State Capture and Defence Procurement in the EU

Czibik, Á., Fazekas, M., Hernandez Sanchez, A. and Wachs, J. (2020). State Capture and Defence Procurement in the EU. GTI-WP/2020:05, Budapest: Government Transparency Institute.

This paper is part of a broader research project which aims to assess state capture risks in the field of defence procurement using a combination of qualitative and quantitative methods to overcome research challenges typical of this area, most of all the relatively low level of transparency due to specific procurement regulations. In this paper, we summarise the findings of the quantitative part also drawing out key policy recommendations.

Public procurement is one of the government activities most vulnerable to corruption (OECD, 2016; World Bank & IBRD, 2013), and risks are even higher in the field of defence due to the large amounts of money involved, the complex and large contracts, the low number of buyers and suppliers – which develops stable personal relationships, and the fact that governments themselves are the enforcers of secrecy (Pyman, Wilson, & Scott, 2009).

This paper aims to a) gauge the extent and types of state capture in defence procurement across the EU,  and b) provide a data-driven assessment of changes in state capture risks due to the latest EU-wide reform in the sector (2009/81/EC Directive on public procurement in the fields of defence and security). In order to achieve these two goals, the paper goes beyond merely measuring corruption and assesses the phenomenon of state capture. We conceptualise state capture not just as widespread corruption, but as a tight clustering of corrupt actors, typically centred around certain public organisations, government functions, or supply markets. These captured clusters may behave radically differently – demanding different solutions – compared to their environment and may grow or shrink over time.

First, we evaluate the scope and quality of publicly available information on defence procurement by collecting data both from the official EU procurement website Tenders Electronic Daily (TED), and alternative information sources like news articles, parliamentary documents and Freedom of Information requests. Since a significant share of defence purchases does not appear on publicly available platforms, media reports are often the only available source of information regarding large value, strategic acquisitions. Our results show that countries differ significantly in terms of the quality and quantity of data published in media and other public repositories such as Freedom of Information requests. While in some countries we were able to collect 200-300 contracts with exact values and clear identity of the winner, in other countries only 3-4 contracts were available. Our data shows that while TED covers on average 6.9% of the total amount spent on defence procurement (Eurostat data – see footnote 3), ranging from 0.1% to 21% depending on the country. By contrast the manually collected dataset covers on average of 7.8% with a range of 0.5% to 19.9%. This seems to support the assumption that alternative information sources like news articles tend to report on large value transactions.

As manually collected data is not comprehensive, and rarely contains exact information on the tendering procedure, we use only TED data for exploring state capture risks in defence procurement. First, we adapt an objective Corruption Risk Index (CRI) from the academic literature (Fazekas, Tóth, and King 2016) which is calculated as a composite index of the following red flags: single bidding, not open procedure type, length of advertisement period, subjective evaluation criteria, call for tender publication, and length of decision period. Second, we construct a contracting network of organisations to test whether corruption risks cluster or are randomly distributed.

We observe significant heterogeneity in corruption risks across countries. If we compare the average CRI score of each country’s entire procurement market with their average military procurement CRI, our data shows that in most countries military procurement contracts have higher corruption risk scores, but there are significant outliers too: In Italy, Bulgaria, Finland and the Netherlands, military procurement has significantly higher corruption risks than procurement in general. The opposite is true in Denmark and Greece: their military procurement contracts have less corruption risk than other kinds of procurement on average.

In order to analyse the distribution of corruption risks in the relationships between buyers and suppliers, we performed a network analysis on the TED data.  We find that, in most defence procurement markets, corruption risks are not random, but rather clustered around the relationships of specific buyers and suppliers. This is especially true in larger markets. Looking at the networks of countries’ military procurement markets, we find that high-corruption risk contracts are not randomly distributed, but rather clustered around specific buyers. This finding highlights the risk of State Capture in specific institutions rather than as a wholesale phenomenon.

Finally, we considered how the most significant recent EU-level policy intervention in the market for defence procurement, the 2009/81/EC Directive, impacted corruption risk. Using a matching approach, we compare similar contracts awarded right before and after the implementation of the Directive at the national level, finding that some corruption risks decreased while others increased following implementation. For example, the rate at which contracts were awarded to a single bidder halved. This observation comes with an important caveat: the number of non-open procedures (for instance direct-awards or invitation-only competitions) significantly increased. More work is needed to assess the impact of the Directive, but this finding suggests that while its requirements may have closed some avenues for favouritism, others remain open.

Full PDF