while struggling to find ventilators.

Decentralized purchasing distorts the market, as it places central and local public buyers in competition with one another, allowing sellers to increase prices and command greater negotiating power.

At the same time, contracting services and goods locally often means meeting local needs more quickly and accurately. However, during a pandemic when resources are already scarce, contracting locally could cost additional lives in other parts of the country.

To keep up with these challenges, public buyers must act extremely fast if they want to purchase much-needed medical supplies. As a result, governments will expedite the regular public procurement process in order to compete with other countries, or even themselves.

During an emergency response, public tenders are often published for a very limited time to help speed up the process. Upon selecting the right company, the contracting authority is highly motivated to seal the deal and complete purchases quickly, often with as little paperwork as possible, before any goods are sold to a more nimble buyer, willing to pay more.

Working under such time pressure, it’s no wonder that corruption risks become more relevant during an emergency response.

In times of crisis, the competitive process of choosing a supplier is often a luxury. Sometimes the reliability of those suppliers is also questionable. In many cases, public buyers are not purchasing directly from the producer, but from brokers, which aim to maximize profit from these lucrative contracts.

Payments are often upfront, adding an additional layer of risk on the quality of procured goods. For example, in Spain, the government recently purchased 640,000 test kits from China, only to later find out that the tests were unreliable and the seller was unlicensed by the Chinese authorities.

Similarly, in Romania the government purchased 1 million protective masks and had to toss half of them away because of inadequate quality.

And in the US, the government awarded a no-bid contract of US$55 million for the production of face masks – at much greater cost – to a company with no employees nor experience in producing medical supplies.

Relaxed procurement rules create the right conditions for companies to maximize profitability through price gouging. Reports from Brazil, the US, and Germany show how price gouging distorts the market. In some extreme cases, governments purchased masks at 25 times the original price.

The rapid changes in procurement procedures and legislation often give suppliers the upper hand to move their product elsewhere. If they don’t like the rules in one country, they can move to another with looser restrictions.

In addition, suppliers with bulk quantities of goods may opt to remove precious medical supplies from the market to force demand and prices up. As a result, the idea of a level playing field doesn’t exist with COVID-19.

Unfair competition benefits unethical suppliers and creates ideal conditions for price rigging, including from organized crime. These actors then work to eliminate competition and prevent new suppliers from entering the market.

Given the extraordinary circumstances of this global health crisis, contracting authorities have stronger decision-making powers to select their supplier of choice. In some cases, this may lead to awarding large contracts to companies with strong ties to politicians or other government leaders.

For example, in Brazil, a contract was awarded to a supplier close to the President, despite the company charging 12 times more for surgical masks than market price. Similarly, in Slovenia the Minister of Economic Development and Technology was caught on tape pressuring a public buyer from the Commodities and Reserves Agency to award a contract worth US$8.6 million to a specific supplier.

Bribery is another risk. With large contracts on offer, public buyers are vulnerable to potential bribery from companies competing for large awards to provide critical medical supplies. While there are little to no reports of bribery to date, some cases may emerge once access to information restrictions are lifted.

Finally, the emergency response to the coronavirus has also affected existing access to information laws in some countries.

In Romania, for example, the Romanian Academic Society highlighted that contracting authorities only have an obligation to share award notices with the National Agency for Public Procurement within 30 days after the end of the emergency response. Although contracting authorities are making an extraordinary effort to procure vital goods, disclosing procurement data is important to foster a culture of transparency and accountability.

Similarly, in Italy, our national chapter reported that emergency measures to fight COVID-19 have temporarily suspended existing freedom of information act (FOIA) requests, limiting available information on public procurement during this time.

Any limitations to restrict citizens’ access to information should be well-justified, temporary and should not preclude access to vital information related to COVID-19.

Procuring for Life, is a two-part series about public procurement during the coronavirus or COVID-19 pandemic. Read the introduction or part two.