Building systems of integrity in public procurement-
Trust in the public procurement system is integral to the growth and development of all nations. Hence, the institution of a transparent, credible, and effective system that can undisputedly be linked to the public good is vital in promoting trust. Studies have indicated that corrupt practices lead to wasteful use of public funds and drives investors away. An International Monetary Fund research study estimates that countries with high levels of corruption have 5 per cent less investment than other countries. Rating agency Standard & Poor’s highlights that investors stand to lose 50 to 100 per cent of their investments within five years in countries with various degrees of corruption.
Given that the Southeast Asian nations have embarked on a massive infrastructure investment programme and seek a significant share of the funding from private investors, ensuring the transparency of their procurement system in order to foster trust in investors is critical. However, with the exception of Singapore, public trust in government procurement of infrastructure projects or services remains low, which often leads to project delays or derailment. Though most of the countries in the region have laws and regulations, which encompass the principles of competition and transparency, they have failed to remove the stigma of corruption. Governments recognise the fault lines and are undertaking governance reforms in an endeavour to create a more efficient, transparent, and accountable government administration, and thus reduce waste and corruption.
Multilateral agencies also have their own set of procurement systems for infrastructure projects. Asian Development Bank (ADB) for instance is using the country system for procurement in the region on a pilot basis. According to Ms Eri Honda, Principal Portfolio Management Specialist, Southeast Asia Department, ADB “There are some gaps between international practices and country systems in Southeast Asian countries, and these gaps vary across countries.”
While there has been steady progress in improving the transparency and trust in infrastructure procurement and oversight during the operational phase, the governments of the countries in the region still face two challenges. First, they need to undertake further changes in order to reinforce the reforms that have been carried out so far. Second, they need to take steps to ensure that the intended changes are actually implemented all the way down to the local level.
Winds of positive change: Decentralisation, disclosure, and technology
In recent years, the decentralisation of political power in Southeast Asian countries has been a positive development. Several responsibilities of federal governments have been handed over to local or provincial governments that comprise elected officials in democratic countries. These governments get their revenues from a combination of federal government grants or loans and local taxes. Based on the general consensus that includes the viewpoint of the World Bank, local governments are better able to identify and address the needs of local communities than federal agencies. Moreover, it is also easier for local communities to hold their local governments accountable for the quality of governance, compared to federal governments.
In terms of procurement for infrastructure projects, local governments are responsible for implementing the smaller public works contracts that are locality specific. Such projects would cover water supply, irrigation, and drainage, as well as civic amenities and certain public buildings. On the other hand, large-scale projects whose impact extends beyond the local community are better handled by provincial or federal agencies, which typically involve the development of roads, telecommunications, and electricity supply.
In 2001, Indonesia introduced a decentralised system of public procurement by creating representative regional assemblies. These assemblies that are entitled to a portion of the federal government’s revenues possess the power to levy local taxes and set rules for public procurement. Even in non-democratic Vietnam, significant power has been handed over to district and provincial authorities.
Another positive development has been the move towards greater transparency in awarding public works contracts. Ensuring transparency entails the public disclosure of all documents relating to contracts, including those for submissions, procedures, and criteria for the evaluation of bids. In the case of tenders, the names of bidders and the prices they offer are made public. The names of the successful bidders and the details contracts are also beginning to be published. Another step that will further strengthen the process is for officials involved in the procurement process to declare any conflicts of interest prior to the awarding of the project and recuse themselves from the selection process in such cases.
In the recent past, many Southeast Asian countries have expressed their commitment to public disclosure and transparency. However, the details of disclosure requirements and the extent to which they are implemented vary widely from country to country. Two countries that have made significant headway in ensuring the transparency of their public procurement systems are Singapore and the Philippines.
One reason corruption in procurement seldom occurs in Singapore is its well-formulated transparency provisions. The Philippines has also taken steps to enhance transparency by publishing information about all public tenders in newspapers, which offers details about the type of procurement, registration procedures, pre-tender qualification procedures, and the selection criteria.
Another way transparency has been enhanced in the region is through the adoption of e-procurement. An e-procurement system has several advantages over its traditional counterparts because it enhances accountability, increases efficiency, and promotes greater access to the government’s procurement market. However, successfully implementing an e-procurement system is a challenge for most governments. It not only requires investments in infrastructure, but also necessitates changing the way government institutions function.
Singapore has a very comprehensive e-procurement system known as GeBiz. This website is used to advertise all procurements, state qualification requirements, procedures, and other information that bidders may require. It is also used to disclose the list of bidders and prices offered, as well as the winning bidder. Moreover, the bids are submitted through the website itself.
The Philippines has also developed a similar website that provides a wide range of information relating to bidding documents, rules and procedures, as well as relevant laws and regulations. According to the World Bank, the development of the Civil Works Registry, along with advertisements and rules posted on the Department of Public Works and Highways website, has reduced procurement time from one year to between two and four months in the Philippines.
Vietnam has launched a more limited e-procurement portal called Vietnam Tenders. This website is primarily an e-bulletin that serves as the sole source of information regarding tenders from government agencies, aid agencies, and even commercial organisations.
Complex legal frameworks and weak enforcement
Though many of the aforementioned changes have been welcomed by investors, further changes are expected to hit a roadblock due to the region’s complex legal and procedural framework related to the awarding of infrastructure projects. Currently, in many of these countries, the laws, regulations, and procedures related to procurement are characterised by fragmentation, ambiguity, and limitations in scope.
Some countries have taken steps to address this situation. For example, until 2003, the Philippines had more than 60 laws, executive orders, presidential decrees, and administrative orders governing procurement, which led to conflicting interpretations that slowed down the procurement process. Therefore, in 2004, the country enacted the Government Procurement Reform Act that put in place a uniform procurement system for the public sector. It spelled out in clear terms the methods and stages to be followed, along with the roles, responsibilities, accountability, and manner of appointment of procurement officials.
In 2012, the Indonesian Government revised its spending rules to speed up the process of the disbursement of funds for projects. Starting in 2013, ministries and agencies are required to prepare the disbursements of their budget every month. ADB is providing assistance to reform the procurement process. For instance, ADB supported the Indonesian government in its efforts to strengthen legislation, develop standard procurement documents, and establish a specialised authority that coordinates procurement policies.
While the laws in most countries follow the Asia Pacific Economic Cooperation’s transparency standards, enforcement remains weak. Procurement officials seldom face any penalties for bypassing new laws. For example, despite the introduction of a uniform procurement system, procurement officials continue to adopt previous procurement practices in Vietnam. Although the law requires that the clarification of the tender invitation documents be sent to all bidders who received the bidding documents, this is seldom done in practice. According to Transparency International, the Vietnamese government also issues far too many circulars and decisions comprising templates and detailed instructions for carrying out procurement processes.
ADB’s experience in the region suggests that the governments in the region also tend to mix the criteria for evaluation and qualification. “Even though we do the pre-qualification before the bidding, the governments assess pre-qualification again during bidding, thereby just repeating the entire process” says Ms Honda.
Among the Southeast Asian countries, Singapore is a role model when it comes to public procurement. Apart from establishing a well-regulated system of procurement, it has also managed to ensure strict adherence to the procurement protocols. The Government Procurement Act of 1997 sets out procurement norms and regulations; any deviations from the rules are highlighted by the Auditor General of the country in a prompt and efficient manner.
Limited institutional capacity
A second factor that has adversely affected the public procurement systems in Southeast Asia is the lack of institutional capacity. A successful public procurement system requires central procurement authorities to oversee procurement policies and practices, review procurement rules, draft bidding documents, advertise intended procurements, and monitor rule compliance.
To address this issue, many countries in the region have set up central procurement authorities or enhanced their powers to perform the aforementioned functions. For example, the powers of the Department of Public Procurement in Vietnam have been expanded to include formulation of procurement laws and regulations; drafting of standard bidding documents; monitoring of compliance; advertising of proposed public works contracts; and implementation of training programmes.
The Philippines established the Government Procurement Policy Board in 2003 under the aegis of the Government Reform Act. Its mandate includes monitoring the act’s implementation, recommending changes to procurement rules and policies, drafting bidding documents, and providing training.
Despite these promising measures, it remains to be seen the extent to which these newly empowered central procurement authorities are able to discharge their duties without being hampered by vested interests. The key element that can enhance procurement standards are the knowledge, skill, and probity of procurement officials, especially when procurement is conducted via provisional authorities. In particular, procurement officials must be educated about globally accepted procurement principles, as well as national laws and regulations. Furthermore, they must possess the capabilities to assess the financial standing and track records of bidders. In addition, they must be sufficiently competent to evaluate the progress of ongoing infrastructure projects and appraise the performance of contractors. To achieve all these objectives, officials will need to undergo systematic training on a regular basis. However, such training programmes are still in a nascent stage in Southeast Asia, with the exception of Singapore. The Philippines has introduced a series of procurement training programmes in recent years.
Constraints in open and fair competition
Another problem plaguing the systems in Southeast Asia is the lack of open competition in the procurement process. Currently, there are several barriers that are obstructing the development of a level playing field for domestic and foreign companies. They include quota restrictions that limit the participation of foreign companies and a bidding system that is subject to preferential margins.
In January 2012, the Indonesian government cancelled tenders for a new container terminal in Jakarta costing $1.3 billion when it suddenly realised that it could be built without foreign participation. Naturally, the government’s action did not go down well with the international bidders for the project. Similarly, in April 2013, Thailand’s Transport Minister, Chadchart Sitipunt, announced a $68 billion transport infrastructure spending plan that contains the following restriction“Only projects requiring foreign expertise will be open for international tender.”
Sometimes, the barriers are informal in nature, with preference given to state-owned enterprises (SOEs), and provincial or local companies/businesses that have associations with government officials or their families. Ms Honda explains “In former socialist countries the role of SOEs is so strong that these are the only ones who can bid with results in virtually no competition”. In such cases, single sourcing or negotiation is used instead of a tender process. This problem is exacerbated in Vietnam by the fact that companies are reluctant to exercise the rights provided by the procurement rules such as the right to ask questions about procurement opportunities and to challenge procurement decisions.
Open competition is sometimes prevented by explicit affirmative action. For example, in Malaysia, there are quotas set aside and preferential margins for the Malay (Bumiputra) community in public procurement. In the Philippines, public works contracts must be awarded to firms with at least 75 per cent Filipino ownership.
In some cases, open tenders are adopted only for high-value contracts, as in Thailand. Contracts of value lower than $80,000 are awarded via negotiation or selective tenders. Similarly, in Vietnam a merit point system is often used to award contracts, which gives more discretion to the procuring entities.
While the participation of local players is important for a country’s economic and social progress, it should be done in a manner to ensure that such firms enhance competition in their own home markets. Most local contractors are very small and have low financial capability which does not allow them to bid for big contracts. “To favour these contractors, governments tend to break down the bigger contracts into small packages which in turn get very difficult to mange” she says. ADB is working with various Southeast Asian countries to strengthen the capacity of local contractors. Lessons can be drawn from countries like Singapore, which have enhanced the role of local firms in the construction industry with the help of public sector clients and government incentives. For many years, the Housing and Development Board of the country gave bidding preferences to local firms with good performance records and pre-financing loan schemes.
Building trust: Key to adding future infrastructure capacity
The discussion of the challenges highlight the existence of corruption that undermines the integrity of the public procurement systems in several countries in the region.
Apart from Singapore, Brunei, and Malaysia, corruption remains an endemic problem in all other Southeast Asian countries. A wide range of public officials including politicians, bureaucrats, judges, and procurement officials, as well as suppliers and contractors, engage in corrupt practices. Corruption by public officials can take many forms such as the misappropriation of funds, acceptance of bribes, nepotism, and cronyism. Suppliers and contractors offer bribes and commit fraud by forging documents to conceal their past financial records. Such practices reduce the efficiency of the public procurement system; increase costs for suppliers and contractors; discourage honest firms from participating in the process; and ultimately, undermine the legitimacy of the state.
Independent and competitive regulators, competition, full disclosure, and swift punishment of violators of existing laws are some of the key components of a public procurement system that can instil trust in the public and investors. Many of the larger economies in the region have come to understand the value of a transparent governance system in infrastructure project procurement. Thus, they have demonstrated their commitment by strengthening their systems through legal reforms, institutional capacity restructuring, and improvements of the tender process. Investors will be keenly watching the impact of the changes on the ground before committing the much-needed financing for infrastructure capacity additions in the region.
