ICGFM forum - March, 6 2008

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

Jorge Claro, President Claro & Associates, Inc.

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.

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

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

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

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

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

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

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

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

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.

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

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.

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

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

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

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

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.

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

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

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 country’s 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

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

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

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

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

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 [email protected]

www.claroassociates.com