Transparency in public procurement – moving away from the abstract

TI_logo_normalToday’s post is by Cobus de Swardt, Managing Director of Transparency International

Public procurement processes are one of the best examples of how citizens, governments and businesses can work together for mutual gain – or work at cross-purposes or the exclusion of one another for huge loss. It is big business. Around US$9.5 trillion of public money is spent each year by governments procuring goods and services for citizens.

Businesses, governments and citizens all stand to win from smart, efficient investments in infrastructure and public services. Projects that do not strip out mismanagement, fraud and corruption end up costly, wasteful, unsuitable, defective or even deadly as we saw in the collapse of the Rana Plaza complex in Bangladesh in 2013, a tragedy that led to hundreds of deaths of a largely female workforce.

When the products that citizens ultimately pay for are dangerous, inappropriate or costly there will be an inevitable loss of public confidence and trust in governments. Corrupted bidding processes also make a mockery of the level playing field for businesses, especially for younger, innovative companies eager to compete in a fair manner who may not have the backdoor contacts to buy contracts.

It happens far too much. The OECD estimates corruption drains off between 20 and 25 per cent of national procurement budgets. Few government activities create greater temptations or offer more opportunities for corruption than public sector procurement. Indeed, 57 per cent of foreign bribery cases prosecuted under the OECD Anti Bribery Convention involved bribes to obtain public contracts.

So how to ensure clean and efficient investments?

Fundamentally, transparent and accountable procurement cycles mean the companies that win the bids are those with the best product, at the best price targeted at achieving the best outcome. This is not a new concept, but we can no longer afford to talk in the abstract.

Information needs to be proactively disclosed from the earliest decisions to the final audits.

Needs assessments, budgets, award criteria, winning bids (justified against the criteria) and contracts (including crucially any contract amendments) all need to be publicly disclosed.

Access to project information is crucial to enable decision-makers to make informed judgements about the cost, quality and socio-economic and environmental impact of the projects concerned. When there is a lack of disclosure of information around government decision-making, it is easier to hide manipulation of decisions. Citizens –those who stand to win or lose the most – need to be part of those decision-making and monitoring processes, not only to act as independent monitors but also to reduce information asymmetries that can lead to trust deficiencies.

However there is a bonus for businesses too. Access to previous contracts allows businesses to make more focused and appropriate bids. More transparency leads to more competition too. Transparency International Slovakia found that transparency reforms in procurement that included contract publication led to an increase in bids from an average of 2.3 per public tender in 2009 to 3.6 in 2013.

In Georgia all information – including amended contracts – is made public. To incentivise good corporate performance and make sure mistakes are not repeated, lists of whitelisted and blacklisted companies are published.

Governments should also collect and disclose the identity and beneficial ownership of all bidders.

Time and time again, Transparency International sees how competitive bids lose out on public contracts because corrupt officials award themselves, family, friends or associates the contract. One way that this can be done is by disguising their identity or that of their family members or associates behind a front or shell company. Governments need to be collecting and at the time of the award, publishing the beneficial ownership information of all bidders.

On the back of a number of procurement scandals in the health sector, Slovakia has committed to adopt a law that would prevent companies who cannot disclose their beneficial ownership from being able to bid for public contracts.

It’s time to make better use of technology and data. E-procurement systems make processes much more efficient and reduce opportunities for corruption by limiting dependence on public officials. South Korea’s e-procurement system KONEPS was found to have saved the public sector US$1.4 billion in costs and the private sector US$6.6 billion compared to the previous paper-based system. The time it took to process the bids dropped from an average of 30 hours to just 2.

All disclosed project information should be made available online in open-data format. This means the information needs to be comparable, freely released and shared, and usable. The Open Contracting Data Standard provides a ready template to make this information accessible and useful. Making better use of open data has benefits for all parties.

With the adoption of concrete specific transparency measures in public procurement as outlined above and in Transparency International’s guide to curbing corruption in public procurement, the private sector benefits from a level playing field, predictable business environments and a reduction in risk. For governments, there is greater efficiency in public spending, better quality of public services and enhanced trust. Citizens meanwhile benefit from better and more appropriate services, and more effective checks and balances.

There is progress on this issue internationally. Through the Open Government Partnership, forty countries now have commitments on making government contracting more open. Several countries including Canada, Colombia, Mexico and Romania are implementing the Open Contracting Global Principles and/or its data standard. As the world looks beyond 2015 and towards new global development and climate goals that must be delivered, ensuring clean and transparent procurement processes, a critical component of how development monies are spent – will be critical for fighting poverty and climate change. Finally, the G20 is developing High Level Procurement Principles for adoption later this year. By incorporating these simple win-win-win components into those Principles, and by encouraging wider adoption of more precise definitions on what we mean by transparency in public procurement, we could generate a real sea-change and start to lower those OECD estimates of corruption in procurement.

Useful links

OECD Integrity Week: Curbing Corruption – Investing in Growth:

OECD Public Procurement Toolbox

OECD Work  on Public Procurement

Tools from Transparency International:

OECD Forum 2015. Investing in the Future: People, Planet, Prosperity

OECD Forum home pageForum 2015, Investing in the Future: People, Planet, Prosperity will take place in Paris on 2-3 June. It will be organised around five themes: Investment; Inclusive growth; Innovation; the New Climate Economy; and Sustainable Development Goals

People

45 million people are unemployed in the OECD, which increases the risk of poverty, ill health, and the levels of inequality within our societies.
This legacy of the crisis is undermining the confidence and trust of citizens in everything from governments to markets, businesses and institutions at large.

The Forum will discuss how to promote access to more and better quality jobs, but also how governments, universities, business and civil society can address growing inequality by expanding access to education.

What skills will be needed to make people more resilient and entrepreneurial? And how to promote the exchange of knowledge between people, universities and business that leads both to innovation and more inclusive growth models.

The Forum will also reflect on actions aimed at reducing the gender gap and enhancing the role of women in economies and societies at large, in the context of the celebration of the 20th anniversary of the Beijing Declaration and the G20 commitment to reduce the gender gap in workforce participation by 25 % by 2025.

Read more on inclusive growth

Planet 

New technologies and business models are essential to help achieve a NEW CLIMATE ECONOMY, which combines strong economic growth while minimising impacts on the environment.

This will be an important issue in the run up to the COP 21 negotiations in Paris and discussion will be informed by the joint OECD, International Energy Agency (IEA), Nuclear Energy Agency (NEA) and International Transport Forum (ITF) work on aligning policies for the transition to a low carbon economy.

The Forum will be an opportunity to reflect on the importance of a coordinated approach to: mobilise infrastructure investment; rethink taxation and urban development; address resource scarcity and the food-water-energy nexus.

Cities will play a key role in this new economy. Cities already generate around 80% of global economic output, and use around 70% of global energy. 54 % of the world’s population lives in cities today, and this figure is expected to increase to 70% by 2050

Prosperity

The Forum will explore the importance of INVESTMENT in placing economies on sustainable growth paths; addressing inequalities; fostering innovation; helping the transition towards low-carbon economies; and financing the Sustainable Development Goals (SDGs).

Investment is still lagging compared to pre-crisis levels, dampening demand and constraining potential growth. Breaking this vicious cycle is a priority to restore dynamism to our economies and create jobs.
Read more on investment
Ongoing innovation in ICT, renewable energy, nanotech, telemedicine, biotechnology, Big Data and the “Internet of Everything” is offering promising solutions in areas such as health, ageing, climate change, food security and represents an increasingly significant source of future economic growth.

The update of the OECD Innovation Strategy will feed into Forum debates with particular emphasis on governments’ ability to meet social and environmental challenges by creating an enabling environment fostering innovation.

Read more on innovation

Better Life Index

‌‌‌‌The OECD will present the 2015 Better Life Index update, incorporating new data and communicating what has been learned from almost 90 000 user responses received since 2011. The Index will be available in seven languages: English, French, Spanish, German, Italian, Portuguese, and Russian.

A complimentary site, highlighting Italian well-being priorities will be launched in conjunction with Expo Milan 2015 in English and Italian.

Circular logic: why we don’t have to destroy to develop

COLToday’s post is by Jane Cull, Founder and Lead Consultant of Life’s Natural Solutions, member of the Advisory Board of the Barcelona Consensus, and former Associate Editor of the Journal of Applied Systems Studies

We require a different way of seeing and thinking if we as a species are to continue to exist on this planet with a growing population. In fact we need a different kind of economy if we are to do that. Our present linear economy of take, make and dispose will not work in the long run as it is based on depletion and destruction. An economic model of growth and development that is based on the depletion and destruction of life is not only unsustainable, it simply won’t work. It’s illogical and does not make sense.

Obviously, resources will run out or be depleted to such an extent that it will be slow or impossible for them to recover. The result is of course that businesses will fail, there will be a lack of jobs, consumers will cut back on spending, and economic growth will decline. We need to instead start to sustain all life (societies, ecosystems, future generations, circular resource flows) if we are to have economic growth and development with a growing population. If we sustain life, then we can sustain ourselves. We must sustain life to sustain ourselves. This is a “circular” or “systems” view of life.

The systems worldview shows us that the world or life does not revolve around us. We are part of and sustained by the web of life. We are intrinsically interconnected and mutually interdependent with it. We are not separate or removed from the very thing that sustains us. This is the systemic reality that we live and participate in, but we do not see it and we need to see it if we are to live sustainably on this planet. We have to sustain life in order to sustain ourselves. It is a circular or systems view of life. It is a shift in our worldview, a shift in paradigms, our way of seeing and thinking.

Moreover, we need a systems view of the world because that is how the world works and operates. We need to understand and work with natural cycles, interconnections and interdependencies of living systems, understand the interconnections and interdependencies of social and environmental systems. We need to be thinking systemically to drive innovations and solutions. We need to be also critical in our thinking. Will the solution work? If it won’t work, why not, what are we not seeing? What is or are the blind spots? What is missing?

So what kind of economic model fits with what is needed to sustain life and at the same time have economic growth and development with a growing population? The model is circular and it is called “Circular Economy”. Circular Economy is about restoration, regeneration, renewal, refurbishment, remanufacture, reusing, recycling, redesign etc. It is a way to stop the depletion of resources, remove chemicals from products, restore nature, decrease pollution, drive energy through different sources of renewable energies (wind, solar, geothermal, biofuels etc), have zero waste.

In fact, waste is perceived as a valuable resource instead of something to throw away, dispose of, incinerate etc. Waste equals food. Waste either becomes a biological nutrient (materials are safe to return back to the biosphere to regenerate or sustain life again) or a technological nutrient (products and materials go back into the manufacturing stream to become the same or another kind of product).

This is what William McDonough and Michael Braungart call a Cradle to Cradle approach. There is now a certification program where businesses can begin to use this approach to drive innovation and circular business models forward.

Another element of Circular Economy is the Service Economy where the current model of ownership of products changes to leasing, i.e., consumers purchase a service instead of a product. The product is leased out for a particular period of time and is then returned back to the manufacturer for a newer model.

Another is the Bio-based Economy where biomass (natural renewable raw materials) is used to make products (biological nutrients) and provide bio-fuels as an alternative to fossil fuels. There is also industrial ecology, where the waste of one industry becomes the product for another.

There are enormous economic benefits of transitioning to a circular economy. In a recent report put out by the Ellen MacArthur Foundation and McKinsey & Company, it was found that “over US$1trillion a year could be generated by 2025 for the global economy and 100,000 new jobs created for the next five years if companies focused on encouraging the build-up of circular supply chains to increase the rate of recycling, reuse and remanufacture.”.

Systems thinking, as I previously mentioned, is also critical as a tool in implementing a Circular Economy. Systems thinking enables us to do expansive and detailed thinking where solutions are reflected on so that wise decisions and choices can be made that take into account impacts and consequences socially and environmentally through considering interconnections and interdependencies. There is also “closed loop thinking”. When considering a by-product, can this material or waste be used in another industry or in another manufacturing process instead of putting it into the environment, moving “from waste to resources” as the OECD says?

However, business and governments face many challenges given that the status quo has been maintained for decades. There are also entrenched vested interests in keeping the status quo going on its present destructive path. However, there is one inescapable reality that businesses and their executives face, as management consultants Accenture point out – “continued dependence on scarce natural resources for growth exposes a company’s tangible and intangible value to serious risks.”

These risks can be reduced through moving towards a circular business model. Resources need to be regenerated if businesses are to survive in the long term. In fact, the term “resource” from the Latin means to rise or recover again, hence the distinction changes to “re-source”. It is a recursive, systemic distinction, reflecting ongoing cycles that sustain life. This is of course vastly different to how we presently see resources in the linear economic model of take, make and dispose, based on depletion and destruction where resources revolve around us, a human-centered worldview.

In nature there is no such thing as waste. Everything is recycled again and again and again which is of course necessary for the ongoing continuum of life. All living systems, including ourselves, are sustained by ongoing cycles in ecosystems and the biosphere. Nothing exists in separation. Systemic interconnectedness and mutual interdependency is the fundament of life in these ongoing cyclical flows.

Imagine for a moment what our world would be like if we transition to a circular economy. There would be clean air, clean water, an abundance of life, and diversity of species. Soils would be fertile instead of contaminated or depleted of nutrients. Barren land would be reclaimed and regenerated for farming or for bio-based materials. We would learn how to work with the natural cycles of nature instead of depleting or destroying it. Forests would be regrown with a view to sustainable harvesting and managing. No toxic chemicals in products (there would be no environmental pollution and no human health issues related to chemical toxicity), no pesticides or heavy metal contamination of food and soils – our food would be healthy to eat through organic farming practices). Fisheries would be sustainably managed (both oceanic and freshwater). Countries would become more self-sufficient

In other words, we would no longer be exposed to the fluctuating risks of markets and supply and demand of scarce resources. Consumers all over the world would be able to live sustainable healthy lives due to the changes taking place in business and governments, Consumers cannot live healthy and sustainable lives if business does not provide the goods and services for them to do so.

We can begin the process of sustaining life itself, both human and environmental in transitioning to this kind of economy. Social and economic benefits abound if we transition to a Circular Economy. Consumers drive demand, businesses grow and expand, new businesses start up creating new jobs, governments regulate, provide policy and incentives, economies grow and develop in the transitioning process.

It’s a win-win for humanity, business, governments, the environment and the web of life on which we depend for our ongoing, continued co-existence. The challenges and hurdles in transitioning to this kind of economy can be overcome. It requires a willingness and commitment to overcome them, to come up with answers and solutions, to work together and collaborate to make this happen as a collective transitional process.

Useful links

Resource Productivity in the G8 and the OECD – A Report in the Framework of the Kobe 3R (Reduce, Reuse, Recycle) Action Plan

Towards a circular economy: A zero waste programme for Europe European Commission

Responsible gold also means supporting livelihoods of artisanal miners

Mukungwe mine photo Gregory Mthembu-Salter
Mukungwe mine. Photo courtesy of Gregory Mthembu-Salter

Today’s post is by Tyler Gillard, who leads the OECD’s work on responsible mineral supply chains (@tylergillard) and Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr)

Last year, a blind Congolese civil society leader named Eric Kajemba helped broker a deal between the Congolese army, local authorities, three powerful Congolese families and a Canadian mining company to de-militarise a lucrative gold mine in South Kivu province of the Democratic Republic of the Congo (DRC).

The mine, called Mukungwe, supports an estimated 5,000 thousand so-called “artisanal” gold miners, who work in harsh conditions and have for years lived under constant threat of extortion and violence by armed groups, the military and criminal gangs that operated in the area.

Kajemba’s efforts, and the support given by both the mining company and the Congolese government, were made in part because of growing international pressure on companies and governments to ensure that minerals used in everyday products don’t finance or fuel violent conflict or human rights abuses when mined in conflict zones.

Yet this same push for “conflict-free” minerals has also created new challenges for mines in eastern Congo, like Mukungwe, to access formal gold markets, mainly because of unreasonably high – and frankly counter-productive – compliance expectations.

To a certain extent this is normal. Formalising a previously informal economy will always create new compliance hurdles. At least this is an improvement over the challenges the miners had previously faced, namely escaping violence, extortion and forced labour at the end of a gun. Still there is a need for greater awareness among consumers and the gold industry that responsible gold also means sourcing responsibly from conflict areas and supporting artisanal miners in their efforts to meet the new demands of the market.

In 2010, US Congress spurred major action when it adopted section 1502 of the Dodd-Frank Act, obliging public companies to report on products containing certain minerals that may be benefiting armed groups in the Democratic Republic of the Congo (DRC). The European Union also proposed a draft regulation in March 2014 on responsible supply chains of minerals from any conflict area worldwide. OECD Due Diligence Guidance was singled out in both cases as the key standard for companies to maintain responsible mineral supply chains.

Gold is one of the minerals targeted by these efforts – and the big players in the gold industry have taken note. The London Bullion Market Association (LBMA), an industry body that maintains standards for the London gold market, made it mandatory for its gold refiners to undergo annual audits that would demonstrate they sourced gold responsibly and in line with the international standards set by the OECD. The World Gold Council and the Responsible Jewellery Council adopted voluntary certification schemes to implement the OECD’s due diligence guidance. Notably, the Dubai Multi-Commodities Centre also adopted audits requirements for its refiners in 2012.

Despite some challenges in rolling out these schemes, this is still a serious achievement. The audited LBMA refiners alone cover 85-90% of gold produced annually. It may even be tempting to say “mission accomplished”, since the gold market is basically conflict-free. However we cannot: there’s still a lot more to do.

Shrinking the last 10% of the informal gold market will be a challenge. And more should be done to strengthen some of the existing audit schemes too. But it’s necessary, and worth the effort. In 2013, more than $115 billion worth of gold was produced. Even if only 5% of that production benefited armed groups or criminal organisations worldwide, that’s still almost $6 billion that’s ended up in the wrong hands.

In contrast to the significant progress made in the formal gold industry, there has been little progress towards creating responsible supply chains of artisanal gold.

Artisanal gold mining generally means informal mining done with rudimentary tools, with little or no attention to health and safety, often rife with child labour and in areas of high-risk or conflict. Governments around the world often ignore the untapped potential of artisanal mining – which accounts for a whopping 90% of the global gold mining workforce – preferring instead to focus their efforts on attracting large-scale mining investments that bring far greater revenues to state coffers.

Given the informal and often illegal nature of the activity, artisanal gold mining continues to be one of the easiest ways for armed groups and criminals across the globe to earn sizable revenues though mafia-style extortion tactics used on the miners and their gold traders. A UN expert group reported in January that artisanal gold is still a major source of financing for armed groups in the DRC, which has seen one of the worst conflicts in recent history, claiming an estimated (pdf) 5.4 million lives since 1996.

As the Mukungwe mine shows, not all of the artisanal gold produced in the Congo supports conflict. But almost all of it is mined informally and smuggled out of the country, making it difficult for international buyers to establish traceability. As a result, markets take a very risk-adverse attitude towards artisanal gold worldwide. Refiners and traders are often expected to provide a sort of “100% conflict-free” guarantee to their financier banks and customers before buying artisanally-mined gold.

If European supermarkets can’t guarantee that the beef they’re selling isn’t horsemeat, how could the banks and other buyers expect refiners to provide guarantees on artisanal gold, which almost by definition is produced informally, without infrastructure, licensing, or really any type of government support and oversight that could help give such assurances?

Banks, buyers and even consumers today need a reminder of what is helpful, and actually expected. These types of “100% conflict-free” expectations are counterproductive, and based on a misperception of international standards.

Standards like the OECD Due Diligence Guidance actually encourage companies to work with artisanal miners, without demanding perfection. Responsible sourcing of minerals is about good faith efforts to work and improve conditions in the supply chain. Unless a buyer finds evidence of armed group involvement or serious human rights abuses in the mine or trader, on-going engagement with artisanal miners is the recommended course of action. Otherwise, there’s a risk that the trade will become even more hidden, leaving the miners in a worse-off position.

Today the discourse within the international community on “conflict minerals” has changed. It’s not just about conflict-free. What’s important is promoting responsible sourcing of minerals from conflict areas, despite the challenges. Whole-scale disengagement with artisanal miners almost always has harsh consequences for miners’ livelihoods.

What can help solve this catch 22? Consumer demand, for starters – at least until local governments take on their responsibilities to help artisanal miners. Jewellers should tap into this demand and begin sourcing – and marketing – responsible artisanal gold from conflict areas (see the Enough Project below). Which consumer wouldn’t appreciate knowing their wedding ring helped support peace and development for some of the world’s worst-off miners living in a conflict zone?

An OECD report on the Mukungwe gold mine in the DRC is one of a series in the pipeline that show how buyers can get directly involved in gold supply chains from areas of conflict. These reports examine the risks associated with specific gold mines and trading routes, and provide concrete recommendations for buyers and governments to help them build responsible sourcing and engagement practices that help artisanal miners. Today, however, the Mukungwe mine still has no legal route to export gold, and no buyer that’s willing to help improve the miners’ conditions, maximise their gold yields, get their documentation in order to export securely, and guard against interference from armed groups.

How long will these miners wait for buyers before they themselves turn to criminal behaviour, for lack of other opportunities? How long before the armed groups decide to come back to the mine and re-establish their grip on the lucrative business? Apparently not very long. On 21 December, armed men stormed Mukungwe and killed at least 10 people, including a 15-year old boy. Although the attackers quickly vacated the mine soon after the attack, the need for responsible engagement could not be more urgent.

Useful links

OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas

Conflict minerals: demonise the criminals, not the miners by Chuck Blakeman, founder of the Crankset Group, on the Insights blog

A recent campaign from the Enough Project noted Signet and Tiffany as industry leaders in responsible gold sourcing, followed by JC Penney, Cartier and Target. The Responsible Jewellery Council has also helped drive responsible practices in the gold sector. Some consumer-labelling schemes for jewellery have also emerged, such as Fairmined or Fairtrade Gold, which could help consumers looking to source gold responsibly.

City slickers and water security: governments getting their hands dirty

Today’s post is from Xavier Leflaive of the OECD Environment DirectorateWater meme

If you’ve just visited the room with no windows and enjoyed the effortless push of the “deposit disposal button” followed by a stream of fresh, clean tap water to wash your hands, you could well be in an OECD city. Count your blessings too if your basement or street has avoided flooding from heavy rain or if your lawn and plants are still in vibrant colour because they are well hydrated during the dry summer. This urban providence doesn’t mean you’re not exposed to the risk of flooding, water scarcity or pollution. It probably means that your city is rolling up its sleeves and getting equipped to manage these risks and minimise their consequences in a way that you and your fellow city slickers can afford.

Water security is providential: globally 1 billion people have no clean drinking water (that’s double the population of the EU) and 2.5 billion lack access to basic sanitation. 20 million people in the São Paulo region don’t know if they’ll have a reliable water supply in the coming months. The number of people at risk from floods is projected to rise from 1.2 billion today to around 1.6 billion in 2050 (nearly 20% of the world’s population). The economic value of assets at risk is expected to be around $45 trillion by 2050, a growth of over 340% from 2010. From a global perspective, the level of water risk protection that OECD city dwellers enjoy is remarkable. The question is, can it last?

Water infrastructure (particularly piping) in our cities is old, cracking and needs to be upgraded. In some cities, leakage from distribution networks is as much as 40%. This is not only a waste of water, but a monumental waste of energy in pumping, treating and channelling this water. It also represents lost opportunities for economic development and equity as this water could have been put to more valuable uses, depriving others of this vital resource.

Deteriorating water quality and increasing competition among water users indicates that many cities in OECD countries have outgrown their water supplies. We are witnessing an unprecedented rate of urbanisation: 86% of the OECD population will be living in urban areas by 2050 with a concentration in cities with over 1 million inhabitants. Climate change generates more uncertainty on how much water will be available and when. It puts cities in coastal zones at greater risk as sea level rises. It gets one asking “does my city have a viable plan to ensure a sustainable water future?”

The upcoming OECD report “Water and Cities: Ensuring Sustainable Futures” warns that managing urban water in the future will need to combine new perspectives on financing, the diffusion of innovative techniques and practices, co-operation between cities and their rural environment, and governance.

Cities in developing countries need to build new infrastructures to secure access and protect against water risks.

Cities in OECD countries face a distinctive challenge: how to renew existing infrastructures and adapt them to a new context, characterised by more variable rain, declining consumption in city centres, and new expectations from city dwellers? This requires additional finance to upgrade existing infrastructures.

We need to explore ways to jumpstart and leverage private investment from groups like financiers, property developers, as well as small entrepreneurs. In France, a new urban water tax is raising revenue that contributes to long-term urban rainwater management by incentivising property owners to manage rainwater close to the source to limit stormwater run-off.

Beyond financing, we are seeing new methods in managing change and retrofitting maladapted infrastructures, architectures and business models. Combining a long-term strategy with a pragmatic approach to renewing the stock of buildings and assets can prove worthwhile. In Tokyo and San Francisco, water recycling is reducing dependence on surface water as well as raising public awareness of the importance of saving water.

Civil society can’t tackle future water challenges on its own. Smart partnerships and better governance can contribute to sustainable urban water management. The “Greenways” programme in Auckland aligns city council actions and investment across a range of policy and operational units, with the aim of delivering multiple freshwater, biodiversity, transport, urban design and stormwater-related outcomes from the same investment. Future water management in OECD cities will also largely depend on the capacities of different tiers of government to work together along a coherent pathway, as well as engage with, and make the best use of, initiatives by local entrepreneurs and stakeholders.

You may now be able to better appreciate the “privilege” of sporting clean hands and dry feet. The OECD is helping governments get their hands dirty in the transition from an era of exploiting existing infrastructures to one of building new assets and retrofitting infrastructure to adapt to changing future conditions. This action is both critical and pressing, to ensure city slickers’ health, economy and environment remain intact.

Useful links

OECD work on water

http://issuu.com/oecd.publishing/docs/oecd_work-on-water-2014_update_augu

Managing Future Water for Cities

World Water Forum in Korea, 12-17 April

http://www.quickmeme.com/Confession-kid/page/97/

OECD Forum 2015

The OECD Forum 2015 will take place on 2-3 June 2015 during the OECD Week, at the OECD Conference Centre, Paris, France.

Held in Paris to coincide with the annual OECD Ministerial Council Meeting, the OECD Forum has emerged as a major international stakeholder summit.

Leaders from all sectors of civil society gather to debate the most pressing social and economic challenges confronting society.

Together with current and former heads of state and government, Nobel Prize winners, top CEOs, leaders of key nongovernmental organisations and trade unions, and prominent members of academia and media.

You too can play your part in helping shape responses to global challenges. Please send your suggestions for OECD Forum 2015 issues to [email protected].

OECD and BEPS: defending the tax cartel?

Intellectual respectability for a grubby squabble?
Intellectual respectability for a grubby squabble?

Today’s post is by Sinclair Davidson Professor of Institutional Economics at the School of Economics, Finance and Marketing, RMIT University College of Business,  Melbourne

High income economies have tended to follow irresponsible fiscal policies over an extended period of time. While we might quibble over whether the better approach to deficits is to spend less or tax more, or indeed some combination of the two, governments have been trying to access new sources of revenue.

At the November 2014 G20 meeting the Australian Treasurer Joe Hockey had plenty to say about taxation:

“At the beginning of the year we set out to restore integrity and resilience to our tax bases, and give our citizens the confidence that everyone is paying their fair share of tax. Now I can say that we will bring international tax rules into the 21st century and ensure the rules keep pace with changing business models.

We have reached consensus on all of the 2014 OECD’s Base Erosion and Profit Shifting Action Plan deliverables, and this keeps the action plan on track for completion in 2015.

Our effort has continued right up to this Summit, and I welcome the recent proposal to amend certain intellectual property regimes or ‘patent boxes’ to ensure that they are not inappropriately used for tax avoidance. This proposal continues our work on harmful tax practices and I commend it to other G20 and OECD members for their consideration.”

Let’s ignore, for argument sake, the failure to distinguish between tax avoidance and tax evasion. Rather I want to focus on the notion of so-called “harmful tax practices”’.

The OECD has been campaigning on “harmful tax practices” since the late 1990s. The OECD had been commissioned by member states to “develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases”. The report itself was a somewhat wordy affair that actually failed to define what ‘harmful tax practices’ constitute. Instead there was a vague reference to spillovers: “If the spillover effects of particular tax practices are so substantial that they are concluded to be poaching other countries tax bases, such practices would be doubtlessly labelled ‘harmful tax competition’.”

The harm of such practices is defined by its consequences – apparently tax competition affects business location decisions, erodes tax bases, undermines tax neutrality, and social acceptance of taxation. Most damning of all, however, is that the OECD was unable to produce any actual evidence of these dire consequences, arguing instead: “A regime can be harmful even where it is difficult to quantify the adverse economic impact it poses”.

The dog had eaten their homework. As I have written elsewhere in the case of the UK and US and in the case of Australia, there is no evidence to support the notion that those nations’ tax bases are being eroded.

Let us rewrite the OECD complaint as follows: If the spillover effects of particular business practices are so substantial that they are concluded to be poaching other businesses customer bases, such practices would be doubtlessly labelled harmful business competition. It now becomes apparent what the game is. Few economists would be concerned at all by that complaint. We all understand that the effects of competition can be harsh on weaker competitors. It turns out that governments and politicians, like business, don’t always appreciate having to work at improving themselves and offering a more attractive mix of services and taxation in order to attract business.

The international tax regime has evolved over time to minimise double taxation so as to enhance the scope for international trade. In essence that has meant the establishment of an international tax cartel where governments have divided up the tax base and apportioned “market share” to each other. It is perfectly understandable why governments would want to establish a tax cartel. Every government has to make a choice as to the public services-tax mix that it is going to offer and a tax cartel with reduced competition makes that choice easier.

Of course, we know that cartels are unstable and members have incentive to cheat. At some point members realise that by lowering their prices – in this case taxes – they can gain market share. So too with the international tax cartel – some countries have chosen to lower their taxes and work harder to attract economic activity to their shores. Other countries, rather than respond to such competition by competing themselves, have chosen instead to engage in fiscal imperialism – bullying and cajoling sovereign nations to change their domestic policies. Or worse – threatening and intimidating companies that take advantage of the tax incentives governments establish to attract their business. Another private sector analogy suggests itself – we all know and understand the distinction between profit-seeking and rent-seeking.

It is important to point out that the famed double Irish-Dutch sandwich, for example, does not rely on bank secrecy, but rather is a function of national laws specifically designed to promote economic activity. There is nothing stopping any of the countries that regularly complain about that strategy from adopting similar policies. Contrary to what politicians would like us to believe there is an important distinction between tax avoidance and tax evasion. It can never be “unfair”, or immoral for that matter, for any person of company to be fully compliant with their legal obligations under tax legislation.

The OECD’s work on harmful tax practices/competition and base erosion and the like has given intellectual respectability to an otherwise grubby political squabble over tax shares. To be sure, the OECD itself is a political organisation that has to respond to member concerns. Yet it should not expect to avoid criticism in what is ultimately a political dispute within a tax cartel.

Useful links

Sinclair Davidson discusses tax reform

Multinational corporations, stateless income and tax havens by Sinclair Davidson, published by the ACCA (Association of Chartered Certified Accountants) the global body for professional accountants.

OECD work on BEPS