Procurement - a corruption hotspot

MOKHTAR Samad, President of the Malaysian Malay Contractors Association, said its members welcomed the new government’s commitment and support for open tenders.

The move is considered an improvement because it prevents backdoor deals which can happen when projects are given through selected tenders or direct negotiations.

But it is shocking when he confirmed that in the past, 10 crony companies would take part in selected tenders, working in cahoots with one another or in other instances contracts would be awarded by direct negotiation, and jobs given directly to cronies “with all sorts of reasons being given” to justify the awards.

The prime objective of the Malaysian Government’s procurement process is to support Government programmes by obtaining value for money through acquisition of works, supplies and services.

The government’s budget for acquiring goods and services is diverse and huge.

In fact, in 2018, the Malaysian government spent an estimated RM220.9 billion on development (asset and service).

As large amount of public funds being channeled into the market through public procurement, the procurement process continue to be vulnerable to fraud and corruption.

According to the Association of Fraud Examiners Report to the Nations 2018, an organization loses at least 5 percent of its profit due to fraud.

Much of this loss by can be attributed to procurement fraud.

The procurement system refers to those processes, procedures, and entities involved in the purchase of goods and services by private or public entities.

Private procurement refers to the acquisition of goods and services in the private sector while the public procurement refers to the government’s process of acquiring goods and services.

Public contracts are necessary for the provision of daily essential services to the public such as transport, electricity, water and communication.

The public sector projects are thus costly and may constitute high risk for fraudulent procurement.

Procurement fraud refers to violations of the procurement process or illegal conduct by which the offender gains advantage, avoids an obligation and thereby causes damage to the organization.

It may also involve an intentional misrepresentation of the truth or deception, designed to gain an unfair advantage over other vendors who are playing by the rules.

The consequences of procurement fraud may not only be about high costs or diminution of value, but may also imperil personal safety, image and organizational capabilities.

There are three stages of procurement process namely presolicitation, solicitation and post solicitation.

The pre solicitation involves activities related to requirement, planning, adequate research, funding develop the procurement strategy, developing the solicitation document, and determining the appropriate contractors.

Collusion between procurement government officers and bidders often take place such as providing insider information, contractors submit their own proposals, tailoring specifications and shortening tender periods.

The second stage includes the competitive bid from contractors or suppliers who can meet the specifications, requirements, needs and the price.

This stage also concern the awarding of tenders, issuing work authorizations, assessing work progress and at times conducting site visits.

Corruption and abuse of power may take place during the site visits.

The final stage includes all the final action such as final amendment on contract, payment and proof of delivery.

The bidding process is particularly vulnerable to fraud and can be difficult to detect, especially within the large organizations with complex procurement operations.

During the pre-solicitation, the tender officers have to conduct market and bench marking of the product or services by way of quality which must be in the tender.

It is found that government departments are only using 55 percent of contracts by E-procurement and the balance 45 percent is still by way of conventional procurement process.

This is the main area where contractors and vendors take advantage of the weak system (including by unregistered vendors) to get high profit by corruption of the contract division officials.

It is necessary for the government to impose E-procurement for public tenders as being mandatory.

All transmission of requests for participation and submission of tenders must be done through electronic means to prevent fraud.

There are many lapses which may occur during the procurement process such as conflict of interest, misuse of power, embezzlement, tender manipulation, fraud, bribery and corruption.

Corrupt ministers, politicians or senior government officials see this as a goldmine for making easy money especially relating to expenditure for the public sector.

However, Malaysia is facing integrity crisis and the government must address the issue of integrity first to overcome corruption.

Projects mean money rather than benefit to the people. The higher the price the better will be their commissions.

Based on complaints received by Malaysian Anti-Corruption Commission (MACC) between 2013 through 2018, wrongdoing involving procurement was approximately 42.8 percent which topped the list of sectors prone to corruption.

However, the World Bank estimated that 20-30 percent of budget for public contracts is wasted.

This finding matches what Tan Sri Ambrin Buang, the former Auditor General predicted ie that up to 30 percent of Malaysia's public projects' value was lost owing to mismanagement and corruption.

Consider the savings the government would have obtained if it paid 30 percent less for goods and services the contractors and vendors provide.

Ambrin also felt frustration due to the poor governance plaguing our civil service and also the GLCs.

If auditing in a small sample could recover RM2 billion in terms of loss, imagine the actual leakages and wastages that the country is incurring year in year out.

As the Auditor General, Ambrin has said, giving oral warnings to erring civil servants is not sufficient.

In the absence of the culture of accountability, no one will bear the responsibility or feel embarrassed by their wrongdoings while corruption would get further aggravated.

In Malaysia, contracts are often awarded to cronies and unqualified businessman and contractors.

There should not be any more direct negotiated tenders and limited tenders that had, until now, been awarded without an open tender.

Even in the open tender it should not be tainted by corruption.

Datuk Seri Azmin Ali stated that the lack of transparency is among the reasons that the national debt has increased and to avoid the further ballooning of national debt, the way forward is to award contracts by open tender.

Open tendering provides an effective way by which companies can tender based on the expertise available in their organisations.

But the MCA president Wee Ka Siong said Pakatan Harapan (PH) seems to have forgotten that it had promised in its election manifesto that open tendering would be used ‘extensively and transparently’.

Transparency and fair competition plays an important role in ensuring the achievement of the best results while spending public money.

Public procurement has a significant impact on economic development and performance in the country.

The new government should stop lobbying for projects by the big or crony companies who later sell the project to another contractor and, sometimes even create up to 3 layers of contracting without any value add.

Contracts should not be awarded to cronies and those who were not reliable and competent.

The rules and procedures are not followed by contractors. Their unethical actions cause great loss to public money and give rise to poor quality in infrastructure and other services or projects.

In a proper government system, contracts should only be given to the most competent companies.

Having taking all the above issues into consideration, the government has promised to introduce an open tender system as the default system which provides a more transparent and better deal for high quality goods and service for citizens.

Transparency, not secrecy, is the antidote to the dieses of corruption.

There should be no more procuring contracts by direct negotiation.

The procurement method must follow a tight legal framework to ensure that all standards are being met and there is quality in the selection process.

To ensure there is no corruption and misappropriation, community-level committees known as oversight committees can be used to monitor enforcement.

The committees should consist of honest people to evaluate tenders and also monitor contracts given out to companies so that there is no abuse of power, especially involving government tenders.

The committee members should be people of good standing and high integrity and their membership should be reviewed periodically, for example, every three years.

The Ministry of Finance or other relevant ministries who were supposed to oversee the procurement exercise also failed to discharge their duties.

As a result of such corruption the contractors failed to deliver projects or goods in accordance with specifications and only achieved low quality products and services.

It is important to monitor project procurement to ensure that the contractors will meet the schedule progress, quality and the project needs

The benefits or value from developing a good procurement process should commensurate with the costs involved as the best procurement is well and thoroughly evaluated, reasoned and justified.

However the returns in terms of savings and getting the best value products and services will more than justify such costs.

The procurement procedures need effective controls to achieve transparency, accountability and avoid risk of fraud and irregularities.

Monitoring and evaluating the procurement process and procedures need a high level of attention to ensure that the process does not fall prey to fraud and corruption.

Continuous monitoring will establish compliance, integrity and ethical standards.

Big data means lots of data, is growing everyday and becoming a key area of focus for procurement.

Many nations are using big data analytics to analyse correlations, uncover patterns of corruption and fraudulent in public procurement.

The traditional system could only store a small amount of data but with big data facilities which store large amounts of data that may consist of hundreds of terabytes (equivalent 1,024 GB) and beyond, the cost of data storage can be reduced and the quality of business intelligence will be improved.

By effectively utilizing big data will increase the overall effectiveness and efficiency of procurement decisions.

Fraud and corruption in procurement is still common in Malaysia.

Our priority must be to reduce this as much as possible and enhancing the procurement process with strong institutions, adequate controls and safeguards is a must. We must start now.

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* Datuk Seri Akhbar Satar is a President of Transparency International Malaysia

** The views expressed here are strictly of the author's and do not necessarily reflect Astro AWANI's.