Transparency in Public Procurement Halisah Ashari See It

February, 2013

Parliament of Malaysia |Research Unit/HA: Transparency in Public Procurement and Business and Civil Society Oversight

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Transparency in Public Procurement and Business and

Civil Society Oversight

Introduction

Public Procurement

Public procurement is the buying of goods and services, including consultancies and

professional services, construction, maintenance and material supply contracts,

facilities contracts, capital equipment and property and leasing arrangements on

behalf of a public authority, such as a government agency. The procurement process

spans the whole life cycle from the identification of need through to the end of a

services contract or the end of the useful life of an asset. The procurement process

aspires to achieve the best value solution. This does not necessarily mean the

lowest cost but the optimum combination of the whole life costs and benefits that

meet the needs of the government.

Public procurement is a powerful driver of development. The system of public

procurement - the expenditure by public authorities and institutions on goods and

services - is one of the most important channels of government spending.

Governments spend public monies to secure inputs and resources to achieve their

objectives and by doing so create significant impact on key stakeholders and wider

society.

In addition to providing goods and services the country needs, the act of

procurement itself can strengthen local economies, support marginalized groups,

and boost local capacity for commerce. Government purchasing impacts both the

domestic and international trade given that governments spend approximately 10 to

17 percent of their GDP in the procurement marketplace. Public procurement

therefore plays a significant role in the global economy.

Obstacles in Public Procurement

Public procurement is a system where public needs meet private offers, a gate

between the public and the private sphere, a sphere with huge corruption risks.

Opportunities for corruption in procurement are raised by the relationship between

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the government (the ‘principal’, as represented by the politicians) and the

bureaucracy (the ‘agent’ as represented by procurement agents).

The challenges in public procurement faced by countries are very similar.

Procurements are regularly manipulated, procurers leak insider information to

chosen bidders, procurement agencies write tenders that are specially tailored to

certain companies, municipalities split up tenders to avoid stricter procurement rules

that apply when reaching a threshold, tender winners modify the content during

fulfilment by lowering quality or raising prices. In exchange, decision-makers receive

kickbacks from the winners, invite government friendly companies to take part as

subcontractors, or find other ways to express their gratitude.

Public procurement is also faced with the challenges imposed by a variety of

environmental factors (external factors) such as market, legal environment, political

environment, organizational and socio-economic environmental factors.

In public procurement, the goals of fairness, competition and economic value are

paramount. Competition is a key factor in ensuring that governments, and their

citizens, receive best value for money in their procurement process. To achieve

these goals, effective and efficient procurement processes must be established.

Effective functioning of public procurement necessitates a high degree of both

transparency and competition. This includes incorporating adequate controls to

promote competition and minimize the risk of fraud, corruption, waste, and the

mismanagement of public funds.

Public procurement procedures often are complex. Transparency of the processes

most often is being questioned and manipulation is hard to detect. However,

procurement laws have been updated and modified regularly by the countries’

governments. Nevertheless, the legal framework is not able to stop misconduct and

corruption in public procurements.

Transparency in Public Procurement

Transparency is a core principle of high-quality public procurement. Transparency

supports the wise use of limited development funds, from planning investments in

advance to measuring the results. An open and transparent procurement process

improves competition, ensures value for money, increases efficiency and reduces

the threat of unfairness or corruption.

Transparency is considered as one of the most effective deterrents to corruption and

precondition for ensuring public officials’ accountability. Transparency allows the

public the widest possible access to documents that enables citizens and businesses

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scrutinize how the powers vested in public procurement officials exercise their

authority.

Transparency has the potential to serve numerous goals of reform. These include:

undermining corruption; promoting the integrity and effectiveness of the public

service; competition and value for money; the collection of reliable data on

procurement; good governance; sound administration; and non-discrimination.

Transparency in public procurement takes form in a variety of practices, such as

publishing procurement policies; advance publication of procurement plans;

advertisement of tender notices; disclosure of evaluation criteria in solicitation

documents; publication of contract awards and prices paid; establishing appropriate

and timely complaint/ protest/dispute mechanisms; implementing financial and

conflict of interest disclosure requirements for public procurement officials; and

publishing supplier sanction lists.

Transparency tools can be used extensively in procurement regulation to provide

disincentives against corrupt practices:

Publicity

The requirement to advertise procurement procedures or at least solicit bids from a

minimum number of bidders will ensure that procurement agents are not able to

contact bidders with whom they would prefer to deal.

Technical specifications

Any technical specifications or standards used must be made available to all bidders

in advance and no changes will be permitted during the course of the procedure that

could favour specific bidders.

Qualification criteria

Objective selection criteria are used to ensure that only qualified bidders can

compete for contracts. One of the disadvantages is that it becomes a mechanical

exercise in collecting compulsory but possibly unnecessary documentation from

vendors. From the anti-corruption perspective, it is sometimes assumed that this

would also somehow prevent corruption. The production of unnecessary information,

however, merely provides an opportunity to demonstrate that the rules have been

complied with, whilst drawing attention away from what might be corrupt behaviour. It

should further be noted that compliance with inappropriate requirements is not

without cost.

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Award criteria

Transparency is applied here to ensure that the agent will be required to state in the

notice or tender documents all the criteria it intends to apply to the award of the

contract. There are two options when choosing award criteria in most procurement

systems: (1) focusing on just the lowest price and, (2) considering the price together

with a number of other criteria (such as after sales service, spare part availability,

etc.) which will be set out in the bidding documents.

Selecting on price alone may have the advantage of speed and simplicity but is

unlikely to be of benefit in the majority of cases, where bidders are competing on the

basis of differentiated products. However, the opportunity for abuse increases with

the application of the second option. The challenge lies in translating qualitative

aspects of the bid into quantifiable terms, which allow for a certain amount of

discretion on the part of the agent, but not enough to provide an opportunity for

corruption.

The imposition of transparency requirements is used to close off opportunities for

corruption. Transparency can make it harder to misuse the procurement systems for

criminal moneymaking. It is not surprising that the biggest scandals in this field were

uncovered first by the press and not by the authorities. With some exceptions (e.g.

business secrets, classified information), information on public procurements are

data of public interest, hence available for every citizen. In addition to preventing

information misuse, procurement regulation has a complementary function: to assist

the procurement agent in overcoming this informational disadvantage.

Good regulation and transparent procedures are necessary to minimize corruption

risks, and also to create a market of tenders that makes public procurements

effective and fosters competition at the same time.

A robust transparency regime enables people to hold public bodies and politicians to

account, thereby instilling trust in a nation’s institutions. In this context, transparency

is considered to be one of the most effective tools to deter corruption and ensure

value for money.

Business and Civil Society Oversight

Transparency is considered to be a prerequisite for ensuring the accountability of

public officials. In this regard, there is broad agreement that the effectiveness of

transparency can be further strengthened by empowering monitoring and oversight

organizations within civil society to scrutinize procurement as they can play an

important role as watchdogs for public sector integrity. Such oversight practices

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could be effective in raising questions on a timely basis, reducing risks in complex

contracts, strengthening procurement and contracting practices, holding public

officials accountable and in general, strengthening governance.

This aspect of transparency is a new frontier for procurement and there is still much

to learn about the ‘ways and means’ necessary to develop and implement

procurement regimes that include civil society monitoring.

Procurement in Malaysia

Malaysia is a member of the Asia-Pacific Economic Co-operation Forum (APEC),

participating actively in the Government Procurement Experts’ Group (GPEG) and

has adopted the APEC Non-Binding Principles on Government Procurement. In

addition, Malaysia has also signed the United Nations Convention Against

Corruption.

Procurement in Malaysia is largely decentralized. The legal framework for public

procurement in Malaysia consists of the Financial Procedure Act 1957, the

Government Contract Act 1949, Treasury Instructions, and Treasury Circular Letters.

These instruments apply to procurement by all federal and state governments and

semi-governmental agencies but not state-owned enterprises. The Government

Procurement Management Division of the Ministry of Finance sets the procurement

policy and rules. The minister of finance or the chief minister for the state

procurement boards appoints a tender board in each procuring agency to administer

specific procurements.

Malaysia’s Government Procurement Regime

Introduction

The prime objective of the Malaysian Government procurement is to support

Government programmes by obtaining value for money through acquisition of works,

supplies and services. To meet this objective close attention is given to price factors

as well as non-price factors such as whole life cost, quality, quantity, timeliness,

maintenance and warranty. The benefits or value from procurement should

commensurate with the costs involved and that the best procurement is well and

thoroughly evaluated, reasoned and justified.

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Government Procurement Policies

The Malaysian Government Procurement Policies, in general, provide support for the

full achievement of the objectives and aspirations of the National Development

Policy and Vision 2020 that is towards a developed nation status. The principal

policies are as follows:

a. To stimulate the growth of local industries through the maximum utilisation of

local materials and resources;

b. To encourage and support the evolvement of Bumiputera (indigenous)

entrepreneurs in line with the nation's aspirations to create Bumiputera

Commercial and Industrial Community;

c. To increase and enhance the capabilities of local institutions and industries

via transfer of technology and expertise;

d. To stimulate and promote service oriented local industries such as freight and

insurance; and

e. To accelerate economic growth whereby Government procurement is used as

a tool to achieve socio-economic and development objectives.

Procurement Principles

In general, government procurement is essentially based on the following principles:

i. Public Accountability - Procurement should obviously reflect public

accountability entrusted with the Government.

ii. Transparency - All procurement regulations, conditions, procedures and

processes need to be clear and transparent to facilitate better

understanding among suppliers and contractors.

iii. Value For Money - Government procurement should yield the best returns

for every Malaysian Ringgit spent in terms of quality, quantity, timeliness,

price and source.

iv. Open And Fair Competition - Processes involving Government

procurement should offer fair and equitable opportunities to all those

participating or competing in any procurement.

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v. Fair Dealing - All acceptable bids will be processed fairly based on current

rules, policies and procedures.

Procurement Objectives

Government procurement comprises the following objectives in general:

a. To ensure continuous supply of materials and services to meet the

Government needs from the best and reliable sources;

b. To ensure efficient, effective and ethical procurement practices to enable the

Government to achieve best value for money without compromising on

quality, delivery and other price and non-price factors;

c. To stimulate and encourage the growth and development of local industries

through the optimal usage of local resources and materials;

d. To expand and invigorate the local industrial sector by means of transfer of

technology and expertise to suit the nation's needs; and

e. To promote alternative and multiple sourcing through supplier/vendor

development according to the aspirations and vision of the Government.

Administration and Machinery

The Malaysian Public Sector and also the Malaysian Government Administration and

Machinery consist of the following entities:

i. The Federal Government

ii. The State Governments

iii. Local Authorities

iv. Statutory Bodies

Transparency in Malaysia

Transparency International’s Corruption Perceptions Index 2012 shows corruption

continues to ravage societies around the world. Two thirds of the 176 countries

ranked in the 2012 index score below 50, on a scale from 0 (perceived to be highly

corrupt) to 100 (perceived to be very clean), showing that public institutions need to

be more transparent, and powerful officials more accountable. The Corruption

Perceptions Index 2012 results demonstrate that societies continue to pay the high

cost of corruption.

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The Corruption Perceptions Index (CPI) measures the perceived levels of public

sector corruption in countries worldwide. The CPI forces governments around the

world to take notice of corruption – their country’s score reflects on them.

For 2012, Malaysia’s CPI score was 49 out of 100 with a country ranking of 54 out of

176. Compared to last year (2011), Malaysia’s CPI was 43 out of 100 and country

ranking 60 out of 183. Malaysia’s position continues to be in the mid-range average,

indicating that while many steps have been undertaken under the GTP/NKRA

initiatives, the respondents have not experienced a significant decrease in corruption

(Transparency International Corruption Perceptions Index 2012).

Malaysia’s 2011 Corruption Barometer (CB) results are about the same as 2010.

40% of the public perceives that corruption levels have stayed the same over the

past three years, and will remain the same for the next three years. The police and

political parties have been identified as the most corrupt institutions, with the police

as the most frequent recipient of bribes in the past 12 months. However, the

percentage of respondents who had paid bribes has encouragingly plummeted from

9% in 2010 to 1.2% in 2011. In addition, almost 50% of the respondents continue to

believe that the Malaysian government is effective in fighting corruption. This

exceeds the government’s benchmark of 38%. These results indicate that day-to-day

bribery at the lower levels or “petty corruption” is being addressed (Transparency

International Malaysia, 2011).

While the government has launched a number of initiatives to address corruption

including recently the Corporate Integrity Pledge for the business sector, the CPI

results show that our leaders and public institutions are not doing enough to combat

corruption, especially “grand corruption”.

Elements of state capture which facilitate “grand corruption” are still prevalent. These

include the continuing and snowballing practice of awarding mega projects and

contracts without open tenders or competitive bidding, limited access to information

which contributes to a culture of secrecy and lack of transparency, allegations of

inflated pricing in military purchases and the continued close nexus between

business and politics in Malaysia.

While the Corruption Perceptions Index measures how corrupt experts think public

sectors are, businesses need to take careful note of the results. Doing business in a

country where corruption is rife means higher costs, delays and losing business to

competitors who pay bribes.

http://www.transparency.org/cpi2012

http://blog.transparency.org/2012/04/23/a-bribery-scheme-to-win-market-dominance-in-mexico/

http://blog.transparency.org/2012/09/06/bribery-is-bad-for-business/

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Exhibit 1: Government Initiatives to Date

Source: CPI 2012: Transparency International, Malaysia

Exhibit 2: Future Initiatives


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Exhibit 3: CPI Malaysia 2012 in pictures


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Transparency International Malaysia

Transparency International Malaysia (TI-M) is an independent, non-governmental

and non-partisan organisation committed to the fight against corruption. TI-M is

committed to the achievement of a socially just and equitable society within a

sustainable, plural democracy that is free of corruption. TI-M is of the view that to

achieve substantial improvements in our fight against corruption the following actions

are necessary for Malaysia:

1. Reforms in the political arena to reduce monetisation of politics and eliminate

opportunities for state capture which results in grand corruption;

2. Continue to strengthen law enforcement institutions especially the MACC,

Judiciary and Police. Their complete independence must be established to

secure the public’s trust;

3. Uphold the rule of law without fear or favour so that abusers especially “big

fish” cases do not have impunity from prosecution;

4. Overhaul the Official Secrets Act (OSA) and introduce a federal Freedom of

Information (FOI) Act;

5. Firm and consistent actions in upholding transparency and accountability in

public procurement;

6. Tackle systemic corruption by focusing on specific sectors through the

involvement of all stakeholders. For example, a coalition involving CIDB,

contractors, professional bodies and other regulators in the construction

industry could be established to drive the initiative to reduce corruption; and

7. Further improve whistleblower legislation to provide wider protection to whistle

blowers and encourage more whistle blowing

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Conclusion and Recommendations

Increasing the effectiveness, efficiency and transparency of procurement systems is

an on-going concern of governments and the international development community.

All countries have recognized that increasing the effectiveness of the use of public

funds, including funds provided through official development assistance (ODA)

requires the existence of an adequate national procurement system that meets

international standards and that operates as intended.

Public procurement is an area in need of attention since resources are not being

properly managed in many countries. A major reform needs to be in place in order

to improve the level of effectiveness of the public procurement system. Reforms in

the public procurement processes should aim at purging the public procurement

sector, encouraging competition, transparency, efficiency and ensuring

accountability. Stakeholders’ relationship and their perceptions as well as

expectations towards performance, transparency, integrity and accountability of

public procurement are important to be considered for improvements.

Issues governing public procurement require establishment of clear procurement

procedures and performance standards. Performance when adopted will provide the

decision-makers in the procurement department with unbiased and objective

information regarding the performance of the procurement function.

Procurement regulation plays an important role in the fight against corruption but

procurement regulation cannot address all forms of corruption, except in overcoming

informational disadvantage Even in cases where the opportunities for corruption are

directly linked to the procurement function, procurement regulation may be helpless,

as in cases of entrenched or systemic corruption. There is a much deeper cultural

problem that goes beyond opportunistic corruption. In such cases, even if the rules

are followed, it does not guarantee there will be no corruption or that procurement

will be conducted well.

Even though there has been a growing trend by public procurement authorities to

increase transparency in their procurement processes, significant challenges need to

be overcome if the principle of transparency is to be fully leveraged to become an

effective means to improve competition, ferret out corruption, hold public officials

accountable and overall, strengthen governance in public procurement.

Accountability constitutes a central pillar of any public procurement system. Without

transparent and accountable systems enabling governments and citizens to engage

in a mutually responsive way, the vast resources channelled through public

procurement systems run the danger of increased corruption and misuse of funds.

Even in a system with low levels of corruption, public and civic oversight can help

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identify inefficiencies, thereby increasing procurement efficiency and effectiveness

for the benefit of improved service delivery and ultimately citizens.

Civil society plays an important role in raising awareness around public procurement

and other areas of public financial management. Civil society can play a variety of

roles in public procurement transparency and accountability. This includes civil

society organizations are allowed to monitor all stages of the procurement process

including the meetings of award committees, gain access and directly monitor the

public procurement processes. It can monitor public material, exert advocacy and

pressure on governments to publicize certain material, such as information on bid

evaluations and awards, and it can directly monitor the procurement process.

Nevertheless, the power bestowed in civil society and the institutional setup must

always be subject to an open and democratic debate. Introducing civil society or

other independent observers has the potential to strengthen transparency and

accountability in public procurement

Efforts to reduce corruption and increase transparency in public procurement and

business and civil society oversight include but not limited to:

1. Recognising the problem is only the first step towards a solution. Citizens

must demand accountability from their leaders. The lack of accountable

leadership and effective public institutions underscore the need to take a

much stronger stance against corruption.

2. More bold measures must be taken to eliminate entrenched interests and

processes that support abuses in public procurement. There is a dire need to

redouble the present efforts to fight corruption on all fronts as the

consequences to the country and its economy will be damaging.

3. Regulation succeeds in reducing the opportunities of the agent for corruption

by applying procedural and transparency requirements. This will enable

transparency that enhances accountability, while not impeding the efficiency

and effectiveness of the procurement process.

4. Functions, openness and transparency are core principles. Transparency and

accountability are tools for promoting integrity and preventing corruption in

procurement. The future holds substantial rewards for governments that

embrace transparency as a core value in all their functions. Greater

transparency will help governments plan their public procurement better and

hold their buyers to account.

http://blog.transparency.org/2012/09/13/local-communities-fight-corruption-at-the-grass-roots/

http://blog.transparency.org/2012/11/21/what-stops-women-reporting-corruption/

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5. The process of suppliers’ selection is very critical in public procurement in

ensuring the most cost-effective suppliers are being selected to avoid any bad

spending of public fund. Procurement agents must also be publicly ranked to

promote widespread transparency.

6. Fairness in public procurement can only be ensured by making information

throughout the process open and available to all. Value can be enhanced by

ensuring that the information has been made available to as wide a range of

interested participants as possible and that unfair advantages in terms of

access to information are curbed. Whether a partner, a funding source, a

supplier, or an interested member of the public information, all stakeholders

should be provided with as wide a view of procurement operations information

as possible.

7. Recognizing that increasing the effectiveness of the use of public funds

requires the existence of an adequate national procurement system that

meets international standards and that operates as intended.

8. Recognizing that regular and continuous assessment of the procurement

system with regard to compliance with the procedures, rules and regulations

has to be embraced by governments to ensure effective use of taxpayers’

resources.

9. Procurement processes need to be permanently monitored. Supervision and

control play a key role since good rules are necessary but not always enough

to curb corruption. It is also important to have clear and publicly available

procedures and to have regular audits by external parties.

10. Calling for reform of the public procurement regulations. The reforms should

include public procurement process, methods, procurement organizational

structure, and the workforce with joint efforts with various development

partners like the World Bank, International Trade Centre, WTO and UNCTAD.

The underlying theme of regulation reforms of public procurement is to ensure

proper management of public procurement so that it reflects the principles of

honesty and integrity, to obtain products and services using the best value-

for-money principles, or to choose the most economic and advantageous

tender available.

11. Share knowledge and facilitate international competition in procurements by

developing a common understanding on each member government’s

procurement regimes, policies, systems, and practices.