How to measure conflict of interest in public procurement?

9.5 bln. EUR in public contracts and 633 mil. EUR in EU subsidies were awarded to Czech politically connected companies. That means roughly 15 % of all the contracts and subsidies going to firms with a high risk of conflict of interest — donors to political parties and companies with politicians in their bodies. This is a scary picture of the interconnection between business and politics, which we published last week. Our novel method of monitoring conflict of interest has raised the wide interest of media and will possibly lead to many individual investigations. So what did we do?

It’s beginning of October 2017, two weeks until parliamentary elections in the Czech Republic. EconLab publishes a rating of all running political parties, based (among others) on their links to business with public money — all of such identified links are listed on PolitickeFinance.cz, available for investigative journalists and audit bodies.

The current leader in polls — populist party ANO 2011 receives the worst score, as its connected firms got over 2.5 bln EUR of public money in past four years, while the party has been in power. Its conflict of interest has been already known to the public, however, now it got some real price sticker — as well as for other parties. And its well above campaign costs of all the parties combined — apparently it paid off to run.

How did we get the numbers?

Our database of company political connections basically follows two branches of economic research — we use both donations to political parties as well as personal connections. We use only connections since the year 2013, to reflect the actual political cycle.

1. The party donations are easy to find, as long as you are willing to manually type them based on parties annual reports (available only in paper form). We did.
2. To get comprehensive data on personal connections, we processed candidate lists for the latest elections to parliament, senate, regions, and municipalities. For each candidate we looked for matches in the business registry (in supervisory and executive boards), using multiple variables such as name frequencies or regional proximity to eliminate likely false matches. Further on we eliminated connections to State-owned enterprises, where the presence of politician is well explainable.

In total we found 3135 different legal persons donating to political parties and other 4255 personally connected companies. Then we used data on company ownership to also include indirectly connected companies up to connection length 2 (including connected company’s mothers, daughters and their mothers and daughters with ownership share above 50%). This step helped for example to include the full structure of over 100 firms in Agrofert a.s., company owned by Andrej Babiš, leader of ANO 2011 and prospective prime minister. (Note: Agrofert was recently placed into a blind trust, however still in favor of Andrej Babiš). As a result, we added another 8653 connected companies, which can be reasonably linked to a political party. Altogether we reliably identified a link to politicians for about 10 % of active Czech companies.

Our main business is quality processing of data on public procurement and subsidies, thus the rest of the job was a bliss. For the linked companies we found individual contracts and published detailed reports — which received wide media attention. Maybe they might help spin the elections a bit — towards the less connected government.

Why is this cool?

From the media, we often hear stories like “company of Mr. A connected to political party B got huge public contract”, hinting towards possible conflict of interest that led to the award of the contract. Us voters in eastern Europe, we are used to stories like that. Unless there is some juicy detail, such stories do not even reach the headlines. Business and politics simply are closely interconnected — and no scandal can apparently break such status.

Our study shows how to move forward. We should stop hoping that small individual scandals can cause the revolution — let’s systematically watch the bigger picture instead. Using metodology like ours, we raise thousands of red flags at once. This gives useful tool to audit or investigative bodies, contracting authorities — and most importantly to voters. If this will not catch in these elections, then perhaps in those to come. And maybe not just in our country — in a project called DIGIWHIST we work on similar tools for the whole EU.