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Monday, November 29, 2010

Failure to award

This story was published today in the Marianas Variety, Guam Edition.

GDOE’s use of emergency power to buy copier machines questioned
A PROTEST has been filed with the Office of Public Accountability against the Guam Department of Education for abusing “emergency declarations” to procure copier machines instead of properly awarding contracts through the normal procurement process.

According to the complaint that Attorney John Thos. Brown, legal counsel for Island Business Systems & Supplies or Town House Department Stores, Inc., filed GDOE issued an invitation for bid in May, but failed to follow through with the rest of the procurement process and award a contract to the lowest bidder, IBSS.

Instead, Brown said GDOE Superintendent Nerissa Bretania Underwood used “emergency declarations” to purchase copiers from Xerox Guam.
There's more to the story, but that is the gist of it.

You can read the Notice of Appeal here.

The interesting aspect of this Appeal is that the Protest alleges that the award of the contract was withheld due to bad faith. Usually appeals are brought alleging a solicitation was conducted wrongly. Here, the allegation is that the solicitation was a good as far as it went, but that it just did not go far enough and award the contract to the low bidder.

There are reasons allowing a government to reject bids or cancel a solicitation, and no bidder has any beneficial or legal right to an award where the government has legitimate rights to end a solicitation. The operative point here is that the action of the government must be legitimate.

In the ABA Model Procurement Code, and Guam Law, there is a right that the bidder can rely on: all parties involved in the negotiation, performance, or administration of territorial contracts have a duty to act in good faith. Moreover, there is an overriding obligation to apply the procurement law "to ensure the fair and equitable treatment of all persons who deal with the procurement system". The government does not act legitimately if it denies a bidder its right to fairness and good faith consideration of contract award.

The Appeal in this case alleges certain facts which specifically draw into question whether the government administered the procurement in this case fairly and in good faith. The Appeal seeks an order that the government award the contract.

This raises an interesting question of remedies. When there is a finding that the solicitation is in violation of the law, the only practicable remedy to a protesting low bidder is to have the solicitation or proposed award "revised to comply with the law". (See 5 GCA § 5451.) In the typical case this would result in a revision of some specification, method of source selection, reconsideration of relevant evaluation criteria or contract term; that is, some error of judgment.

Here, there has been no award or proposed award, and the violation alleged is the failure to judge, not the error of judgment. Thus, the only available "revision" is to require that the decision making process be "revised" by determining the award that should have been made but was not; that is, to exercise the judgment that should have occurred but, for lack of good faith and fairness, was not.

On Guam, the Public Auditor has that authority implicitly by the grant of "the power to review and determine de novo any matter properly submitted". (5 GCA § 5703.)

Friday, November 26, 2010

Debating transparency in Kenya: a case for reform

Note: This post contains a number of labels, as the opinion piece in this post is a comprehensive critique of the procurement situation in Kenya. You should read the full article, particularly if you do not understand the reference to any particular label.

Transparent and competitive public procurement system key to a functioning economy
all governmental entities are struggling in the face of unrelenting budget constraints, downsizing, public demand for increased transparency in public procurement and greater concerns about efficiency, fairness and equity. Additionally, public procurement professionals have faced a constantly changing environment typified by rapidly emerging technologies, increasing product choice, environment concerns, and the complexities of international and regional trading agreements.

Further, policy makers are increasingly using public procurement as a tool to achieve socioeconomic goals. In this environment, public procurement has become much more complex than ever before, and public procurement officials must deal with a broad range of issues.

They have been walking on a tight rope in balancing the dynamic tension between (a) competing socioeconomic objectives, (b) national economic interests vis-à-vis- global competition as required by regional and international trade agreements, (c) satisfying the requirements of fairness, equity and transparency, (d) maintaining an overarching focus on maximising competition; and (d) utilising new technology to enhance procurement efficiency, including e-procurement and purchase cards.

A sound procurement system is based on four major elements or pillars: legislative and regulatory framework, institutional framework and management capacity, procurement operations and market practices, and integrity of procurement system. A weakness in one of the four pillars inevitably leads to an unsound public procurement system. This contribution highlights the weakness in the current legal and regulatory framework on public procurement—the Public Procurement and Disposal Act 2005.

The principal reason for the enactment of the Act was to have a legal regime that weeds out inefficiencies in the procurement process, remove patterns of abuse, and the failure of the public purchaser to obtain adequate value in return for the expenditure of public funds.

However, these objectives have never been fully achieved in practice. Key provisions of the Act and the regulations are replete with textual weaknesses that have often been abused by procuring entities. Moreover, the Act does not envisage contemporary market realities hence the need to continuously revise it to keep pace with these developments.

The authors’ review of more than 100 decisions from the Review Board and the High Court has revealed an inconsistent implementation of these policy objectives. There are no set guidelines, judicial or statutory, that ought to guide decision makes in the interpretation and application of the policy objectives. It is proposed that the Act is amended to restate and redefine the stated policy objectives.

transparency and non-discrimination are the key pillars of the legal regime on public procurement and disposal. A transparent and openly competitive public procurement system with clear procedures and contract award criteria is a prerequisite to a functioning economy.

A good procurement system must therefore provide watertight provisions amongst others , (a) requiring procuring entities to publish tender notices in good time to allow adequate responses from bidders, (b) clearly stipulating any technical specifications and procedures, (c) outlining bid opening procedures and detailing the terms and conditions of the contract awarded, and (d) requiring the procuring entity to maintain reliable record of proceedings, disclose all relevant information and avail for inspection the name and address of the successful bidder and the value of the winning bid.

the right of unsuccessful tenderer to challenge the award of the tender is a key feature of the public procurement process. An ideal public procurement legal regime should contain bid-challenge procedures that are non-discriminatory, timely, transparent and effective.

A critical review of the Act reveals that while the mere fact of lodging of a request for administrative review to the Review Board automatically operates to suspend the procurement proceedings, there are no concomitant provisions for automatic interim measures when an applicant seeks to challenge the decision of the Review Board by way of judicial review to the High Court.

This conflict was played out in the case of Republic Versus the Public Procurement Administrative Review ex parte Egerton University where the Review Board’s decision to direct procuring entity to extend the disputed contract for three months was stayed by the High Court. This created a hiatus that led to the completion of the original project thereby rendering the judicial and administrative review proceedings nugatory.

Debating transparency in Pakistan

Access to information stressed to ensure transparency, good governance
Realizing the importance of transparency in governance and right to information legislation, Individualland- a nonprofit organization held a roundtable seminar on Friday, to promote a healthy debate that can yield positive results.

Participants from number of different organizations like Public Procurement Regulatory Authority (PPRA), National Accountability Bureau (NAB), Public Accounts Committee (PAC), Development Assistance Database (DAD), National Database and Registration Authority (NADRA) and National Disaster Management Authority (NDMA) took part in the roundtable.

The participants said access to information was mandatory to ensure transparency, good governance and to curb corruption in the country.

Speakers were of the view that transparency in governance refers to the absence of secrecy and mystery between the government and those being governed. The information shared should not be ambiguous or selective, but complete and correct.

Transparency International Chairman Adil Gillani on the occasion said transparency meant openness. “Government departments need to put all records and information on their websites as it a public property,” he said.

He said NAB was responsible to take action against various scam like sugar crises not the Supreme Court of Pakistan. “Presently there is no governance in Pakistan,” he said.

Individualland Pakistan Executive Director Gulmina Bilal said that transparency in governance not only improved goodwill of the government but all its functionaries.

Gulmina said that Pakistan being a democracy also had this legislation as an integral part of its constitution. However, its implementation was still not up to the mark. At the end it was agreed that better understanding of governance, especially economic governance and transparency are important aspects of successful governments. It was also agreed that consensus between different stakeholders on increasing transparency could only be ensured by proper implementation of the right to information legislation.

Ireland schools also pay for unauthorized procurement

NI Department of Education launches procurement fraud probe
Northern Ireland’s Department of Education has launched fraud investigations into buying practices at two education authorities after discovering procurement irregularities in school contracts.

Launching the inquiries, education minister Caitríona Ruane informed the Northern Ireland Assembly of serious concerns surrounding procurement activities at the North Eastern Education and Library Board (NEELB) and the South Eastern Education and Library Board (SEELB).

The external investigation into the NEELB, County Antrim’s local education authority, follows its purchase of a £8.2 million school building for Magherafelt High school. This involved an agreement with a contractor without the full approval of the Department of Education. Despite lacking approval, the board paid the contractor for work.

The minister also expressed “serious concerns” around procurement practices at SEELB, which covers most of County Down and a small part of Country Antrim. She described a “suspected fraud” concerning the installation of heating equipment in a school, where second-hand burners were put in. Additional procurement irregularities linked to a maintenance contract led Ruane to commission an investigation into the contract and procurement practices at the SEELB.

Ruane has also instructed her department to create a Centre of Procurement Expertise for the education sector. It will carry out an assessment of the region’s capacity to manage contracts and procurement practices across the education sector.

She said: “In the light of these events I have determined that further action is needed to provide assurance to me as minister and to the executive that procurement practices across the education sector are professional.”

NI Education Minister’s Statement To Assembly On Procurement


Comment: The reference to "also" in the title to this post?
See this.

When preference turns to privilege

The bulk of the news in this post comes from a report in the Washington Post, which was picked up by other MSM, too (e.g.).

WaPo's story is about a small corporation with no obvious direct experience which picked up a very large military contract. The small corporation was affiliated with a Alaskan Native Corporation, known as US2.

Before going to the WaPo item, it is worth going first to Alaska for some home-grown information about this company. This from the Alaska Dispatch:

Alaska Native subsidiary got $250 million Army contract

An Army contract worth as much as $250 million awarded to a subsidiary of Cape Fox Corp., an Alaska Native corporation in Southeast, is drawing attention two years later, according to The Washington Post. The newspaper, which has been reporting on special federal contracting privileges for Alaska Native corporations, says United Solutions and Services, known as US2 and co-owned by Cape Fox Corp., got the no-bid federal contract.

It's not the first time Cape Fox has come under scrutiny this year. Alaska Dispatch reported in May that Cape Fox and two companies it owns -- APM LLC and 1CI Inc. -- were suing two of APM's former CEOs and four of those men's companies for $27 million in damages.

Last fall, the Air Force expelled 20 contractors from its procurement list, citing an extensive scheme to exploit and deceive an award process designed to assist small and disadvantaged businesses -- businesses which, if Native-owned, are given preferential treatment. Six of the companies named had direct ties to Cape Fox. The rest had ties to former APM chief executive Townsend Jackson, his brother Craig Jackson, and other family members.

Cape Fox and other Alaska Native corporations have been under fire for benefiting from a special federal contracting program. Many Native corporations have created subsidiaries that are involved in what are called 8(a) contracts with the federal government. For years, critics have claimed Native corporations have received unfair advantages compared to other small businesses and that the Small Business Administrations 8(a) program lacks oversight.

The program creates preferences for economically disadvantaged small businesses. Alaska Native companies enjoy the lion's share. Native corporations can go after federal contracts without facing competition. They can also subcontract to larger companies that aren't Native-owned but have the expertise to fulfill the contracts.
Now from the Washington Post:

Little size or expertise, but a big contract
For its first three decades of existence, US2's parent, Cape Fox, was primarily a logging operation. But its forests became depleted, and ventures into tourism, real estate and other areas were unprofitable.

Company executives turned to federal contracting. In late 2004, Hadley launched US2. Cape Fox owned 51 percent of the new company, qualifying it under federal rules to receive the contracting benefits bestowed on Alaska native corporations.

Hadley has long lived in Delaware, but under the unique rules approved by Congress, ANC subsidiaries do not have to be run by native executives or operate in Alaska. US2 has no native employees.

Hadley spent much of his career at Delmarva Power & Light, working as a lineman, field supervisor, training supervisor and project manager. He has had management jobs with other firms, including another ANC subsidiary.

The year before, United Solutions and Services, known as US2, had just three employees and several small contracts for janitorial services and other work. It was based in a four-bedroom colonial, where the founder worked out of his living room.

But the firm had one quality the Army prized: It was co-owned by an Alaska native corporation (ANC) and therefore could receive federal contracts of any size without competition, under special set-aside exemptions granted by Congress to help impoverished Alaska natives.

On Sept. 2, 2008, US2 was granted a deal worth as much as $250 million - 3,000 times the $73,000 in revenue the firm claimed the year before. The contract enabled the Army to quickly fund a wide array of projects, including a global campaign to prevent sexual assault and harassment, without seeking outside bids.

US2 could not do the work by itself, though. With the Army's knowledge, the firm subcontracted the majority of it to more established companies, a Washington Post investigation has found.

Federal rules generally require prime contractors on set-aside deals to perform at least half of the work, something US2 did not do on more than $100 million worth of jobs, according to interviews with Army officials and an analysis of federal procurement data.

In response to The Post's findings, officials at the Department of the Interior, which managed the contract for the Army, said proper procedures were followed in the contract award. But they said in a statement that they have asked the department's inspector general to investigate.

Army officials acknowledged using the firm to avoid competition, saying they did not have enough time or contracting workers to seek other bids. "At some point, you don't have time to use the six-, nine-month sort of standard contracting route," said Andrew Jones, chief of budget integration for Army Manpower and Reserve Affairs. "Our internal contract office here, they can't always handle the surge of requirements."

Jones played down the company's lack of experience. "All that prior stuff is irrelevant," he said, because the firm has delivered solid results. [See my comments on the "no harm, no foul" defense, here and here.]

"This is one of the things that's going right with contracting," said Walter Wood, a contracting official for the Army.

Stephen Hadley, the nonnative chief executive operating out of his living room in Delaware, received $615,000 last year as 49 percent owner of US2. That amount does not include his salary, which he declined to disclose. William Walker, an attorney for US2 and Cape Fox, said Hadley's compensation agreements were approved by the Cape Fox board. Walker said US2's profits "played an integral part" in providing benefits to Cape Fox shareholders, contributing to a total of $5.2 million in dividends since 2001.

Hadley said he has worked hard to build US2.

"When I got into the 'federal world' and realized that I had a chance to be entrepreneurial, do public service and help out the Alaskan natives, I fell immediately for the challenge," he said. "I am very proud of what we have accomplished. All it took was a good plan, lots of luck, perseverance, people willing to take a chance and God's will to make it happen."

"Contrary to your misinformed view, this contract is an example of the way in which the government can solicit strong results on the part of federal contractors to ensure taxpayer interests are effectively represented," Walker said.

In April 2008, the firm's fortunes began to improve. It received a no-bid contract from the Army potentially worth more than $7 million for "professional, scientific and technical services." Three months later, the company received a $22 million construction contract without competition to build a 15,000-square-foot Army Experience Center, a high-tech facility in Philadelphia intended to support Army recruitment.

Walker said that job made US2's reputation inside the Pentagon. "As a result of US2's successful work on this project and other previous contract awards on behalf of the U.S. Army, the company earned a reputation as a quality, reliable contractor," he said.

At the time, the Army was under pressure to address the more than 2,400 reported sexual assaults each year in the military.

On Sept. 2, 2008, US2 received the contract for $250 million over five years to provide human resources and technical support to the Assistant Secretary for Manpower and Reserve Affairs.

Under the contract's broad terms, jobs quickly began flowing to the small firm, including the Sexual Harassment and Assault Response and Prevention Program (SHARP). In a few days at the end of September 2008 alone, the Army issued $42 million worth of task orders. Nearly all of the Army spending so far - 97 percent of about $143 million - has been approved in the last few days of the past three fiscal years, federal procurement records show.

The Army is using US2 so extensively that the ceiling on the contract was raised by 50 percent, to $375 million, documents show.

In 2009, US2 was asked to provide support to a program to identify 145,000 servicemen and -women, veterans and their beneficiaries who were eligible for special "stop-loss" pay for serving extended tours in Iraq and Afghanistan. This year, the Army has used US2 for programs that deal with drug and alcohol abuse, suicide prevention, traumatic brain injury and post-traumatic stress disorder, according to the Interior Department. US2 also provides support services for the U.S. Army Medical Command.

To perform all those jobs, US2 said it has relied on a constellation of subcontractors, including Summit Marketing Group, General Dynamics Information Technology, the nonprofit government contractor LMI and the public relations firm O'Keeffe and Co.

Hadley acknowledged that US2 does not have the experience in-house to do all the work. "We hire people to do that," he said.

Federal rules generally require that ANCs do at least 50 percent of the work on service contracts, but Army officials and Hadley said that US2 began meeting that threshold only in June.

Walker said no one expected the firm to do more than half the work immediately, because it is operating in a "business development program" at the Small Business Administration, which oversees the ANC program.

In a statement, the SBA said that under the type of contract US2 has with the Army, a firm "must have performed the applicable percentage of work (50%) with its own employees in the aggregate at any point in time."

"The fact that our use of subcontractors is diminishing and that by the end of the contract, we will have complied with all performance requirements shows that the program works as intended," Walker said.




Sunday, November 21, 2010

Guam Procurement Institute -- a proposal

This is a column I wrote, appearing today in the Marianas Business Journal.

Professionalizing procurement staff
Lawyers, accountants, teachers and real estate agents get education and continuous formal training to do their jobs. Procurement staff get ... what?

When Guam adopted the American Bar Association Model Procurement Code as the basis for its own Procurement Act, the legislature simply passed over the part that required the establishment of a procurement institute for both public and private sector procurement staff.

The comments to the ABA Code point out that "procurement is a complex process which experience has shown can only be adequately learned over a period of time. Thus training in procurement is vital for new government employees without prior knowledge in the field."

"In addition, training courses should be reasonably available to vendor personnel, university professors, students and others. Experience has shown that when a vendor or other person affected by the system (and I might mention senators and agency heads in this context) makes an unnecessary mistake through a lack of knowledge of the ground rules of procurement, it causes friction and expense to the government."

The ABA Code envisioned a local procurement institute to provide formal and continuous procurement education and training, research, and a library of procurement resource material.

A procurement institute is not bricks and mortar. It is a curriculum under the guidance of an administrator. It is both a formal vehicle for theoretical and profession education as well as a community outreach program to provide broad exposure to the "ground rules of procurement."

Hawaii is an ABA Model Procurement Code state, and it has established its Hawaii Procurement Institute under the supervision of a law professor in the University of Hawaii's Richardson School of Law. Procurement is only 20% to 25% law. The rest is logistics, purchasing management, public administration, contract management, audit and accounting.

It is my suggestion that UOG's School of Business and Public Administration would be an excellent choice of host for a Guam Procurement Institute.

The U.S. government spends multiple millions of dollars on procurement staffing and training because it recognizes the critical role procurement plays in effective government and delivery of services.

In the U.S. Air Force, contracting is a career path. Following the example of the Air Force, the U.S. Army established a "Contracting Command" and staffed it with contracting professionals.

The head of the Army's Contracting Command, Edward Harrington, was recently interviewed in the Washington Post. He said "contracting is a practice, a profession. It is similar to law or engineering, where you develop your expertise and skills over a number of years. . . . It takes time to get the training as well as to get the experience with all of the various contracting regulations. Those mid- and senior-level individuals are essential to coaching, counseling and mentoring our entry-level people coming onboard. We do regular ethics training with our contracting workforce. We focus on procurement integrity and ensuring that we have no undue influence on the process or the people in the process."

It is my belief that a better educated, trained and professional Guam procurement workforce will reduce the instances of blunder in the management of the procurement processes, saving government and industry money, time and aggravation, and delivering the whole of government from the appearance of a dysfunctional and self-interested system of patronage.

Building a quality procurement system is like building a quality hotel. You can have the best design, plans, specifications, tools, material and equipment, but, without the skilled workforce, all you have is a pile of rubble.

FOLLOW UP:

The Guam Pacific Daily News ran this Editorial November 30, 2010:
Institute: Procurement process needs enforcement, education to work

The government of Guam continues to violate its own procurement rules and regulations due to systemic problems that paves the way for abuse.

Elected officials need to revamp the GovGuam procurement process and implement measures to ensure procurement laws and regulations are followed. We must also hold accountable those who don't follow the law.

The Department of Public Works has been "artificially" splitting large contracts into smaller, lower-priced ones to circumvent the competitive bidding process. This practice is allowed to continue because there is no effective penalty against doing so.

GovGuam has a long history of violating procurement rules. Agencies split contracts to circumvent the rules or fail to follow regulations that result in bid protests and delays to important projects.

This has to stop because our community can't afford to allow it to continue. We need to be able to trust that government agencies and employees will follow their own procurement rules and regulations.

Elected officials need to implement tighter controls on agencies and employees to ensure the procurement process is administered properly.

Guam also needs a "Procurement Institute," to educate and train local government employees in the procurement process. The lack of training is the most enduring and systemic problem with the island's procurement process, according to local attorney John Thos. Brown, author of "A Guam Procurement Process Primer."

According to Brown, when the island adopted its procurement code, lawmakers omitted provisions that required a funded procurement institute to hold procurement training for public- and private-sector procurement participants.

The incoming administration must work with lawmakers to make these changes happen. Elected officials need to make it clear to directors and employees that they must follow procurement laws and regulations. It's also important that whenever procurement rules aren't followed, that GovGuam hold accountable those responsible.

Government officials can't turn a blind eye or cast blame on the system. When agencies and employees fail to follow rules and regulations, they must be held to task for that failure.

The price is not always right

Any statement of procurement law to the effect that the award goes to the lowest responsive and responsible bid must be read with some implied qualifications. It is not simply a low bid that wins, but a reasonably low bid.

In the same way that a sole bid response must be closely evaluated for price reasonableness, so must an abnormally low bid.


This seems to be the case around the world.

Abnormally low offers - too good to be true? (UK)
According to the press, the existing contract was worth around £34 million a year. When it came up for renewal, the challenger, Morrison Facilities Services Limited (MFS) submitted a bid of around £23 million. However, it was beaten by the £17 million bid of Connaught PLC. The MFS bid and the other bids received were all around 25 per cent to 33 per cent higher than the Connaught bid.

At the hearing, a witness for MFS deconstructed Connaught's prices to show that, in MFS' view, it was simply physically impossible for Connaught to actually deliver the requirement at that low price. There was also evidence that the Council itself had queried Connaught's price and had twice sought confirmation.

Regulation 30(6) of The Public Contracts Regulations 2006 gives contracting authorities a right (not an obligation) to reject an abnormally low bid, provided proper investigation has taken place.

Given the tough economic times, contracting authorities are likely to be receiving a greater number of low-priced bids from bidders desperate to get a foot in the door. This case shows that contracting authorities will do well to be on their guard; if a contracting authority intends to award a contract to a very low bidder, it should make sure that proper investigation does take place and that there are objectively reasonable reasons for the low-price of the bid.

Contractor's Opportunistic Bidding Behavior and Equilibrium Price Level in the Construction Market (Taiwan)
The competitive bidding system has been to blame for abnormally low bids, which are considered as one of the main causes of poor project quality. Previous studies have regarded the pricing of bidders as an optimum decision based on contractor's cost and market competition level. However, the sell to produce characteristic of construction projects may induce contractors to offer a low bid and then make up the amount initially sacrificed from beyond-contractual reward (BCR) gained through cutting corners and claims.

The price level for projects with a strict owner is remarkably higher than for those with relatively less strict owners. Improvement in the construction management system of projects is crucial to lower the possibility that contractors gain BCR and do opportunistic bidding, and to further enhance project quality.

Public Procurement - India (India)
32 What constitutes an 'abnormally low' bid?

'Abnormally low' bids are those that vary from the estimated rates by more than 25 per cent, even after updating the scheduled rates to match the prevailing cost index.

33 What is the required process for dealing with abnormally low tenders?

Abnormally low price may lead to a conclusion of an anti-competition move and this is a ground to order re-tendering. Factors have been prescribed to judge the reasonableness of price (though these are usually resorted to if price is found to be too high (and not abnormally low).

Procurement Procedures Amended to Stop Malicious Low Bids (Taiwan)
The Public Construction Commission (PCC) has revised the “Procedures for Handling Bids With a Total Bid Price Less Than 80% of the Government Estimate in Accordance With Article 58 of the Government Procurement Act” to require agencies handling lowest-tender procurement projects to demand explanations from companies that win bids with abnormally low tenders. The agencies can also refuse to allow such bidders to win bids by providing security. This new provision can stop companies from maliciously using low bids to win contracts, and upgrade the quality of contract performance.

To help agencies evaluate whether an explanation given by a bidder is reasonable or not, another new provision stipulates directions for such explanations—why the bid price is so low, and how the low bid will not impair the quality of execution. If the explanation provided by the bidder is unrelated to completion of the subject of the procurement, it will not be accepted.

Damage to Treasury: Abnormally Low Tenders in Public Construction Works (Turkey)
A detailed analysis of the submitted questionnaires revealed a number of reasons for Abnormally Low Tenders (ALTs) and their adverse effect on the construction industry. Staying in the business, miscalculation of bid price, work experience document, and inaccuracy of the conceptual cost were found to be the main reasons behind ALTs. A better database system for contractors on market unit prices, a better quality control assessment in construction and postconstruction phases, full complete design documents in tender packages, and a better evaluation system on the assessment of ALTs are recommended by the study.

Beware if the contractor bid is too low (California)
Do not automatically accept the lowest bid. In fact, you should beware of any bid that is substantially lower than the others. It probably indicates that the contractor made a mistake or is not including all the work quoted by his or her competitors. You may be headed for a dispute with your contractor if you accept an abnormally low bid. It is also possible that this contractor will cut corners or do substandard work in order to make a profit on the job.

Surete du Quebec dumps security firm contract (Canada)
On Monday, the Surete du Quebec announced it was cancelling its contract with Secur-Action to provide security at its headquarters on Parthenais St.

The same day, Quebec's public security ministry announced on its website that it would not finalize a deal with Secur-Action to provide security at Montreal's courthouse or the courthouse on Gouin Blvd., built to hold trials of organized crime figures and street gang members.

Questions surrounding the company's bids came to light this month when Montreal Mayor Gerald Tremblay asked for an investigation after learning that Secur-Action had submitted an "abnormally low bid" to provide security at Montreal police headquarters on St. Urbain St. The one-year contract was for $874,802, according to La Presse.

The bid was much lower than a similar bid submitted several years ago by the firm Cartier, which had stopped applying for the contract because it was not profitable enough.

Read more: http://www.montrealgazette.com/news/Surete+Quebec+dumps+security+firm+contract/3595011/story.html#ixzz15yRnvtwo

The Procurement Rules and Regulations of the Royal Government of Bhutan:
5.4.5 Abnormally Low Bid

5.4.5.1 Where the prices in a particular bid appear abnormally low or the bid appears seriously unbalanced, the Procuring Agency may reject it only after seeking written explanations from the bidder submitting the low or seriously unbalanced bid. In the case of a bid which appears seriously unbalanced, the procuring agency shall request from the bidder an analysis of rates of the relevant items.

5.4.5.2 The Procuring Agency may take into consideration explanations which are justified on objective grounds including:
a. The economy of the construction method or the method by which the goods or services are to be provided; or
b. The technical solutions chosen; or
c. The exceptionally favourable conditions available to the bidder for the execution of the contract; or
d. The originality of the work, product or service proposed by the bidder.
e. The internal consistency of those prices with the construction methods and schedule proposed.

5.4.5.3 If the Procuring Agency decides to accept the abnormally low bid or the bid with the seriously unbalanced rates after considering the above factors, the bidder shall be required to provide additional differential security equivalent to the difference between the estimated amount and the quoted price in addition to the performance security.

The situation in Sweden:
31 What constitutes an ‘abnormally low’ bid?

There is no general definition of an abnormally low bid in the PPA or UPA. The contracting authority or entity has to determine if a bid is abnormally low based on the circumstances of the procurement. There is no precedent in case law regarding what constitutes an abnormally low bid.

32 What is the required process for dealing with abnormally low tenders?

A contracting authority or entity may refuse tenders that it considers abnormally low. Such refusal must, however, be preceded by a written request for an explanation of the low tender value which has not been satisfactorily answered by the tenderer. A request for an explanation may relate to details such as the economics of the construction method, the manufacturing process or the services provided, technical solutions or any exceptionally favourable conditions available to the tenderer for the execution of the work, supplies or services, the originality of the tenderer’s proposal, compliance with the provisions relating to employment protection and the possibility of the tenderer obtaining state aid. The contracting authority or entity shall verify those constituent elements by consulting the tenderer, taking into account the evidence supplied.

UPDATE JUNE 2, 2016   For a recent (as of the date of this Update) view on this subject from the perspective of the UK, see  Abnormally Low Tenders posted on the CMS Law Now website.
The rules around tendering for public contracts have been updated recently and are set out in the Public Contracts Regulations 2015 (“PCR 2015”).  Regulation 69(1) of the PCR 2015 directs that a contracting authority shall require a tenderer to explain the price or costs proposed in the tender where a tender appears to be abnormally low.  However, while this mandatory requirement on contracting authorities may appear clear, there are surprisingly few examples of this Regulation (or its non-mandatory predecessor - Regulation 30(6) of the Public Contracts Regulations 2006 (“PCR 2006”)) coming under judicial scrutiny in the United Kingdom.  Elsewhere in the EU, award decisions are more often challenged on the ground of abnormally low or high prices and can be a fertile ground for court appointed experts.
The main area of confusion arises in relation to what is meant by “abnormally low”.  In other words there is no explanation of the “trigger point” included in the PCR 2015 at which the contracting authority should require the tenderer to explain its tender.  This gives rise to a slightly odd position that it is required only to ask questions of the tenderer if the tender appears to be abnormally low but unless it asks the questions the authority may not know if the tender is abnormally low in the first place.

Read More at the article's link above.



The procurement portal of the Republic of the Philippines

For those interested in the procurement processes or issues in the Philippines, this Government website may be a useful start:

Philippine Government Procurement

Bridging gaps and breaking walls for a better understanding of procurement reforms




A United Kingdom approach to procurement

I have happened upon the UK's official procurement website, or so it appears. It is the web home of the Office of Government Commerce (OGC). The Home Page is here.

It appears to offer a treasure trove of procurement advice and resource, not only restricted to the unique requirements of the United Kingdom and the European Union, but also framed in more universally recognized statements of procurement theory and principle.


For instance, it describes the procurement process in the manner I consider most appropriate to obtain effective procurement outcomes:
The procurement process spans the whole life cycle, from the identification of the need to purchase, through supplier selection and contracting, to the delivery of the required goods or services and (where relevant) the underlying policy outcome through to the disposal of the asset(s) or service closure or recompetition exercise. Its success can only be ultimately judged or measured when the product has been disposed of, or sold on, or when the service contract has been delivered in full.
Its Introduction to Public Procurement also details one of the cornerstones of effective procurement practice:
Pre-Procurement Planning

It is essential effective planning is carried out prior to a procurement. This planning should include :

> consultation with stakeholders about what is needed and the budget that is available to fulfil the need

> engagement with the market to understand the solutions that may be available and to get feedback on how the requirement may be best met

> establishment of effective governance arrangements and resourcing plans

> if necessary because the department does not have the necessary expertise, appointing advisers to help ensure novel or difficult projects are established on a sound footing

Developing Specifications

It is important to provide sufficient detail to allow the market to respond to requirements, whilst leaving room for innovation where appropriate.

Output- or outcome-based specifications should normally be used. These focus on what authorities want to achieve, not how a supplier is to provide it. This challenges suppliers and gives them the scope to develop innovative solutions.

In certain circumstances it will be essential to specify exactly what is required in detail (e.g. for specialised laboratory equipment).

Specifying an accepted industry standard for a technical solution is also good practice; specifying non-standard or ‘gold-plated’ solutions will always lead to higher costs.

While the website appears to be under re-construction, it nevertheless contains links and articles and other material that is sure, at some point, to offer valuable insight to any student or procurement practitioner, regardless of your particular procurement framework.

I encourage you to have a "sticky beak" (a look around).

Saturday, November 20, 2010

Procurement controversies -- Guyana

Public accounts head berates gov’t over procurement commission Published - Friday, November 19, 2010
Government’s failure to submit their nominees for the Public Procurement Commission (PPC) was cited again as the National Assembly yesterday adopted the report of the Public Accounts Committee (PAC) on the public accounts of Guyana for 2006.

Chairman of the PAC, Volda Lawrence noted that the PPC is an important body in securing and procuring items and must come into being. She pointed out that the Constitution – 10 years ago – says that there must be one.

Lawrence said that the government has shown no interest in bringing the PPC into being and this failure has stymied the work of the PAC. A problem arising out of the non-existence of the PPC is the non-compliance of Ministries and agencies at various levels with the public procurement Act and the breach of tender board procedures particularly the splitting of contracts, Lawrence said.

She noted that that many of the issues highlighted in the 2006 report have been overridden by time and events. Lawrence said that there continued to be various levels of non-compliance with the existing tender board regulations relating to the procurement of goods and services and undertaking of works, both capital and current, by some agencies. She cited that Ministry of Public Works, the Ministry of Education, the Ministry of Home Affairs, the Ministry of Health, the Ministry of Legal Affairs and Regions, Three, Seven and Ten as those who disregard the Public Procurement Act.

Another “perpetual problem” is overpayment to contractors, Lawrence said. “This practice continues unabated. We are yet to hear of any Ministry or agency receiving a successful judgment against a single contractor or any officer being surcharged or disciplined for making substantial advances or payment upfront to contractors”. She said that the PAC has concluded after interviewing several accounting officers and staff of various ministries and agencies that “there is collusion between staff and contractors to defraud the Guyanese people of large sums of money”. Reading from the report, she said that: “The PAC recommends that officers and consultants who affix their signatures of completion in which overpayments are found should be sanctioned or surcharged where necessary”.

Commentary: It might be noted that the Guam Procurement Policy Office is the central authority for GovGuam procurement policy matters, with sole power to promulgate procurement regulations. It was established in 1983 when the Procurement Act was first adopted. See 5 GCA § 5102.

To my knowledge the Policy Office has instigated only one policy act, being the initial adoption of the Procurement Regulations about 25 years ago. Since then, it appears that there has been no constitution of the Office and no further policy consideration or implementation, notwithstanding other significant developments to Guam procurement law.

Friday, November 19, 2010

The dilemma of "only one bid received"


The ABA Model Procurement Code, adopted in Guam at 5 GCA § 5001(b)(6), requires the government "to foster effective broad-based competition".

Regulations add specific requirements to the general obligation to foster effective competition, especially in regards to competitive sealed bidding.

Guam regulations require that bids "be mailed or otherwise furnished to a sufficient number of bidders for the purpose of securing competition". (2 GAR § 3109(f)(1)).

It is pretty clear from these emphatic requirements that the government's job is not to simply put a small ad in the paper with some vague description of a solicitation and then sit back and see what turns up. It must actually solicit.

So, assume it has done that. It has effectively solicited. And then ... only one bid is submitted. Does that bid win by default?

This is not a new issue. There is an interesting story that dates back to the infamous sinking of the US Battleship Maine in Havana Harbor, which touched off the Spanish-American War in 1898. As soon as the war was ended, there began calls to Raise the Maine from the bottom of the harbor. Evidently, the first thoughts were to simply remove the Maine, which was a hazard to harbor traffic, and a solicitation of bids was made.

The NY Times has a story from June 1903 that described the results of this solicitation. When the time came to open the bids for the removal of the wreckage, only one bid was submitted, from a prominent Cuban, who agreed to cut it up and remove it. Apparently "American metal concerns" objected that they would have bid had they been allowed to use dynamite. In the event, the committee of Treasury evaluators, after opening the bid, decided it was too vague to award. Fortuitously, for historians anyway, it was later decided to spend the money to actually raise the Maine intact.

Even before the Maine event, one-bid solicitations were creating a stir. Another NY Times story, reported in March 1878, concerned a solicitation for street cleaning services, which attracted only one bid. The Board of Police, which issued the solicitation, was concerned that the one bid showed a lack of competition and would not be in the best interests of the City to take the bid. They then passed the buck to legal counsel for an opinion whether they might be bound to accept the bid nevertheless.

But this is not a problem lost in history, as the following articles illustrate.

With only one bid on county home, there's even less reason for Jefferson County commissioners to rush to try to sell it before they leave office

After what happened last week, it's clear the Jefferson County Commission won't be able to sell the county's nursing home before commissioners leave office in a month. So, it's silly for commissioners to vote this week on a resolution expressing the county's intent to sell the home.

Last Tuesday, the commission had to put off opening bids on the county home after only one bid was received.

One bid received for planned demolition of Potsdam building
The single bid was opened Wednesday at the Potsdam Town Hall, 35 Market St., with Supervisor Marie C. Regan and councilmen Rollin A. Beattie and Harold D. Demick witnessing the opening. The group took no formal action; the full Town Council is expected to act on the bid Nov. 3.

Mr. Demick said it was important that town officials move quickly to raze the old fraternity house before winter sets in, because of growing worries that a teenager or college-age student could be hurt on the property.

Brockton gets 1 bid for audit
A committee formed to review bids on an audit of Brockton’s water department should know by the end of this week whether it will move forward with the lone proposal it received, or seek other candidates.

Michael Morris, Brockton’s chief procurement officer, said the non-financial details of the offer will be assessed in the next few days to see whether their technical elements meet minimum requirements. If so, the bid’s price, which has yet to be opened, will be reviewed, he said.

The US Department of Transportation, Federal Transit Administration, has considered many of the issues a one-bid solicitation poses, and offered guidance. It has said, for instance,
A. The FTA Procurement Circular 4220.1F at Ch. VI, Section 3.i.(1)(b)2, discusses the scenario of receiving only one bid after a competitive solicitation. You will need to review the specification used to determine if it was overly restrictive: i.e., if only one company could meet the requirements. If this is true, then you need to have a sole source justification approved before you can award the contract. If you determine that the specification was not restrictive, and other companies could have met the specification but chose not to bid for other reasons, then you need to document the file with your determination that the competition was adequate.

The FTA Circular also requires that some form of cost or price analysis be done in order to determine that the price is reasonable. We would not think the state contract price could be used as a benchmark since that price was not arrived at competitively. You should look at the Best Practices Procurement Manual, section 5.2 – Cost and Price Analysis, which has a number of suggestions for doing a price analysis. (Reviewed: July 2010)

A. If you have determined that your specification and other terms and conditions were not restrictive, and factors other than your solicitation were responsible for other suppliers not bidding, then competition was adequate and you may award this as a competitive award, with a price analysis to determine that the price is fair and reasonable. The situation of a single bid received after a competitive solicitation is addressed in the FTA Circular 4220.1F, at Ch. VI, Section 3.i.(1)(b)2. (Revised: July 2010)

A. If a single bid is received, you will have to determine if competition was adequate or inadequate. The situation of a single bid received after a competitive solicitation is addressed in the FTA Circular 4220.1F, at Ch. VI, Section 3.i.(1)(b)2. If you find that competition was inadequate because of a restrictive specification that only one offeror could meet, then you must process this as a sole source contract award and obtain the requisite agency approvals prior to award.
Q. Is competition or lack of competition defined by the number of quotes solicited or the number received? Presuming 3 responsible and capable firms are solicited and only one firm submits a quote, have the competition requirements been essentially met?
A. You will need to determine whether the competition was adequate by contacting the companies you solicited to find out why they did not submit bids. If there was a problem with the specification being restrictive, then you have inadequate competition and must fix the problem and re-solicit, or process the contract as a sole source award and obtain the necessary management approvals. The mere fact that only one bid was received does not automatically mean competition was inadequate since many unrelated factors could cause potential sources not to submit a bid or proposal. (Revised: July 2010)
The Federal Acquisition Regulations urge special caution when only one bid is received.
14.408-1(b) If less than three bids have been received, the contracting officer shall examine the situation to ascertain the reasons for the small number of responses. Award shall be made notwithstanding the limited number of bids. However, the contracting officer shall initiate, if appropriate, corrective action to increase competition in future solicitations for the same or similar items, and include a notation of such action in the records of the invitation for bids (see 14.204).

14.408-2 (a) The contracting officer shall determine that a prospective contractor is responsible (see Subpart 9.1) and that the prices offered are reasonable before awarding the contract. The price analysis techniques in 15.404-1(b) may be used as guidelines. In each case the determination shall be made in the light of all prevailing circumstances. Particular care must be taken in cases where only a single bid is received.

Frederick Marks, CPPO, VCO, a retired purchasing officer, has written a very useful guide, in the form of questions, addressing the question,

"Only one bid... now what?":
Personally I have never liked receiving one bid, as it really never told me anything. It's as bad as not receiving any bids. I felt it reflected on my professionalism, and nothing annoyed me more than not being able to say that a price is fair and reasonable.

There are reasons that you have received one bid, and before you decide whether to open it or not, you need more information.

Internal factors include the specifications. Were they written to allow multiple bidders, or were they targeted toward one bidder or product? Are they clear? Is your pricing formula fair and consistent with how the marketplace prices its product? Are you asking for something the marketplace cannot provide or that is too complicated? Are your terms and conditions unreasonable?

What research did you do prior to sending out the bid? Did you survey the marketplace? Are you dealing with a sole or proprietary source? Is the marketplace stable enough to give you a firm price? If not, do you have the appropriate price adjustment clause that will keep both you and the bidder whole during the term of the contract? What input, if any, did your end user give to you in producing the bid papers? Did they get it from independent research or from one outside vendor?

What research did you use to develop your bid list? Did you use the same bidders as last time or did you add new ones? Have you checked sources outside your local area? Did you contact a trade association to see if they have members that could assist you? Does the trade association have standard specifications that you could use instead of your home-grown specifications?

After you consider all this, and still decide to open the bid (if your procedures allow it), what are you going to do with the information? How will you verify that the prices are fair and reasonable?

The Guam Procurement Regulations (2 GAR § 3102(c)) state that where "only one responsive bid is received" (which could include a situation where more than one bid was received but the other bids were non-responsive), an award may be made to the single bidder if a finding is made "that the price submitted is fair and reasonable"; but if it determined that the need "continues" notwithstanding a price that is not fair and reasonable, the procurement may be conducted as a sole source or emergency procurement "as appropriate". A similar situation is allowed for only one proposal received in response to a Request for Proposals.


(NOTE: A newer post closely related to this subject is at One bid received vs one bid solicited, June 15, 2011.  And that post has been updated July 2019 with reference to a new FAR on the topic.)

(Also note, Do longer competitions bring better prices?, June 25, 2011)

Monday, November 15, 2010

Resistance is fertile

The US Federal government is likely the single largest purchaser in the world. To say that vested interests are endemic would be an understatement. So when change is sought from without or above, it is resisted from within -- within the government and within the industry that does most of the business with the government.

And I don't imply any judgment about the nature of the resistance, because that will speak for itself. In fact, most humans in most circumstances resist change. So regardless of good or bad, resistance is often fertile.

But back to the topic, the current administration is following tradition of trying to put its own stamp on the procurement system, and those who operate the machinery are finding plenty of reasons to fault the changes desired by those who have oversight of the mission.

Pentagon official searches for the source of contracting waste
Frank Kendall arguably has the most difficult job in all of federal acquisition -- rooting out the source of entrenched waste in the Defense Department's $375 billion-per-year contracting system.

Kendall told Government Executive that he plans to approach the mission from a different perspective -- a ground-up strategy examining the root causes of waste and inefficiency.

As the department's second-highest ranking politically appointed acquisition official, Kendall has assembled a team of people from Pentagon headquarters and the various service agencies to decipher and measure the sources of acquisition waste.

But the examination is more than a simple process-oriented review to eliminate system redundancy or streams of paperwork. Kendall wants to reform the behavior and incentives that lead to cost inefficiencies, some of which are deeply engrained in the Defense acquisition process.

For example, Defense has a tendency to sign on to the next latest and greatest technological advance, no matter if the program is necessary, ready or affordable, he said. Budget operators and service leaders, meanwhile, want to spend as little as possible for weapons systems, but then impose unrealistic schedules on contractors. And companies place bids on contracts that are overly optimistic, hoping they will recoup costs further downstream, according to Kendall.

"I am hopeful that once we understand what those behaviors are costing us in terms of inefficiency then it will be easier to change them," he said. "That is a hypothesis that has yet to be proved."

Reforming the acquisition system of the largest single buyer of goods and services on the planet will not be easy. Interest groups scattered throughout the Pentagon advocate passionately for pet projects. Congress is deeply invested in keeping Defense projects -- and the jobs associated with them -- in their backyard, an all-too familiar scenario that most recently has played out with the F-35 Joint Strike Fighter.

"There is a certain amount of institutional inertia that needs to be overcome," Kendall said.

Last year, Defense Secretary Robert Gates announced he would reduce the percentage of support service contractors from its current level of 39 percent of the workforce to its pre-2001 level of 26 percent. The Pentagon will replace those contractors during the next five years with 39,000 new full-time government employees, 20,000 of whom would be acquisition professionals, although the latter figure could grow, Kendall said.

The additions to the Pentagon acquisition workforce would be split roughly between 10,000 insourcing conversions and 10,000 new hires. As of the end of March, the department has hired approximately 4,800 new employees, nearly two-thirds through insourcing, according to Defense spokeswoman Cheryl Irwin.

Industry officials have criticized the insourcing initiative as "quota driven," arguing routine commercial activities are being moved in-house without any verifiable cost savings. But Kendall claims those concerns are off target and miss the big picture.

"When people use the word 'quota' there is a perception of arbitrariness," he said. "That is not our intent. We are trying to bring in specific needs of the government to do jobs where they atrophied too much. ... We are not measuring performance in terms of pure numbers. We want quality and we want the right kinds of people brought in to do the work that needs to get done."

Bad press makes contracting an unattractive field, professor says
Norm Augustine, who was chairman of the Business Executives for National Security task force on Defense acquisition law and oversight, said finding the right balance between recruitment and training is crucial.

"Adding, say, 10,000 people each with one year's experience is different than adding 500 people with 20 years' experience," Augustine said.

Senior acquisition officials question procurement policy direction
The biennial survey by the Professional Services Council, a contractor trade association, and Grant Thornton LLP, a business advisory firm, interviewed 33 officials from across government, including senior acquisition executives, congressional staff and oversight employees, on a host of topics.

On many key issues there appears to be a widening chasm between operational and oversight officials

For example, recent legislative and regulatory actions have shown a preference for fixed-price contracts above cost-plus or time-and-materials awards. In many cases, officials are required to provide lengthy written explanations when using the latter contract types. But the survey showed that 71 percent of respondents felt the fixed-price mandates had not resulted in better contract outcomes for the government or the taxpayer.

A similar disconnect between a policy's intention and result was found in response to questions about insourcing. Many officials argued the concept, while necessary to restore core government capabilities, has not been conducted thoughtfully or strategically and might be moving too rapidly. Meanwhile, a whopping 94 percent of respondents said insourcing will hurt small businesses.

"Insourcing is moving too quickly and it is too focused on hitting metrics," one interviewee said.

As in previous surveys, enhancing, training and managing the acquisition workforce remain the biggest operational challenges in acquisition, respondents said. They noted that while the addition of direct hiring authority at some agencies has helped to a point, constant turnover, insufficient training and a reliance on interns have created functional concerns. Acquisition officials suggested the system might be improving, but oversight officials generally were more skeptical.

Contract administrators also appeared to be struggling under the weight of oversight mandates. Nearly 90 percent of those surveyed agreed more resources were devoted to back-end oversight than front-end contract management. Others suggested overly burdensome oversight was inhibiting innovation while stressing rigidity and a focus on lowest cost.

"Resources are absolutely not in balance," one interviewee said. "They have thrown resources at [inspectors general] and auditors, but they have done nothing to facilitate contract administration."

The divide was evident in other areas. More than 70 percent of operational executives said existing structures designed to prevent organizational conflicts of interest function effectively. Sixty percent of oversight professionals disagreed. The two sides also disagreed on the need to reform personal conflict-of-interest rules, with operational officials generally in favor of maintaining the existing structure.

The long arm of the law of procurement fraud

More from the 2010/11 Kroll Global Fraud Report.

The regulatory challenges of crossing new frontiers
One result from the latest EIU Global Fraud Survey—that the greatest fraud risk to companies lies with employees and agents—reinforces a truth well-known to practitioners: it’s usually an inside job.

But there is a double risk from employees committing crimes that seek perceived easy routes to business success, such as paying bribes, colluding with competitors and cutting corners on compliance: not only does the company suffer the economic consequences of their behavior but it also opens itself to increasingly robust treatment from regulators. These risks have been heightened by the current economic climate.

Many companies operating in the currently flat markets of the developed world are seeking growth elsewhere, sometimes simply to survive. That is likely to require developing new product lines or entering new geographical markets – which generally means operating outside existing comfort zones. The quick route is to use acquisitions, joint ventures, or distribution agreements but, as with all short cuts, these can be risky. Acquisitions or partnerships can infect a business if they have questionable business practices or lax standards. These may even be perceived to be tolerated in the target’s or partner’s sector or country of operation, but they can leave the unaware open to economic damage and increasingly harsh treatment from regulators.

This risk is heightened when the move is into an emerging market, where growth rates are higher but governance, compliance and transparency are often less mature than in developed countries and where regulation is sporadic and inconsistent, even arbitrary. Too often, corporate attention focuses on market and credit risk in emerging markets: operational risk is neglected until it turns around and bites you.

The bite is as likely to come from regulatory enforcement at home as in the place where the offense occurs. Stung by criticism that their laxity contributed to the financial crisis, regulators are acting with renewed vigor, authority, and political backing – and in some cases new legal powers.

Certain longstanding prosecutorial backwaters have bubbled into life. The most obvious is corruption: as the Economist Intelligence Unit’s introduction highlights, there have been more prosecutions under the United States Foreign Corrupt Practices Act (FCPA) in the past five years than in the previous 30 and the UK has passed a new Bribery Act. Corruption is not the only area of increased regulatory activity: last year fines – in one case of more than half a billion dollars – were levied against several major banks for financial sanctions compliance failures that might once have been seen as little more than clerical errors.1 Meanwhile, European Union competition investigators have conducted dawn raids to gather documents and the resultant suits have led to fines of hundreds of millions of euros.

Another feature of the new regulatory landscape is the rise of extraterritoriality: the application of laws from one country to actions in another. The FCPA always applied to overseas actions, as does the new UK Bribery Act. So, typically, do competition legislation and trade sanction-related laws.

The exposure is not only to the actions of a company’s own employees: regulators have gotten wise to the practice of “outsourcing” wrong-doing to a local partner or agent. The UK Bribery Act makes quite explicit a corporation’s liability to third party acts that benefit the company, but it has been implicit in most such national legislation already. The onus is now clearly on the company to police the actions of affiliates, partners, and agents, and to have a clear record of doing so, in order to protect its own integrity. This applies not just to the prevention of corruption but to many other aspects of international trade and business regulation.

The SEC cracks down harder on pay to play
Banks have long had “Know Your Customer” rules; now the United States Securities and Exchange Commission (SEC) is telling investment managers to “Know Your Placement Agent” as part of its efforts to crack down on “pay to play” – the practice of making political donations or payments in return for government business.

For investment managers seeking government work, federal, state, and local pension fund investments hold out enticing prospects. These total more than $2.6 trillion, or one-third of all US pension assets. On June 30 of this year, the SEC adopted rules to restrict investment managers from making political contributions if they are trying to win government business. They also require placement agents – third parties hired by investment managers to solicit government business – to register with the SEC.

The SEC first addressed pay to play in 1999, but recent events show that those rules did not go far enough.

* In March 2009, the SEC charged New York State’s former Deputy Comptroller with attempting to extract illegal kickbacks from placement agents trying to obtain business from the New York State Common Retirement Fund.1 The SEC and New York’s Attorney General also charged private equity firm Quadrangle Capital Partners with trying to win a $100 million investment from the fund by paying more than $1million to a top political adviser and fundraiser of the State Comptroller, who oversaw the fund.2 In April 2010, Quadrangle agreed to pay a $12 million fine to settle the charges and pledged to support regulators’ efforts to ensure that investment managers are selected “based solely on merit.”3

* In 2009, a private investment advisor to New Mexico’s State Investment Council admitted that, due to pressure from unnamed, politically-connected individuals, he had recommended investments which were not necessarily in the state’s best interest. A grand jury is investigating.4

* In May 2010, the California Attorney General sued a placement agent, representing leading private equity firm Apollo Global Management, for “attempting to bribe” a senior investment officer at the California Public Employee Retirement System (CalPERS), the nation’s largest public pension fund. The agent had allegedly sought to persuade CalPERS to buy a 10% interest in Apollo.5 Apollo was not charged and said it was “deeply troubled” by the allegations.6

Foreign Corrupt Practices Act
The energy industry has long been fertile ground for corruption and bribery and, therefore, ripe for Foreign Corrupt Practices Act (FCPA) enforcement activity. By its very nature, the international energy business, including the oil and gas sector, requires a high degree of government involvement and cooperation, particularly when entering markets overseas, constructing facilities in new territories, applying for permits from foreign agencies, or reaching distribution agreements with countries. Such cooperation can be achieved in many ways, and some firms resort to methods with FCPA implications.

The most recent example of an energy company undergoing an FCPA investigation and prosecution ended in a December 2008 settlement between Siemens AG, the United States Department of Justice (DOJ), and the Securities and Exchange Commission (SEC). The case provides lessons for every international energy firm on how to remain FCPA compliant as it develops business and establishes a presence overseas.

Cooperation with Government investigations: Siemens’ approach to the FCPA investigation has been universally recognized as the “right way” and can serve as a model for those facing similar actions. Siemens retained a multi-national team of accountants and lawyers to establish the facts and circumstances surrounding all of the allegations. The company was also reportedly timely and forthcoming with all of the DOJ’s requests for documents and information. The settlement agreement calls Siemens’ level of cooperation “exceptional.” This behavior is said to be why the company secured the terms it did. Approaching an FCPA investigation cooperativly, rather than contentiously, is the single greatest lesson coming from the case.

Due diligence failures: Siemens’ failure to perform meaningful due diligence on some third-party consultants led to many of its FCPA-related problems. Numerous “red flags” relating to their hiring and use went mostly undetected because of a failure to centralize the due diligence and third-party retention processes. For example, Siemens engaged certain consultants with no relevant experience in their contracted tasks and many received unusually high fees relative to the going rate for such work. In addition, the company used third parties concurrently employed by the governments with which it was seeking a business relationship. Engagement of a third party should always be preceded by a level of due diligence which will yield full knowledge of its proposed activities, remuneration, and expertise to carry out its mission.

Management’s role in compliance: Siemens was harshly taken to task for management’s apparent failure to ensure FCPA compliance in parts of its overseas business. The SEC complaint criticized Siemens’ FCPA compliance program, saying bribe payments and inadequate controls were “accepted by senior management.” The DOJ admonished Siemens’ senior leadership for failing to instill ethics into its business by, for example, not making a clear statement of company policy to employees on the payment of bribes. In essence, the government was condemning a failure of corporate leadership to create a “tone at the top” consistent with effective compliance. Management buy-in involves more than just promulgation of FCPA related rules: senior executives must be actively engaged to ensure not merely conformity with the letter of the law, but also an ethos of compliance.

See, also, Foreign corrupt practices? It's negotiable.

Kroll Global Fraud Report - detecting a climate of procurement fraud

The Economist commissions Kroll to conduct an annual report of the state of fraud risk in the world's economies. This report is an excellent guide to fraud risk generally and procurement fraud more particularly.

The Kroll Global Fraud Report for 2010/11 is online here.

I found the following advice particularly practical and worthy for detecting procurement fraud generally, though this particular extract was taken from the Kroll report on Brazil's transportation infrastructure issues.
For companies seeking to exploit upcoming investment opportunities there are several ways to build up a layer of protection against fraud.

The first step is to evaluate the transparency and fairness of the bidding process carefully. Some of the key questions that should be asked include: Have the details of the process been clearly communicated? Is an independent committee or person presiding over the process? What criteria will be used to qualify or disqualify bidders? Are these criteria fair or tailored to disqualify all but a select few companies? Are they reasonably related to the necessities of the present project? What factors will be considered in selecting the winner? All of these questions should be answered to the company’s satisfaction before it submits a bid.

The second step for a business is to conduct background checks on its own employees and on those companies which it will engage. This is especially important when subcontracting local workers and businesses. A thorough background check can provide clearer details of their qualifications and prior experience, how they are perceived by their competitors and clients, and whether they have previously been involved in fraudulent projects or have otherwise been the subject of a fraud investigation.

Competitive market intelligence is an additional weapon in the investor’s arsenal. Fundamental questions to consider in this analysis include: Are competitors able to sell their services and products at abnormally low prices? If yes, is there a legitimate reason or is the real explanation that fraudulent methods are being employed, such as the use of substandard or counterfeit materials and products? Is there a cartel or similar organization in place that is preventing other companies from entering the market in general or a particular bidding process? Is it possible other relationships exist between competitors that would constitute unfair competition?

Safeguards against possible fraud and exposure to corruption during the project’s execution are equally important. It is essential that corporate executives be aware of local and international laws, regulations, and industry standards, particularly when doing business in new jurisdictions. These must therefore be researched and resultant actions and policies clearly communicated and enforced through appropriate training and periodic monitoring of the work underway. Additionally audits of, for example, purchase orders, invoices and payroll information will provide information that can raise red flags.

For years, transportation infrastructure projects in Brazil have been rife with fraud and the problem shows no sign of abating. As recently as August 5, 2010, arrest warrants were executed for 28 individuals accused of rigging bids and diverting funds related to several transportation infrastructure projects in Brazil. Losses are estimated to be nearly $2.9 million and the accused range from government administrators and officials to owners and employees of the companies contracted to perform the work. They face a wide range of charges, from corruption, embezzlement, and money laundering to forgery, conspiracy, and other criminal violations of Brazilian bidding laws.

Another recent example of fraud in the sector came to light in September 2009 when a whole host of individuals, companies and other entities that provide or manage services related to the air travel industry were investigated for allegedly rigging online auctions and forming a cartel that served to exclude potential competitors from the market. Of the 305 companies authorized to participate in bids, only 16 actually registered. The fraud, estimated to have reached more than $286 million, was one of the largest of its kind in recent Brazilian history.

The ways in which fraud in the industry has been perpetrated are seemingly endless: overbilling, overpayments, use of ghost employees, use of materials of inferior quality, attesting to work that has not actually been completed, forewarnings about upcoming audits, altering or concealing documents.

Given the widespread presence of fraud, the risks inherent in participating in infrastructure projects can outweigh the benefits. In most cases, these projects involve government officials or entities in some capacity. Consequently, if your company has any significant link to the United States or United Kingdom, the far-reaching provisions of the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act could lead to crippling costs, including penalties, disgorgement of profits, and mandatory monitoring. Moreover, Brazilian authorities can separately impose their own hefty fines and initiate criminal and civil litigation.


Finally, conviction for fraud, or even investigation, can result in reputational damage which, while difficult to quantify, will certainly leave a long-lasting scar on any company or individual involved.




Pay to play

The dark side of Public Private Partnerships is populated by private firms that pay public officials and entities for a piece of the procurement pie, and other government advantages, such as licenses, tax perks and the like.

Following in this post, and subsequent posts, are a sampling of recent articles on this subject.

Procurement fraud and inefficiency costs Russia £20bn a year
Russia is losing almost (£20bn) or 1 trillion roubles annually due to corruption and inefficiency in its public procurement process, it has been warned.

According to a BBC report, the 1 trillion roubles figure, which "significantly exceeds" previous official corruption and waste estimates, is immense even for an economy on the scale of Russia.

The report notes that the projected shortfall equates to a fifth of the nation's budget for state and local procurement, or over than 10% of the national income for 2010.

"Gigantic sums of money are being pocketed by officials and dishonest businessmen," Russian President Dmitry Medvedev was reported as saying.

South African Govt to crack down on tender fraud
Companies found guilty of tender fraud will be fined double the amount of the bid, and IT systems will come under “specialised scrutiny”, as government cracks down on wasteful spending.

Finance minister Pravin Gordhan has proposed that service providers that obtain government contracts fraudulently could face a fine of double the contract value. In addition, public officials who assist in tender fraud will be held liable for the losses incurred by government.

“Measures are required to ensure that officials who have breached the buying rules should not remain under suspension, drawing full benefits, while investigations drag on for years,” noted Gordhan.

The five-step plan to clamp down on tender fraud also involves increased monitoring, and National Treasury taking over payments in some instances. Tenders will have to be publicly disclosed at all phases, and reasons for awards will have to be supplied.

Tax compliance measures will also be strengthened and government will look at identifying procurement requirements that could be better managed centrally.

Gordhan adds several areas of reform have been proposed to aid in identifying savings and better organise public services. Among these, he says IT systems and management of consulting services will come under “specialised scrutiny within the supply chain regulatory framework”.

Half of supply cost traced to corruption (Philippines)
The cost of corruption may reach as high as 50 percent of the procurement cost of businesses, an industry leader said yesterday.

"It’s more extreme in certain industries. Government is more susceptible," Charlie P. Villasenor, chairman of the Procurement and Sourcing Institute Asia (PASIA), said.

The estimate of P.50 lost to "unethical practices" for every P1 in procurement was disclosed by Villasenor at a press conference announcing the 1st Philippine Annual Ethics in Procurement Conference on November 3.

Greg Navarro, president of the Financial Executives Institute of the Philippines, said Asian values for which Filipinos are known such as "hiya, utang na loob and pakikisama" have been used for personal gain in procurement.

Villasenor said. PASIA, which is an affiliate of the US-based Institute of Supply Management, will launch what it calls a scientific or forensic approach to detecting fraud, including a whistle-blowing campaign against companies suspected to deal in transactions that are not transparent.

Villasenor said the group will launch ISM standards which will certify companies adhering to principles and standards of ethical supply management conduct. According to Villasenor, 18 companies are ready for certification, the results of which will be made public.

Other PASIA initiatives to be discussed at the conference include the setting up a study center for training in public procurement systems, which is very different from private

Monday, November 8, 2010

Sweet embraceable you

The Guam Office of Public Accountability has issued a Performance Audit of the capital works procurement efforts of the Guam Department of Public Works during the period October 1, 2006 through September 30, 2009.

It is not a flattering assessment.

Almost two-thirds, by value, of the project monies were improperly expended.

As the report summarizes:
From fiscal years (FY) 2007 to 2009, DPW expended $25.9 million (M) for 566 Capital Improvement Projects (CIPs). Our audit of DPW’s CIP procurement during this period revealed projects totaling $16.1M were not procured in accordance with the Guam Procurement Law and the Procurement Regulations; specifically:

(1) preferential selection of 10 contractors who received $14.1M (54%) of the $25.9M in awarded projects;

(2) 262 CIPs totaling $6.6M were not advertised;

(3) emergency procurement was used to circumvent the competitive sealed bid process, including the $199,200 purchase of eight sports utility vehicles from a contractor who is not an authorized automotive dealer;

(4) documentation was missing for procurements totaling $10.5M; and

(5) $226,926 in routine maintenance work was contracted as CIPs and the top five contractors received $121,539 or 54%.

These conditions occurred due to conflicting advertising requirements, artificial division of procurement, poor planning, and inadequate training of CIP personnel.

Actually, the mention of poor planning and inadequate training, while accurate, pulls the punch. Under more specific findings, OPA stated:
DPW does not have a suspension and debarment listing and thus has no way to identify contractors who should be barred from doing business with the government. DPW continually awards projects to contractors who performed poorly. For example:

• In September 2006, Contractor #8 was awarded $765,000 to design and construct emergency generator, shelters, and tanks at five public schools. The contractor failed to complete the project but was not penalized and was instead awarded two more projects: one for $21,147 in April 2007 and another for $29,995 in December 2007.

• In August 2007, Contractor #10 was awarded $186,876 to install typhoon shutters at seven schools. We tested the project at Harry S. Truman Elementary and found that the 90-day timeframe for completion was exceeded by 219 days. Despite the poor performance, the contractor was awarded another $704,158 in December 2007 to install typhoon shutters at nine other schools.

An Engineer Supervisor told us that projects are often divided into smaller purchases to make soliciting price quotes easier. A DPW Supervisor explained that projects are divided into smaller purchases for ease of commencing the project without a lengthy approval process. As a result, 262 projects were artificially divided to avoid advertisement, the sealed bid process was circumvented, and 25 contractors were paid $6.6M. Some instances noted include:

• Between June and December 2006, Contractor #14 was awarded 39 projects totaling $501,280 for hazard mitigation in various village streets. We found no evidence that the projects were advertised.

• From May 3 to 8, 2007, Contractor #17 was awarded 38 projects totaling $465,140 for tie-down and reinforcement of air condition units at various schools. These projects were not advertised.

• On May 2, 2007, Contractor #5 was awarded six $21,600 purchase orders totaling $129,600 for roof hardening at six schools. These projects were not advertised.

• On August 21, 2006, Contractor #12 received a $41,600 purchase order to renovate the police department’s building in Tiyan. The contractor received another two purchase orders totaling $48,973 in December 2006, as well as a purchase order for $22,875 in March 2007 and another for $8,650 in May 2007 for additional costs. Altogether, the project totaled $122,098, but the various parts were kept under $25,000 and were not advertised.

Title 5 G.C.A. § 5215 and 2 G.A.R. § 3113 state that no combination of emergency procurements may be made for the amount of goods, supplies, or services greater than necessary to meet the emergency or within 30 days immediately following the procurement. In addition, 5 G.C.A. § 5010 states that when possible all procurements be made sufficiently in advance of delivery or performance to promote maximum competition and good management of resources. DPW CIP personnel provided a listing of 90 CIP emergency procurements totaling $5.8M.

• On September 29, 2006, Contractor #18 was awarded five purchase orders totaling $407,847. Five purchase orders totaling $199,200 were for the emergency procurement of eight sport utility vehicles. Delivery took between 140 and 255 days to complete. Based on the timeframe and the nature of the purchase, the purchase appears to be an abuse of emergency procurement.

• On June 18, 2007, Contractor #39 was awarded two emergency projects totaling $91,888 ($42,444 and $49,444) for Emergency Flood Control at two schools. The projects were completed in January and December 2008, respectively. Based on the type of work and lengthy completion time, emergency procurement was inappropriate for the nine projects totaling $1.4 million but used simply to circumvent the procurement process.

[The report was also critical of many expenditures justified by Executive Order emergency declarations which failed to meet the statutory requirements for emergency procurements:] Of the 11 CIP procurements tested, nine totaling $1M exceeded the 30-day emergency timeframe and took from 76 to 255 days to complete.

The reasons cited for the setbacks included shipment delays, incorrect material order, and inclement weather. Based on the type of work and lengthy completion time, we concluded that emergency procurement was utilized simply to circumvent the procurement process.

The government of Guam Single Audits over the past 10 years has consistently identified the lack of complete history of the procurement and proper documentation as a significant deficiency, yet no measurable improvements have been made.

The law requires procurement officers to maintain complete records of procurement transactions, to include all written documents and internal and external communication in each file. Additionally, emergency procurement requires documentation of the emergency, the goods and services needed to address it, and the basis for which the contractor was selected. DPW CIP regulations even prescribe a standardized filing system for organizing and maintaining CIP procurement files.

We tested 67 files totaling $10.5M and found them disorganized. All lacked documents such as bid analyses, rationales for awarding the best bidder, and internal and external communications. The files were not consistent with one another and were not kept according to the standardized filing system. We found the following deficiencies:

• 17 projects totaling $238,380 had no evidence of bid evaluation or rationale for contractor selection;

• 5 emergency procurement projects totaling $868,213 had no documentation for written determination of emergency or the authorizing executive order;

• 17 projects totaling $187,275 were missing affidavits, such as the major shareholders and non-collusion affidavits;

• 9 projects totaling $4,778,772 were missing bid opening attendance sheets;

• 8 projects totaling $4,724,772 were missing the receipt time of all bid submittals;

• 8 projects totaling $4,724,772 were missing the notice of award to unsuccessful bidders;

• 4 projects totaling $450,000 were missing the distribution record for bid amendments;

• 45 projects totaling $5,267,667 were missing records of meeting, communications, and audio recordings of negotiations;

• 21 projects totaling $205,739 did not indicate the bid period (from the availability of bid documents to bid opening); and

• The only RFP for $973,166 that was tested did not have all the relevant procurement documentation, such as the record of submitted proposals (Register of Proposals) and each consultant’s detailed resume.

CIP personnel told us that they had no formal procurement training and were simply carrying out the practices of their predecessors. We also learned that DPW’s CIP procurement process is hampered by a lack of teamwork and communication breakdown, and staff resistance to change. A Management Analyst’s recommendations for improvement were negatively received by CIP staff.

DPW's management response is included in the report. In his letter transmitting it to OPA, the Director said, "DPW embraces this audit, findings and recommendations ...."

Time will tell whether this report is embraced, as in taken to heart, or, like the other audits done over the prior ten years, embraced, as in a death hug.

Hear Travis Coffman's interview with me on Guam radio K-57, on the topic of this post:
CLICK HERE.

The Public Auditor despaired of the seeming failure to correct obvious and recurrent procurement requirements, as quoted in one news item covering this report. The Pacific Daily News quoted her as saying,
Part of why local government entities repeat breaking contracts into smaller amounts is the lack of effective penalty to keep such cases from happening, Brooks said.

"The punishment is very minor, if at all, and that is probably why you have this going on," the public auditor said.

"That's why bad behavior -- in the sense of bad processes -- continues," Brooks said.

The public auditor said until tougher penalties are put in place, all she can do is continue to shed public light on artificially divided contracts.

I would point out that any concerned taxpayer, including the Legislator or a Senator, who wants to take the trouble can also do something about it.

First, Guam has a law that holds government employees personally responsible for illegal expenditure of public funds. 5 GCA § 7102 sets the standard of care applicable to government officials when spending public funds:
Any officer, agent, contractor, or employee of the Executive Branch of the government of Guam who is charged with or assumes responsibility for the certification of availability of funds or the spending of money belonging to the territory of Guam, including the Governor and Lt. Governor of Guam, stands in a fiduciary relationship to the people of Guam in regard to the management of public money.
The procurement law specifically provides how contracts are to be solicited, thus payment under any contract made contrary to the procurement law would seem to be an illegal expenditure.

The procurement law "shall apply to every expenditure of public funds irrespective of their source, including federal assistance funds, ... by this Territory, acting through a governmental body", with a few, minor exceptions and qualifications. (5 GCA § 5004(b).)

5 GCA § 7103 allows any taxpayer to bring an action to make sure public funds are spent as required, and to make government employees personally responsible if the funds are not spent properly:
Any taxpayer who is a resident of Guam shall have standing to sue the government of Guam and any officer, agent, contractor, or employee of the Executive Branch of the government of Guam for the purpose of enjoining any officer, agent, contractor, or employee of the Executive Branch of the government of Guam from expending money without proper appropriation, without proper authority, illegally, or contrary to law, and to obtain a personal judgment in the courts of Guam against such officers, agents, contractors, or employees of the government of Guam and in favor of the Government of Guam for the return to the Government of Guam of any money which has been expended without proper appropriation, without proper authority, illegally, or contrary to law. For purposes of this Chapter, the Governor and Lt. Governor of Guam are officers of the government of Guam, and are included within the scope of this Chapter.
Moreover, "The Senators and the Guam Legislature shall have standing to sue under this Chapter. The Legislative Counsel, or Assistant Legislative Counsel, may, as a part of his or her duties for the Guam Legislature, represent members of the Guam Legislature or the Guam Legislature, or both, in bringing suit under this Chapter...." (5 GCA § 7115.)

AND THEN, there is the matter of contractors who should be penalized for shoddy performance. There is a procedure that allows the government to bring an investigation to determine if the contractor should be suspended or disbarred. (5 GCA § 5426(a).)

However, the law also allows "Any member of the public may petition the Chief Procurement Officer, the Director of Public Works or the head of the purchasing agency to take action to debar or suspend" a contractor. (5 GCA § 5426(f).)

So, if anyone, including Senators, REALLY wants to do something to get the attention of the government, this could be an excellent vehicle for effective enforcement of the procurement law.