Public Procurement Fundamentals

Naushad Khan

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787546073
• Topic: Business
• Subtopic: Business General
• Index: Business

During the last two decades, public procurement evolved in most of the world but is often carried out by government officials with little or no experience with procurement policies and procedures. As a result, substantial amounts of public funds are lost due to wrong selection of suppliers and contractors. While a large amount of literature exists on public procurement, it deals with different aspects such as commercial, environmental, legal, and technical aspects. In this new work, Khan provides an introduction to procurement and efficiency, bringing together these difficult and complex aspects of public procurement in a clear and succinct manner.
From his experience with the World Bank throughout Central and Eastern Europe, Balkans, Caucuses, and Central and South Asia, Khan has created a step-by-step manual for government officials, researchers, and students.

CHAPTER 1

WHAT IS PUBLIC PROCUREMENT: INTRODUCTION

Public procurement is an important government system for spending public money on acquisition of goods, works, and services needed for public programs and projects. Procurement comprises: (i) preparation of annual budget when government agencies have to estimate their needs, (ii) procurement planning following budgetary allocation, and (iii) execution of procurement plans. Procurement plans are implemented using a procurement cycle that includes tendering or bidding, contract award, and contract management. The main objective of these activities is delivery of quality and timely services to citizens through public programs and projects, implementation of which is supported by public procurement.

The procurement activity of the government begins with the identification of inputs needed for implementing public programs and projects; categorization of these inputs into goods, works, and services; estimation of their costs; selection of suppliers; award of contract; contract management; delivery and receipt of goods, works, and services; their efficient and effective utilization; and proper maintenance.

During the past two decades, public procurement has evolved from being considered as just the simple purchasing of goods, works, and services to be handled by store clerks and purchasing officers to a complex government activity, inclusive of multiple stakeholders, to be conducted, managed, and supervised by qualified and competent public procurement professionals.

The main objective of public programs and projects is to improve the living standards of citizens. It helps convert limited resources into timely, cost-efficient, and effective services. Public procurement is critical for accountability of public expenditure and supports good governance, and it assists with economic and social development and public trust in government. Good procurement is essential for ensuring timely delivery of goods, works, and services intended for citizens; it also promotes competitiveness, trade (within and among countries), and investment.

The volume of procurement of goods, works, and services in every country is increasing rapidly, resulting from and in parallel with growth in economic activities. Access to information today has made citizens more aware of their rights of access to benefits from public programs and projects; they are now in a better position to challenge and scrutinize the outcome of public procurements. They know that poor procurement practices can prevent them from receiving public benefits.

Citizens now exert more and more pressure on their governments for timely, quality, and cost-efficient delivery of services. This increasing pressure compels governments to focus more sharply on improvements in procurement legislative and regulatory framework, procedures and practices, risk management, enhancement of oversight and accountability, anti-corruption mechanisms, and the use of innovative tools/approaches, including e-procurement, public–private partnership, third-party oversight, etc.

The pace of the implementation of public procurement reform, however, is largely dependent on how a government organizes itself and addresses the capacity-building needs of government agencies and public officials to manage, conduct, and control procurement. The goal of successful implementation of procurement reform is to have a significant impact on the country’s economy and subsequent development of the private sector. However, in developing countries, very little attention is paid to government organization and capacity building and development of the private sector for and through public procurement.

PILLARS OF PUBLIC PROCUREMENT

Legislative/regulatory framework, including standard procurement documents: the public procurement regulatory framework comprises the implementation regulations and standard procurement documents. The implementation regulations discuss in more detail the provisions in the public procurement law or act (PPL/A) so as to facilitate public officials’ adherence to them. Also, in order to facilitate the implementation task of public officials, and with a view to standardizing the procedures and practices of the conduct of procurement, the PPL/As also stipulate the preparation of standard prequalification/bidding documents as a minimum for goods, works, and services, as well as procurement manuals and standard/model specifications for the procurement of off-the-shelf goods.

Institutional and management capacity is required to ensure that the public procurement system in a country is functioning as part of the institutions and management systems that operate to ensure public sector governance in the country, including budget preparation, its execution and reporting; procurement regulatory body, its funding and staffing; existence of institutional development capacity; and procedures for collecting and monitoring national procurement data.

Procurement operations and market practices: this pillar considers whether public procurement is effectively and efficiently functioning at the level of procuring entities. Given the importance of the private sector to procurement, it also looks at whether the private sector is strong and capable of providing competition; whether the private sector has any trust in public officials conducting and managing procurement; whether it has easy access to credit to be able to participate in tendering, etc. It also ensures that the necessary procedures are in place that do not only keep the private sector informed about the legal and procedural requirements of public procurement but also create an environment of trust by all parties in the public procurement system.

Integrity and transparency of the public procurement system: this pillar ensures that the public procurement system functions with integrity, that suitable controls supporting the system exist, and that appropriate anti-corruption measures are in place to avoid any improprieties in public procurement. Therefore, this pillar considers effective control and audit systems, efficiency of appeals mechanism, access to procurement information, and ethics and anti-corruption measures.

Figure 1.1 shows the four pillars of public procurement discussed above.

Figure 1.1. Pillars of Public Procurement.

UNIVERSAL PRINCIPLES OF PROCUREMENT

The public procurement system in most countries is based on the following seven globally accepted principles: value for money, economy, integrity, fit for purpose, efficiency, transparency, and fairness. The World Bank Policy on “Procurement in IPF (Investment Project Financing) and Other Operational Procurement Matters” issued on June 28, 2016 (www.worldbank.org/procure), defines these principles as shown in the following:

1. “… Value for money means effective, efficient, and economic use of resources, which requires an evaluation of relevant costs and benefits, along with an assessment of risks, and non-price attributes and/or life cycle costs, as appropriate. Price alone may not necessarily represent value for money.
2. … Economy takes into consideration factors such as sustainability, quality, and non-price attributes and/or life cycle cost as appropriate that support value for money. It permits integrating into the Procurement Process economic, environmental, and social considerations …
3. Integrity … refers to the use of funds, resources, assets, and authority according to the intended purposes and in a manner that is well informed, aligned with the public interest and aligned with broader principles of governance … all parties involved in the Procurement Process … observe the highest standard of ethics … and refrain from fraud and corruption.
4. Fit for Purpose … applies both to the intended outcomes and the procurement arrangements in determining the most appropriate approach to meet the project development objectives and outcomes, taking into account the context and the risk, value, and complexity of the procurement.
5. Efficiency … requires that procurement processes be proportional to the value and risks of the underlying project activities. Procurement arrangements are generally time-sensitive and strive to avoid delays.
6. Transparency … requires (i) that relevant procurement information be made publicly available to all interested parties, consistently and in a timely manner, through readily accessible and widely available sources at reasonable or no cost; (ii) appropriate reporting of procurement activities; and (iii) the use of confidentiality provisions in contracts only where justified.
7. Fairness … refers to (i) equal opportunity and treatment for bidders and consultants; (ii) equitable distribution of rights and obligations between …; and (iii) credible mechanisms for addressing procurement-related complaints and providing recourse ….”

If the above-mentioned principles of procurement are adhered to, contracts would be awarded impartially and on the basis of the merit of the bids. This would help achieve the objective of a program or project.

While all the above-mentioned principles must always be safeguarded and followed, it is sometimes difficult to achieve economy and efficiency in procurement at the same time. For example, if items of goods, works, or services are needed immediately — e.g., in emergency situations, man-made or natural disasters — the government has to pay a higher price for obtaining the required item urgently. That means economy has to be compromised for efficiency and vice versa.

Procurement is generally divided in three categories: goods, works, and services. All manufactured items, including equipment, furniture, etc., are defined as goods while works relate to construction, repair, and rehabilitation of infrastructures, including buildings, roads, highways, etc. Services are further divided in two subcategories: (i) advisory and intellectual (consultant) services and (ii) technical services that are labor and/or equipment intensive, such as cleaning, surveying, and mapping.

Goods

Manufactured goods, equipment, furniture, computers, material, and supplies are defined as goods.

Works

Construction, reconstruction, and rehabilitation of infrastructure, including all kinds of buildings, ports, highways, roads, and bridges are known as works.

Consultant services

Intellectual and advisory services are called consultancy services. Examples include project management, advice on privatization, design and delivery of training, etc.

Technical services

Non-intellectual services are technical services in which the element of manual or machine inputs is substantial. Some examples are: building maintenance, surveys, mapping, data collection and inputting, etc.

PROCUREMENT AND PUBLIC FINANCE MANAGEMENT (PFM)

The need that countries have for program and projects to improve their citizens’ living standards is always higher than funds they have available at any time. This means that governments are always faced with the difficult task of prioritizing their programs and projects on the basis of competing strategic, policy, urgency, and other criteria. The PFM has an important role to play in this process.

PFM relates to collection of resources and their efficient and effective allocation for government programs (also called budget formulation); it includes efficient utilization of these scarce resources, including economic and efficient conduct of procurement, and a system of controls to ensure that budget entities use budget funds with care. Public procurement is a key element of the resource management process within any PFM system (see Figure 1.2). Procurement is often seen as a separate subject from PFM. However, procurement is more than a process for executing transactions; it constitutes an integral part of the mechanism through which budget entities use public money. Procurement links directly to service delivery and government policy aims (since budgets get translated into services aimed at by a government policy in large part through the operation of the procurement system).

Figure 1.2. PFM Cycle.

PFM CYCLE

Budget is formulated on the basis of budget entities’ estimates of expenditures on government programs and projects. These estimates are usually based on end users’ submissions to the Ministry of Finance (MOF). Once parliament or similar approving authority has approved the budget, budget entities become responsible and accountable for spending the allocated funds on approved government programs and projects. They are responsible for, among others, preparing realistic procurement plans for conducting procurement of goods, works, and services according to the public procurement legislative and regulatory framework.

External and internal audit have the responsibility of ensuring that budget entities are spending budgetary funds in accordance with prevailing applicable procedures. They play an important role in procurement through enhancing accountability of public officials, risk management process, and governance.

In practice, however, effectiveness of a PFM system varies from country to country. Obviously, strong PFM systems yield strong results in terms of public procurement. The weaknesses of the PFM system relate to poor procurement planning; ineffective conduct of public procurement which results in government paying higher prices for goods, works, and services; and weak external and internal controls. This is usually the result of lack of appropriate regulations and capacity to implement them.

PROCUREMENT AT NATIONAL AND SUB-NATIONAL LEVELS

Until recently, in most countries, public procurement was centralized and was therefore a function of the central government. However, with increasing decentralization of government authority to provincial, state, or local authorities, procurement now usually takes place at national, sub-national (province/state), and local levels.

The decentralization of government authority to sub-national levels has to be accompanied by the necessary institutional framework, management capacity for public procurement, and accountability to be an effective public function. In some countries, while public procurement laws and regulations change at the central level, the changes take quite a long time in reaching the sub-national levels. As a result, public officials responsible for public procurement continue applying outdated procurement laws/acts and regulations impacting adversely on government reputation. This shows the need of better interaction and communication between national and sub-national procurement agencies.

CENTRALIZED, DECENTRALIZED, OR HYBRID

Most public procurement systems provide for a large degree of decentralization of the procurement function. In a decentralized system, government agencies serve as procuring entities which fulfill their needs in goods, works, and services, in accordance with the country’s legislative and/or regulatory requirements. A decentralized procurement approach, which has been necessitated by the decentralization of government authority, contrasts with the centralized approach.

In a centralized public procurement system, a single government entity is designated as a procurement entity to conduct procurement for all government entities. However, there is an increasing realization that neither full centralization nor full decentralization offers an optimal solution. A hybrid model (combination of decentralized and centralized procurement) seems to offer a better solution, especially for procurement of commonly and frequently used items.

In a hybrid model, a governme...

Table of contents

• Cover
• Title Page
• Chapter 1 What Is Public Procurement: Introduction
• Chapter 2 Who Does It and for Whom: Organization and Capacity
• Chapter 3 How It Is Done: Procurement Cycle and Procedures
• Chapter 4 Contract Management
• Chapter 5 How It Is Controlled: Risks to Procurement and Their Mitigation
• Chapter 6 New Tools of Public Procurement
• Appendix A: Simple Step-By-Step Generic Procurement Manual
• Appendix B: Additional Readings
• Index