Facilitating the Implementation of the Mexican Supreme Audit Institution’s Mandate

1. Introduction: The public investment cycle and integrity risks

Abstract

This chapter sets the context for the discussions throughout the report. It analyses why infrastructure investment is so important and the challenges Mexico faces in terms of addressing its infrastructure gap and upgrading the quality of its infrastructure. Likewise, it discusses integrity risks throughout the public investment cycle.

Public infrastructure is a common good with multiple benefits, direct and indirect. First, infrastructure in sectors such as energy, transport, water and telecommunications is the backbone of our economies, essential for sustained and inclusive growth and for meeting the Sustainable Development Goals (SDGs). Second, infrastructure boosts the competitiveness of economies by increasing productivity and decreasing costs for transport, communications, and trade. Third, infrastructure allows reversing inequality by facilitating access to public services by citizens.

Despite its importance and net benefits, an infrastructure gap remains in many countries. During fiscal year 2021, Mexico’s expenditures budget (Presupuesto de Egresos de la Federación, PEF) allocated MXN 828.9 billion for public works related to infrastructure investments, which represents 13.17% of the total budget (MXN 6 295.7 billion).1 Despite such investment, the G-20 Global Infrastructure Hub estimates that Mexico’s infrastructure gap amounts to USD 544 billion, which is much higher than in other Latin American countries or in countries of similar size and degree of development (see Figure 1.1).

Figure 1.1. Infrastructure gap in selected countries (USD billion)

Source: (G-20, 2021[1]).

As illustrated by these numbers, expenditures to build new infrastructure or maintain old ones have generally not been enough to address countries’ needs, which in turn may slow down the post Covid-19 economic recovery and hinder development efforts. In fact, the latest OECD Economic Outlook estimates that Mexico will only recover to pre-pandemic GDP per capita by the third quarter of 2023. Only Saudi Arabia, South Africa, and Argentina will take longer among G-20 countries (OECD, 2021[2]).

The infrastructure gap is not exclusively a question of quantity; the quality of infrastructure should also be taken into account (OECD, 2016[3]). Although the quality of Mexico’s infrastructure compares reasonably well with that of Latin America, it does not compare favourably with, for example, Europe (Global Infrastruture Hub, 2020[4]).

In this context, the international experience indicates that one of the major issues distorting the governance of infrastructure is corruption, which not only diverts resources from investment in infrastructure, but it may also lead to “white elephants” and poor quality of the works. The Construction Sector Transparency Initiative (CoST) estimates that 10 to 30% of the investment in publicly funded projects in the world may be lost through mismanagement and corruption (OECD, 2016[5]). Furthermore, integrity failures can take place in any stage of the public investment cycle (see Figure 1.2 and Table 1.1).

Figure 1.2. The public investment cycle

Source: (OECD, 2016[3]).

Table 1.1. International experiences indicate that integrity failures may occur in the different stages of the public investment cycle

Stage	Integrity failures
Needs definition and project preparation	Interest groups such as lobbyists, political coalitions and/or trade unions use unethical and/or corrupt tactics to influence decision makers towards their specific interest. Decision makers are influenced to adopt an investment or purchase that is unnecessary. Decision makers are influenced to vote for the development of new infrastructure, instead of maintaining existing ones. The reason could be the search for the political prestige attached to new infrastructure being developed during one’s mandate or the promise of financial gain, as contracts for new infrastructure are more expensive than maintenance. Public officials are bribed by a potential interest group to obtain confidential information on the government policy priorities or strategic government documents before these are made public. Exchanges between project designers and intermediaries, involving the public bodies that provide or obtain funds for the project(s), may have an impact on the planning of public works per se and can lead to the introduction of inaccurate policy requirements. Elected officials choose a specific public investment to benefit contractors who contributed to a political campaign. Elected officials favour public investment that will be carried out through concessions or public-private partnerships (PPPs) to benefit a private operator who contributed to their political campaigns. A specific public investment is selected because the public official responsible for approving the public investment has received a bribe from a potential contractor. A specific public investment is selected because the public official or his family member is part of the board of the potential company developing, building, or participating in the construction of the public investment. A specific public investment is selected because the public official has allegiance (previous employment or business relationships) with the potential company developing, building, or participating in the construction of the public investment.
Appraisal	A consultancy firm in charge of the feasibility study intentionally provides an under-estimation of the costs while overestimating the benefits. Consultants extend the life of projects as a way to make profits and maintain their networks. A public official presents incomplete or false information regarding the social, economic and/or environmental feasibility studies to ensure the public investment is approved. A public official or the intended contractor/private operator bribes the person (or firm) carrying out the social, economic and/or environmental feasibility studies to ensure the public investment is approved. The investor’s financial risk assessments may be negated or manipulated to downplay the risks associated with the contractor. The potential private operator of a PPP or a concession bribes a public official to not carry out a proper risk allocation, sensitivity analysis or other guarantee measures. The potential private operator of a PPP or a concession bribes a public official for him not to secure the land where the project will be carried out and to disclose information about the location so the potential private operator of a PPP or a concession can buy the land and increase the price of expropriation. A financial institution or agent, such as a bank, pays a bribe to a public official in charge of the public investment in return for the institution or agent being awarded the contract to finance the investment.
Planning and document design	Needed goods, services, or maintenance costs are over- or under-estimated to favour a particular potential bidder. Hidden mistakes and fictitious positions can be built into the project calculation and design, affecting the terms of reference, which leaves openings that can later be used to conveniently account for increased costs, influence the selection process or the selection procedure. The terms of reference are developed to be excessively confusing in order to hide manipulations and corruption and to make monitoring difficult. The contractor bribes a public official in order to obtain planning permits for the public investment, or to obtain approval for a design that does not meet relevant building regulations. Companies bribe a public official or local authority to obtain confidential information about the planning and design process. Potential bidders collude to ensure that the design of the tender will only favour one of the bidders (cartels). A company bribes public officials or the authority responsible for the design of the public investment to tailor the design for itself and disqualify other potential bidders. A company bribes decision makers to favour a direct “emergency” contract, circumventing open competition. The design firm, architect or engineer has a close relationship with the public official in charge of the public investment (e.g. family or former colleagues), the contractor or the consultants. The tender is artificially split into several lots, in order to stay below certain procedural thresholds. Estimates for the infrastructure works are kept low, in order to shift important expenses to the maintenance and after-sale phase. In this way, the investment is more likely to take place, and the most important gains go to the maintenance contractor.
Tendering	Bidders bribe a public official or the consultant engineer to obtain confidential information about the process, the tender documents, and the reference price, resulting in asymmetry of information for all potential bidders. A bidder bribes the public official in charge of the public investment in order to reject another properly qualified bidder at the pre-qualification stage. The bidder bribes a public official, in return for which the public official ensures that the bribing bidder wins the contract. The official ensures that there is no competitive process. The public official may announce false reasons to justify a direct award (e.g. emergency or national security). The bidder provides a contribution to the ruling party to ensure that he will obtain the procurement contract or the concession without competition or that the evaluation method will benefit him only. Bidders collude to give the appearance of competition through bid-rigging schemes such as cover bidding, bid suppression, bid rotation, and market allocation. The public official awards contracts to companies owned by his family members or to companies with which he has a relationship (e.g. previous or future employer).
Implementation and contract execution	The contractor has many ways to defraud the public budget: rendering of fictitious work, inflating the work volume, changing orders, using lower quality materials than specified in the contract, supplying goods of a lower price and quality than quoted, rendering contracted services in an improper way, etc. Renegotiations of the contract and terms of references are allowed after the contract was awarded, changing the initial requirements. The contractor bribes the public official and/or the consultant engineer to allow “change orders”, modifications to the public investment increasing the scope, time and costs, resulting in higher prices paid. The contractor bribes the public official and/or the consultant engineer to approve defective or non-existent work. The contractor provides false invoices and bribes the public official and/or the consultant engineer to approve or overlook the discrepancy. The contractor misprices the goods or services and bribes the public official and/or the consultant engineer to approve or overlook the discrepancy. The contractor does false reporting of work time and qualification of his staff to increase or justify the cost paid by the government and bribes the public official and/or the consultant engineer to not verify the validity.
Evaluation and audit	Auditors are bribed to overlook faults in financial risk assessments by the contracting entity that would otherwise point to risks in awarding the contract to the winning bid. A stakeholder falsifies information about the financing, processes and/or results in order to have falsely positive evaluations. Stakeholders forge financial documentation requested by the auditors. Information is purposely not publicly disclosed in order to avoid evaluation by civil society. Internal or external auditors are complicit in limiting the information they request as part of the audit execution. Actors are complicit in fragmenting contracts to avoid meeting the financial threshold that requires an ex ante audit, in order to move ahead with projects that have not been structured in compliance with regulations. The public official hires a company with which he has close relationship to ensure that the auditor will not report the findings. The contractor and/or the public official bribe the auditor to ensure that the auditor will not report legitimate findings of non-compliance and substandard performance. Auditors are bribed to report favourable audit observations.

Source: (OECD, 2016[3]).

In this context, the role of Supreme Audit Institutions (SAIs) is key to ensure integrity, efficiency, and value-for-money in infrastructure investments. This is the case in Mexico, which cannot afford to spare any resources in corruption or mismanagement. In fact, Mexico’s Superior Audit of the Federation (Auditoría Superior de la Federación, ASF) core powers and functions include auditing public works and infrastructure spending, but it has traditionally concentrated on the financial side and analysing the governance of infrastructure is hence a major opportunity.

This report aims to support ASF in the incorporation of governance issues into its public works audits. It will illustrate ASF efforts through the analysis of good practices implemented in other OECD countries’ SAIs, such as the UK National Audit Office, and in Latin America, such as Brazil’s Federal Court of Accounts (TCU). It will assess different strategic considerations for the new unit for infrastructure audits that would be established in ASF’s Special Audit for Financial Compliance (Auditoría Especial de Cumplimiento Financiero, AECF), including objectives and resources. Finally, it will analyse infrastructure auditing practices in the context of emergencies.

References

[1] G-20 (2021), Infrastructure Outlook, https://outlook.gihub.org/ (accessed on 13 October 2021).

[4] Global Infrastruture Hub (2020), Infrastructure Monitor, https://www.gihub.org/infrastructure-monitor/ (accessed on 13 October 2021).

[2] OECD (2021), OECD Economic Outlook, No. 109 (Edition 2021/1), OECD Publishing, Paris, https://www.oecd.org/economic-outlook/.

[5] OECD (2016), Getting Infrastructure Right: The Ten Key Governance Challenges and Policy Options, OECD, Paris, https://www.oecd.org/gov/getting-infrastructure-right.pdf.

[3] OECD (2016), Integrity Framework for Public Investment, OECD Public Governance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264251762-en.

Note

← 1.  Information provided by ASF.