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Reforming Public Procurement -- Syquia 1 Introduction It is now widely accepted that corruption in public procurement systems impedes the ability of both government and foreign aid institutions to achieve sustainable development in a country. It is also generally recognized that corruption breeds in an environment characterized by poor governance and weak rule of law. In the Philippines, for example, the World Bank observed that poor long-term economic performance reflects flaws in public sector governance, and that these failings are rooted in weaknesses in the structure of public administration and in features of the broader political economy within which such structures function. i Corruption in public procurement is particularly debilitating because it creates leakages in a government’s financial and budget systems that lessen the impact of much needed spending on health, education, infrastructure, agriculture and other programs. In addition to reducing the effectiveness of public service delivery, it may also negatively impact the investment climate. Grand scale corruption is often associated with major government projects and programs, because corrupt actors frequently transfer large financial benefits to private firms through procurement contracts and the award of concessions. Furthermore, a share is always allotted to the corrupt official, so that in total, these cases have a staggering impact on the government’s budget and, in turn, the country’s growth prospects. ii A 1998 study on Philippine projects funded from congressional initiatives provides a clear picture of the leakages created by corruption in public procurement, how the pie is divided up among the numerous actors, and how much remains for the benefit of society. iii For public works projects, the study estimated that, on average, 12 to 20 percent of the budgeted funds went to lawmakers, one to two percent went to Department of Budget and Management (DBM) personnel responsible for releasing the funds, 10 percent went to the head of the implementing agency. In addition, seven percent went to the mayor, and three percent went to the local community leader—leaving roughly 63 percent for project implementation. iv For procurement of medical supplies and educational materials, 40 to 50 percent of budgeted funds went to lawmakers, one to two percent went to DBM personnel, and 10 percent went to the head of the implementing agency—leaving between 40 and 50 percent for the supplier. v Indeed, even conservative estimates in the Philippines suggest that as much as 20 percent of government funds budgeted for procurement is lost to corrupt practices. vi The situation in Vietnam is similar: last year, the State Auditing Agency reported that the Vietnamese Government wasted VND 4.5 trillion (US$281 million), nearly one percent of GDP in 2005, on inappropriate spending decisions and misconduct at various stages in the procurement cycle. vii While there are various other reasons to reform public procurement systems in developing countries (e.g., opening domestic procurement to international competition), approaching procurement reform as an anti-corruption measure has not only proven to be practical, but also quite effective, because it forces policy makers to focus on internal issues, and not merely upon external pressures. 2 Approaching public procurement policy reforms in the context of developing countries Although developing countries have much to gain from global approaches and “best practices” principles, experience has continuously shown that if policy or systemic reforms are to gain any real foothold in a country beyond laws that exist only on paper, external and internal working environments must be given serious consideration. Public procurement reform is no exception to this rule. While the basic principles of transparency, competition, accountability, equity, efficiency, economy and effectiveness still hold in any country—developing or otherwise—the real challenge is in adapting these principles to local circumstances. Throughout the reform process, careful attention must be paid to the concerns of central decision makers, the demands on implementing agencies, political uncertainties, changes in the focus and policies of government, and the concerns of the private sector, civil society, and the general public. Fiscal Reform and Economic Governance Project
Reforming Public Procurement -- Syquia Foreign aid institutions that encourage legislative and institutional changes in developing countries may face obstacles in gaining the confidence of the central government, and even greater difficulty in garnering support from local governments and their constituents. Or, they may encounter governments that readily pass reform laws and regulations, but then fail to implement them because there was never true local ownership of the reforms. In approaching reform of public procurement policies, systems and practices, avoiding these situations requires careful planning, sound advice and constant attention to the needs and interests of various stakeholders at the national and local level, and of the private sector and civil society. This study looks at the procurement reform process as comprising five basic steps: Step 1: Assessing the national public procurement system and practices, developing the strategy and planning the approach Step 2: Developing or improving the legal framework Step 3: Developing the oversight and institutional framework Step 4: Conducting capacity building programs Step 5: Assessing the impact of reforms at both the central and local levels These steps are roughly sequential but not strictly consecutive, and they are designed to ensure a proper fit between international best practices and the developing country context. The entire process may take from four to six years to complete, and should be viewed not so much as a one-time event, but rather as a continuous cycle: Each step feeds into the next, and as each cycle ends with an impact assessment, the results of that assessment similarly feed into the next national public procurement assessment, identifying gaps that have not been addressed, and informing a new strategy and approach to guide the next round of reforms. The following sections are based on real case examples from the Philippines, Lao DPR, Vietnam and Ghana, as well as on a wide review of literature and international documentation. These sections describe this procurement reform cycle in detail and provide insight into how these steps have been or could be implemented. The concluding section brings together the five-step process, discussing its implementation and timeframes. 3 Step One: Assess the national public procurement system and practices, develop the strategy and plan the approach 3.1 Using the Baseline Indicators System (BIS) to assess national public procurement systems The Round Table on Strengthening Procurement Capacities in Developing Countries, a joint initiative of the World Bank and of the Organization for Economic Co-operation and Development’s Development Assistance Group (OECD-DAC), recently introduced the Baseline Indicators System (BIS). The BIS measures the quality of a country’s procurement policies, systems and institutional capacity based on several core indicators. viii In December 2004, representatives from developing countries, multilateral and bilateral development institutions and other participants in the Round Table signed the “Johannesburg Declaration,” which committed participants to adopt the BIS as the agreed international standards for assessment of national procurement systems. Fiscal Reform and Economic Governance Project 2
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