The Importance of
Transparent and Effective
Procurement Practices

By David Levintow

Senior Associate, IP3

I. Strategic Implications of Good Procurement Practices

Perhaps there is no more visible and conspicuous signal that countries can send to the international investment community than in the manner and practices by which international tendering and procurement are conducted. This involves both the way requirements for new procurement actions are conducted as well as the management of existing contracts, especially for construction and for new service delivery.

The procurement process is the first part of the project life cycle in which the outside investors and prospective bidders officially learn about the needs and requirements of the various government units. It becomes critically important therefore that exceptional care is taken in drafting and establishing proper bid and tender documentation and tendering procedures.

By close examination of the bid and tender documents made available through public advertising, the procedures set forth, the schedule for receiving and evaluating bids, compliance with international "best practices" and other indicators, investors and their bankers can determine whether that procurement - and indeed the entire investment climate in the host country, is indeed transparent and truly competitive.

Bidders will closely examine the detailed scope of work, the general and specific conditions applicable to the project, the project time schedule, the list of firms invited to submit proposals, inclusion of sample or model contracts, and other aspects of the procurement to determine if the costly and time-consuming process of preparing a full proposal is justified.

II. The Procurement Process

Among the most important bases for determining transparency and fairness in the procurement will be the description in the bid and tender documents about the criteria that will be used for evaluation and selection, particularly the weighting to be applied to evaluation factors, conditions for acceptance of bids, and the procedures to be followed (for example, if a bidders conference will be held). Investors will note whether technical proposals are separated from the cost submissions (the so-called "two envelope" system), and evidence - especially on major projects - that a pre-qualification screening, using letters of interest, followed by checking of credentials and corporate qualification, then "short-listing" of companies invited to submit complete proposals, had been performed.

Government officials in charge of conducting procurement should recognize that virtually all firms participating in international tenders have participated in such bidding countless times, and will quickly recognize if the bid documents have been professionally prepared, and whether appropriate transparent procedures and policies are being followed. One of the first things looked at is whether the government has performed a needs analysis, and whether this effort is documented with at least a pre-feasibility study.

For their part, governments would be well advised to appoint qualified and knowledgeable members of the proposal Evaluation Committee, with most members fully familiar with the project and competent to review and rank-order the proposals received. These committee members must be skilled in following the usual steps in transparent bidding procedure (starting with signing full confidentiality and non-disclosure statements), including initial conformance reviews, so that non-complying proposals are quickly discarded for failure to comply with the conditions set forth in the bid and tender documents. Issues examined at this step include whether the proposal was submitted on time, in the proper format, and whether the bidder is properly responding to the full scope of work and duration required. Additionally, this is the time where the government first determines whether the bidders fully understand the needs, and whether they submitted a properly detailed work schedule. Also whether all necessary supporting documents as required in the tender, have been submitted. Reasons for rejection have to be provided, in writing, to those firms failing to make this initial cut.

The next step is the thorough and detailed bid appraisal, keeping careful and complete records of each meeting of the committee, using memoranda and minutes of the meetings, and setting forth the findings on spreadsheet/database type documents listing each of the conforming bids being evaluated, and columns for the factors being compared. At the end of this stage a summary rating should be made for each valid bid received. In the two-envelope system, technical proposals are submitted in a separate envelope from the cost proposal, and these technical submissions are rank-ordered on a technical compliance basis. This can be on a pass-fail or numerical ranking basis, depending on the nature of the project. Once proposals are identified that the government is confident offer the best "value for money" based on the cost proposals, quality of service, affordability, and risk sharing, often expressed in the net present value of the entire proposal, then the process can move towards final evaluation.

A usual third step is to prepare a summary of the entire evaluation, detailing the rating factors chosen, and reasons for ranking each of the proposals. After the time ranked firm has been identified by this process, a recommendation is made, with reasons given, for inviting the particular firm to start negotiations for the contract that will be awarded. Clearly this process is more manageable if there are only a reasonably small number of detailed proposals to evaluate. That is why it is necessary to pre-qualify bidders and only allow the short-listed firms to submit full proposals.

Those officials involved in the bidding process must acknowledge that it takes considerable time and money to prepare and submit a proposal, and therefore bidders expect there is a reasonable chance they will be selected and awarded the contract. To save everyone's time and money, it is most important that the bid and tender documents prepared, and the policies and procedures followed, are carefully and professionally conducted. Those involved on the evaluation team should be familiar with the model contract clauses that are issued by UNCITRAL and FIDIC, which have prepared guidelines and sample clauses for international contracts that are well known and highly respected.

The conclusion of the bid and tender process after evaluation of the cost and financial proposals is initiation of negotiations with the top-ranked firm, to make certain that all technical, social and financial aspects are mutually understood and agreed to. It should be clearly understood, for example, that the final contract reflects a reallocation of risk from the government to the contractor, for which a suitable rate of return or profit on the investment, needs to be earned. There should be a full understanding by the government as to the level of the tariffs or charges to users that will need to be charged, in order for the private contractor to complete the construction and for the on-going operation to be sustainable.

Concerns such as the private operator being able to fully recover costs of construction, operation and maintenance, and the level of the tariffs needed to effect such cost recovery being affordable to users, also needs to be fully addressed during the negotiations, so as to ensure that both parties have a clear understanding of what each party expects of the other.

III. Performance Monitoring and Contract Compliance: Making Results Happen

Post contract award performance monitoring, and the creation and conduct of a regulatory capacity, are critical requirements for successful procurement, so that objective function of the project can be realized, and that the outcome is responsive to the needs and affordable to users. It is important to incorporate during this time an effective mechanism for tracking the compliance of the contractor with key performance indicators that are clearly set forth in contract language and which allow objective assessments to be made of success or lack thereof. Penalties for non-compliance need to be included in this monitoring and regulatory process, so that incentives to continue proper service delivery are sustained. There must also be procedures for stakeholder consultation and feedback, to make sure that end-users are satisfied with the service provided, and customers are treated fairly. Also, in such arrangements, opportunity for dispute resolution are spelled out, giving any party full opportunity to be heard, and - where disagreements persist - an outside arbitration process acceptable to both parties, can be employed.

IV. Conclusions

To gain trust and credibility in the marketplace for international procurements, governments must ensure that the highest levels of integrity permeate the entire procurement process. If the process is not conducted properly, or is allowed to be neglected or ignored, costly and painful disappointments will likely occur. The likely damage will not just be to that particular procurement, but will call into question the overall government procurement process. Public-private partnership procurements can be difficult to organize, but with the proper planning and structure put in place, successful procurements can be conducted.