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Friday, March 23, 2012

Reviewing the benefit of procurement review

The UK law firm CMS Cameron McKenna LLC publishes a free on-line information service that often provides excellent commentary on Continental procurement issues (email contact for subscription). The comment below highlights recent trends in judicial review of procurement controversies in the UK, where review procedures differ somewhat, in details, from the usual US procedures.

It makes the particular observation that, contrary to many ill-advised commentators, access to review procedures can have a beneficial impact on the over-all procurement regime. On Guam, this has been shown demonstrably. Prior to changes in the law to allow de novo review of agency procurement decisions, little was achieved to obtain regularity and effectiveness in local procurement decision-making. However, once the Public Auditor was given the administrative review authority, the lid has been lifted, and GovGuam has been forced to significantly clean up or otherwise address its procurement shortcomings.

It should be remembered that, for the most part, there is no timely policing of procurement irregularities. There may be after-the-fact audits or other investigations that reveal past misdeeds, but that has not proven effective in changing anything.

Most procurement regimes, by default, rely to one extent or the other on the players in the system, and occasionally parties outside the procurement process, to police the process. (The article below suggests the UK system allows a broader class of protestor that does the US system generally.) They must be encouraged as far as possible to do so. Discouraging such criticism does nothing to enhance the efficacy of good governance or effective procurement.

Public procurement challenges: the rising use of judicial review by Rupert Choat
The EU rules which apply in the UK are some of the most detailed and strict of any of the international public procurement regimes. While much is written about the UK’s public procurement regulations, little is said about how the courts have enlarged the scope for challenges. Recognition has, though, rightly been given to the excellent, speedy, service that the courts provide in dealing with challenges.

The regulations dictate who may be challenged (essentially public and quasi-public bodies, such as utilities) and by whom. They also dictate when and how challenges may be brought, on what grounds and what relief is available.

However, the courts have developed grounds for challenges beyond those stated in the regulations. For instance, even where an authority treats bidders equally and transparently its assessments may still be challenged where it commits a “manifest error”. This allows challenges where, for example, an authority fails to evaluate a bid correctly against the relevant criteria.

Over the last year or so there are signs that the courts will permit challenges even further – beyond what the regulations expressly contemplate – in ways that had previously been thought impossible. The courts’ powers of judicial review of many public and quasi-public bodies’ decisions are being brought to bear. The use of these powers was seen last year when the courts quashed the government’s decision to halt various Building Schools for the Future projects (although the government later essentially repeated its decision by withholding funding). This was a temporary victory for authorities which are more used to judicial review being used against them.

Judicial review widens the scope for challenging contracting authorities, upon grounds such as irrationality. While authorities have a discretion as to the criteria they apply to bids (so long as the criteria and any sub-criteria and weightings are disclosed to all bidders), judicial review allows attacks upon the criteria themselves, in ways that the regulations do not envisage.

The applicant need not be an aggrieved bidder and it does not take much for them to show the necessary “standing”; for instance, a subcontractor of a bidder that loses a public tender may have the right to challenge the process (although it may be a rare case where they would in fact to do so). A much wider class of complainant is empowered than aggrieved actual or potential bidders, who are the only complainants that the regulations recognise.

Despite all this, judicial review does not increase an aggrieved bidder’s prospect of obtaining damages for wasted bid costs or lost profits on a contract that would or might have been awarded to it.

It would be wrong to suggest that the courts have only made challenges easier. For instance, the recent change to the regulations requiring authorities automatically to suspend a contract award, if it is challenged by litigation in the 10-day standstill period, has put an onus on authorities to seek court-clearance of the suspension. The courts have been forthcoming with lifting suspensions.

As for judicial review the Supreme Court’s latest addition in November questioned the lack of a coherent basis for court intervention. We may yet see a retreat.

The bases for challenging publicly procured contracts are in a state of flux.

This article underscores the fact that there is no one procurement law. There may be universal principles, and there are certainly consensus principles in most modern states, but the details of procurement procedure in each jurisdiction must be appreciated. Results will vary.

I consider this variety to be a good thing. It allows different states to experiment with alternatives and, so long as the results are reported, provide education for all of us. We have a lot to learn.

Procurement controversies -- Hawaii

The following controversy underlines the cost of improper procurement. If the procurement had been conducted with an eye to cost in the first instance, there would have been substantial savings to the government. Now it will cost the government more money to pay the damages done by the wrongful procurement.

It might be noted that the State of Hawaii, as is Guam, is an ABA Model Procurement Code jurisdiction. This does not mean that the local law is identical to the ABA Model. Neither is Guam's. There are occasional differences in particulars, often substantial difference, but the principals remain the same.

From The Maui News and its news services March 23, 2012
$1.2 million to end vote machine dispute

The Hawaii Attorney General's Office is requesting $1.2 million to settle a 2008 protest filed over a contract for electronic voting machines.

Hart InterCivic Inc. was awarded a $43.3 million contract for new electronic voting machines through the 2016 elections, with an option to extend to 2018. Another vendor submitted a competing bid of $18 million.

Attorney General David Louie's office says former Chief Election Officer Kevin Cronin violated state procurement code when he awarded a multi-term contract for voting equipment without conducting the required analysis of the proposals.

The contract in this case appears to be, effectively, a 10 year "multi-term" contract.

The ABA Model Code contemplates the use of multi-year contracts (§ 3-503). They are allowed only for supplies or services "for any period of time deemed to be in the best interests of the [state] ...."

But what is meant by "the best interests of the state"? The Code provides the answer: "A multi-year contract is authorized where ... such a contract will serve the best interests of the [state] by encouraging effective competition or otherwise promoting economies...." (§ 3-503(2)(b).)

It should be noted that this results from a settlement, not an administrative or judicial adjudication.

It is hard to justify accepting a $43 million award for such a long contract term over an $18 million alternative unless the lower offer is demonstrably nonresponsive to the real needs of the government. The fact that this was settled suggests the difficulty in proving absolutely the responsiveness of the lower bid in this case, but also stands as a testament to the "stink" test.

This case reminds me of a similar action I brought to Guam's Public Auditor a few of years ago. See the Decision in that matter here.

Sunday, March 11, 2012

When the going gets tough, get tougher, don't quit

Don't relax procurement rules by Byron Buckley, an associate editor at The Gleaner.
IN THE lead-up to the December 2011 general election, the Jamaica Labour Party government was rocked by controversy surrounding the implementation of the Jamaica Development Infrastructure Programme (JDIP). There were charges of irregularity and lack of transparency, championed by the Opposition People's National Party and alluded to by the auditor general, as well as the Office of Contractor General (OCG).

Against this background, it was surprising to hear comments in Parliament last week by Finance Minister Dr Peter Phillips and his opposition counterpart, Audley Shaw, suggesting that the government procurement rules are hampering the expediting of the business of State.

Wittingly or unwittingly, this viewpoint could be paving the way for the relaxation of Jamaica's procurement regulatory system. This is alarming.

With the new administration champing at the bit to get its much-talked-about JEEP (Jamaica Emergency Employment Programme) going, taxpayers must be vigilant that the rules governing the procurement of goods and services/works are not flouted or relaxed.

In reaction to the strictures expressed by Phillips and Shaw, the OCG has noted that the procurement rules, which were comprehensively revised in January 2011, "provide ample room and flexibility for emergency and direct contracting, as well as for relaxed procedures and reduced rigidity in instances of low-value procurements".

Indeed, the OCG believes some public bodies have imposed strictures on themselves by not affording adequate time to carry out procurement procedures.

rather than contemplating the relaxation of government procurement rules, the new administration needs to follow through on promises it made during the election campaign to lick corruption when it assumes power. During the December 20, 2011 National Leadership Debate, then Opposition Leader Portia Simpson Miller said:

"I am very strong ... in terms of fighting corruption and will not tolerate any form of corruption in a People's National Party government, and that's why when I'm returned to power, as prime minister, I will ensure the strengthening of these institutions, like Office of the Contractor General, and all the institutions having to investigate corruption and deal with (acts of) corruption when they are reported ... . I will be very firm and strong on corruption. I do not believe that we should allow anyone to corrupt the system of government."

The Simpson Miller administration needs to lay out a timetable to implement the reform and strengthening of the Government's contract-awarding and management system. There is the immediate matter of tidying up the JDIP and Palisadoes roadwork projects to achieve the following objectives set out by the OCG:

Government, through its implementing agencies, should ensure that the selection of JDIP subcontractors is subject to an OCG-supervised competitive tender process to facilitate the office's ability to better scrutinise the particulars of all such subcontracts and to secure competition, transparency and value for money in the contracts-award process.

All tributary contracts that are awarded by JDIP subcontractors must be awarded to only National Contracts Commission (NCC) registered contractors.

Implementing agencies must ensure that, as part of their evaluation process, and particularly prior to the award of each subcontract, a determination is made as to each contractor's capacity to undertake the works, which will insulate JDIP against the potential for poor quality of work, cost and time overruns.

In an effort to secure value for money, the implementing agencies must develop a fully informed comparable estimate that is based upon existing market rates for use in competitive tendering.

Immediate engagement of an independent consultant to discharge the key monitoring, auditing and reporting functions that should be associated with a programme of the magnitude of the JDIP. The independent consultant's primary objective should be to secure and ensure value for money on every project that is implemented under JDIP.

Sticking out for accountability is not merely for moral/ethical fulfilment. There is a cost to the State and taxpayers. Everybody loses in the long run. According to anti-corruption watchdog Transparency International, the cost of corruption in public contracting, expressed as a percentage of the value of the contract, ranges from an average of 10 to 25 per cent, and as much as 50 per cent in the worst cases. Based on 2009 figures, Jamaica spent more than $90 billion in the procurement of government goods, works and services. Do the maths!

There is also the cost to society in terms of little value for money spent as manifested in shoddy workmanship, which require additional expenditure.

In addition to implementing the short-term reform measures to the JDIP, the Simpson Miller administration should consider favourably a number of recommendations Contractor General Greg Christie has been making over time. Top among these is the establishment of a national anti-corruption agency by merging several government watchdog agencies, as Peter Phillips said last December that a PNP administration would do.

As former Prime Minister Bruce Golding noted in his inaugural address: "Corruption in Jamaica is much too easy, too risk-free. We are going to make it more difficult, more hazardous, with stiff penalties for violations. We intend to ... impose criminal sanctions for breaches of the rules governing the award of government contracts, establish a special prosecutor to investigate and prosecute persons involved in corruption, and enact legislation for the impeachment and removal from office of public officials guilty of misconduct, corruption, abuse of authority or betrayal of public trust."

Prime Minister Simpson Miller must pick up from where Mr Golding left off (or did not start). She must resist any temptation by either her parliamentary or Cabinet colleagues to relax accountability and transparency requirements in governance. Even if her administration does not introduce legislative reform to the Contractor General Act in the short term, Mrs Simpson Miller should introduce stiff administrative penalties to erring public servants.

In addition, her administration should initiate the reform of the libel laws to give the media more power to shine the spotlight on corrupt public officials.

Outsourcing procurement mismanagement

Leighton Abu Dhabi scandal revealed
Leighton signed a $1.4 billion joint venture with Abu Dhabi-based Tourism Development & Investment Company in December 2007 to undertake contracting for various projects commissioned by TDIC, the tourism asset development arm of the Abu Dhabi Tourism Authority.

Eighteen months later, the joint venture company was abandoned and both companies blamed the decision on the global financial crisis. Neither company mentioned a scandal that had resulted in an internal investigation being carried out after TDIC received a series of documents that alleged fraudulent activity by a Leighton manager, who for the purposes of this article is called NX.

The revelations raised in the report come as Leighton admitted last month it had alerted the AFP to a possible breach of anti-bribery laws relating to its Singapore-based subsidiary Leighton Offshore Pvt and payments made to facilitate a wharf construction project in Iraq in 2010.

The Iraq payments are not the only potential corruption case facing the construction giant. Documents from a New South Wales Supreme Court case last year reveal Leighton conducted an internal inquiry into ''apparently corrupt conduct'' involving allegations that a senior employee channelled half a million dollars' worth of steel to a third-party project at the Bantam Shipyard in Indonesia.

It can now be revealed that another internal investigation, code-named project rabbit, was headed by Deloitte Corporate Finance. Deloitte completed an internal report on June 22, 2009, days after the TDIC/Leighton joint venture collapsed. The Deloitte report listed ''mental impressions, analyses and opinions solely to assist Al Habtoor Leighton Group in providing a summary of findings as part of its work in connection with an internal investigation into commercial procurement practices and to brief the TDIC''.

The report said: ''As of the date of this report there has been no evidence to substantiate any fraudulent activities alleged to have been conducted by [NX], however there are still concerns regarding his employment of procurement practices that are not in line with AHLG procedures. Further, the investigative team is not able to confirm the source of or the use for the AED [Arab Emirates dollars] 350,000 that was noted in his personal bank statements.''

Leighton said yesterday: ''It is difficult to confirm the detail. This is a matter that occurred in 2008-09 and current management have no knowledge of this matter. We appreciate these matters being raised with us are serious and undertake to look into them further as we take our values very seriously.'' None of the investigations into Leighton suggest it has done anything wrong, but it is a reminder to companies doing business in countries that have a culture of bribery and graft that they need to ensure their affairs are squeaky clean.

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Not sexy enough for this shirt

Illinois remains a wasteland: Taxpayers pay high price when governments lose their way
"Procurement is not sexy, but procurement is the heart and soul of corruption," said Emily Miller, policy and government affairs coordinator for the Better Government Association. "That is where it continues to be bred and it lives and thrives."

A February University of Illinois at Chicago study estimated that political corruption costs state taxpayers no less than $500 million a year. Even if it fails to reach the level of criminal misconduct, the not-insignificant added cost of fiscal missteps and Keystone Kops-style oversight – a corrupted process, if you will – are well beyond the means of a state nursing a sizable budget deficit and even larger unpaid obligations.

The day before the inspector general's report on the aviation department's wrong turns on GPS, Illinois' Auditor General torched the Department of Healthcare and Family Services and Executive Ethics Commission over "serious deficiencies" in a process that resulted in the awarding of three state-worker health-insurance contracts worth $7 billion. One result was that it's difficult to know if the state got a good deal on the insurance or not.

Ironically, some of the problems cited stem from confusion over rules, responsibilities and requirements of revamped purchasing laws established to prevent the sort of corruption that thrived during ex-Gov. Rod Blagojevich's administration.

"This was supposed to be the fix, and now all this waste happened after the fact," Miller said.

"It does seem to be verging on incompetence in this case unless they find a direct so-and-so gave money to so-and-so for the contract, which is what we find in the corruption reports, like the Blagojevich contracts," said Dick Simpson, a former Chicago alderman who's now a UIC political science professor and co-author of the school's "Chicago and Illinois, Leading the Pack in Corruption" report last month. "The thing about waste and inefficiency is they're mostly out of sight."

The Office of the Auditor General's 169-page insurance-deal state audit report set off a wave of animated finger-pointing and finger-wagging.

Among the audit's findings: The state agencies signed off on a deal allowed a consulting firm to help review the bids that business relationships with each of the bidders; an original recommendation to award the contract was changed after an agency head met with the governor's office; one insurer scored a contract in 20 counties in which it did not bid and in 24 counties where it had no in-network primary-care physicians. And finally, that all of this should have been flagged before the deals were done.