Public procurement risks and the Covid-19 pandemic

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Adriana Dantas
Adriana Dantas, São Paulo
adantas@adrianadantas.com

Marina Nicolosi
Adriana Dantas, São Paulo
mnicolosi@adrianadantas.com

Around the globe, many countries are taking measures to keep up with their growing health system’s demands to mitigate the effects of Covid-19 as much as possible.

Initiatives have, for instance, been taken in:

• the United States, where Circular No 2020/5 regarding the Covid-19 pandemic's impact on public procurements, published 4 February 2020, allows government to present evidence to the contracting authority about their permanent, temporary, partial or total impossibilities of fulfilling their obligations due to the pandemic;
• Italy, which has drastically simplified processes for procuring emergency equipment, especially ventilators;
• Colombia, where contracts relating to the fight against Covid-19 are concluded without a call for tender, in parallel to the mandatory disclosure of certain information on the government's electronic public procurement platform;
• the United Kingdom and the European Union,[1] where the UK Cabinet Office and the European Commission on Public Procurement During the Current Covid-19 Crisis have respectively published guidelines on mechanisms incorporated into public procurement frameworks allowing them to purchase goods and services directly and speedily

Brazil published its 13,979 Act on 6 February 2020,[2] which establishes measures to deal with the public health emergency and, in particular, actions relating to: sanitisation (isolation, quarantine, testing, examinations, vaccines, treatment), restrictions on mobility, the requisition of goods and services, and authorisation for importing products without registration at ANVISA (Brazil’s health surveillance agency). All these measures are to remain in force until the end of the state of emergency is decreed by the World Health Organisation (WHO).

Under this Act, Brazil’s government has taken measures to simplify processes for the procuring of goods and services aimed at fighting the pandemic and its impact. These include exempting the launch of public calls for tender for the acquisition of goods, services and health supplies destined to combat Covid-19. Such measures, among others, may pose risks of fraud, corruption and undue advantages.

More specifically, the measures, established in the 13,979/20 Act, provide for the following, among others:

• the possibility of contracting companies previously declared unfaithful or suspended by government, as long as they are proven to be the sole option;
• the presumption of the emergency legal nature of the contract and its suitability for the pandemic;
• the possibility of contracting for higher values resulting from price fluctuations, as long as justified; and
• the automatic renewal of contracts every six months for as long as it is necessary to fight the pandemic.

Although Brazil has a history of corruption and deviations in the context of public procurement and contracts, with more than BRL22bn (approx. US$3.7bn) in leniency agreements signed by the Federal Prosecutors’ Office (MPF) between 2014 and 2019,[3] the country enjoys a certain maturity in the public procurement process, with almost 30 years of legislation, as well as transparency rules and contract tracking systems (Access to Information Act), public penalties (government blacklisting) and robust and active inspection structures (such as Public Prosecutor's Office (MPF), General Comptrollers’ Offices and Court of Auditors), not to mention the Clean Company Act No 12,846/13, which penalises private and mixed capital entities for misconduct in their interactions with the public administration.

In the context of the pandemic, while the simplification of procurement processes (as it is the case in Brazil) is arguably justified, surveillance authorities will not lose sight of their mandate to uphold the law and defend public interest as they have publicly declared. On the contrary, given the heightened risks of misconduct, these entities will pay close attention. In preparation for this approach, a few fundamental rules should be observed, either by the contracting public entity, or by the contracted vendor.

The first rule is to document and record all activities and interactions in connection to the delivery of goods and services to government in the context of the pandemic.

The second is the formalisation of the detailed justification of: (1) all actions subject to simplification and streamlining, as well as all exception made to suspension and debarment rules; (2) how each contract responds to the need to address and mitigate the crisis; (3) price fluctuations due to increased demand, reduced supply, unavailability of raw materials; as well as (4) the need to extend concluded contracts, especially regarding the continuity of the emergency situation.

A third rule is giving transparency and publicity to all actions and interactions taken during these exceptional times of pandemic, in order to offer legal certainty and visibility to stakeholders so that they (and, in particular, the surveillance authorities) can have access and acquaintance of such activities.

In the context of the Covid-19 crisis, control and supervision are likely to be more demanding. For this reason, Brazil’s authorities have prepared to monitor public procurement and donations in the context of the pandemic, by assigning specific public agents to tasks such as at Brazil’s General Comptroller’s Office (CGU), and the Federal Court of Auditors (TCU), and plan to create committees composed of several bodies, including the Federal Supreme Court (STF), the Attorney General’s Office (PGR) and TCU, to endorse direct purchases made without the public procurement procedure. In addition, to support companies in operations carried out with the public sector that are based on exceptional measures adopted due to Covid-19, the CGU has also published the booklet entitled Good Practices of Integrity in Public-Private Relations in Times of Pandemic,[4] which seeks to guide corporations and, especially, compliance officers involved in: entering into contracts and partnerships with public entities; the anticipation of funds from contracts signed with the public administration; donations to public bodies and entities; and, obtaining reduced interest loans from public banks.

In order to support business sustainability – if not survival – it is crucial that vendors and contracting entities uphold legal and compliance rules throughout the current state of emergency. However, a trend of cutbacks in human and material resources allocated for compliance functions as one of the first measures to prepare companies for the economic crisis has been noted. Such an attitude appears to reflect the misconception that compliance is an unnecessary burden.

Under normal circumstances, the United Nations Office on Drugs and Crime estimates that between ten and 25 per cent of public procurement budgets around the world are diverted due to corruption and fraud.[5] Urgent and chaotic situations, especially those involving public health and financial stability, increase risk of fraud and corruption, which can only be mitigated with empowerment of the compliance function, and robust internal controls and auditing. For the sake of comparison, the World Bank resources to tackle the Covid-19 pandemic within 15 months from its beginnings is approximately 19,000 per cent higher than investments that were allocated for avian flu in the period 2006–2013.[6] This comparison gives an idea of the magnitude of the risk of fraud and corruption to which countries might be subjected. For this reason, upholding, if not strengthening, these areas is key.

Finally, it is worth mentioning that the above recommendations should also be applied to contracts with entities making donations to the public administration. Indeed, solidarity initiatives generate fundamental resources, but they require the same care highlighted above regarding the formalisation, disclosure, recording and, above all, transparency of public contracting.

In this unprecedented crisis, strong commitment to protecting public health and business sustainability within the bounds of integrity is critical. Such a commitment is essential in ensuring the legal certainty of relationships and the reliability of public-private interactions in the short, medium and long-term.

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