Integrity challenges in public procurement

Our priority must be to prevent abuse and to enhance the procurement process within strong institutions with high degree of integrity, accountability, transparency and adequate controls, and safeguards. 

AN honest senior civil servant lamented that sometimes, public procurement ends up in a situation where the product procured falls short of the quality intended and expected. He compared it to a situation where the purchase was for a motorcycle, but instead, a bicycle is delivered, and the government ends up paying the price of a car.

Public procurement is vulnerable to procurement fraud and corruption because it involves huge amounts of spending money. Among the types of procurement fraud are conflict of interest, bid-rigging, and awarding contracts to unqualified contractors and cronies.

• Conflict of interest may arise when procurement officials have undisclosed interest with a contractor that may lead to corrupt practices;

• Bid-rigging fraud or collusive tendering schemes meanwhile involve collusion between competing companies during the bidding process; and

• Awarding contracts to unqualified contractors and cronies can happen only without the knowledge of any outside third parties.

Bid-rigging in public procurement is a fraud scheme that involves agreement among the contractors in the bidding process as follows:

1. Bid suppression is where contractors participating in a tender agree among themselves not to bid to ensure the pre-agreed contractor wins;

2. Bid rotation is where bidding companies collude by taking turns to be the winning bidder;

3. Market division is where contractors agree to bid and divide markets based on product, customer, service or geographical areas;

4. Complementary bidding is merely to give the appearance of a genuine bid but is actually intended to fail; and

5. Phantom bidder involves contractors creating a dummy company and submitting a variety of bids on one contract, with no intention of winning.

Bid-rigging damages the industry, leads to corruption, higher prices where consumers have to pay, and wrecks the economy. Collusion between some allegedly corrupt procurement civil servants and corrupt bidders also often happens.

Corrupt officials would usually provide insider information, allow contractors to submit their own proposals, tailoring specifications to the corrupt bidder, shortening tender periods and taking a cut of the profits as bribes from the conspirator’s bidders.

The major red flags of collusive tendering include the following:

* Collusion between procurer and bidder

a. A particular contractor always wins

b. Multiple awards for similar work given to the same contractor

c. Various irregularities in the bidding process

d. Improper acceptance of late bids

e. Bid very close to budget

f. Unreasonably short time limit to bid

g. Change in tender after other bidder’s prices are known

h. Unexplained changes in contract shortly after award

i. Disqualification of suitable tenders

j. A qualified bidder fails to bid

k. Disqualifying other legitimate and qualified bidders

l. Awarding tender not to lowest acceptable tenders

* Collusion among contractors

a. Joint venture bids are submitted when they can bid on their own

b. Certain contractor’s tenders at very high price for no logical cost justification

c. Bidders always submit either highest or lowest offers

d. Losing bidders get sub-contract work from the winning bidders

e. Withdrawal of lowest tenderer who then becomes a sub-con

f. Award tenders to sub-contractors’ work to company which submitted highest tenderers

g. Tender pattern from group of companies

h. Quality of the work performed, or goods supplied are sub-standard

I. Bidders who buy bid packages but do not submit the bids

j. Bidders using similar paper, same font, template addresses, email, telephone numbers and spelling or grammatical errors

k. Any kind of pattern on geographical areas (divide markets based on product, customer, service etc.)

* Direct Negotiation

Awarding projects through direct negotiations is not wrong and it is only appropriate when it is implemented with full transparency and integrity. The projects might concern matters which are of national interest, an emergency situation or if nothing is done would lead to detrimental consequences.

Any direct negotiation projects should also meet certain criteria and must not be implemented according to one’s whims and fancies. To prevent the nation from procurement fraud and incurring losses, direct negotiation projects should only be awarded to competent and reliable contractors.

One of the primary reasons for open tender is to promote and foster a culture of integrity among all parties involved. However, this may not achieve its objective if it still has elements of corrupt practices.

The government must stop lobbying for projects by big or unqualified crony companies who later sell the project to another contractor and, sometimes, even create up to 5 layers of contracting without any value add, but instead, provide inferior quality supplies or products in order to save costs.

At times, the system needs to be simplified, but all ‘handlers’, including the technical committee as well as the finance committee and the ‘board’ should consist of people with integrity. This is to ensure that all parties involved in the process ensure that it is carried out in a more transparent manner and resources are utilised at the most optimum level.

One of the most effective deterrence to bid rigging is to set pre-qualifications of the companies or contractors by requiring them to submit audited financial statements for at least the past 5 years.

The government stipulates that any procurement shall follow five key principles, namely public accountability, transparency, value for money, open and fair competition, and fair dealings. However, the recent Auditor General’s Annual Report repeatedly suggests that these principles have not been fully adhered to.

Every year, the Auditor-General’s report highlights cases of procured goods, services, and works that are being paid for well above market prices, under-utilised, and sub-standard in nature. It is pointless for the government to develop good policies if some civil servants, contractors, and businessmen are not ethical and have the good moral fibre to implement formulated policies with integrity and accountability.

Fraud and corruption in procurement is still common in Malaysia. Our priority must be to prevent abuse and to enhance the procurement process within strong institutions with high degree of integrity, accountability, transparency and adequate controls, and safeguards. We must start now.