Modernizing Public Procurement for Financial Management Excellence

1. ICGFM forum - March, 6 2008 • Current Trends in International Public Sector Procurement and their impact on Financial Management • Jorge Claro, President • Claro & Associates, Inc.

2. Background • Reform of the State is one of the most important components of the International fight against corruption. • Recently, modernization of procurement systems has been an integral part of the reform of the State efforts in most countries. Such a modernization is difficult and there are many challenges in the road ahead. • New evaluation tools to assess capacity to tackle these challenges are being developed by the international and regional organizations such as OECD/DAC, MDBs and others.

3. Background • International studies indicate Public Sector Procurement accounts for approximately 15% to 20% of GNP in many countries • Procurement has traditionally been poorly managed with inefficiencies adding anywhere between 15% to 20% to the cost of the works, goods and services being procured • Corrupt practices add an additional 15% to 20% to the cost of those works, goods or services • In other words, inefficiency and corruption combined could account for 2.25% to 4% of GNP in most countries, thus negating growth

4. Background • There is a strong demand to increase transparency in public sector management and therefore: • Electronic Government Procurement (e-GP) is being or has been introduced in most countries • Many countries have also introduced substantial reforms and new mechanisms for procurement • in the Americas, a Hemispheric Network of Procurement Officials has been established. The network is successfully exchanging ideas, sharing information and know-how on the reform of the procurement process • http://www.compraspublicas.org • Many donor-funded procurement reform projects require financial data and information that is not readily available in most countries

5. New Mechanisms • These mechanisms are at the core of the new trends and changes being introduced in Public Sector Procurement around the world: • Framework Contracts • Lease Agreements • Reverse Auctions • Public-Private Partnerships • Countries that have introduced them or plan to do so are facing challenges and opportunities on institutional and legal reform as well as capacity building

6. New Mechanisms • The selection, incorporation and use of these new mechanisms will impact all the elements of an Integrated Financial Management System: • Accounting • Budgeting • Cash Management • Credit Management

7. Framework Contracts • A contract that: • Establishes terms and conditions under which subsequent contracts will be placed • Does not commit the purchaser to purchase • Requires the supplier to supply in accordance with the terms defined within the scope of the contract

8. Framework Contracts • Benefits: • Reduced administration • Competitive pricing (aggregation of demand) • Assured quality • Legal protection against breach of contract • Assured delivery of goods • Planned supplier stock levels • Continuity of supply • Long-term working relationships • Improved flexibility and cooperation • Multiple awards

9. Framework Contracts • What countries need to do: • Adapt Standard Contractual Terms • Determine what goods and services may be subject to open-ended contracts • Adapt standard competitive bidding processes. • Train personnel (drafting task orders, managing long-term relationships with awardees) • Improve coordination among agencies and entities

10. Framework Contracts • From a Financial Management perspective: • Introduce systems that are capable of keeping track of multiple-awardee contracts and performance monitor • Encourage purchasing units to use them as contracting vehicles • Provide data to help negotiators determine acceptable prices • Put in place internal and external audits of procurement processes and subsequent awards • Budget for training and/or hiring personnel • Develop strong internal managerial controls

11. Lease Agreements • A distinct type of rent relationship • Governments may use lease agreements in order to: • Acquire the use of buildings for administrative purposes, such as office space, or • Have access to the use but not the ownership of equipment such as computers, photocopiers, cars, machinery and others.

12. Lease Agreements • Benefits: • Governments have access to state-of-the-art equipment without making substantial investments • Continuous access to cutting edge technology • Aggregated demand leading to better contractual terms • Defective equipment may be replaced or repaired on-demand

13. Lease Agreements • Most countries contemplate the use of Lease Agreements for Real Estate • Their use as a means to procure goods will require: • In-house capacity to manage long term contracts that have an important service component • Trained personnel on new technologies and trends. • Knowledge and capacity to negotiate the best possible terms and prices • Provide effective remedies to lessors since the lessee is a sovereign entity.

14. Lease Agreements • From a Financial Management Perspective: • Put in place systems to keep updated inventory of leased equipment • Carry out cost/benefit analysis to help determine if service agreements should be included in lease agreements • Determine the financial risk on leased equipment and the need for insurance (i.e. amount of deposits and damage or loss of equipment) • Put in place robust controls on the performance, not just the cost of the lease

15. Reverse Auctions • A reverse auction is a mechanisms where suppliers bid against each other for contracts against a set specification, pre-established criteria and price ceiling • The roles of the buyer and the seller are reversed • Its primary objective is to drive purchase prices down • This mechanism is particularly useful for purchasing off-the-shelve, generic items or commodities, where price is the only deciding factor to determine the winner

16. Reverse Auctions • In Brazil, the Pregao Eletronico, an Electronic Reverse Auction, has been in use since 2000, generating important savings to the country, both in price and time • Benefits: • Reduction of paperwork • Streamlined processes • A shorter negotiation cycle • More competitive prices • Increased transparency in the award process • Faster development of Electronic Government Procurement systems

17. Reverse Auctions • Risks • The process may become cumbersome or complicated • The process may be used for items that are not susceptible to generating savings • Markets may be disrupted due to potential cartelization • Internal markets may be very small • There is a limited number of private sector entrepreneurs • The auctions may be susceptible to low-balling

18. Reverse Auctions • Countries contemplating adopting this mechanism should consider that: • It will require specific changes to be introduced to national and local procurement laws • e-RAs need an e-commerce legal framework • The e-GP system must be sophisticated enough to support hosting e-RA sessions.

19. Reverse Auctions • From a financial management perspective: • Put in place a system able to track transactions that do not have a paper trail • Ensure timely budgetary allocations and cash flow • Establish electronic payment systems • Put in place market intelligence mechanisms to ensure that the best products at the best prices are being procured, thus ensuring value for money

20. Public-Private Partnerships • A Public Private Partnership is a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies that works to ensure the funding, construction, renovation, and management of an infrastructure or provision of a service • Contractually, a PPP is a legally binding instrument • Entered into by a government and a private party (usually a business) • With the objective of providing assets and delivering services • That organizes risks among the various partners

21. Public-Private Partnerships • Benefits: • Create long-term investment opportunities for the private sector • Helps reduce capital investments or the national debt • Bridges the gap between the need for infrastructure and the country’s financial capabilities • Improve service delivery • Improve cost effectiveness (private partner wishes a return on investment) • Allow public projects to benefit from private sector innovation, experience and flexibility of services • Reduce public sector risk • Deliver capital projects faster • Improve budget certainty

22. Public-Private Partnerships • Countries must consider: • PPP must be specifically regulated • Investment Laws, Commercial Codes, Procurement Laws • Differentiated from Concession Agreements of Parastatals. • PPP form long term working relationships that may present difficult scenarios in terms of power sharing and management • PPP require high-level management skills, as well as significant planning and strategizing. • Due to their nature, PPPs will be corporations subject to government regulation

23. Public-Private Partnerships • From a financial management perspective: • Demand for interaction with private sector accounting practices and financial systems • Determination of the financial soundness of the project and its long-term performance • Determination of the overall financial framework • Attest to the legality and continuity of operations • Report and interpret the results of the activities undertaken by the PPP

24. Conclusions The mechanisms are being introduced in many countries at a very different pace and corresponding to very different strategies Procurement reform should not be undertaken in isolation but rather in a broader and participatory context and as an integral part of the reform of the state process Reforms should be guided by a national strategy that considers the procedural, financial and managerial dimensions of a reform Introducing these mechanisms can have long-term effects on domestic markets, with financial and administrative implications

25. Conclusions • Financial management must provide inputs for decision-making • Sound financial management is key to reducing opportunities for fraud and corruption • There is a need for qualified professionals and redesigned systems in both the procurement and financial arenas • Capacity building and training still represent a challenge in these areas • The convergence between procurement and financial management needs to be emphasized and strengthened

26. Thanks Many thanks for the opportunity to talk to you today Jorge Claro President Claro & Associates, Inc. 10708 Lady Slipper Terrace North Bethesda, MD 20852 Tel 301 230-9011 jclaro@claroassociates.com www.claroassociates.com