By the Charter Institute of Procurement & Supply (2012), bid security is an amount of money that may be calculated as a percentage of the budget estimate of a procurement requirement or a percentage of a bidder’s bid price. It is used by the client as protection against bidders withdrawing their bids prior to the end of their bid validity period, or for refusing to sign the contract. The bid security is intended to deter bidders from withdrawing their bids because they would otherwise forfeit the bid security amount to the client. It gives the client some assurance that the selected bidder will sign the contract or otherwise forfeit their bid security. Whereas, The Liberian Public Procurement and Concession revised act of September 16, 2010 defined “bid security” as security provided by a bidder to secure the obligation of the bidder participating in a procurement or Concession bidding process, including any obligation to sign the procurement or Concession contract in accordance with the requirements of the bidding documents.
From the two definitions above, it is established that bid security is an additional requirement which qualifies a supplier/contractor to participate in procurement of certain value; which without, you are not allow to partake in the procurement process where it is a requirement. This bid security is mostly requested for when bidding in an open competitive bidding process and is usually acceptable through unconditional bank guarantee, irrevocable letter of credit, certified check, or bond. Rarely, some procuring entities accept cash payment (deposit) for bid security.
Large and financially potent firms which constitute a very small percentage of Enterprise in every economy will continue to dominate Small and Medium-size Enterprises (SMEs) in public tenders through the demand of “bid security” as a criterion to participate in a tender of certain monetary value. They have the financial potency; can easily secure a bid security from banks or other financial institutions. On the other hand, indigenous SMEs with the same capacity to perform a procurement contract struggle to secure bid security from bank/financial institutions. This discourages indigenous SMEs from competing in public tender.
According to Betty Kathhure Nkonge (2013), SMEs have the potential to grow into large companies that support the Growth Domestic Product (GDP) growth and check unemployment if they are encouraged by the government policy or public procurement authority. SMEs are important to developing economies for their contribution to GDP and generating employment (ICTSD, 2016). Unfortunately bid security does not motivate SMEs participation in public tender. Although bid security is estimated at not more than two percent of the bidder’s bid value or the allocated procurement budget. Cumulatively, the cost is huge to SMEs. Bid security is established to prevent irresponsible bidders’ participation in tender or protect against the withdrawal of bid ahead of the bid validity period or refusal to sign a procurement contract after the bid has been won.
As unveiled by Frimpong (2015), in developing economies there is a general perception in the financial sector that lending or provision of capital to SMEs is a risky business. This means, obtaining bid security can be very challenging for indigenous SMEs due to the perception hold by financial institutions against SMEs. In the face of these challenges encountered, the bid security is returned or released to the unsuccessful bidders upon conclusion of the procurement contract with the successful bidder. Like there have been many developments in the field of procurement and supply chain management, the request of bid security from especially indigenous SMEs should be reassessed if we are to encourage competition that drives the growth of indigenous SMEs.
Countries like the United States of America, Brazil and Bangladesh have used Preferential Procurement in order to improve their domestic industries (Ding and Chee-Wah, 2006: iv). 57% of the suppliers to public procurement in Brazil are SMEs, up to 98% in Ecuador (in 2014, 51% was awarded to SMEs in Ecuador; in Brazil, also in 2014, 27% was awarded to micro and small enterprises), thanks in part to set-asides policies (OAS, 2015). In China, up to 76.2% of the government procurement contracts are granted to SMEs (Mingming, 2016).
In Africa, South Africa and Ghana are experiencing minimum progress through the use of preferential procurement in their construction industry according to (MM Saad, 2014) and (C Amoah, 2017) respectively. In Rwanda, according to The New Times October, 26, 2018 edition, preferential procurement has reduced the trade deficit by about 36 per cent and increase value of total exports by about 69 per cent, from about $558 million to $943 million. As such, the government of Liberia as the single largest seller and buyer must conduct economy activities and set procurement policy in ways that promote economy expansion and job creation. It is these enterprises that facilitate government procurement activities through taxes, duties, fines, fees etc.; therefore, creating impasses would also mean reducing government revenue envelope. Majority SMEs cannot equally compete with large firms in public tender if regulators of procurement place excessive financial burden on them.
Bid security have had some significant impact to the field of procurement/supply chain management, helping to streamline who partake in a procurement process when the monetary value is high. Procuring entities have used bid security to ensure that a bidder/contract is serious for business and will sign a procurement contract after he wins the bid. However, through the request for bid security, bidders are deterred from bidding if they consider the bid security amount too high. This reduced competition. Also, the cost of the bid security in most cases is added by the bidder into their bid price to cover the expense incurred. Increase acquisition cost. Lastly, some qualified bidders cannot afford the bid security. This may result in loss of quality.
As I argue above, an effective and supportive public procurement system/requirement has a positive impact on the economy of every nation. But where the system discourages majority players, the negative consequences will be high. The most important are endangering the existence and development of SMEs, creating unemployment due to insolvency of SMEs and deepening social inequalities. Procurement regulators have to analyze how many dollars (aggregate) firms spent to secure bid security for tender they do not win and the financial implication such loses have on businesses.
Haven researched several academic justifications and debates about the subject matter and with the weight of evidence declared by scholars in the field, I believe that a genuine bidder(s) can be established without the request for bid security, creating a competitive procurement process. This will encourage SMEs, most of which are owned by indigenous Liberians to participate in public procurement, possibly win procurement contract and help grow the economy. This would allow suppliers/bidders to keep the cost of goods and works at their normal cost when competition is high. We can create measures that eliminate “irresponsible” bidders’ participation, at the same time prevents withdrawal of bid or refusal to sign procurement contract. The article have viewed bid security as an avoidable expenditure to businesses; in reverse it is an added cost to procuring entities and also deterrence to indigenous SMEs from competing in public tender which has a negative effect on economic growth.
To this end and to motivate the participation of indigenous SMEs in public tender and enhance their chances of winning bigger procurement contract, I recommend the following:
- That indigenous Liberian small and medium –size business (SMEs) be exempted from submitting bid security as an encouragement to compete in public tender.
- That procuring entity request financial Statement from indigenous SMEs as a replacement for bid security. This would allow procuring entity to know the financial position of their supplier. It would show the supplier asset, liability and the position of profit and loss. This would establish whether the supplier is responsible to manage a procurement contract.
- That participating indigenous SMEs are made to sign a non-withdrawal form; bidder withdrawing its bid ahead of the bid validity period or refusal to sign procurement contract shall be blacklisted from participation in public tender for a period of time.
- That minimum amount of fine is imposed on indigenous SMEs only when it refuses to sign a procurement contract in keeping with what is contained in the bid document or withdrawal of bid ahead of the bid validity period.
- That the Liberia Business Association (LBA) coordinates and empowers indigenous SMEs to jointly participate in tender of certain monetary value. Forming a joint-venture or corporative would strengthen the capacity of indigenous SMEs in public tender.
- That procurement of certain monetary values are set aside solely for indigenous SMEs to compete among themselves.
- Or that bigger value procurement contracts is unbundled to provide opportunity to SMEs.
Nkonge, B. (2013). Challenges faced by Small and Medium Enterprise Suppliers when bidding for tenders. A case of Thika District. International Journal of Academic Research In Business And Social Sciences, 3(12). doi: 10.6007/ijarbss/v3-i12/426
ICTSD (2016). Trade Policies and Sustainable Development in the Context of Global Value Chains
United Nation 2009 Annual Statistical Report on United Nations Procurement
Ding and Chee-Wah, (2006: iv). Institution and Social Mobilization
MM Saad (2014). The impact of preferential procurement in South African construction industry
James adu peprah (2016). Small and medium sized enterprises (SMES) accessibility to public procurement: SMES entity perspective in Ghana
Policies that Promotes SME Participation in Public Procurement
Mingming (2016). Handbook of the Sharing Economy
Frimpong (2015). Service experiences and dyadic value co-creation in healthcare service delivery: A CIT approach
The New Times October, 26, 2018 edition