Integrity challenges in the public procurement

AN honest senior civil servant lamented that sometimes public procurement ends up in a situation where product procured falls short of the quality intended and expected.

He related it to a situation where the purchase was for a motorcycle, but instead gets a bicycle and 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.

Procurement fraud

Among the types of procurement fraud are conflict of interest, or bid rigging and awarding contracts to unqualified contractors and cronies.

• Conflict of interest may arise when procurement officials have undisclosed interest in 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.

Collusive bidding by contractors

Bid-rigging in public procurement is fraud schemes that involve 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 are actually intended to fail; and

5. Phantom bidder involves contractors creating a dummy company and submitting a variety of bids on one contract and does not intend to win.

Bid rigging damages the industry, leads to corruption, higher prices where consumers have to pay, and the economy.

Collusion between some allegedly corrupt procurement civil servants and corrupt bidders also often happens.

The corrupt officials usually will provide insider information, allow contractors to submit their own proposals, tailoring specifications to the corrupt bidder, shortening tender periods and take 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 become sub-con

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

g. There appears to be patterns to tender 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 grammar 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 the 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 the big or unqualified crony companies who later sell the project to another contractor and, where 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 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 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 Annual Reports repeatedly suggest 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 the some of civil servants, contractors, and businessmen are not ethical and have the good moral fibre to implementation of the 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 safeguard. We must start now.

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* Datuk Seri Akhbar Satar is the President, Malaysia Association of Certified Fraud Examiners

*** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.