public sector procurement: a perennial governance challenge · procurement procedure-there are five...

Gezani MazibukoProf. David Fourie

Public sector procurement: a

Perennial governance challenge

20 October 2016

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Presentation outline

Introduction

International procurement challenges

International public procurement case studies

International public procurement governance approach

Public procurement model

Conclusion

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Introduction

International procurement means enabling access to foreign procurement marketswhich are highly significant from both the economic and political state of affairs.

Public procurement issues and regulations typically represent the means by whichgovernment can carry out its activities and powers. For the private sector, publicprocurement is a route to the sale of goods, construction and services to thebiggest or one of the biggest and most important clients in most economiesaround the world (Pearse, 2009).

Public procurement concerns areas of strategic importance including infrastructuredevelopment, schools and hospitals. Financially, public procurement can reflect upto 10% to 15% of gross domestic product in many countries (Pearse, 2009).

Public procurement legal and regulatory reform has focused on the benefits ofharmonisation of applicable procurement norms and standards internationally.Sound and adequate principles underlying international public procurementbenefit both international trade and domestic economies.

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International public procurement challenges

Government procurement is poked with multi-faceted issues: confronts manychallenges, both nationally and internationally-some of the challenges relate topractical hurdles which threaten competition, transparency and equality ofexisting rules.

Elusive equilibrium between public and private sector interests -any rule,interpretation, guideline or proposal of modification is likely to generate anadvantage for one party, while diminishing the benefit for its counterpart.

Any leak on the procurement system such as corruption and inefficiency will drainpublic procurement-affect the contracting authority or entity or the contractors orsuppliers and taxpayers, whose money ultimately pays for governmentprocurement procedures-have a direct impact on the ability of the contract tofulfil the public needs which it is meant to address.

International public procurement

challenges

Gezani Mazibuko

Prof. David Fourie Corruption in Public Procurement

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United Nations Commission on International Trade Law (UNCITRAL) recognised thatcorruption in procurement context takes several forms: Corrupt, fraudulent andCoercive practices. There are emerging trends that public procurement suffersfrom the sinister illness of corruption and the need to bribe is often consideredmerely a fixed cost that all bidders must bear, rather than an opportunity for acompetitive advantage.

When people observe that there is reckless and corrupt behaviour which is notbeing sanctioned, they easily reduce their own integrity standards. It also appliesto suppliers of goods and services in such environments, which realise thatoffering a competitive price and quality is insufficient to obtain contracts.

Broken institutions and corrupt officials fuel inequality and exploitation-keepingwealth in the hands of an elite few and trapping many more in poverty. Based onexpert opinion from around the world, the Transparency International (TL)Corruption Perceptions Index measures the perceived levels of public sectorcorruption worldwide which does not look good.

Procurement of goods, works and other services by public bodies alone amountsto between 15 and 30 per cent of gross domestic product on average; in somecountries even more. With so much money changing hands, few governmentactivities create greater temptations or offer more opportunities for corruption(Transparency International, 2016).


challenges

Gezani Mazibuko

Prof. David Fourie Fostering Competition

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Competition in public procurement is a fundamental goal. However, competition isbeing threatened by global problem of cartel or other cooperating groups thatillegally fix prices or otherwise rig bids in public procurement.

The key and broadly accepted principle underlying a modern publicprocurement system is open competition-unrestricted, universal access to theprocurement market. An open and competitive public procurement contractingprocedure begins with the government’s description of its requirements and aninvitation to suppliers to indicate their interest in the contract and theirprofessional capacity to fulfill it.

Cartels violate competition and procurement law-undermines the confidence ofbidders and participants in procurement procedures, drain confidence ingovernment procurement-members of the public think of procurement proceduresas arranged or compromised when those procedures have no transparency oreffective competition.

Government procurement system should provide sufficiently strong oversights andenforcement mechanisms to eliminate cartels in government procurement.


challenges

Gezani Mazibuko

Prof. David Fourie Technology as partner of public procurement

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Recent improvements in internet technology connectivity provide an opportunity to makeprocurement for goods and services more transparent and efficient.

Do public procurement international and local rules improve good governance? Istechnology a partner of good public procurement management?

New internet technologies have given those in public procurement access to National andinternational laws and regulations-thus enhance transparency in public procurement.Created a term in the procurement lexicon-e-procurement, e-Government publicprocurement (e-GP)

Despite the above improvements there are still many issues that have to be resolved in e-procurement:

Does e-procurement : Improve governance and reduce corruption?, Really save money?,Eliminate the work of procurement officials?, Carry security risks?, Is new legislation requiredto implement e-GP, Is e-procurement expensive? Who pays to implement the e-procurementsystem?

International public

procurement case studies

Gezani Mazibuko

Prof. David Fourie Brazil case study

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Brazil public procurement procedure

Public Procurement law-Bidding procedures are open to all interested parties. Parties have to submit to conditions definedbeforehand in the tender notification. The principles of quality, legality, impartiality, morality (honesty), and publicity, abidingby the bid invitation, objective awarding, and formal procedure apply (Bueno, Levy and Advogados, 2009).

Institutional arrangement-Brazilian Federal government procurement is centrally regulated by the Secretariat for Logistics andInformation Technology (SLTI), an agency of the Ministry of Planning, Budget, and Management(World Bank, 2010)

Procurement procedure-there are five types of bid procedures under law 8666 namely: competitive bid, request for quotation,invitation to bid, contest bid and auction.

Remedies and enforcement-Brazil’s Tribunal de Contas da União (TCU) is the country’s supreme auditor and reports to theNational Congress. It is an oversight entity that investigates and evaluates the actions and performance of people, institutions,agencies or companies or public or private that receive Federal money or manage Federal assets with respect to the receipt,management, and use of public funds (World Bank, 2010). Bidders may bring administrative appeals against any actsperformed by the bidding committee within the auspices of the aspects of the Antitrust Law in public bidding to the auditor(Garcia, 2009).

In 2015 Brazil corruption perception was measured against 168 countries. All good steps, however, big corruption schemes thatinvolve individuals at the highest level of power and lack of punishment of the corrupt continue to prevail in Brazil. This is wellexemplified by Brazil ranked 76 and scored of 38, on a scale from 0 to 100 where 0 is highly corrupt and 100 very clean).Graft remains endemic Brazil.



Gezani Mazibuko

Prof. David Fourie China case study

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China public procurement procedure

Public procurement law-In 1999 and 2002, China enacted two primary laws governing government procurement, the Bidding Law (BL)and Government Procurement Law (GPL). The two laws were supplemented by various implementing measures issued by differentgovernment agencies (Garcia, 2009 and Fuguo, Wang and Liaohai, 2011).

Institutional framework-According to the Bidding Law (BL), the State Council provides for detailed rules concerning the allocation ofauthority. The BL recognises the key role played by the National Development and Reform Committee (NDRC) in formulating biddingpolicy. BL allows line ministries to supervise bidding activities in line with their administrative functions (Thai, 2009 and Bianchi and Guidi,2010).

Procurement Procedure-There are two procedures applicable namely: open bidding and selective bidding that are adopted in the BL;while the negotiated procedure is omitted (Thai, 2009). Under the Bidding law, legal coverage is restricted to large scale infrastructureprojects above certain threshold value determined by the SDPC (Pearse, 2009).The GPL applies to all purchases by central and sub-central government but does not apply to projects undertaken by State Owned Enterprises (SOEs) using public funds or to public goodsprovided by SOEs such as energy supply or infrastructure projects (Fuguo, Wang and Liaohai, 2011). The procuring entity operating interms of GPL, may use sole source procurement when: procurement is made from the sole source supplier, is not feasible to procure fromother suppliers due to an unexpected emergency.

Remedies and enforcement- In terms of the BL, a bidder or any other interested person has the right to challenge the decision of theprocuring entity or to complain to the relevant administrative supervision department, if he/she believes there has been a violation. Acomplaint can be made in relation to any phase of the bidding activities including bid invitation, submission of bids, opening of bids,evaluation of bids, determination of the successful bid, and conclusion of the contract (Thai, 2009).

In 2015 China procurement corruption perception was measured against 168 countries. China ranked 83 scored 37 points out of 100 onthe 2015 Corruption Perceptions Index reported by Transparency International. Xi Jinping’s anti-corruption campaign is much broader andmore intense than anyone could have expected. In his administration’s first 18 months, nearly a quarter-million officials and others wereheld in detention or formally charged with corruption.



Gezani Mazibuko

Prof. David Fourie Germany case study

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Germany public procurement procedure

Legislative requirements-German public procurement law is a multi-layered structure of legal rules which set outthe Act against the Restriction of Competition, the Public Procurement Regulation, contracting rules for awardingcontracts for construction work, service contracts, except those for construction work, professional servicescontracts and various budgetary laws (Garcia, 2009:232). Public Procurement Law in Germany is divided into twomajor fields namely: Local and European (EU) Public Procurement Law (EU, 2006 and Arrowsmith, 2014).

Institutional framework - Procurement has traditionally been carried out on a decentralised basis. Due to financialconstraints some public institutions have considered alternative ways of procuring goods and services e.g. somemunicipalities in Lower Saxony, have established centralised procurement bodies which take various forms e.g.limited liability companies.

Public procurement procedure - The contracting authorities may employ the procedures such as the openprocedure, restricted procedure or two-step-procedure, negotiated procedure, and competitive dialogue. The openprocedure has priority. A deviation from this principle is only permissible if a statutory exception exists (Thai, 2009and Zuccolotto, 2005).

Remedies and enforcement-In case of an infringement of procurement rules, bidders can complain and also claimdamages. Petitions for judicial review of federal procurement procedures have to be filed with the Federal JudicialReview Chambers which are constituted within the Federal Cartel Office.

In 2015 Germany procurement corruption perception was measured against 168 countries. Germany ranked 10,scored 81 points out of 100. Although government transparency is high and anti-corruption measures are enforcedeffectively, the auto industry, construction, and public contracting, in conjunction with questionable political partyinfluence and party donations, are areas of continued concern.

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Public procurement governance approach

Government procurement rules and practices can have a powerful impact on domestic economies and on national andinternational trade. To be effective, transparency and good management must also be accompanied by methods that monitorcompliance, impose accountability and enforce sanctions where there is non-compliance (OECD, 2009 and Garcia, 2009).

Procurement rules, transparent and efficient actions can foster and strengthen national and international markets-enablecontractors and suppliers to comply with government contracts. Strict procurement regulation and transparency were not alwaysseen as natural characteristics of public procurement practice. In the 1980s, public procurement was not broadly recognised asa separate, important discipline, but viewed as a set of purely internal rules, used expediently by governments to contract withprivate sector to satisfy public needs.

As international trade rules and institutions entered into force and came to dominate the global arena, governmentprocurement emerged as a vital part of the global initiative to craft a new world economic order. The WTO GeneralProcurement Agreement(GPA) which is one of the gold standard for the best practice in procurement and a plurilateralagreement which applies amongst those WTO members that have acceded to it or applied and been accepted by the othersignatories.

The United Nations Commission on International Trade Law (UNCITRAL) was given a mandate to further the progressiveharmonisation and modernisation of the law of internal trade. The working group on public procurement is one of the sixgroups set by UNCITRAL-in 1994, UNCITRAL issued a mode Law on Procurement of Goods, Construction and Services. Thedecision by UNCITRAL to formulate model legislation on procurement was in response to a number of countries’ existinglegislation governing procurement rules which were inadequate or outdated (Garcia, 2009 and Arrowsmith, Linarelli andWallace, 2000).


Figure 1: Public procurement modelPublic Procurement legislation & policy

imperatives

Public procurement organisation

e-Procurement

Good governance and management

of the procurement

procedure and remedies

Focus on 5-year needs

Processes and systems support

Transparency

Public Procurement Model

Accountability, control,

Performance management and

monitoring and evaluation

DOL & Economic development-

district and local municipalities’

Public procurement advisory unit

Prevention of misconduct,

compliance and monitoring


DIMENSION OBJECTIVE

Public procurement organisation Highlights the way in which procurement is organised and handled within the enterprise. The way purchasing is organized is crucial to the ways in which

decision-making, processes, roles and responsibilities are distributed within the procuring environment.

e-Procurement The development of e-commerce will have considerable effects on the way that public procurement is organised. The European Commission, World

Trade Organisation (GPA) and UNCITRAL Public procurement Law have already recognised this.

Transparency Provide an adequate degree of transparency in the entire procurement cycle in order to promote fair and equitable treatment for potential suppliers.

Encourage fair completion and supress cartels.

GoodManagement Ensure that public funds are used in public procurement according to the purposes intended.

Procurement planning for related expenditures for a long-term and strategic view of government needs are critical. Governments should Link public procurement with public financial

management systems to foster transparency and accountability

Monitoring of funds-by oversight institutions such as internal control and internal audit bodies, supreme audit institutions or parliamentary committees

Accountability and control Establish a clear chain of responsibility together with effective control mechanisms-authority for approval, external audits of procurement, financial audits, performance audits review,

handle complaints from potential suppliers in a fair and timely manner, providing remedies to challenge the decision early in the process, such as the setting aside of the award

decision, the use of a standstill period for challenging the decision between the award and the beginning of the contract, or the decision to suspend temporarily the award decision

when relevant, disclose public information on the key terms of major contracts to civil society organisations, media and the wider public.

Civil society organisations, media and the general public to scrutinise public procurement through the disclosure of public information.

Prevention of misconduct, compliance andmonitoring Put mechanisms in place to prevent risks to integrity in public procurement. Provide institutional or procedural frameworks that help protect officials in public procurement against

undue influence from politicians or higher level officials.

Encourage close co-operation between government and the private sector to maintain high standards of integrity, in contract management/Supplier cooperation and contract

management.

Legislation and policy imperatives Illustrates the extent to which a comprehensive procurement policy has been developed and implemented.

An adequate legislative framework, supported by regulations to address procedural issues not normally the subject of primary legislation, an adequate institutional, administrative

infrastructure and effective review and accountability regime

Processes and system support Illustrate the overall procurement processes starting from need recognition, ordering to the actual invoice, payment and close out of the project.

Forecast of 5-Year Needs Innovative procurement process entails a time period.

Define approximate quantity of public needs for at least 5 years. Provides significant data, types and quantities of long tem public needs.

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Conclusion

Corruption in public procurement is a global problem with devastating financial and ethical impact.While various players have a part to play a role in the fight against corruption in publicprocurement, governments have the most significant role.

The application of the WTO Government Procurement Agreement (GPA) and the UNCITRALProcurement Law are critical international best practices for any country to replicate from. The ECprocurement directives prove to be fundamental in the quest for government procurementinternational procurement best practice. This state of affairs shows that countries are not islandsbut can replicate the international procurement best practices available globally. Best internationalprocurement practice therefore relates to sound and adequate principles underlying internationalpublic procurement which can benefit both international trade and domestic economies.

In addition, international public procurement practice propagates transparency and fair treatmentof participation, foster competition, and participation in procurement, achieves value for money,avoid abuse and corruption and promotes greater public confidence in procurement.

The modelling of the content of a national procurement approach will depend on the contractualtraditions of individual transition and developing countries.

public sector procurement: a perennial governance challenge · procurement procedure-there are five...

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