Public Procurement

Missed Opportunities in Public Procurement Christine Tonkin

Argument

Transactionally focused Public Procurement

compliance

compliance

com

pli

ance

com

plian

ce

Corruption

Exploitation

Fraud

Why?

NO requirement to base procurement strategy and decision-making on evidence that demonstrates:

Critical consideration of requirements;

Understanding of dynamics of relevant supply markets;

Systematic assessment of stakeholder needs/issues.

Procurement risks assumed to be managed through compliance

Aims

of Public Procurement

Transparency/probity

Ensure that public funds are not diverted

for fraudulent or corrupt purposes

Economy

Make best use of funds in meeting certain policy objectives

Procurement Mgt

Transactional in focus

Overall procurement effort = Σ all transactions

Procedures = ƒ(relative estimated value)

Procurement Management

Which procedures?

Transactional value thresholds

Who can purchase

Extent of competition

Advertisement of tenders

Procedures re

solicitation, receipt,

evaluation

Procedures re contract

award

Who can

bind

Public

disclosure

Controls

Delegation of Authority

Segregation of Duties

Generic specifications

Avoidance of splitting orders

Public Procurement

Fraud Corruption Exploitation

Controls

Delivered as expected?

Best offer?

Performance issues –

efficient?

Final $ = contract $ ?

Main FOCUS ON

COMPLIANCE

Public vs Private

RISK ≈ Estimated value Inherent risks in supply mkts, in

nature of goods/services, in needs/issues of stakeholders

NOT explicitly identified and managed

Manage Total Effort Identify risks and

challenges and match to objectives, strategy, org, systems

P&P and capabilities

Public vs Private

Stakeholders needs and issues are likely to

be known but not explicitly documented, considered or managed

BVM = compliant sourcing, evaluation and contract award

Profit, innovation,

time to market, value

add

Explicitly consider & manage

stakeholders needs

Public vs Private

EGGS IN SELECTION AND AWARD

BASKET: contract delivery ???????

Little front loading: PLAN TO COMPLY

Focus on value

lost/gained in all phases

Front loading:

PLANNING = STRATEGY

Public vs Private

Planning = process scheduling

No circumscription of nature and extent of evidence required for

strategy

Procurement strategy explicitly

identified and managed

Systematically consider information relevant for decision

making

Black Box of Procurement

Actual Assumed

COMPLIANCE SUFFICIENT to guarantee integrity & accountability

Lack of explicit articulation of strategy & evidence from which it is derived

Example 1

Requirements

a mix of complex goods & services

distribution over wide geographic area

very difficult circumstances

Entity did not have internal expertise to frame TOR sought assistance of consultants

Three contracts

1) Small contract to frame TOR to select consultants

2) Larger contract to draft TOR for purchase of goods/services

3) Largest contract to purchase goods/services

Procurement process

All 3 procurement actions were conducted in compliance with internal procedures

Competitive tender for contract to frame ToR for major contract and for largest contract for goods/services (3rd)

Consultants who were awarded the 2nd contract were those who had framed the TOR for that consultancy

Consultants then developed TOR for goods/services for 3rd contract valued > $50 million

Selection of Major Contractor

Closed process i.e. # of pre-qualified companies were asked to bid

Only 1 pre-qualified company tendered and was deemed to be qualified recommend to award the contract

Review of process found deficiencies and determined that the company should not have been recommended for the contract

Lack of transparency in pricing

Lack of experience of supplier

Contract award

Undertook another procurement exercise to address deficiencies without any result or resolution of the deficiencies

Contract awarded to the recommended company

SUCCESS:

Contract was effectively delivered in a timely manner

Fraud & Corruption

Allegations:

Consultants who framed the TOR for the goods/services contract were associated with the company which was awarded the contract

Large secret commission (10%) payable by company to consultants

Outcomes:

Company had settled a substantial penalty imposed by authorities

One of the consultants admitted guilt

Problem

Procuring entity relied on seemingly reputable consultants to fill significant knowledge gap:

How relevant supply markets operated

Capabilities of potential suppliers and respective supply chains

How to approach market that avoided payment of risk premium

How to achieve transparent pricing for the components of goods vs services

Procuring entity blindly accepted advice of consultants to its detriment

Example 2

Required complex products on an on-going basis

As per its rules, established a panel of suppliers with whom orders would be placed from time to time

over a pre-determined period and

under pre-negotiated T&C and pricing

Entity brought together suppliers regularly to explain program delivery objectives and challenges

thought to enable suppliers to better plan their production and highlight issues of continuity of supply

Trouble

After one such meeting, suppliers argued cost of a key input had suddenly increased unable to fulfill orders at pre-negotiated price

Procuring entity then analysed supply chain and found that one of its direct suppliers was also the producer of the key input to the finished product of the other suppliers on the panel

Indirectly, this direct supplier received a large share of the total value of the entity’s demand.

Exploitative behaviour

The key input supplier had bid to supply the finished product in order to exploit the procuring entity

How?

By using the knowledge it gained about the anticipated demand and imperatives of the programme delivery (at the regular meetings) to manipulate its pricing of the key input to the other suppliers on the panel.

How discovered

Up to that point the Procuring entity relied on compliance with traditional procurement regulations to secure best value

It was the first time it introduced the practice of undertaking structured supply market analysis as part of the info gathering needed to frame an effective procurement strategy

The exploitative behaviour of the key input supplier was uncovered

Example 3

Require certain goods and services and bundles its requirements in a way that is convenient for the org in terms of contract management only 1 supplier to manage

Only 2 companies were prepared to bid to provide the total bundle of goods and services

Thought to be genuine competitors

Contracts between them valued at $225 million / year

Deficiencies

NO analysis of supply chains to determine

if there is a better way to approach the relevant supply market and/or

to bundle or unbundle the requirements

NO effort to allow other suppliers (that may be specialists in some elements of the supply chain) to address parts of the requirements partial offers would not be entertained

Problem

Entity relied entirely on its procurement procedures to secure value for money and ensure probity and accountability

Entity had effectively created a self-imposed duopoly

Result

Suppliers that bid for the contract do so at a premium to cover the risk of uncertainty in the elements of the supply chain in which

they are not experts or

other ways present them with potential costly risks in the future

The aspects of the specifications in which the suppliers are experts make up a relatively small proportion of the overall value of the procurement

Pricing offered is inflated with risk premium

Implications

What is not known is what the final price includes because it is not transparent

Lack of transparency of pricing means that the total amount paid could include

forms of exploitative pricing

corrupt transfers

However procurement was always undertaken in full compliance with rules and there was no apparent dissatisfaction in the way of procuring these goods/services

Case Commonalities

Very high contract value & complex in nature

Conducted in accordance with the procurement rules

NO indication that organisation was dissatisfied

1) Contract considered great success

2) Satisfied until suppliers sought unexpected price increases

3) No one has formally expressed any dissatisfaction except occasionally lamenting the high cost

Case Commonalities

NO issues raised by internal or external audit

1) Alleged fraud detected in unrelated investigation

2) Procuring unit uncovered exploitation via structured market analysis

3) No one sees there is a problem, continues as is

NO evidence gathered in planning stage that

critically considered the way the need is expressed

provided understanding of dynamics of supply mkts

systematically assessed stakeholder needs/issues

Deficiencies

Procuring unit did not have capability to undertake research and analysis and relied exclusively on unverified advice of consultants

Procuring unit belatedly took opportunity to learn the skill of supply market analysis

Procuring unit does not see the need for such info gathering

Consequence

Corruption

Exploitation

Fraud Lack of

info

The Challenge

PUBLIC PROCUREMENT

Thank you Christine Tonkin maelisatonkin@gmail.com