Current Trends in International Public Sector Procurement and their impact on Financial Management

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ICGFM forum - March, 6 2008

• Current Trends in International Public Sector
  Procurement and their impact on Financial
  Management
• Jorge Claro, President
• Claro Associates, Inc.

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Background

• Reform of the State is one of the most important
  components of the International fight against
  corruption.
• Recently, modernization of procurement systems
  has been an integral part of the reform of the
  State efforts in most countries. Such a
  modernization is difficult and there are many
  challenges in the road ahead.
• New evaluation tools to assess capacity to
  tackle these challenges are being developed by
  the international and regional organizations such
  as OECD/DAC, MDBs and others.

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Background

• International studies indicate Public Sector
  Procurement accounts for approximately 15 to 20
  of GNP in many countries
• Procurement has traditionally been poorly
  managed with inefficiencies adding anywhere
  between 15 to 20 to the cost of the works,
  goods and services being procured
• Corrupt practices add an additional 15 to 20
  to the cost of those works, goods or services
• In other words, inefficiency and corruption
  combined could account for 2.25 to 4 of GNP in
  most countries, thus negating growth

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Background

• There is a strong demand to increase
  transparency in public sector management and
  therefore
• Electronic Government Procurement (e-GP) is being
  or has been introduced in most countries
• Many countries have also introduced substantial
  reforms and new mechanisms for procurement
• in the Americas, a Hemispheric Network of
  Procurement Officials has been established. The
  network is successfully exchanging ideas, sharing
  information and know-how on the reform of the
  procurement process
• http//www.compraspublicas.org
• Many donor-funded procurement reform projects
  require financial data and information that is
  not readily available in most countries

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New Mechanisms

• These mechanisms are at the core of the new
  trends and changes being introduced in Public
  Sector Procurement around the world
• Framework Contracts
• Lease Agreements
• Reverse Auctions
• Public-Private Partnerships
• Countries that have introduced them or plan to
  do so are facing challenges and opportunities on
  institutional and legal reform as well as
  capacity building

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New Mechanisms

• The selection, incorporation and use of these
  new mechanisms will impact all the elements of an
  Integrated Financial Management System
• Accounting
• Budgeting
• Cash Management
• Credit Management

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Framework Contracts

• A contract that
• Establishes terms and conditions under which
  subsequent contracts will be placed
• Does not commit the purchaser to purchase
• Requires the supplier to supply in accordance
  with the terms defined within the scope of the
  contract

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Framework Contracts

• Benefits
• Reduced administration
• Competitive pricing (aggregation of demand)
• Assured quality
• Legal protection against breach of contract
• Assured delivery of goods
• Planned supplier stock levels
• Continuity of supply
• Long-term working relationships
• Improved flexibility and cooperation
• Multiple awards

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Framework Contracts

• What countries need to do
• Adapt Standard Contractual Terms
• Determine what goods and services may be subject
  to open-ended contracts
• Adapt standard competitive bidding processes.
• Train personnel (drafting task orders, managing
  long-term relationships with awardees)
• Improve coordination among agencies and entities

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Framework Contracts

• From a Financial Management perspective
• Introduce systems that are capable of keeping
  track of multiple-awardee contracts and
  performance monitor
• Encourage purchasing units to use them as
  contracting vehicles
• Provide data to help negotiators determine
  acceptable prices
• Put in place internal and external audits of
  procurement processes and subsequent awards
• Budget for training and/or hiring personnel
• Develop strong internal managerial controls

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Lease Agreements

• A distinct type of rent relationship
• Governments may use lease agreements in order
  to
• Acquire the use of buildings for administrative
  purposes, such as office space, or
• Have access to the use but not the ownership of
  equipment such as computers, photocopiers, cars,
  machinery and others.

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Lease Agreements

• Benefits
• Governments have access to state-of-the-art
  equipment without making substantial investments
• Continuous access to cutting edge technology
• Aggregated demand leading to better contractual
  terms
• Defective equipment may be replaced or repaired
  on-demand

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Lease Agreements

• Most countries contemplate the use of Lease
  Agreements for Real Estate
• Their use as a means to procure goods will
  require
• In-house capacity to manage long term contracts
  that have an important service component
• Trained personnel on new technologies and trends.
  
• Knowledge and capacity to negotiate the best
  possible terms and prices
• Provide effective remedies to lessors since the
  lessee is a sovereign entity.

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Lease Agreements

• From a Financial Management Perspective
• Put in place systems to keep updated inventory of
  leased equipment
• Carry out cost/benefit analysis to help determine
  if service agreements should be included in
  lease agreements
• Determine the financial risk on leased equipment
  and the need for insurance (i.e. amount of
  deposits and damage or loss of equipment)
• Put in place robust controls on the performance,
  not just the cost of the lease

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Reverse Auctions

• A reverse auction is a mechanisms where
  suppliers bid against each other for contracts
  against a set specification, pre-established
  criteria and price ceiling
• The roles of the buyer and the seller are
  reversed
• Its primary objective is to drive purchase prices
  down
• This mechanism is particularly useful for
  purchasing off-the-shelve, generic items or
  commodities, where price is the only deciding
  factor to determine the winner

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Reverse Auctions

• In Brazil, the Pregao Eletronico, an Electronic
  Reverse Auction, has been in use since 2000,
  generating important savings to the country, both
  in price and time
• Benefits
• Reduction of paperwork
• Streamlined processes
• A shorter negotiation cycle
• More competitive prices
• Increased transparency in the award process
• Faster development of Electronic Government
  Procurement systems

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Reverse Auctions

• Risks
• The process may become cumbersome or complicated
• The process may be used for items that are not
  susceptible to generating savings
• Markets may be disrupted due to potential
  cartelization
• Internal markets may be very small
• There is a limited number of private sector
  entrepreneurs
• The auctions may be susceptible to low-balling

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Reverse Auctions

• Countries contemplating adopting this mechanism
  should consider that
• It will require specific changes to be introduced
  to national and local procurement laws
• e-RAs need an e-commerce legal framework
• The e-GP system must be sophisticated enough to
  support hosting e-RA sessions.

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Reverse Auctions

• From a financial management perspective
• Put in place a system able to track transactions
  that do not have a paper trail
• Ensure timely budgetary allocations and cash flow
• Establish electronic payment systems
• Put in place market intelligence mechanisms to
  ensure that the best products at the best prices
  are being procured, thus ensuring value for money
  

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Public-Private Partnerships

• A Public Private Partnership is a system in
  which a government service or private business
  venture is funded and operated through a
  partnership of government and one or more private
  sector companies that works to ensure the
  funding, construction, renovation, and management
  of an infrastructure or provision of a service
• Contractually, a PPP is a legally binding
  instrument
• Entered into by a government and a private party
  (usually a business)
• With the objective of providing assets and
  delivering services
• That organizes risks among the various partners

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Public-Private Partnerships

• Benefits
• Create long-term investment opportunities for the
  private sector
• Helps reduce capital investments or the national
  debt
• Bridges the gap between the need for
  infrastructure and the countrys financial
  capabilities
• Improve service delivery
• Improve cost effectiveness (private partner
  wishes a return on investment)
• Allow public projects to benefit from private
  sector innovation, experience and flexibility of
  services
• Reduce public sector risk
• Deliver capital projects faster
• Improve budget certainty

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Public-Private Partnerships

• Countries must consider
• PPP must be specifically regulated
• Investment Laws, Commercial Codes, Procurement
  Laws
• Differentiated from Concession Agreements of
  Parastatals .
• PPP form long term working relationships that may
  present difficult scenarios in terms of power
  sharing and management
• PPP require high-level management skills, as well
  as significant planning and strategizing.
• Due to their nature, PPPs will be corporations
  subject to government regulation

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Public-Private Partnerships

• From a financial management perspective
• Demand for interaction with private sector
  accounting practices and financial systems
• Determination of the financial soundness of the
  project and its long-term performance
• Determination of the overall financial framework
• Attest to the legality and continuity of
  operations
• Report and interpret the results of the
  activities undertaken by the PPP

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Conclusions
The mechanisms are being introduced in many
countries at a very different pace and
corresponding to very different strategies
Procurement reform should not be undertaken in
isolation but rather in a broader and
participatory context and as an integral part of
the reform of the state process Reforms should
be guided by a national strategy that considers
the procedural, financial and managerial
dimensions of a reform Introducing these
mechanisms can have long-term effects on domestic
markets, with financial and administrative
implications
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Conclusions

• Financial management must provide inputs for
  decision-making
• Sound financial management is key to reducing
  opportunities for fraud and corruption
• There is a need for qualified professionals and
  redesigned systems in both the procurement and
  financial arenas
• Capacity building and training still represent a
  challenge in these areas
• The convergence between procurement and
  financial management needs to be emphasized and
  strengthened

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Thanks
Many thanks for the opportunity to talk to
you today Jorge Claro President Claro
Associates, Inc. 10708 Lady Slipper
Terrace North Bethesda, MD 20852 Tel 301
230-9011 jclaro_at_claroassociates.com www.claroass
ociates.com