Handbook For Curbing Corruption in Public Procurement
Handbook For Curbing Corruption in Public Procurement
Handbook For Curbing Corruption in Public Procurement
1 ..............
ACKNOWLEDGMENTS
All rights reserved. All the written and visual material contain herein is
the exclusive property of Transparency International and/or its national
chapters. This material may be reproduced and otherwise utilised for
non-commercial purposes related to anti-corruption if this publication is
correctly and clearly identified as the source.
This publication has been produced with the financial assistance of the
European Union and the UK Foreign and Commonwealth Office. The
contents of this publication are the sole responsibility of Transparency
International and can under no circumstances be regarded as reflecting
the position of the European Union or the UK Foreign and Commonwealth
Office. TI Malaysia received financial assistance from the Canadian High
Commission for its work on the Handbook.
ISBN: 3-935711-23-9
............... 2
3 ..............
The five year strategy plan of TI Malaysia from 2006 to 2010 focuses
on organisational development, advocacy, education and training,
surveys, media relations, publications, and regional networking. Policy
advocacy is aimed at improving the institutional pillars of the National
Integrity systems, reviewing anti-corruption policies and laws and
promoting greater transparency and accountability in public contracting
and procurement.
5 ..............
............... 6
............... 8
INTRODUCTION - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 13
SECTION 1 THE PROBLEM OF CORRUPTION IN PUBLIC PROCUREMENT
AN ANALYSIS --------------------------------------------------------------------------- 13
1.1. THE TERM PROCUREMENT -------------------------------------------------------------- 13
1.2. DEFINITION OF CORRUPTION --------------------------------------------------------- 14
1.3. FORMS OF CORRUPTION ---------------------------------------------------------------- 15
1.4. MANIFESTATIONS OF CORRUPTION IN PUBLIC PROCUREMENT ------------- 17
1.4.1. CORRUPTION RISKS AND MANIFESTATIONS ACROSS
THE PROCUREMENT CYCLE -------------------------------------------------------------- 17
1.4.2. SPECIAL RISK FACTORS -------------------------------------------------------------------- 20
1.4.3. ROLE OF LENDERS, FUNDERS AND GUARANTORS ---------------------------------- 24
1.4.4. ACTORS IN CORRUPT DEALS ------------------------------------------------------------- 26
1.4.5. IMPACT OF AND DAMAGE FROM CORRUPTION IN PUBLIC PROCUREMENT -- 28
SECTION 2 WHAT CAN BE DONE ABOUT IT? ANTI-CORRUPTION STRATEGIES
AND INITIATIVES IN PUBLIC PROCUREMENT ---------------------------------- 32
2.1. CRITICAL STEPS FOR TRANSPARENCY ACROSS
THE PROCUREMENT CYCLE ------------------------------------------------------------ 32
2.2. ANTI-CORRUPTION STRATEGIES AND INITIATIVES OF
PUBLIC AUTHORITIES -------------------------------------------------------------------- 48
2.2.1. GOOD PROCUREMENT PRINCIPLES ---------------------------------------------------- 48
2.2.2. GOOD PROCUREMENT LAW ------------------------------------------------------------- 52
2.2.3. LAW ENFORCEMENT ----------------------------------------------------------------------- 56
2.2.4. INTERNATIONAL ANTI-CORRUPTION CONVENTIONS ------------------------------ 59
2.2.5. PREVENTION --------------------------------------------------------------------------------- 62
2.2.6. CONTROLS AND CONTROL STRUCTURES (INTERNAL
AND EXTERNAL) ---------------------------------------------------------------------------- 64
2.2.7. INFORMATION GATHERING - WHISTLEBLOWING ----------------------------------- 65
2.2.8. E-PROCUREMENT -------------------------------------------------------------------------- 66
2.3. ANTI-CORRUPTION INITIATIVES IN THE PRIVATE SECTOR ---------------------- 68
2.3.1. OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES --------------------------- 68
2.3.2. UN GLOBAL COMPACT -------------------------------------------------------------------- 70
2.3.3. FIDIC “POLICY STATEMENT ON BUSINESS INTEGRITY” OF CONSULTANTS ----- 72
2.3.4. CODES OF ETHICS IN BUSINESS --------------------------------------------------------- 73
2.3.5. AGENT’S CONTRACTS---------------------------------------------------------------------- 76
2.3.6. TI’S INITIATIVES WITH SPECIFIC SECTORS --------------------------------------------- 76
SECTION 3 COLLABORATIVE TOOLS (INVOLVING GOVERNMENTS, COMPANIES
AND CIVIL SOCIETY) TO PREVENT OR REDUCE CORRUPTION------------ 80
3.1. THE TI INTEGRITY PACT ------------------------------------------------------------------ 80
3.2. THE INTEGRITY CLAUSE ----------------------------------------------------------------- 89
3.3. PUBLIC HEARINGS------------------------------------------------------------------------- 90 9 ..............
TI INDONESIA CHAPTER
SECTION 1 BACKGROUND --------------------------------------------------------------------109
1.1. THE INDONESIAN GOVERNMENT’S EFFORTS AGAINST CORRUPTION ----109
1.2. PUBLIC PROCUREMENT IN INDONESIA --------------------------------------------111
1.3. LEGAL CONTEXT OF PUBLIC PROCUREMENT ------------------------------------113
SECTION 2 ROLE OF TRANSPARENCY INTERNATIONAL INDONESIA IN
PROMOTING PUBLIC PROCUREMENT REFORM --------------------------117
2.1. A KEY TOOL: THE INTEGRITY PACT ---------------------------------------------------117
2.2. PUBLIC PROCUREMENT ASSESSMENT ---------------------------------------------118
2.3. INTEGRITY PACT IMPLEMENTATION IN SOLOK DISTRICT,
WEST SUMATRA---------------------------------------------------------------------------120
2.3.1. BACKGROUND -------------------------------------------------------------------------120
2.3.2. CREATING THE ENVIRONMENT FOR INTEGRITY PACT IMPLEMENTATION 120
2.3.3. INDEPENDENT MONITORING OF THE IMPLEMENTATION
OF INTEGRITY PACTS -----------------------------------------------------------------123
2.3.4. PROCUREMENT IN SOLOK REGENCY, BEFORE AND AFTER INTEGRITY
PACT IMPLEMENTATION -------------------------------------------------------------125
SECTION 3 LESSON LEARNED AND RECOMMENDATIONS --------------------------128
3.1. LESSON LEARNED ------------------------------------------------------------------------128
3.2. RECOMMENDATIONS -------------------------------------------------------------------130
TI MALAYSIA CHAPTER
SECTION 1 INTRODUCTION – E.U. ASIA URBS PROJECT ------------------------------147
SECTION 2 MALAYSIA: BACKGROUND AND CONTEXT --------------------------------149
2.1. INTRODUCTION: MILESTONES IN MALAYSIA’S
ANTI-CORRUPTION DRIVE -------------------------------------------------------------149
2.2. MALAYSIA’S NATIONAL INTEGRITY PLAN (NIP)
& INTEGRITY INSTITUTE MALAYSIA (IIM) -------------------------------------------151
2.3. ANTI-CORRUPTION INITIATIVES AND ACTION -----------------------------------152
2.4. INITIATIVES AND ACTION BY THE GOVERNMENT -------------------------------152
............... 10
TI PAKISTAN CHAPTER
SECTION 1
1.1 INTRODUCTION --------------------------------------------------------------------------201
1.2 PAKISTAN’S NATIONAL ANTI-CORRUPTION STRATEGY (NACS) --------------202
1.3 PAKISTAN’S NATIONAL AGENCY FOR PROCUREMENT -------------------------204
1.4 ANTI-CORRUPTION AGENCIES IN PAKISTAN --------------------------------------206
SECTION 2 TI PAKISTAN TOOLS AND EXPERIENCE IN PUBLIC CONTRACTING -208
2.1. PROMOTION OF THE IP FOR THE K-III GREATER KARACHI
WATER SUPPLY SCHEME ----------------------------------------------------------------208
2.2. MEMORANDUM OF UNDERSTANDING (MOU) ----------------------------------212
2.3. MODEL CHECKLIST OF THE BIDDING PROCESS BY TI PAKISTAN FOR
CONFIRMATION OF COMPLIANCE OF PUBLIC PROCUREMENT RULES
8 JUNE 2004 S.R.O. 432 (I)/2004 BY PAKISTANI GOVERNMENT FINANCE
DIVISION ------------------------------------------------------------------------------------216
SECTION 3 THE EU ASIA URBS PROJECT & THE WAY FORWARD -------------------217
3.1. THE EU ASIA URBS PROJECT ----------------------------------------------------------217
3.2. CURRENT EFFORT: PROMOTE APPLICATION OF PROCUREMENT RULES
AT PROVINCIAL LEVEL-------------------------------------------------------------------219
Corruption often is called a “control crime”: Since both the bribe giver
and the taker are criminals, both try to keep the crime covered up, and
only control efforts by the authorities will lead to disclosure of the facts
and eventual prosecution.
a decision to which the payer often has a legal claim (customs clearance
of luggage or machinery) but which may be unduly delayed or withheld
pending some payment. Both are forms of corruption and constitute
illegal behaviour in most countries.
Cartel or Collusion
Bidders often form a cartel, which then tries to manipulate the
award decision in favour of one of their members, with or without the
involvement of a corrupt inside official. Collusion agreements can
include, for example, assigning “turns” among the cartel members for
winning public bids, or agreeing to internal compensation payments for
submitting high or other “failed” bids.
............... 16
Corruption and corruption risks can take place along the entire
cycle of public procurement. The cycle includes the following most
common phases:
1 2 3 4 5
Preparation
Needs Contractor Final
phase/Process Contract
assessment selection and accounting and
design & bid Implementation
phase/ Demand award phase audit ( when
documents phase
determination applicable)
preparation
............... 18
Needs
assessment • Accountants doing final accounts and Auditors are biased
phase/ Demand or “bought” and willing to support false certificates.
determination
In TI’s experience and research, the early and late stages of the
procurement cycle are increasingly exposed to corruption.
1
Detailed results of the application of the Public Contracting Monitoring System, a
methodology developed by Transparency International to measure corruption risk
in public procurement systems, can be found at: http://www.transparency.org/
regional_pages/americas/contrataciones_publicas/diagnostico_y_medicion .
2
For more detailed recommendations on strategies to address and prevent
corruption in Disaster relief and other emergency situations consult, as well as
http://www.u4.no/themes/ces/main.cfm (“Corruption and public procurement in
aid-funded emergency relief ).
3
Thomas & Rock Kopczak, 2005.
4
Ewins, Pete, Harvey, Paul, Savage, Kevin & Jacobs, Alex; 2006. For additional
information on this subject, please see the References at the end of this Chapter. 21 ..............
5
These red flags have been directly quoted or inspired from “Corruption in Public
Procurement: A perennial Challenge.” by Ed. Campos et al, in “The Many Faces
of Corruption” World Bank. Forthcoming 2007. The article contains further detail
on red flags and corrupt practices and the publication is a good reference for
corruption and anti-corruption in different sectors
6
Ibid. 23 ..............
Commercial Banks
Commercial banks can, but rarely do play an important role in
the prevention and control of corruption in business transactions.
Commercial banks are often in possession of relevant information
that can provide accurate signals of corrupt-to-be deals like the
engagement of agents overseas at absurd fees and under unclear
contracts, money flows to tax havens and uncommon ownership
structures. Commercial banks are well equipped to pursue due
diligence on their clients and should be encouraged to be more
interested in reducing the financial risk associated with corruption
risk.
Official Donors
Donors have a key role in promoting transparency and
accountability both in the overseas activities they fund and also
within their own operations. All governmental donor agencies
have their own procurement regulations but considerable lack of 25 ..............
Politicians
Politicians (especially at municipal level) often have a double
political-administrative function (e.g. City Councillors) that results in
a complex legal position as regards corruption (i.e. whether they are
regarded as “officials” under the penal code or not).
Witnesses
All those who have information about corruption have the
power to stop it, and keeping silent is close to participating in it.
Increasingly, whistleblower motivation and protection mechanisms,
anti-corruption hot lines and other systems aim at making it easier
for people who want to see things changing.
Financial Impact
Financial impact or damage can consist of:
• Unnecessarily high cost of purchases, investments, services, or
unnecessarily low income from licenses, permits, concessions
etc.;
• Sub-specification quality of supplies or works, not justifying
the price actually paid;
• Burdening a government with financial obligations for
purchases or investments that are not needed or are not
economically justified at all or are oversized; and
• Burdening a government with early repair costs to repair
and maintain investments, which are too recent to justify or
explain such maintenance costs.
Economic Impact
Economic impact can consist in burdening a government
with operational, maintenance and debt servicing liability for
investments/purchases, which do not contribute positively to the
economy of the country. Further economic impact can happen
when capital investment levels decrease because of corruption costs
and threats to business operators, thus affecting economic growth
and employment.
7
Sources used were the Supreme Audit Office, the Ministry of Finance and public
services at the municipal level.
8
Additional Information can be found at Transparency International - Czech
Republic: Chlumcanskeho 5, 180 21 Prague 8 (David Ondracka or A d r i a n a
Krnacova) . Tel: +420 266 790 115; Tel: +420 266 790 117; fax: +420 284 682 872.
E-mail: ondracka@transparency.cz. http://www.transparency.cz . 29 ..............
Environmental Impact
Corruption in procurement can engender bad choices,
among them projects that have adverse environmental impact.
In implementing an investment project which does not comply
with the country’s (or international) environmental standards, the
damage may consist in unnecessary or increased environmental
or health risks or actual damage, financial liabilities, or long-term
adverse impact on the environment.
Impact on Innovation
Corruption inducted lack of competition leads to the neglect
of innovation. Companies relying on corruption will not spend
resources on innovation, and even non-corrupt companies will feel
less inclined to make the necessary investments in innovation if they
cannot access markets due to corruption.
Erosion of Values
When people observe lack of concern for integrity and the
common good among senior officials and private sector economic
operators, and reckless and corrupt behaviour is not being
sanctioned, they easily reduce their own integrity standards, out of
need and often out of greed. This applies also to other economic
operators who realise that offering a competitive price and quality
are not adequate requirements for obtaining contracts.
9
For further information on the impact of corruption and health and also more
details on corruption in health related procurement and the pharmaceutical
industry, consult TI’s Global Corruption Report 2006. 31 ..............
In this phase, the critical issues are to make sure that the goods and
services to be purchased or the investment to be made is socially and
economically justified and that the best of the various alternatives is
chosen to meet the assessed need.
1
• Are the goods or the services to be acquired needed at
this time?
Needs • For investment projects: Is additional capacity truly
assessment needed, or could the demand gap be met by better
phase/ Demand performance on reducing losses or effecting repairs in the
determination existing system?
• Is the planned capacity or quantity or extent of the service
actually needed in the foreseeable future (in order to avoid
unneeded or oversized project investments)?
• What are the optimal location, capacity and design for the
investment?
............... 32
• In many cases there are consultants hired for this stage and the
next one. The key at this stage is therefore:
- The transparency of the process by which they are
contracted; and
- The independence with which they operate (possible
conflict of interests).
• Enable public (civil society) participation at this stage of the
decision making process. One way could be through public
hearings but also through other means of open consultation
processes. This allows to:
- Check the need;
- Enable accountability; and
- Identify necessary/unnecessary elements of the goods,
services or investment to be acquired.
Things to Do:
............... 34
Most of what has been said about the previous phase applies
equally to this second phase of the process: The consultants need to be
scrupulously independent, and the public should have full access to the
process.
During the process of preparing the design and the bid documents,
advertising the process, possibly pre-qualification and the submission
of bids, red flags or indicators of potential manipulation could be the
following11:
11
For more information on these points please refer to the World Bank . 35 ..............
............... 36
37 ..............
For major civil works contracts, the government may apply pre-
qualification procedures so as to conduct the actual bidding process
among bidders already cleared as to their financial and technical
competence. In such cases, the integrity requirements should be applied
during the pre-qualification phase, so as to assure that all potential
............... 38 bidders have submitted to appropriate integrity clauses.
12
Transparency International: Stealing the Future – Corruption in the Classroom,
2005. For more detailed information consult http://www.transparency.org/global_
priorities/education/corruption_education.
13
For more details on this case, see Poder Ciudadano (2004). 39 ..............
............... 40
14
Ibid.
41 ..............
15
Ibid Inspired by
43 ..............
16
Material directly quoted from or inspired by World Bank. See above.
45 ..............
............... 46
5
The Final Accounting and Final Audit Phase
Final
It is most important that the final accounting of a project
accounting and
be carried out by staff who has not been involved in any of audit ( when
the previous phases, so as to avoid any collusion or cover-up applicable)
of previous wrongdoing during the final accounting phase.
Integrity
Integrity means that the procurement processes are honest and
in compliance with the respective laws, that the best available, most
suitable technical expertise is employed in a non-discriminatory
manner, that fair and open competition leads to a quality product at
a fair price (value for money), and that the product takes into account
............... 48 the legitimate aspirations and concerns of all the stakeholders.
17
Wiehen; Michael. Avoiding Corruption in Privatisation - A Practical Guide.
49 ..............
Accountability
Accountability means that governments, public (government-
owned or –controlled) institutions or corporations and individual
officials, on the one hand, and companies, company executives
and agents or other individuals acting on behalf of companies, on
the other hand, must be accountable for the correct and complete
execution of their tasks and duties and for the decisions and actions
being made in their area of responsibility. Procedures enabling full
accountability should be systematic and dependable.
18
For more detailed information on results and the methodology used, consult
http://www.transparency.org/global_priorities/public_contracting/projects_
public_contracting/pcms. 53 ..............
The standards focus on the public sector and cover the entire
project cycle including:
• Needs assessment;
• Design, preparation and budgeting activities prior to the
contracting process;
• The contracting process itself; and
• Contract implementation.
Regional Conventions
In Europe, the most important regional anti-corruption
conventions are the Council of Europe Criminal Law Convention
on Corruption20 and the Civil Law Convention on Corruption21 that
entered into force in 2002 and 2003 respectively. They cover broadly
the same ground as the OECD and UN Conventions. Neither has so
far been ratified by most major industrialised European countries.
There is also the EU-Anti-Corruption Law of 1998 and the EU-
Frame Agreement (2003/568/JI) dated July 22, 2003 of the Council
of the European Union concerning the fight against corruption in
the private sector.
19
Argentina, Brazil, Bulgaria, Chile, and Slovakia.
20
For a full text of the Convention see the following link: http://conventions.coe.
int/Treaty/EN/Treaties/Html/173.htm .
21
For a full text of the Convention see the following link: http://conventions.coe.
int/Treaty/en/Treaties/Html/174.htm .
22
For a full text of the Convention see the following link: http://www.oas.org/
juridico/english/Treaties/b-58.html . See also TI’s Civil Society advocacy guide
for conventions: http://www.transparency.org/global_priorities/international_
conventions/projects_conventions/americas
23
For full Convention text see following link: http://www.africa-union.org/root/AU/
Documents/Treaties/Text/Convention%20on%20Combating%20Corruption.pdf . 61 ..............
2.2.5. PREVENTION
24
For further information see: http://www1.oecd.org/daf/ASIAcom/ActionPlan.
htm#actionplan. 63 ..............
2.2.8. E-PROCUREMENT
Among the benefits that have been observed with these systems
are:
• Increased efficiency;
• Enhanced transparency;
• Pubic access (in Mexico universities, chambers of commerce,
business; associations and NGOs are under contract to observe
and monitor the processes);
• Better risk management;
• Higher levels of integrity and ethics;
• Significantly better access to government procurement for
Small and Medium Size Enterprises (SMEs);
• Better access for non-local (provincial) bidders;
• Corruption avoidance;
• Cost savings (average 20%) compared to traditional
procurement;
• In addition to federal government, other regional and
municipal buyers join the system on a voluntary basis; and
• In Mexico the World Bank allows COMPRANET to supersede
World Bank Procurement Guidelines.
67 ..............
The Guidelines:
• Apply to business operations worldwide; they cover
multinational enterprises in member countries irrespective of
where those enterprises pursue their activities;
• Were developed by involving representatives of corporations,
employees, and non-governmental organisations; and
• Are provided with an implementation mechanism (National
Contact Points in each country as well as the OECD investment
committee CIME).
26
See also on http://www.oecd.org/dataoecd/15/43/33914891.pdf .
27
This includes the 30 OECD member countries and nine other countries, known
as signatory countries: Argentina, Brazil, Chile, Estonia, Israel, Latvia, Lithuania,
Romania, and Slovenia. 69 ..............
Human Rights
Principle 1: Businesses should support and respect the protection of
internationally proclaimed human rights;
Principle 2: Make sure that they are not complicit in human rights
abuses;
Labour Standards
Principle 3: Businesses should uphold the freedom of association
and the effective recognition of the right to collective
bargaining;
Principle 4: The elimination of all forms of forced and compulsory
labour;
Principle 5: The effective abolition of child labour;
Principle 6: The elimination of discrimination in respect of
employment and occupation;
Environment
Principle 7: Businesses should support a precautionary approach to
environmental challenges;
Principle 8: Undertake initiatives to promote greater environmental
responsibility;
Principle 9: Encourage the development and diffusion of
environmentally friendly technologies; and
Anti-Corruption
Principle 10: Businesses should work against all forms of corruption,
including extortion and bribery.
27
See also the official Global Compact website: http://www.unglobalcompact.
org/ . 71 ..............
28
“Corrupt practices can occur at all stages of the procurement process: in the
marketing of engineering services, during the design; in preparing tender
documents (including specifications); in pre-qualifying bidders; in evaluating
tenders; in supervising the performance of those carrying out the construction;
issuing of payment certifications to contractors; and making decisions on
contractors’ claims.” FIDIC Policy Statement on Corruption 1996.
29
FIDIC Policy Statement 1996, Recommendation 5.
30
The FIDIC policy statement can be found at: http://www1.fidic.org/about/
statement16.asp
It contains links to the FIDIC “Business Integrity Management System (BIMS)” and
the FIDIC Code of Ethics.
31
http://www.iccwbo.org/policy/anticorruption/id870/index.html. 73 ..............
32
The Business Principles as well as the Guidance Document and a document
outlining the Six Step Implementation Process can be downloaded for free from
TI’s homepage at: http://www.transparency.org/global_priorities/private_sector/
business_principles . 75 ..............
Water Industry
The pervasiveness of corruption in the water sector spurred TI
and seven leading water organisations (International Water and
Sanitation Centre (IRC) of the Netherlands, IBON, an NGO located
in the Philippines, the Stockholm International Water Institute (SIWI), 77 ..............
the Swedish Water House (SWH), the Water and Sanitation Program-
Africa (WSP-Africa) of the World Bank, AquaFed (an International
Federation of Private Water Operators) and UNICEF to found the
Water Integrity Network (WIN) in early 2006.
Defence Industry
TI is also, through its National Chapter in the UK, leading a global
............... 78 project in the defence and security sector, working with the major
33
Please visit http://www.waterintegritynetwork.net/ for further information.
34
More information can be found on TI’s website: http://www.transparency.org/
news_room/in_focus/2006/defence_sector . 79 ..............
There are tools, some of them developed by TI, that are based on
a collaborative approach involving committed contracting agencies,
companies and civil society. Below is an outline description of some of
them35.
It is now widely recognised that Civil Society can have a crucial role
in contributing to the transparency and integrity of public procurement
processes. There are a number of roles Civil Society can play in bringing
transparency to procurement processes. Civil Society can play a key role
in monitoring procurement processes, in being a source of expertise and
an independent voice to raise issues and difficult questions, to manage
conflict and balance powers and bring together groups of people.
From the outset it has been expected that Civil Society in the
respective country would play a key role in overseeing and monitoring
the correct and full implementation of the IP. This monitoring function can
be carried out by a civil society organization (provided it has the required
capacity) or by a competent individual(s) selected by civil society.
The IP concept is suitable not just for construction, supply and other
procurement contracts, but equally for other contracting processes such
as:
• selection of (engineering, architectural or other) consultants,
• Selection of the buyer/recipient of state property as part of a
government’s state asset privatisation programme, or
• Selection of the beneficiary of a state permit, license, or
concession (such as for oil or gas exploration or production,
mining, fishing, logging or other extraction rights), or for
government-regulated services (such as telecommunications,
water supply or garbage collection services).
36
For a complete report, consult: http://www.transparenciacolombia.org.co. We
have selected here one of those cases and therefore this does not reflect the
whole of the experience. 85 ..............
............... 86
El Cajón
The use of the Integrity Pact encompassed the bidding process for
various engineering works on the 1,228 GWh hydroelectricity plant,
known as “El Cajón”. The project was billed as Mexico’s most important
infrastructure project of the decade. It was the first time the federal
government, via the Federal Electricity Commission, had accepted
independent monitoring by a civil society organisation of a bidding
process in the energy sector. The case had particularly high expectations,
given the size of the project and the sector’s reputation as being tainted
by high levels of corruption.
37
This meant both confidential information and information that legitimately
would concern other bidders.
38
Interviews performed by Juanita Olaya during 2001 for TI. 87 ..............
Short of applying the full Integrity Pact, principals may insert so-
called Integrity Clauses in their contracts with suppliers, contractors
and consultants. Such clauses normally stipulate that the supplier etc
(i) has not been convicted, and has not been formally investigated,
of a corruption crime and (ii) has not and will not resort to bribery or
any other form of corruption in the context of the respective contract.
Misinformation by the supplier under such clause would give the
principal the right to cancel the contract unconditionally. Some major
public institutions that enter into many purchase, construction and
consultancy contracts, elect to insert such a clause into their General
Purchasing Rules that are then incorporated into individual contracts by
reference. A setback of the Integrity Clause is that it normally contains no
direct sanction. Another limitation is that the Clause in the absence of an
independent monitoring system might be ineffective.
39
For additional information, please contact:Transparencia Mexicana. Mónica
Gabriela Ramírez. Dulce Olivia 73, Colonia Villa Coyoacán, México, DF, 04000.
México Phone/Fax: +52-55-5659 4714 E-mail: transparencia99@Prodigy.net.mx, or
see: http://www.transparenciamexicana.org.mx/pactosdeintegridad/#pactos . 89 ..............
The adjusted contract value was still lower than the other bids
made by the loosing companies in the original bidding process in
the year 2000. As a result, the Municipality of Morón had to spend
less on waste collection than any other municipality of Buenos Aires
province. The contract adjustment was performed transparently
without deviating from the legal mandate to perform open bidding,
and the process enabled the parties to protect public funds.40
It is now widely recognised that Civil Society can have a crucial role
in contributing to the transparency of public procurement processes,
through a number of roles, including by being a source of expertise and
an independent voice to raise issues or bring groups of people together.
40
For additional information, please contact: Poder Ciudadano, Pilar Arcidiacono.
Piedras 547 (C1070AAK), Ciudad de Buenos Aires, Argentina. Tel./Fax: +54-11-4331
4925. E-mail: pilar@poderciudadano.org, or see http://www.poderciudadano.org/. 91 ..............
Once the auction process was finalised, CLD issued a report describing
how the process was conducted and the lessons learned.This procedure
has been successfully implemented in Ecuador in twelve strategic
procurement processes to this date, in the areas of telecommunication,
electricity distribution, and hydro-electrical power generation.41
41
For additional information, please contact:Corporación Latinoamericana para el
Desarrollo (CLD). Andres Tobar, Juan Ramírez N35-10 y Germán Alemán, Quito-
Ecuador. Tel: (593-22) 468-212/227 E-mail: atobar@cld.org.ec; also see http://
www.cld.org.ec/ . 95 ..............
............... 96
42
Further information on the project might be sought by writing to the address
tbrasil@transparencia.org.br . 97 ..............
............... 98
Arbitration
Arbitration is the process toward settlement of a dispute by a person
or persons chosen to hear both sides to a dispute and come to a
recommendation/decision. Although less formal than a civil case in a court,
the setting and procedures in arbitration are similar to those used in court.
The parties to the arbitration usually appoint their own representatives,
and those two together appoint the third arbitrator. The parties to the
dispute also decide the other terms: Whether the recommendation of
the arbitrators is binding or not, which law and language to apply, the
process to be used and the handling of the costs. Arbitration in theory is
faster and less costly than formal court proceedings. But in international
cases, involving parties from different jurisdictions, costs and processing
times often escalate. Still, arbitration is most often used in international
commercial cases, reflecting the reluctance of parties to submit to a
national system other than their own. “Arbitration Tribunals”, which can
be selected by the parties, exist at national and international levels. The
best known is the Tribunal of the International Chamber of Commerce
(ICC) in Paris.
Concession
Concession is the legal instrument by which a public authority (usually the
government or a government department) confers to a private individual
or company the right to exploit certain resources within the territory of
the concession-giver. The concession contract defines the resources
to be exploited (forestry/logging, fishing, mineral or oil resources), the
manner in which this may take place, the concession payments due to
the concession-giver, the time of validity and any other terms. See also
Franchise, License, Permit.
43
For additional information, please contact: Proética. Consejo Nacional para la
Etica Pública. Manco Cápac 826, Miraflores. Lima 18, Peru. Tel: + 511- 446-8589,
Fax:+511-446-8581, http://www.proetica.org.pe. 99 ..............
Consultant
Consultants are individuals or companies who offer their advice and
expertise to “employers” such as governments, government departments,
public or private corporations. The expertise can be in the technical,
financial, economic or legal domain. Contracts with consultants are
either for long-term advisory or short-term ad-hoc assignments. Many
public authorities rely on consultants to carry out technical tasks that
are complex and are not required frequently enough to justify the
employment of permanent staff.
In the selection of consultants the employer should be careful to ascertain
that the consultant is truly independent and not in some form linked to a
supplier of goods or services who might be interested in tendering for a
contract being prepared by the consultant.
Contract
An agreement between two or more parties creating obligations that
are enforceable or otherwise recognisable at law, a binding contract. The
written instrument that sets forth such agreement.
Corruption
The misuse of entrusted power for private gain.
Debarment
Debarment is the act of precluding someone from having access to,
or doing something; it is an exclusion or a hindrance. Debarment in
procurement usually refers to the decision of an “employer” to block the
access of an individual or a company to the process of selecting a supplier,
contractor or consultant for a government contract. Debarred individuals
and companies will normally be entered in a Debarment Register (on
national, regional or municipal basis), which should be publicly accessible
and should be binding on public procurement decisions within the
respective jurisdiction. Debarment will normally be determined and
declared to sanction an individual or company for specific violations
of legal, ethical or contractual obligations. Debarment will normally
be declared for a period of time reflecting the severity of the violation.
The debarment process should follow due process of law requirements,
............... 100 including clear rules about removal of a debarred individual or company
e-Procurement
Electronic procurement through the Internet. The Internet can cover
any or all of the provision of information, the actual contracting and the
payment
Franchise
A legal instrument under which an individual or company is authorized
to operate an enterprise under the name and with the public image of
another company (the franchise giver).
Integrity Pact
The Integrity Pact (IP) is a tool developed during the 1990s by TI to help
governments, businesses and civil society fight corruption in the field
of public contracting. The IP is an agreement between a government or
government department and all bidders for a (public sector) contract. It
contains mutual rights and obligations to the effect that neither side will
pay, offer, demand or accept bribes, or collude with competitors to obtain
the contract, or while carrying it out. The IP also requires that bidders
disclose all commissions and similar expenses paid by them to anybody
in connection with the contract; and bidders agree that sanctions will
apply when violations occur. The sanctions normally would include loss
or denial of contract, forfeiture of the bid or performance bond, liability
for damages (possibly liquidated damages) vis-à-vis the employer
and the competitors, and debarment for future contracts against the
bidders, and criminal, civil or disciplinary action against employees of the
government.
License
A license is a legal instrument by which a public authority (a government
or public corporation) allows an individual or company to operate specific 101 ..............
Mediation
Mediation, as distinguished from arbitration, is a non-binding process
under which the parties to a dispute call in an independent third
person who will mediate the dispute in the effort to reach a voluntary
agreement between the two parties without the involvement of a court
or arbitration.
Monitoring
The act of observing or checking. In public procurement this refers to the
objective external follow up and observation of a procurement process
or a contract execution, preferably by a third independent expert party
(civil society).
Ombudsman
Originating in Scandinavia, the Ombudsman has been introduced in many
other countries, for a variety of functions, mostly complaints by the public
about the quality of public services. In the area of corruption avoidance
and fighting, the Ombudsman is a person (or office) appointed by a public
authority or a private company to be available to receive confidential or
otherwise privileged information regarding potential corruption activities
within the appointing authority or company. When the Ombudsman is
an attorney, the confidentiality of the information provided to him, and
especially of the informant, is assured. The Ombudsman will convey the
relevant facts to the afflicted authority or company so as to facilitate
action to stop the violation, but will reveal the identity of the informant
only with the latter’s consent.
Permit
A permit is a legal instrument by which a public authority (a government
or public corporation) authorizes an individual or company to undertake
............... 102 specific activities such as constructing or expanding a building, or the
Preferences
Many authorities (in industrial as in developing countries) offer
preferences to selected groups of tenderers: In developing countries,
domestic tenderers often are offered a specific (small) quantified
preference over tenderers from abroad; for a limited period of time this
may make economic sense. In industrial countries, especially municipality
procurement, regional tenderers are given a preference to support
“local industry”; this interferes with the objective of obtaining the most
economic price.
Privatisation
The transfer (normally through sale) of ownership of property, or of the
power and control over property, from the public to the private sector
in a manner that the recipient obtains substantial, independent control
(which normally, but not necessarily, means majority of ownership). Many
countries in the 1980’s undertook this kind of reduction of the public
sector to achieve a variety of aims: to improve industry performance by
freeing it from bureaucratic state control, to augment public revenue,
to widen share ownership, and to increase competition to benefit
consumers. Privatisation has also taken the form of the sale of state and
local authority housing.
Procurement
“Procurement” refers to the acquisition of consumption or investment
goods or services, from pencils, bed sheets and aspirin for hospitals,
gasoline for government cars, the acquisition of car and truck fleets,
equipment for schools and hospitals, machinery for force account use by
government departments, other light or heavy equipment or real estate,
to construction, advisory and other services (from the construction of a
hydroelectric power station or expressway to the hiring of consultants for
engineering, financial, legal or other advisory functions).
for goods, works and other services and thus covers not just the narrow
selection of a contract partner by a purchasing body and the actual
entering of a contract between the two, but the entire process from
needs assessment through preparation, award and implementation/
administration of contracts for goods, works and other services such as
consultant services of a technical, financial, legal or other nature.
Public Expenditure
The expenditure of public funds by central, regional or local governmental
authorities for goods or services for the public benefit.
Regulatory Processes
The government activity of regulating private operators in public service
fields such as waste disposal, electric power supply, water supply, bus
operations etc.
Sanction
The penalty for non-compliance (with obligations) specified in a law,
decree or contract.
Sub-Contracting
When an individual or company (the contractor) contracts with another
............... 104 individual or company (the sub-contractor) for the latter to execute totally
Tender/Bid
Tender or bid is the offer submitted by an individual or company in
a procurement process conducted by a public authority or private
employer/purchaser/investor.
Tendering/Bidding Process
The process by which a public authority or a public or private
company selects a supplier, contractor or consultant, normally by way
of competition. There are various levels of potential restriction in the
process: “Open public tendering” means that anybody can submit a
tender. “Competitive international bidding (CIB)” is the most unrestricted
form. In some jurisdictions the exclusion of non-national tenderers is
practiced. Competition may be restricted to domestic bidders, or to pre-
qualified or even to arbitrarily selected bidders. The most restricted form
of tendering is the sole-source contracting (without any competition).
Any process short of open public tendering risks manipulation and less
economic pricing.
105 ..............
REFERENCES
............... 106
PART II
How to Reduce Corruption in
Public Procurement:
44
TI Indonesia and other civil society organisations were involved in selecting the
KPK chairpersons in 2003, and former executive board chair of TI Indonesia, Erry
Riyana Hardjapamekas now serves as KPK Vice-Chair.
45
See Law No. 30 of 2002. 109 ..............
............... 110
• Price mark-ups
Prices are supposed to be the vendor’s/bidder’s estimate, based
on the details of the technical project. Prices can be manipulated,
however, by both the vendor and public official to increase the
bidder’s profits;
46
Such as Law No. 18 of 1999, Presidential Decree No. 18 of 2000, and Presidential
Decree No. 80 of 2003.
47
Bribe Payers Index, TI, 2002, see: http://www.transparency.org/policy_research/
surveys_indices/bpi/complete_report_bpi_2002#size.
48
Indicators for these and other potential manipulations during the public
procurement process are described in detail in Section 2.1. 111 ..............
............... 112
49
According to the former Solok regent Gamawan Fauzi, now governor of West
Sumatra. See References at end of this Chapter.
50
Before KPK was established.
51
Source: Agus Rahardjo, Chief of Procurement Development Policy, National
Planning and Development Agency, Government of Indonesia presentation
at Seminar, “Integrity Pact Implementation to Prevent Corruption on Public
Procurement”, TI Indonesia and GTZ, Support for Good Governance, August 25,
2005, Mahakam Hotel, Jakarta. 113 ..............
52
Budihardjo, Executive Director of Indonesian Procurement Watch, Gap Analysis
between Presidential Decree No. 80 of 2003 and Government Decree No. 18 of
1999 See References at end of this Chapter.
53
It fails to explain Integrity Pacts, however, and gives no detail on how the
government could implement them. TI Indonesia played a key role in pushing for
Presidential Decree No. 80/2003 to include the Integrity Pact requirement.
54
Ibid. 115 ..............
............... 116
117 ..............
Integrity Pact
............... 118
Executive sector
Public Works Bureau - The Public Works Bureau spends most of the allocated local budget on procurement due to its
duties related to infrastructure-related projects.
- Some local government officials perceive existent regulations to be legal references for public
procurement. This seems due to lack of technical knowledge of public procurement processes.
- Most local government officials fail to perceive an Integrity Pact as legally binding. They believe
that by merely signing the “letter” they have implemented the Integrity Pact. They fail to realise
that the implementation of an IP applies throughout all phases of a public procurement process,
including putting in place a strong monitoring mechanism.
- The Solok Regency and other institutions within the District have gained good understanding of
IP concept as means to prevent corruption. However, they still require support to increase their
capacity and to ensure the sustainability of initial efforts.
Sekda/Dalbang (Secretary - Most of the local budget is spent on stationery and logistics.
of the Local Government - Most of the staff is aware and understands that public procurement must comply with Presidential
Office) Decree No.80/ 2003.
- Some local secretariats have complied with the public procurement mechanism.
Bupati/Wakil Bupati - The four regents assessed understand procurement processes must comply with Presidential
(Local/Vice Regent) Decree No.80/2003 and the laws on construction.
- Local governments often have a policy to protect local vendors due to their limited capability to
compete with large companies from large cities: Solok Regency Government has issued Local
Regulation No. 4 of 2002 on the contribution of vendors from other cities to protect local vendors;
Wonosobo Regency Government has an “unwritten” policy to protect local vendors against bigger
competitors from other large cities.
- The Solok Regency has issued a local regulation on IP implementation, Regency Decree No. 456/
BUP- 2003, and a special regulation concerning complaint mechanisms, Regency Decree No 245/
NUP- 2004. One of the main benefits of these regulations is they enable the public to provide
more feedback to the local government.
Legislative sector
- Most legislators who cooperated with TI Indonesia in this assessment were actively involved in the preparation of budgets and in the
monitoring of budget implementation. However, they did not have sufficient knowledge of public procurement.
- Most local legislatures proposed to integrate “lowest price” clauses into public procurement regulations: Under such clauses selection
committees are not allowed to accept bidders whose prices are lower than 10% compared to the owner’s estimate. To do otherwise,
they perceive, would affect the quality of the project.
- The majority of the local legislators suggested the need for “capacity building”, given the educational background of the project
inspectors.
- The need for regular consultations amongst stakeholders was also suggested. Such communication would create better
understanding of a project’s goals and aims.
Police and local judiciary sector
- Legal institutions are aware that bad practices enable corruption, but these institutions often seem to have limited knowledge of
public procurement and its procedures.
- Wonosobo Police Districts have established a new anti-corruption division this year. It is hoped that, it will facilitate learning more
about public procurement issues. Although they have discovered and collected sufficient data and evidence, they still need to
increase their knowledge of specific public procurement regulations.
119 ..............
Media
- Media professionals were very aware that procurement is vulnerable to corruption. They often carry out investigations and uncover
irregularities in public procurement processes. As a result, the general public in Solok Regency has come to witness the terrible
impact of corruption in public procurement, as in the cases of the collapse of Kapalo Banda Bridge, the water supply leak, and the
stagnation of the Lolo Nagari Project.
- The Solok Regency has provided an example of good practice in relation to media reporting. The Regent has been very responsive.
He has joined the local press in placing pressure on those allegedly involved in irregularities in public procurement.
Civil Society
- Some non-governmental organisations (NGOs) do not appreciate the complexity of public procurement processes. In Solok,
however, civil society is very concerned with the problem. The TI Indonesia Solok Field Office has organised a series of trainings on
public procurement monitoring for figures in many nagaris (villages).
- Civil society actors in Solok have also established an NGO, called Aliansi Pendorong Pakta Integritas or APPI (the Integrity Pact
Independent Monitoring Alliance). APPI, in a joint effort with some individual community figures, monitored nine projects in Solok
Regency, and received a good and productive response on their findings from the Solok Regency.
- NGOs in Solok, especially APPI, understand the need to monitor the procurement process, but due to their inadequate knowledge of
construction engineering, feel they cannot monitor optimally.
2.3.1. BACKGROUND
For all public institutions in the district and all its public officials,
the signing of the IP in November 2003 has bound them to their
commitments as stipulated in the IP document for all future
procurement processes. It is hoped this will serve as encouragement
for other public officials to sign IPs. The bidders in individual tenders
sign the IP as part of the tender process (as described in Table 2
below).
Table 3: Main features of the Integrity Pact as used in the District of Solok
IP Regulations IP Implementation
Commitment from political leaders and public officials not to Stated through joint commitment by signing an IP.
accept any kind of bribe, gift, etc.
Commitment from tender participants/contractors not to offer - Arranged in Presidential Decree No. 80/2003.
any kind of bribe, gift, etc. - Confirmed by Regent Decree No. 456/BUP/2003.
- Implementation of Integrity Pact since 1 January 2004.
- Regent decree No. 100/667/TP/2004: All vendors must add to
their bidding documents a signed and sealed copy of the IP
following the bidding process.
Commitment from the executive of the individual public For the public institution: joint commitment by signing IP on 10th
institution as well as the contractor towards community November 2003. For the contractor: When the awarding decision
participation. is announced, the winning bidder is required to sign the IP again.
Commitment from the executive of the individual public APPI, social community group along with the community of Solok
institution towards an independent supervision. gain independent supervisory status.
Commitment for transparency and accountability. Stipulated in Local Regulation for Transparency and Participation,
No 5 / 2004—binds the public institutions that have signed the IP.
The IP contains an agreement to minimise secrecy. - Detailed information about the construction process and in the
project is classified until the winner of the tender is determined.
- The amount of owner-estimated price is not a secret.
The IP contains an agreement on sanctions, incentive system and - Sanction for government staff is based on PP 30.
disincentive - Sanctions for contractors include blacklisting.
............... 122
APPI holds public hearings with the local government and the
legislature to suggest recommendations for transparent public
procurement as well as community-based participatory monitoring.
APPI has now successfully monitored various projects within the Solok
regency, for example, by contributing to the identification of some
problematic projects. Last year, APPI was in charge of monitoring nine
of the largest procurement projects in the Solok district. Three out of
nine projects were pointed out and finally declared as ‘troubled’ (the
Convention Hall Project in Alahan Panjang, the Pipe Water Channel
project in Muaro Paneh and the Kapalo Banda Bridge). These cases
have now been investigated by legal authorities and are waiting to
be dealt with by the local court.
............... 124
Process of finance clearance for the The Local Finances Department gives The check clearance process for the
project funding a cheque to the company’s finance project funding takes one day.
department, and the contractor’s - Cheque clearance is done through a
treasurer cashes the cheque himself at bank transaction.
the appointed bank.
“Rolling” Bidding Had become a common practice, not This practice may still exist, but it
only in Solok Regency, but also in other happens much less. The Presidential
places Decree No. 80/2003 minimises the
opportunity for this.
Letter of communication with Letter of communication related to the Letter of communication with the
administration tender is slow, and administration is administration related to the tender
unorganised. much better.
Demand for “extra money” (e.g. Frequent demands for unrelated The practice is still happening although
facilitation payments) payments from irresponsible officials, it seems now more hidden
the police etc. This demand can be more easily
rejected by the contractors due to the
Integrity Pact
Report of project execution The report is drafted by the contractor The report is drafted by the contractor.
but often gets rejected. The supervisor matches the field
If the report is submitted with a bribe it conditions with the content of the
is more likely to be accepted report. If it matches, the supervisor
will sign it
Supervision Project funds obtainable although the Funds are not easy to get if the project
work had not been completed. is not running. The corruption practice
is decreasing, but still exist
Company conditions and business - Small companies in the regency can - Small companies find it difficult to
competition operate and win a project through win a contract, due to their inability to
bribery. compete with larger companies.57
- There are many small companies.
............... 126
56
See detailed findings presented above.
57
Former managers of small companies increasingly become executives of larger
companies leading a branch of that company in the regency. 127 ..............
• Public officials beyond the level of the Regency have not yet taken
up the Integrity Pact approach. Integrity Pacts, as a tool to reduce 129 ..............
3.2. RECOMMENDATIONS
............... 130
ANNEX1
PUBLIC PROCUREMENT SITUATION &
INTEGRITY PACT IMPLEMENTATION IN INDONESIA
131 ..............
1. GOVERNMENT COMMITMENT
2. PRIVATE COMMITMENT
3. GOVT AND PRIVATE COMMITMENT
OF COMMUNITY PARTICIPATION
THE BASIC ELEMENTS
IN THE IMPLEMENTATION OF 4. INDEPENDENT MONITORING
INTEGRITY PACT INSTITUTION BY CIVIL SOCIETY
5. COMPLAINT AND MONITORING
MECHANISM
6. CONFLICT RESOLUTION MECHANISM
7. WITNESS PROTECTION
MECHANISM
9. AGREEMENT OF SECRET
LIMITATION 8. SANCTION IMPLEMENTATION,
DISINCENTIVE & INCENTIVE
133 ..............
1 Commitment from leaders, public officials Stated through Joint commitment by signing IP in
for rejecting any kind of bribery, gift etc. 10 Nov 2003 by all staff level
2 Commitment from Auction participants/ • Has been arranged in Presidential Decree No.
contractor for not giving/offering any kind 80/2003
of bribery, gift, etc • Confirmed by Regent Decree No. 456/BUP
– 2003, about the implementation of Integrity
Pact since 1 January 2004.
• Regent decree No. 100/667/TP – 2004:
all business agents must equipped their
documents with IP which had been signed on
a sealed letter to follow bidding process
4 Commitment from the executive toward an APPI, social community group along with the
independent supervision community of Solok becomes an independent
supervisor
............... 134
7 Agreement for sanction, incentive system • Sanction for government staff is based on PP
and disincentive 30
• Sanction for troubled enterprise, for example
by black listing
9 Agreement in the witness protection Head of Regency, as the highest Official in the
system local government becomes the person who is
responsible for witness protection system
1 The chain of bureaucracy in It took 13 times of signing The auction documents can
the settlement of auction process to settle the auction be settled by only 3 times of
documents document signing process
3 “Rolling” Bidding It has become a common This practice may still exist,
thing, not only in Solok but often quite small. The
Regency, but also in other Presidential Decree No.
place 80/2003 minimizes this
opportunity
135 ..............
5 Demand for “extra money” • there is always demand for • practice is still
(expense for tactic fund outside unexpected expense from happening although
formal cost) irresponsible official, the seems to be obscure
police etc • this demand is easily
• the demand for tactic fund rejected by the
happen several times contractors due to the
Integrity Pact
6 The report of project execution • the report is initially made The report is directly finished
by contractor, but it’s always by the contractor
rejected
• If the report is given by The supervisor only matches
giving bribery, would the the field condition, to what
supervisor accept the is written in the report. If it
report matches, the supervisor will
• finally the contractor sign it
decides to hand over
the entire report to the
supervisor
............... 136
9 The case of deceit in the project • the deceit in the project • The deceit is decreased
execution execution often happens and rarely found
• the bidding process is
spoiled with corruption
action
11 Monitoring the implementation The bidding process is running • The community is active
of Public Procurement System without supervision from in supervising bidding
the community, because the process and during the
community don’t understand project runs
about their rights in the project • There are quite a lot of
supervision problems in the project
which are reported
to the government,
Judicative, and published
through the media
137 ..............
ANNEX2
LESSONS LEARNED INTEGRITY PACT IMPLEMENTATION IN
SOLOK DISTRICT
INDEPENDENT MONITORING
NGOs INSTITUTION
• PC & PI Training
CAPACITY
• Workshop BUILDING PC MONITORING
• Nagari Meeting
NAGARI COMMUNITY-BASED
COMMUNITY MONITORING
139 ..............
Monitoring Process
TI - I Monitoring
Public Procurement
Case Study
Phase of Cases
MEDIA
RELATED
DEPARTEMENT
Independent EKSEKUTIVE
Monitoring
Institution
HEAD OF REGENCY
LEGISLATIVE
Independent
Monitoring
Institution
CONTRACTOR
RECOMENDATION
141 ..............
Project Information
Community Complaint
Dated from 23 October 2004: Via short message service, the member of
the community reported there has been a landslide from the pile of Kapalo
Banda Bridge.
............... 142
Wing concrete 2
Cases Follow-Up
by Independent Monitoring Institution
Cases Follow-Up
1. Contract was terminated without notification;
2. Contractor has been blacklisting as Local Government partner;
3. Personal Guarantee Custody by User;
4. Cases on the Civil Judiciary Process; and
5. Related department and contractor has investigate by District
Attorney. 143 ..............
EDITORIAL
INTEGRITY PACT
Translated from Media Indonesia Daily Newspaper
Heru Suyanto
145 ..............
............... 146
PART II
How to Reduce Corruption in
Public Procurement:
............... 148
58
Source: TI Malaysia’s Newsletter Vol. 7 No. 1, April 2006. 149 ..............
............... 150
IIM attempts to create space for citizens who want to learn about the
spread of corruption as well as give those interested in the promotion of
transparency and integrity in the country an opportunity to voice their
concerns. In pursuit of this end, the Institute has organised seminars and
workshops for citizens to get involved. Examples are the recent World
Ethics and Integrity Forum (April 2005) and the Forum on the Construction
Industry (September 2005).
151 ..............
............... 154
60
Abridged from the submission by the Malaysian International Chamber of
Commerce and Industry for the Ninth Malaysia Plan.
61
http://www.soxlaw.com .
62
http://www.epu.jpm.my/rm9/html/english.htm. 155 ..............
With such large sums of monies involved, there are opportunities and
temptations for corruption. The Malaysian government has been aware
of this and as early as 1957 introduced the Financial Procedure that laid
out the guidelines for the collection and payment of public funds as well
as procedures for purchase and disposal of public property.
There has been a clear trend towards better practices. For example,
in January 2004, Prime Minister Dato’ Seri Abdullah Ahmad Badawi
announced government contracts and procurement will be carried
out through open tenders to limit opportunities for corruption. Open
tendering will be the norm and direct negotiations limited to special
cases. The prime minister said efficient and transparent processes will
reduce uncertainty as well as limit opportunities for corruption.
According to the prime minister, the Red Book potentially will save
4 to 9 billion Malaysian Ringgit of the estimated 50 billion Malaysian
Ringgits in procurement of the GLCs. This would be a saving of 8-18%.
This drive for better delivery systems and better procurement systems
in the GLCs is not happening in a vacuum. It is part of the prime minister’s
push for more transparency and integrity in his overall campaign to make
Malaysia a first class or first world country with first class mentality.
63
Budget Strategy 2006, item 28: http://webevents.bernama.com/events/
budget2006/speech.php. 157 ..............
Almost all the local authorities derive their power from the Local
Government Act of 1976. The notable exceptions are Kuala Lumpur
City Hall, the Kota Kinabalu City Hall, Putrajaya and Pasir Gudang. Their
existence is under special enactments.
The Local Government Act only provides for municipal councils and
district councils, the former for localities that are more urban in nature.
City councils are municipal councils that have been given the status of
city by the king on the recommendation of the cabinet upon fulfilment
of specific criteria (although political considerations are also important).
The major responsibilities of the local authorities are provided under
the Local Government Act. They include: control of public places; control
of pollution of streams; control of the preparation and sale of food,
operations of markets, sanitation and nuisance; and burial places and
crematoria.
64
Copies of the study are available at TI Malaysia office.
65
Sutinah Sutan, 2006. Speech given at the National Workshop on Preventing
Corruption in Public Contracting. The full speech can be found in the Proceedings.
Please refer to TI Malaysia website, http://www.transparency.org.my.
159 ..............
............... 160
PRESIDENT
INTERNAL
AUDIT 24 COUNCILLORS
MUNICIPAL
SECRETARY
DIRECTOR
DIRECTOR
ADMINISTRATION
FINANCE
DIRECTOR DIRECTOR
ENGINEERING HEALTH
DIRECTOR URBAN
SERVICE
66
For further explanation on assessment rates, a property tax in Malaysia, see
below under Finance. 161 ..............
Almost all the presidents or mayors of the local authorities are senior
federal government officers. As such, the state governments need the
permission of the Public Services Department to second these officers
to these posts.
The other sources of income are plan processing fees, parking charges,
licensing fees, fines, and rental of properties. The federal government does
provide grants, but the amounts given out annually are a pittance. It also
provides grants in lieu of rates. But these are not really grants because the
federal government does not pay rates for its properties unlike everyone
else.
1. Procurement of supplies;
2. Procurement of works; and
3. Procurement of services.
165 ..............
1. Public Accountability;
2. Transparency;
3. Best Value for money;
4. Open competition; and
5. Fair dealing
1. Direct Purchase
Heads of departments in Local councils are allowed to source
procurement from anyone subject to the Bumiputra preference
policy for goods and services up to RM 20,000. In practice,
however, the need for, for example, office stationery is satisfied
67
These circulars can be found at http://www.treasury.gov.my/index.php.
68
An official definition widely used in Malaysia embracing ethnic Malays as well as
other indigenous ethnic groups such as the Orang Asli in Peninsular Malaysia and
the tribal peoples in Sabah and Sarawak. 167 ..............
2. Quotation
For any procurement between RM 20,000 to RM 200,000, the
department that needs to make the purchase must get quotations
from at least five suppliers. The decision to pick a particular
supplier is made by a Quotation Committee of the government
department or agency or local authority.
In the case of a local authority, the committee is made up of the
Secretary of the Council, Director of Finance and a senior officer
in the Secretariat. The head of the department that requests the
purchase prepares the documentation.
3. Tender
Procurements above RM 200,000 must be made through tenders.
The decision-making authority is the Tender Board which is made
up of the president or mayor, the city or municipal or district
council secretary, the district officer who is usually a councillor
and the State Financial Officer.
According to Auditor General Tan Sri Dato’ Setia Hj. Ambrin Buang70
............... 168 , many local councils have not complied with the Treasury procurement
69
http://www.treasury.gov.my/index.php?tpl_id=73&lang=eng .
70
Speech given at the 2006 National Workshop on Preventing Corruption in Public
Contracting. The full speech can be found in the Proceedings. Please refer to TI
Malaysia website: http://www.transparency.org.my . 169 ..............
However, not all local authorities are audited every year because
there are too many for the capacity of the existing staff of the Auditor-
General Office. Only selected local authorities are audited.
69
The Sun: May 20, 2004; June 14, 2004; June 15, 2004. 171 ..............
Transparency
The key word is transparency, or rather the lack of it. For instance, in
a tender process, why a bidder is successful and why its competitors fail
are not explained.
Access to Information
Another major obstacle to transparency is lack of information. Too
many things are classified as official secrets and Malaysia has a very
restrictive official secrets law. There have been calls for a “Freedom of
Information” law including an independent ombudsman78.
The result of the obstacles described above is that, for the individual
citizen, there is a huge question about how local authorities spend
their revenues. As a reaction to this, leaders of residents associations,
for example, in Petaling Jaya, are demanding that the municipal council
to make public the accounts, especially the expenditures of the past
few years. So far, the council is reluctant to be transparent. Ratepayers,
77
Nambiar, Shankaren (2005) Making Government Procurement Transparent on
http://www.mier.org.my/mierscan.
78
Cumaraswamy, 2005. 175 ..............
even those who are familiar with the workings of local authorities, are
in the dark about how their tax dollar is spent. Even the councillors are
in the dark about the procurement exercises. Although they debate and
approve the annual budgets, they have no idea how procurements are
made.
............... 176
Forms of Advocacy
Advocacy is often difficult. This becomes particularly apparent in anti-
corruption advocacy: It challenges government, industry, employees,
institutions, and communities. The following definitions80 of certain
concepts are helpful.
79
Source: Governance, Organisational Effectiveness and the Non Profit Sector, Asia
Pacific Philanthropy Sector, Manila, Philippines 2003.
80
Source: Towards and Effective Policy Advocacy Management (Philippines)
Author Unknown. 179 ..............
Purpose of Advocacy
Civil society organisations should determine the objectives/purposes
of their advocacy programmes before embarking on them. Objectives
can include the following (where possible examples are given from the
area of public procurement):
Characteristics of Advocacy
• Advocacy assumes that people have basic needs, rights, and
those rights are enforceable (e.g. right to representation, right to
information);
81
See http://www.usj.com.my 181 ..............
• Local
• National
• Regional
• International
• Multi-level
This can take the form of capacity building in advocacy (see below)
or in content issues. A good example of the latter is TI’s E.U.-Asia Urbs
project on Preventing Corruption in Public Contracting. It’s was to build
the capacity of government officials and civil society on issues related to
procurement principles, transparency, and accountability83 .
82
See conference report in Annex.
83
See reports of National Workshops on Preventing Corruption in Procurement
from Indonesia, Pakistan, and Malaysia. 183 ..............
............... 184
Research
Training
REFORM
Advocacy
Checklist
One method to gather data is to develop a questionnaire or checklist
by which the required information can be compiled and recorded. Below
is an example of such a checklist for public procurement practices which
was developed in Hong Kong and outlines some areas of potential
corruption procurement. In the checklist, a “no” answer indicates a
potential weakness requiring further investigation:
Policies
- Are there written policies and procedures governing
procurement?
- Have these guidelines been promulgated and clearly explained to
all staff?
- Are the procurement instructions regularly reviewed and
updated?
Requisition
- Is there an official requisition for purchases?
- Is there a defined approval process for a requisition?
- Does all staff concerned know the requisition process?
- Is a list of specimen signatures of the approving officers maintained
for checking of authenticity?
187 ..............
Approved Suppliers
- Is there a list of approved suppliers?
- Is there a prescribed system for the inclusion and/or deletion of
suppliers from the list?
- Is there a performance appraisal for the approved suppliers?
Quotations
- Are the circumstances for purchasing goods by quotation clearly
specified?
- Are there safeguards against order splitting?
- Are checks performed to confirm the authenticity of quotations or
reasons for non-quotation?
- Are random checks performed to ensure the prices obtained for
direct purchases are fair and reasonable?
- Are security measures in place to prevent mislaid quotations and
unauthorised release of information?
Tenders
- Is complete information given in the tender documents?
- Is the tender box double-locked with the keys held separately by
two staff members of appropriate level?
- Is the tender information kept confidential before a decision is
made?
- Are unsuccessful bidders notified of the tender result?
- Are conditions and procedures in place for the waiver of
competitive tender procedures?
Miscellaneous
- Is the organisation’s policy on conflict of interest and staff
acceptance of advantages made known to all suppliers?
- Is there clear segregation of duties to minimise the opportunities
for corrupt collusion?
- Are staff regularly transferred, both for career development and to
minimise the potential for syndicated corruption?
............... 188
Identification of Stakeholders
The best plans are formulated by those involved or affected by a
variety of different backgrounds.
Helpful questions:
Advocacy Strategies:
Ask yourself: Can we win? Or can our organisation afford to lose? For
long-term goals, build a sense of community and community power
and team spirit, expand the leadership base, deepen the leadership’s
experience, and broaden the organisation’s membership and contact
base.
191 ..............
• Document reviews;
• Carry out surveys;
• Hold discussions;
• Make observations;
• Listen to community members;
• Do brainstorming;
• Hold informal conversations; and
• Do scenario mappings.
In order for your monitoring and evaluation results to feed into your
future actions:
• Information
Information is a critical component of capacity building on
complex issues such as procurement. Well-produced, clear, user-
friendly tools such as handbooks, manuals on monitoring are
valuable tools. Integrity Pacts can be used to build expertise in
good governance. Websites are an invaluable resource for capacity
building.
• It is critical to have the capacity to manage information with the
explosion of information. Information must be timely.
2. Training / Education
• Training and education are the most common means for building
capacity.
• The curriculum for workshops on advocacy for reforms in
procurement issues should be customised to meet the needs of
target groups.
• A training plan / strategy is indispensable. The CBT workshops
held in Indonesia, Pakistan, and Malaysia provide vital insights for
building effective training programmes84. )
............... 194
84
See Reports on Workshops on the following websites: TI Malaysia ( http://www.
transparency.org.my ), TI Pakistan ( http://www.transparency.org.pk/ ), and TI
Indonesia ( http://www.ti.or.id/ ). 195 ..............
Introduction
Part 1
involved the Opening Ceremony by the Deputy Minister of Housing
and Local Government, Y.B. Dato’ Hjh. Azizah bt. Datuk S.P. Hj. Mohd. Dun
followed by a Panel Discussion of International Experiences in Preventing
Corruption in Public Procurement.
Part 2
attended by 140 participants including representations of local
government agencies, the Auditor General’s office, the Anti-Corruption
Agency (ACA), civil society organisations, the media, and members of
Transparency International Malaysia.
Dato’ Hjh. Azizah highlighted the key Malaysian Acts and Laws as
well as the procedures and the guidelines that govern procurement
processes. These guidelines and laws are in place to curb corruption in
procurement.
Four international experts: Mr. Kim Geo Sung from TI South Korea; Mr.
Donal O’Leary TI Berlin; Mr. Syed Adil Gilani; TI Pakistan; and Mr. Adhi Ardian
Kustiiadi, TI Indonesia, highlighted issues relating to Public Procurement
............... 196 and the use of Integrity Pacts to prevent corruption. Ms Lisa Prevenslik-
The Malaysian speakers included, Y. Bhg. Tan Sri Dato’ Setia Haji
Ambrin bin Buang, Auditor-General Malaysia, Cik Hajah Sutina binti Sutan,
Director of Planning and Research of Anti Corruption Agency, En Che
Hashmuddin Bin Mohammad, Deputy Secretary Procurement Division,
Ministry of Finance.
Olaya, Juanita, et al.: Assessment Mission Notes, E.U. Asia Urbs Project;
Transparency International; 2005.
Tunku Abdul Aziz: Local Government and the Fight Against Corruption;
undated.
............... 200
PART II
How to Reduce Corruption in
Public Procurement:
1.1. INTRODUCTION
85
TI has developed and promoted the concept of the National Integrity System
(NIS) as part of its holistic approach to countering corruption. While there is
no blueprint for an effective system to prevent corruption, there is a growing
international consensus as to the important features of anti-corruption systems
that work best. 201 ..............
The NACS has three phases: The review and assessment phase,
the development of an overarching strategic framework, and the
implementation plan for all pillars.
• Sets out the results of the overall review and assessment, including
the nature, extent and impact of corruption (Chapter 2 of the
NACS document);
• Outlines the genesis of corruption, and of anti-corruption initiatives,
setting out many of the key underlying causes of corruption
(Chapter 3 of the NACS document);
• Examines systemic weaknesses within each pillar of the national
............... 202 integrity system, and how they sustain corruption (Chapter 4 of the
207 ..............
............... 208
88
The MoU was signed for the phase of award of consultant and construction
contracts. After a change in the management of KWSB, however, the new
management did not continue the MoU which had expired. 209 ..............
Conclusion
The case of the K-III project shows the potential monetary benefits
of transparency in government procurement and, more specifically, the
success that can be achieved by the application of the Integrity Pact.
a) Model
The idea of these MoUs is for TI Pakistan to support individual public
agencies (e.g. National Bank of Pakistan, City District Governments
of Karachi, Central Board of Revenue) to implement Pakistan’s Public
Procurement Rules 2004, particularly in as much as they require the
application of Integrity Pacts in public contracting processes.
90
A detailed report, including these calculations is available on TI Pakistan website:
http://www.transparency.org.pk/documents/kw&sb.pdf 213 ..............
b) Application
TI Pakistan has signed MoUs with a wide range of public agencies
and has prepared procurement manuals for eight of them (see Annex
2). One noteworthy example of how support provided by TI Pakistan
helps generate market competition is the case of Pakistan Steel, a state-
owned company. In 2004 TI Pakistan signed a MoU with Pakistan Steel
after preparing the procurement manual, vetting all tender documents
for a period of three months, which was later extended. TI Pakistan has
vetted and amended over 500 of their tender documents. Pakistan Steel
also referred special procurement cases to TI Pakistan for advice on the
application of national legislation, the Public Procurement Rules 2004.
In one case, Pakistan Steel needed, for the first time, metallurgical
coke to enhance production capacity. Since metallurgical coke is an item
rarely used, a market inquiry by Pakistan Steel in June 2005 resulted in the
identification of only one supplier who was quoting US$ 400 per ton. The
issue was referred to TI Pakistan to be handled in accordance with the
Public Procurement Rules 2004. TI Pakistan supported Pakistan Steel by
preparing a tender notice and tender documents for them based on the
procurement manual. Pakistan Steel was then advised to:
TI Pakistan found that this active response to the bid was related
to the tendering process which included signing of an Integrity Pact.
The process assured suppliers that the awarding of the contract would
be on the basis of merit and they could also, for example, submit their
objections to the bid evaluation report prior to the award of contract. This
encouraged numerous bidders to participate in the process.
Later that year, a second tender was floated for 70,000 tons, and 15
bids were received. A contract was awarded to the lowest responsive
bidder, M/s Hong Fortune Resources (Energy) China Co. Ltd., at US$ 145
per ton (for a total of US $ 10,150,000). As a result, the total cost for the
procurement amounted to approximately US$ 16 million as compared to
the cost of US$ 42 million that was initially estimated by Pakistan Steel.
The award saved Pakistan Steel 60% of the initial estimated cost and a net
sum of US$ 25.7 million. or Rs. 154 million. Pakistan Steel is now procuring
a further 250,000 tons of metallurgical coke using the same procedure.
c) Conclusion
In the experience of TI Pakistan, the application of an Integrity Pact
allows public procurement to be based on standard biding documents
which satisfy international standards. This, in turn, generates healthy
market competition and allows the contract to be awarded to the most
experienced, competent and lowest responsive evaluated bidder in the
shortest amount of time.
............... 216
91
Further details on all these activities can be found on TI Pakistan’s website: http://
www.transparency.org.pk. 217 ..............
The media gave good coverage to the CBT Workshop, which raised
public awareness of the importance of transparent public procurement
and the role of TI Pakistan in the implementation of the new procurement
law. Since the CBT workshop, three MoU’s on the application of the
Integrity Pact have been signed: with National Bank of Pakistan, Port
Qasim and the Trading Corporation of Pakistan.
219 ..............
ANNEX 1
That PIA along with TI-Pakistan will work jointly for the implementation
of the PEC & World Bank SBDs which is a recommendation of the NACS,
and those recommendations in the NACS involving Transparency in
procurement, and Public Procurement Rules 2004 .It is also agreed that
the PIA will establish an accountability in all its dealings and try to provide
all the necessary Checks and Balances in its effort towards a Transparent
Procurement System.
Tariq Kirmani
Chairman
Pakistan International Airlines (PIA)
Saad Rashid
Project Advisor
Transparency International Pakistan
223 ..............
ANNEX 2
ANNEX 3
Activity:
Capacity Building and Training on Procurement: Train the Trainers
Workshop, September 19-21, 2005, Karachi, Pakistan
Project:
Preventing Corruption in Public Contracting: Capacity Building and
Networking for Civil Society and Local Governments
Participation
The workshop met its goal of attracting about 20 participants. About
50% of the participants represented State owned enterprises while
the remaining 50% was split between national and local government
............... 224 representatives. TI Pakistan and some journalists also participated. The
Gender Balance
There was a significant gender imbalance with only two participants
being women. However, the age distribution of participants was good
with the majority ranging between 30 and 60.
Workshop Content
Participants felt the Workshop had adequately covered issues, such
as how corruption in public contracting operates and can be prevented.
They had the opportunity to see how international and regional
norms, guidelines, state obligations, and legal case studies can work to
prevent and address corruption. They also had the chance to review
the characteristics of corruption in public contracting and the risks of
corruption in Pakistan. Overall, participants assessed that “current and
future needs for capacity building and training on reforming public
procurement practices” were covered best.
225 ..............
............... 226
11 Integrity Pact
227 ..............
............... 228
18 Re-bidding.-
(1) If the PROCURING AGENCY has rejected
all tenders and reinvaded Tenders. Then;
(2) PROCURING AGENCY before invitation
for re-bidding shall assess the reasons for
rejection and may revise specifications,
evaluation criteria or any other condition
for bidders as it may deem necessary.
229 ..............
............... 230