Governance and pitfalls in public procurement function in Tanzania

Governance and pitfalls in the public procurement

function in Tanzania

Kassim Hussein, PhD

[email protected]+255 754 360 174

mailto:[email protected]

Structure

• What is Governance and why procurement needs Governance

• Causality between growth and governance• Pitfalls in public procurement• Should the PMU be robotic?• Whether SOE be supplier of Choice?• Internal and External procurement environment• Considering Social benefits in procurements

Governance - meaning

• International Standard on Auditing (ISA) 260

• Governance is the term used to describe the role of persons entrusted with the supervision, control, and direction of an entity.

What is Corporate Governance?

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Corporate Governance is a mechanism through which boards and directors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadership, direction and control.

IFC

“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals…… The aim is to align as nearly as possible the interests of individuals, corporations and society.”

Sir Adrian CadburyCorporate Governance Overview, 1999

ISA 260

• Depending on the jurisdiction, different bodies may have responsibility for corporate governance:

Board of Directors Audit Committee Other supervisory committees

ISA 260 requires the auditor to determine those persons that are charged with governance (their role, mechanisms, effectiveness, efficiency )

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Board Governance Framework

AuditCommittee

Remuneration Committee

OtherCommittees

Board Committees

Strategy

Board of Directors• Achievement of strategic objectives and value creation• Fulfil responsibilities and duties in law and prescribed functions

Boar

d O

pera

tions

Chairman

Board Meetings

Reporting &Disclosure

Internal Controls & Assurance

Executive Committee

Internal Audit External Audit Other Assurance Providers Management

Combined Assurance Model

GovernanceSystem andControls

Corporate Policies & Procedures

Board Governance Instruments

Monitoring and Evaluation Key

Area

s of R

espo

nsib

ility

CEO & Management

Shareholders

Info

rmati

on a

nd C

omm

unic

ation

CorporateSecretary

Why procurement needs Good Governance

• In Tanzania about 75% of its budget per financial year is used in public procurement. And it is consumes 100% of Government development budgeted.

• World-wide , it is estimated of the financial activities of government procurement managers is between 10% – 30 % of GNP (Callender & Mathews, 2000).

• The sheer size of procurement funds involved, has a great impact on the economy and needs to be well managed.


• Efficient handling this size of procurement outlays has been a policy and management concern as well as a challenge for public procurement practitioners.

• There has been a lot of wastage through procurement function; a good governance system can save and redirect such savings to more needy areas that has more leverage.

“You have impressed me that you have intervened and cancelled some procurement processes and managed to save 852.62 billion shillings that could have been misused by two institutions. One can see how much you have saved just on two tenders, hence the need to support you,” - Dr. Phillip Mpango telling Mr. M. Lumbanga PPRA Chairman on receiving the PPRA report


• Governments will continue to be under pressure, finding it difficult to raise tax revenues, although we will see increased efforts to get more and more but demand for services, particularly health and education sectors given the commitments.

• Election campaigns will stress how well political parties can deliver “savings” as well as their election manifesto will be attractive. ‘Ahadi za Rais’ will sore!


• Breach of governance practice continues

• conflict of interest and other integrity issues are still high

• Malpractices in procurement is still high

• PPAA CASES evidences.

Why procurement needs Good Governance – More reasons

• Causality: Good governance and economic growth and therefore public procurement has been utilized as an important tool for achieving economic, social and other objectives

The causality between growth and governance

Burkhart and Lewis-Beck (1994) found that while higher per capita incomes foster democracy, democracy in turn does not foster higher incomes

B. Friedman (2005) argues that higher living standards encourage more open, tolerant and democratic societies

Growth causes governance to improve ...

… and better governance causes growth

Using measures of rule of law, bureaucratic quality and corruption, Chong and Calderon (2000) found significant causality from good governance to growth and vice versa – i.e. “good governance” both contributes to and results from strong economic performance

Other studies have dealt with the potential for reverse causation by using exogenous instruments for the governance indicators and concluded that good governance has a significant and strong causal impact on economic performance …

… but the debate on causality continues …


• In countries that has big sovereign debt like Tanzania, lenders such as World Bank impose conditionalities for countries. For example The World Bank’s Procurement Under IBRD Loans and IBRD Credits specifically has at least few major concerns or objectives of public procurement for projects funded by its loans:


1. Ensuring that the loan is used to buy only those goods and services needed for the project;

2. Ensuring fair competition for all qualified bidders from the World Bank’s eligible countries; Promoting transparency or integrity; and

3. Encouraging development of indigenous contractors and manufacturers


• by allowing local buyers to build in a margin of preference for local contractors and manufacturers (Tucker, 1998).

• Public procurement has been perceived as an area of waste and corruption (due to many reasons (including greater scrutiny of taxpayers and competing vendors).


• As we have moved to a regional/ global economy, public procurement has to comply with respective government’s procurement regulations and social and economic procurement goals. (Without violating regional and/or international trade agreements.)

The pitfalls in procurement

• The Board of Directors/ MAB/ Board of Councilors' have been sidelined in the procurement. They have no oversight role.

• Directors fiduciary responsibility includes to prepare financial Statements and provide attestation. Here is where in the Audit Report they find ‘matters of Emphasis’ for the first time.

EffectiveGovernance

The IIA Corporate Governance Model ( A 4 legged stool)


• Disregarding procurement role (economic, social, and political environment)

• A sound procurement system has accomplish two sets of requirements:


The procurement policy requirements normally include economic goals (preferring domestic or local firms), environment protection or green procurement (promoting the use of recycled goods), social goals (assisting minority and woman-owned business concerns), and international trade agreements.

The procurement management requirements normally include quality, timeliness, cost (more than just the price), minimizing business, financial and technical risks, maximizing competition, and maintaining integrity.

Corruption in procurement

• “Tanzanian public procurement is rife with corruption. Businesses point to government officials often favouring well-connected companies and individuals when awarding contracts, and public funds are sometimes diverted to companies, individuals or groups due to corruption” (GCR 2014-2015).

• “But corruption in public procurement isn’t just about money. It also reduces the quality of work or services. And it can cost lives.


http://www.weforum.org/

Corruption 1. Corruption accounts for 25% of Africa’s GDP

Tanzania included. It hinders credible businesses to transact with the government.

2. According to Amb. Lumbanga in this years’ PPRA report, corruption red flags, indicating a high likelihood of corruption in selected projects, were observed in nine entities.

3. Procuring officials in government/parastals have brief case businesses and or companies which are pre-qualified and awarded the contracts.


People in many countries have paid a terrible personal price for collapsed buildings and counterfeit medicines. The end result? Our trust in our leaders is eroded” - Transparency International, July 2014

Corruption in procurement The pitfalls in procurement

Unethical conduct in procurement 1. Over and under-invoicing in imports and local

procurement are some of the practices. – Long time lags and delays on the part of government to

pay suppliers are some of the causes for over-invoicing. – Under invoicing is due to uncertainties relating to a

supplier’s chances of winning a tender bid.2. Pre-qualifications is not always open to the public; but

selected few. (The current move to put these in the website is applauded)

3. Some stringent prequalification criteria disqualify local businesses enterprises and are tailored to suit specific suppliers.

4. After prequalification; competent bidders are disqualified under false allegations: “Not responsive”5. Some firms have never won a contract for a bid (because they are not ‘known’)

Unethical conduct in procurement

High cost of doing business

Expensive and prohibitive bid securities for example; bankers cheques or Certified cheques

Once a company is awarded the contract, the price quoted is always fixed (no allowance is provided for price variations) for the whole contract period of e.g. 120 days. Exchange rate fluctuations have to factored in by local bidders Public Procurement.

1.The cost of buying the pre-qualification documents generally is very high.

2.Some organizations place bid advertisements in the media with out the intension of doing business.

Unethical conduct in procurement

Ethics (or lack of it) in procurement

• PPRA and the role of Tender Boards

• PPRA and their Audits• PPAA• Bidders behavior


• It is very difficult for policy makers and public procurement practitioners to make an optimal decision, as there are always trade- offs among these goals.

Should the PMU be robotic?

• Public procurement management units (PMU) have had the tendency to be robots - been secretaries to the Tender Board merely doing clerical work.

(Cannot advise the most optimal way to get services or goods)


• Strategic procurement requires a focus on outcomes not just on processes.


• Elsewhere, they forcefully challenged the perceived clerical task of public procurement. One survey of 704 members at the National Institute of Governmental Purchasing, Inc., 83% of respondents contended that the major role of current purchasing is tactical (www.nigp.org).

• Making public procurement a recognized profession is another challenge. Building a body of public procurement knowledge, one of attributes of a profession, is very critical.

http://www.nigp.org/

Internal procurement factors

• Interests of various elements and people influence the public procurement :

• Types of goods, services and capital assets required by users.

• Professionalism or quality of procurement workforce;

• Staffing levels (e.g., ratio of procurement practitioners to contract actions) and

• Budget resources required.

Social issues

• “social issues” in procurement context is broadly as defined issues: which impact on society or parts of society and cover a range of issues including;

• equalities issues (i.e. age, disability, gender, race, religion and sexual orientation),

• training issues,

Social issues

• minimum labour standards and• the promotion of small and medium-sized

enterprises (SMEs), • including minority ethnic enterprises and • includes social enterprises.

Social issues• The priority for all public procurement is to

achieve the best Value for Money (VFM). • VFM does not mean accepting the cheapest

price. It means obtaining the best possible balance between price and quality in meeting the customer’s requirements.

• The requirements of the public sector bodies include the promotion of sustainable development, social, economic and environmental objectives.

Wider Social Benefits

• In a procurement context example, when awarding contracts connected to infrastructure or urban development project, the contractor may reasonably be expected to consider how those contracts might aid the regeneration project, perhaps by providing training opportunities for the unemployed.

• When drawing up the requirement and drafting the Invitation to Tender documentation. it is particularly important to consider social issues early on in the process.

Should the public sector be a supplier of choice?

• The current strategic level discussions and practice indicates that a relatively new goal for public procurement in many countries including Tanzania.

• The changing supply market dynamics and governments pushing for social outcomes, such as sustainability, will require new supply market relationships into the future. Public sector agencies will need to become customers of choice for their supplier bases.


• Purchasers are identifying and developing their requirements. At this stage it is important to consider the requirement and its potential impact.

• Does the requirement have particular relevance for any particular groups? Is that fully reflected in the requirement?

• Has the contracting authority considered all potential social, economic and environmental benefits that could be delivered as part of the performance


• of the contract, whilst still being able to demonstrate Value for Money?

• Does the requirement affect the authority's ability to comply with its positive equality duties and if so, what considerations are appropriate?


• Would it be a suitable opportunity for particular groups to compete for business?

• Is the requirement and associated documentation written in such a way that it is easily understood by potential bidders who might not be familiar with public procurement procedures?

Some relief: Compliance

• Compliance is increasing• Financial Year 2015/16 compliance has

increased from 69 percent last year to 71 percent this year, which is however below the 78 percent target.

• The average compliance level for MDAs and LGAs had increased from 69 to 75 and 67 to 70 percent respectively, compared to last year’s results.

The compliance level of public authorities dropped from 71 to 70 percent.• ‘A memorandum of understanding between PPRA

and PCCB, the individual audit reports for entities with higher likelihood of corruption would be submitted to the anti-corruption watchdog for further action’.

• CAG audits and reports accordingly.. Matters of emphasis’


• PPRA, PPAA work commendable• Whistleblowing Act in place but response is

generally low• PO-PSM/ BRELA have asked for signatures on

the Integrity Pledge….


Conclusion

• There are remarkable gains: the legal framework, institutions: tender boards, PPRA, PPAA, Board (PSPTB)

• Areas for next level: addressing professional conduct especially ethical practice; value for money (integrity)

• Social benefit concerns: Procuring locally, supporting SME’s; Should SOE’s be supplier of choice?

Thank you

• Q & A… Comments… Discussions