1.1 Clientelism and Corruption in Public Procurement
Public Procurement is a term that is used to refer to governments’ purchasing activities of goods, services, and construction of public works. The construction of highways, public buildings, social housing; the provision of various types of services such as energy supply or municipal services such as waste management; and of various types of goods such as medical equipment for state hospitals are just a few examples of public investments that involve procurement. Public procurement comprises large shares of government budgets and Gross Domestic Products (GDPs) in the majority of the countries in the world. For instance, the total expenditure in public procurement activities in the European Union (EU) member countries amounts to almost 20 % of EU’s GDP (European Parliament, Directorate General for Internal Policies Policy Department D: Budgetary Affairs 2013).
Public procurement has long been used as a means to support Small and Medium Enterprise (SME) development, stimulate industrial advancement, and to generate sustainable growth. Yet, as one of the most important areas where the state and the private sector interact extensively, public procurement processes are open to the use of public resources for different interests other than the public good. Public procurement process thus may well involve corrupt transfers between the state officials and the private sector firms for reasons ranging from personal interests to finance of party politics. As it is put forward by a 2005 International Monetary Fund (IMF) Report, “corruption in public procurement is the most severe type of corruption” (IMF, Chapter III, Building Institutions, p. 143). Similarly, a World Trade Organization (WTO) report states that, corruption in government procurement is “a barrier to development and a scourge on the welfare of citizens in developing and developed countries alike” (Arrowsmith and Anderson 2011 p. 685). Yet, it is also underlined in almost all reports published by international organizations that transparency as the main tool to avoid corrupt practices is lacking mainly in the developing states.
Apart from the economic costs associated with public loss, corruption in public procurement, many times results in social costs when poorly constructed public buildings collapse, or when substandard or counterfeit medicines put public health under risk due to the lack of detailed technical prerequisites in procurement processes. For example, “the high death tolls as a result of the devastating earthquakes in China (2008), Haiti (2010), India (2001) and Turkey (1999) were partly blamed on alleged corruption in the construction of public buildings, including schools and hospitals” (Transparency International 2010).
Thus, in global policy circles, it is an unchallenged view that improving procurement systems through fostering transparency, competition, non-discrimination, and efficiency is vital for ensuring that the tax payers’ money spent on public procurement delivers good quality services with minimum social costs and at reasonable economic cost (Transparency International 2012). OECD (2007) report for instance defines transparent procurement regimes as the ones in which (1) participants and potential participants are aware of the applicable rules of procedures; (2) the discretion of procurement officers is subject to formal rules; (3) compliance with the applicable rules is verifiable; and (4) mechanisms exist for scrutinizing decisions to ensure compliance with legal norms. Therefore, numerous international organizations and international financial institutions—including the WB, IMF, OECD, WTO—as well as the EU emphasize the need to increase transparency and control corruption in public procurement.
1.2 Public Procurement in Turkey: The Elusive Quest for Competitiveness
The world has seen an important change in the institutional framework that governs and regulates the public procurement systems in the last three decades. Many countries have undertaken extensive reform attempts in their national procurement systems with an aim to establish a legal framework in order to enhance transparency, accountability, and competitiveness. Regulatory reforms, within which independent regulatory agencies (IRAs) have emerged as key actors, have also been vital as a result of accelerated globalization and market reforms that transformed the role of the state. Turkey, which initiated the reform process only after the financial crisis of 2001 under the supervision of the World Bank (WB) and IMF, is a latecomer.
In Turkey, contracting out of the public services to the private sector via public procurement has been a major tool in supporting the SMEs. It has also been considered as more efficient and cheaper compared with the provision of those services by public institutions. Accordingly, public procurement comprises a substantial part of government spending. One fourth of annual public spending goes to public procurement. The share of public procurement in GDP is around 8.5 %. Every year more than hundred thousand public procurement contracts are awarded to mainly SMEs.
Yet, public procurement, where government officials and private sector firms engage in transactions that involve transfers of large sums of money, is also open to favoritism and corruption. Indeed when public procurement was regulated under the State Procurement Law (SPL, Law No: 2886) between 1983 and 2003, the procurement processes were politicized from within and were not carried out within a transparent framework. As a result, many irregular and illegal practices and major corruption scandals emerged in the procurement process (Doğaner 1999; Baran 2000).
The major corruption scandals coupled with the recurrent economic crises that brought the economy to the edge of collapse forced Turkey’s politicians to take steps in institutional development to achieve a healthier economic and political environment (Esfahani and Gürakar 2013). The improving prospects for joining the EU and the approval of a three-year stand-by agreement by the IMF in 1999 initiated institutional reform from above as loan/aid and candidacy/accession conditionalities. The EU membership negotiation process required meeting the conditions required by the Copenhagen declaration that entailed adopting the EU legal and the institutional framework. The IMF funds, which Turkey desperately needed to revolve its massive debt, were linked to a series of conditionality written into the stand-by agreements. These included both further liberalization of the economy as well as a series of institutional reforms aimed at limiting, if not ending, rent seeking in the public sector and patronage-based dispersion of public funds. In addition, the WB approved the provision of Programmatic Financial and Public Sector Adjustment Loan conditional on public sector reform.
One major area of institutional reform was about the public procurement policy. Turkey was required to draft a new Public Procurement Law (PPL) to replace the State Procurement Law (SPL). The new law was to be discussed and agreed with the EU and the WB on the basis of the essential standards of transparency, accountability, and competitiveness set by the UN Commission on International Trade Law (UNCITRAL Model Law), which would also formulate a path toward increasing harmonization with the EU Procurement Directives that is itself bounded by the WTO’s Plurilateral Agreement on Government Procurement. The policy makers accepted to reform the public procurement system in line with the framework required by the international financial institutions (IFIs) and the EU nexus. This would in turn help them to meet the extensive set of economic criteria required by the Copenhagen declaration, because they generally overlapped with the IFIs loan/aid conditionalities.
Consequently, Turkey’s new PPL (Law No. 4734) was passed on January 4, 2002, to be enacted in January 2003. The new law included several important changes in administration of public procurements; substantially extended the scope of the law via making the procurements of the majority of the state institutions subject to the law; introduced explicit rules of qualification for participation; and rearranged the threshold values in a way that tender participation of international firms has become easier. An independent regulatory agency, the Public Procurement Authority (PPA), has also been established and regulation of public procurement process was taken from the Ministry of Public Works and Settlements and the Ministry of Finance (MoF) to be given to the PPA with an aim to foster transparency and depoliticize the public procurement processes.
The main rationale for drafting a new PPL and establishing an autonomous body to regulate and monitor the public procurement processes was making public spending more efficient and transparent and depoliticizing the procurement process. However, the practice proved somewhat challenging particularly after a totally new political party, Justice and Development Party (AKP), won the majority of the seats in the parliament in November, 2002 and formed the majority government for the first time since 1987. Since then, the public procurement reform has remained as one of the most contentious areas. As observed by the European Commission’s (EC’s) Regular Reports on Turkey’s Progress toward Accession, there has been little headway, if not a retrogression, in the public procurement reform process.
AKP’s success was a by-product of the collective action among the business spheres of Anatolia who was unhappy about the previous unequal distribution of rents during the 1980s and 1990s. However, those business groups whose mental models had been shaped within the existing institutional structure, perceived themselves as the new insiders or the new privileged clientele. Hence, they expected AKP to speak this time to their interests. Regarding the public procurement policy, these business people strongly opposed the new law and demanded to be outside of its scope. As a result, the AKP government who initially enthusiastically followed the EU-initiated reform process in selective areas, such as the civil–military relations and the judicial institutions, has not preferred to follow through with the public procurement related reforms. On the contrary, the government has made numerous controversial changes to the PPL that diverted the public procurement system from the acquis. Indeed, under the AKP majority government more than 30 different laws and decrees in the force of law that made more than 150 amendments to the PPL were passed in the parliament. With these amendments procurements of several public institutions have been exempted from the law. Moreover, some exceptional provisions about certain procurements have been inserted into the Law (e.g. some procurements shall be made via “restricted procedure” rather than “open tender”).
All in all these legal changes have increased discretion in awarding contracts, raising doubts on the upsurge in crony capitalism. Overall, both the number and the value-share of public procurement contracts that fall outside transparent public procurement process (open auctions) increased substantially during the period between 2005 and 2014. While the number of contracts awarded via open auctions fell from 100,820 (in 2005 to 65,016 in 2014), the number of contracts awarded through less competitive and less transparent methods and those covered by exceptions rose from 41,157 to 58,680. In terms of the share in total number of contracts awarded, these numbers indicate a fall for open auctions from 71 % to 52.5 %, while a rise for the other tender procedures and the ones covered under exceptions from 29 % to 47.5 % (PPA, Procurement Statistics).
As a result, as argued by the EC, the public procurement system has rather deviated from the Acquis, rather than getting more aligned with it. The European Council continuously criticizes the public procurement processes in Turkey as non-transparent and discriminatory on the grounds that (1) a large number of procuring entities are exempted from the scope of the Law; (2) amendments to the PPL have entailed restrictions in competition and full transparency; (3) public procurement grant qualification procedures are complicated and thus hinder competitiveness; and (4) there is no coherent legal framework for concessions awards and public–private partnerships (EC Turkey Progress Report 2011).
Indeed Turkey’s major graft investigation/crisis of December 17 and December 25—even though dealing only with the tip of the iceberg—has revealed the essentials of the extensive state–business interactions and how they have become sources of insider influence and corruption that distort politics, regulation, and judicial functioning. The court cases initiated against the corrupt practices have also underlined the need for developing a more refined account of the mechanisms that are used to privilege the “insiders.”
1.3 Outline of the Book
This book provides a qualitative and quantitative analyses of Turkey’s public procurement system during the AKP era. The qualitative part mainly investigates the changes and continuities in the institutional framework governing the public procurement process and the state–business relations in Turkey. The quantitative analysis of a unique public procurement data set that includes all (49,355) high value (above TL 1 million) public procurement contracts awarded between 2004 and 2011 however provides systematic evidence on favoritism in public procurement in Turkey.
Theoretically, the literature on Accession Europeanization and a broader set of theories within the Institutional Economics literature considers third party enforcement from an institutionally developed country as one of the factors that trigger institutional reform in countries with relatively less developed institutions (e.g. Schimmelfennig and Sedelmeier 2004; North et al. 2010). Yet, the developments in the legal and institutional framework governing the public procurement in Turkey are in contrast with these projections. The public procurement policy is a negotiation chapter, but as will be demonstrated in Chaps. 3 and 4, reform in line with the EU policy framework in this specific area has remained rather limited, if not went in the opposite direction. Indeed, the institutions that regulate government procurement have been strategically redesigned in order to create some “opportunity spaces” for the “privileged” business actors.
Given that institutional evolution is a path dependent process with a lot of infighting among the existing power holders, who and whose interests are products of prior political and economic institutions, the following chapter will accordingly elucidate the changes and continuities in the dynamics of state–business relations in Turkey. How do the institutional legacies (constitutive role of institutions) and changes in the regional and global economic relations shape the expectations of business people and the attitudes of policy makers in developing a framework for regulating the public procurement market? The chapter thus further elucidates how a new phenomenon, the Islamic business associations (MÜSİAD, TUSKON, ASKON, and TÜMSİAD) that use Islam as a network basis started to thrive first in the beginning of the 1990s and then in mid-2000s. It further explicates the nature of the relationship of these associat...