Public Procurement and Contract Administration in Nigeria

PUBLIC PROCUREMENT AND CONTRACT ADMINISTRATION Overview of Procurement Procurement is the acquisition of goods, works and services at the best total cost of ownership, in the right quality and quantity and at the right time. It also involves the acquisition of goods and services at the right place and from the right source. Public Procurement is the acquisition of goods, works and services by Government Ministries Departments and Agencies. In an effort to provide development and fulfil campaign promises, governments all over the world are involved in large scale procurement of goods, works and services. Public Procurement account for substantial part of most countries GDP. The establishment of good public procurement system is increasingly being viewed as measure of accountability and transparency. The responsibility of government to ensure transparency is also increasingly becoming a serious campaign issue. Public Procurement helps ensure the judicious use of public resources. An efficient Public Procurement System will ensure at all times government acquisition of goods, works, and services are done with due regard to:  · Economy;  · Efficiency;  · Fairness;  · Reliability; Transparency; and  · Accountability and Ethical Standards. Economy: This will ensure that the procuring entity obtain the best value for the money expended. Value may include more than price. It includes quality, and timely delivery of the goods or services. However, the ultimate aim of a sound procurement is to obtain the maximum value for money. Efficiency: A good procurement must be seen to be posi tive. It should be devoid of bottlenecks and other forms of inefficiencies. A good procurement system is devoid of protracted delays. It must be simple and swift. Fairness: A good system will ensure fairness to all bidders and will be impartial, consistent, and reliable. It will ensure level playing field to all contractors, suppliers and consultants. Transparency: Good procurement system establishes and maintains rules and procedures that are accessible and unambiguous. It is not only fair, but it is seen to be fair. Accountability and Ethical Standards: A system must ensure its practitioners obey the rules. It enforces the rules through a process of sanctioning those who neglect, disobey or bend the rules to gain certain advantages. The rules and procedures must be clear and unambiguous The process of establishing formal public procurement system in Nigeria started with the election of Obasanjo in 1999. It started with the establishment of Due process office under the Presidency. The Due process office was headed then by Mrs. Oby Ekwesili, the current Vice President of World Bank in charge of African Region. The Due process Office succeeded in saving billions of Naira according to the press release by the Agency. Public Procurement bill was passed by the two houses of the National Assembly and signed into law by the President in 2007. The Act provide for the establishment of Public Procurement Council and Bureau for Public Procurement to beheaded by a Director General. Nigeria public procurement Act was enacted in 2007. Overview of Contract Administration Contract Administration on the other hand involves all those activities which are performed with aim of promoting the smooth execution of contracts. Contract Administration starts from the time a contract is signed to the time a contract is closed. There are various forms in which a contract can closes: A contract can close when an operational certificate has been issued and the contractor collects the final payment under the contract. A contract can close if it is terminated and what is due to the either of the party (client or contractor) has been paid. A contract could be terminated due non performance by the contractors, due to failure of the client to fulfil obligations under the contract or due to events or happening beyond the control of the parties to the contract (force majeure). A contract can be discharged when there is a dispute. This can happen either amicably or through mediation through arbitration and adjudication or through the court. The court is usually the last resort in this kind of settlement. Most modern contracts proscribe mediation mechanism. Contract closure should be seen as part of the procurement process that assures that the employer gets what it paid for and contractor, payment for goods or services delivered. The Role of Regulation in Public Procurement A good regulatory framework is pre-requisite for an efficient Public procurement system. The role of policy formulation should be separate from policy execution and a mechanism for handling protests must be established. Any agency involved in any form of execution of public procurement should not be involved in regulating procurement. The Nigeria Public Procurement Act is however, somehow deficient in the area of separation of policy formulation, execution and regulation and protest handling mechanism. The Bureau is involve in giving no objection for contracts yet is involve enforcing compliance with the provisions of the Act. This vested the power of execution and regulation in the Bureau. The Bureau also through the council (where the DG is the secretary) is involved in policy formulation and handling of protest. A good example of separation of regulation, execution and protest handling mechanism is the Kenyan public procurement system. It incorporated the necessary separation of execution, policy formulation and protest handling mechanism. However, this has not prevented politicians in Kenya from abusing the procurement system. In 2004 all the procurement officials in the various MDA in Kenya were suspended to allow politicians recover the money they spent in election campaign. The various agencies under the Kenyan Act are: Public Procurement Oversight Authority The functions of the Kenyan Public Procurement Oversight Authority are: To ensure that the procurement procedures established under the Act are complied with; To monitor the public procurement system and report on the overall functioning to the Minister and also do the following functions: support the training and professional development of persons involved in procurement Issue written directions to ublic entities with respect to procurement including the conduct of procurement proceedings and the dissemination of information on procurements; and ensure that procuring entities engage procurement professionals in their procurement units. To initiate public procurement policy and propose amendments to the Act. To perform such other functions and duties as provided for under the Act Public Procurement Oversight Advisory Board Composition The Public Procurement Oversight Advisory Board shall consist of nine members appointed by the Minister approved by Parliament from persons nominated by the prescribed organizations and the Director-General. Functions To advise the Authority generally on exercise of its powers and the performance of its functions To approve the estimates of the revenue and expenditures of the Authority; To recommend the appointment and termination of the Director-General of the Authority Perform such other functions and duties as provided for under the Act. Public Procurement Administrative Review Board The Public Procurement Administrative Review Board, review complaints and make appropriate recommendation to the government. The Public Procurement Oversight Authority shall provide administrative services to the Review Board. Procuring Entities (MDA) It is the responsibility of Procuring Entities to comply with provisions of the Act. Specifically the Kenyan Act provides; What is being procured must be within the approved budget of the procuring entity and included an annual procurement plan Procurement undertaken by a procuring entity must be as per threshold matrix as set out in the regulations There is adequate segregation of duties in respect of procurement initiation, processing and receipt of goods, works and services. A public entity shall establish a tender committee, procurement unit and such other bodies as required under the regulations for the purpose of making such ecisions on behalf of the public entity as specified in the Act . Procurement Planning The first thing to do in procurement is, planning the process. It involves definition of the project scope and expected completion time. Specifically, the procuring entities need to identify the required works, goods or services to be procured. The procuring entities also need to determine the various procurement sequences. The procuring entity will selec t equipment packages and choose the method of procurement to use depending on the scope and complexity of the assignment. The following methods are usually used in procurement of goods, works and services (non-intellectual services): International competitive bidding (ICB) Limited international bidding National competitive bidding Shopping Procurement Plan should separate consultancy services, works, goods and supply and installation of plants and equipments. Procurement plan should address the following; How the procurement process should be handled (ICB,NCB, Others, Co-financing) Define the timing of each step in the procurement process (Each step, Each Package). It should also identify the procurement & implementation team The plan should also take in account the approvals process and delays that may occur. It should take into account all technical, staffing, legal and training etc. Procurement Steps There should be identification of needs. The list of goods, equipment, materials plants etc. Types of Works (Large, Small, Very Small) and aassociated Services. The procuring entity should also indentify the means of transportation, distribution and training. The plan should also take into account after sales service and warranty period. The steps include the advertisement of tenders. The World Bank require advert in G. D. Market and United Nation Business on-line. National competitive bidding requires advert in at least two nationally read newspapers. The process includes; Issuance of Bidding Documents Bid or Quotations Submission & Opening Bid or Quotation Evaluation Contract and Purchase Order Award. This will be preceded by contract notification, signature and effectiveness. Pre-contract Meeting Officials of the procuring entity involve in the procurement process should meet in order to: Understand their responsibilities and restrictions under the contract The role of the project manager should also be defined The various tests and other forms of quality control should be defined. Specific deliverables and special contract provisions should be explained. Monitoring and performance measurement should be understood and invoicing and payment procedures should be explained. Pre- contract meeting/discussion between the employer and the contractors are usually organised. At such meeting, the objective of the contract and its requirements are clearly defined. The contract effectiveness conditions are explained. Others issues to be discussed are: The project manager (from the employer) and contractors representative Organization and structures of the contractor’s implementation team. Implementation schedule and Reporting method Progress meetings, works certification and invoicing After the pre-contract discussion all grey areas are ironed out, the contract is signed by contractor’s representative with the power of attorney and the authorised representative of the contractor. Contract Effectiveness This will take place after the contract has been signed and following conditions have been fulfilled: Contractor provide performance guaranty and advance payment guaranty (if required) If the contract requires payment of advance payment, it has been paid If Letter of Credit is required it must be established The Letter of Credit must be confirmed (if funded by Nigeria government) or made operative through issuance of special commitment if World Bank financed contract or letter of guaranty if AfDB financed contract The employer must write a letter conveying the effectiveness to the contractor Letter of Credit Letters of Credit are guided by universal custom practice established by International Chamber of commerce and Industry based in Paris, France. It provides condition to enable parties to contract of sale living in different countries to make and receive payment for goods supplied. It start with a bank in the buyers country (opening bank) opening direct communication with another bank in the seller country (advising bank), through a correspondence bank (usually the negotiating bank). The opening bank will open either an irrevocable Letter of credit or a revocable letter of credit depending on the circumstance of the transaction. It is irrevocable because once established neither of the party can cancel it unilaterally before the expiration of the validity. Letter of Credit is said to be confirmed if in addition to the confirmation of the opening bank, another bank (say the negotiating bank also add its confirmation). Under LC for contracts financed by World Bank, LC’s are irrevocable but are unconfirmed. They are made operational when a special commitment is issued on it by World Bank. Incoterms 2000 Incoterms means International Commercial Terms published by International Chambers of Commerce (ICC), Headquarter in Paris. Incoterms was created in 1936 by ICC to facilitate international trade by providing uniform interpretation of trade terms. Incoterms are regularly updated to keep pace with developments in international trade. The latest is incoterms 2000. The scope of incoterms is limited to rights & obligations of parties to contract of sales as it relates to delivery of tangible goods. For example under the C terms, the Seller fulfils his obligation upon the shipment of goods. Once the good are shipped by the seller, under the C terms the buyer is obliged to receive the goods. The following are the various incoterms Group E: Departure {text:list-item} Group E: Main Carriage unpaid {text:list-item} {text:list-item} Group C: Main Carriage Paid {text:list-item} {text:list-item} {text:list-item} {text:list-item} Group D: Arrival {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} Terms of Payment There are terms of payment for various contracts. Terms of payment are usually specified in the bidding document or request for proposal (RFP). Under a project financed by credit from the World Bank, the following terms shall apply as follows; Schedule 1-Plant & Equipment from Abroad text:list-item} {text:list-item} {text:list-item} Schedule 2-Plant & Equipment from Employers Country {text:list-item} {text:list-item} {text:list-item} Schedule 3-Local Transportation {text:list-item} {text:list-item} Schedule 4-Installation Service {text:list-item} {text:list-item} {text:list-item} All payment must be made 45 days from submission of invo ice and invoice not paid more than 60 days will attract interest. Role of Project Manager and Contractors Representative: Project Manager The contractor must be notified of the Project Manager in writing. The Project Manager shall act and represent the employer at times during the validity of the contract. He shall give all instructions, notices, orders, certificates etc. He shall give approval and receives notices, instructions, information on behalf of the employer. Contractors Representative: The employer must be notified in writing with his CV attached. Contractor representative must be approved by employer. The contractors representative act and represent the contractor at all time during the validity of the contract, He received all instructions, notices, orders, certificates, approvals and communications. The contractor representative issues all notices, instructions, information and other communications on behalf of the contractor Monitoring and Evaluation Monitoring and Evaluation is an essentially part of contract administration. It is usually performed by project manager. Project Manager approves all designs and drawings for supply & installations contract etc. The project manager inspects & issue acceptance certificate before shipment. Proper monitoring ensures potential disputes are averted Invoicing and Payments Contractors and employers are partners. The contractors have goods/services or works required by the employer while the contractor want money from the employer. Contract won under international competitive bidding process give world-wide, most competitive price to the employer. Issuance of invoices and demand for payment is an obligation of the contractor while the employer has responsibility to pay for goods delivered and or services and works performed by the contractor. The format of invoicing and works certification should be worked out early to avoid employment of penalty clause. Progress Meetings Progress meeting is necessary aspect of large and complex contracts which takes longer time to complete. Progress meetings are held at regular intervals. It is usually held to monitor the progress of the contract implementation. At such meeting contract implementation progress are discussed and compared with the contract implementation schedule. Implementation problems are also discussed with a view of solving them. The objective is to ensure that the contract will be completed with requisite quality, on time and within budget. Some identified Contract Administration Problems in Nigeria Institutional problems like contracts enforcement and prolonged court procedures are serious impediment to smooth contract administration. Other common contract administration problems are: Contracts entered into with parties having little understanding of the contract terms. Ccontracts’ seen as ways of dispensing favours. Therefore, little attention is paid to qualification. Contractors in some cases do not employ qualified personnel to manage and execute contracts. It usually takes unnecessarily long time to issue sufficient Bonds and Insurances for the execution of contracts, due to stringent conditions. Inadequate monitoring by employers also affects smooth contract implementation. A common contract administration problem that has become very visible especially in Nigeria Power Sector is losing out other partners in JV or Consortium agreement Delay in making payment to the contractors due to inadequate budgetary provisions Employment of unqualified or incompetent sub-contractors Delays in opening LC’s and extension of LC’s & Form M. Misapplication of proceeds of advance payment by contractors Di spute in the interpretation of contract terms Delay in issuing Duties and vat exemptions certificate conveyance Difficulties in clearing goods in the ports and the poor state of the nation infrastructure Inconsistency in government policies and corruption of government officials Avoiding Dispute in contract implementation The best dispute resolution method is not to have disputed at all. However, if there is a dispute direct negotiations between the parties at an early stage could be helpful. If no solution is found through direct negotiation, establish in a letter the facts of which constitute the breach of contract to focus the problem on the issue under dispute In United Kingdom an alternative dispute resolution technique called â€Å"partnering technique† is being employed. Partnering starts with a workshop usually during the kick off meeting where expectations of parties (contractor and employer) are discussed and harmonised. A partnering agreement or charter is signed by the parties. Employer and contractor are expected to encourage their staff to achieve the charter. In some cases the employer and the contractor share offices in the spirit of the partnering. Dispute Resolution Adjudication Once a dispute cannot be resolved mutually between the parties, it can be referred to adjudicator by either party in writing with a copy to the other party. The adjudicator shall give his decision in writing to both parties. The decision of the adjudicator is not final. The name of the adjudicator and his CV is usually included in the bidding document. If a bidder has problem with a suggested adjudicator, he must indicate so in writing and suggest another adjudicator which must be accepted by the employer. Arbitration If either of the party is dissatisfied with the decision of the adjudicator, the dissatisfied party can write to the arbitrator. Either party may give the other notice to commence arbitration. The ddecision of arbitration are final and binding on all parties Arbitration Courts The Court of Arbitration of International Chamber of Commerce (Paris) is the most popular arbitration institute in the World. Other are; London Court of Arbitration and Allied Professional Society The American Arbitration Association in United State of American Arbitration Institute of Stockholm Chamber of Commerce based in Sweden. United Nations Commission on International Trade Law (UNCITRAL) – UN International Centre for Settlement of Investment Dispute (ICSID)- WB Change Orders and Price Adjustments Contracts are base on plans, designs, specification and quantities which are best estimates. Field conditions, revisions to original plan could cause the scope of the contract to change. Revisions caused by changes in expectation and technology may require change order. A â€Å"change order† is request for a change in the scope of a contract. It may be requested by either party to a contract. A â€Å"change order† signed by all the parties have the same authority as the original contract. For contracts financed by World Bank, change order is applied to changes in contract that is more than 5% of the contract sum. Under the World Bank procurement system, contract which exceed 18 months period should have provision for price adjustment. Contract Close Out Contract close out begins when the contract has been physically complete, i. e. all services have been performed and products delivered. Close out is completed when all administrative actions have been completed, all disputes settled, and final payment have been made. Materials and equipment to be handed over properly receipted. Contract close out is as important as contract award and contract monitoring. A check list of all services, products, etc. to be delivered in the contract should be kept in the contract file. Governance: Fraud, Corruption & Conflict of Interest Conflict of interest refers to a situation in which procurement official evaluate tenders involving companies in which they have direct or indirect interest. Fraud on the other hand includes misrepresentation or omission of facts to influence a procurement process or the execution of contract. It also includes collusion among bidders. corruption include offering, giving, receiving or soliciting directly or indirectly of anything of value to influence the action of a public official in the procurement process or contract execution. Governance: Identification of Corruption Some â€Å"red flags† in procurement process that indicate possibility of corruption include the following: Poor record keeping Deviations from procedures without written justification Poorly defined roles/responsibilities Absence of good internal control system â€Å"Red flags† can be exhibited by individuals involve in procurement and contract administration as follows: Extravagant lifestyle Excessive interaction with supplier(s) and contractors Too much secrecy Reluctance to delegate duties Keeping contact with certain suppliers exclusively Some â€Å"red flags† in a particular procuring entity are: Always the same suppliers competing & wining Reluctance of established supplier and contractors to bid for contracts in an entity Some â€Å"red flags† in contract administration Excessive cost overruns Excessive numbers of change orders (increasing cost) Payment of frivolous claims Governance: Corruption Contributing Factors& Known Signals Lack of competitive environment Lack of trained & competent procurement staff Widespread lack of trust & job security Permissive environment (no sanctions after established cases of fraud and corruption) Lack of good mechanism for handling protest & delays Known signals {text:list-item} {text:list-item} {text:list-item} {text:list-item} Case Study Case 1 An employer invited bid for the supply of one X-ray machine for the main hospital for delivery one month ex-stock within 2 months of Letter of Credit. In the bidding document, bidders were asked to quote price on CIP capital city by air in US dollars. Bidders were provided 60 days to submit bids. Six bids were opened publicly. All except one bidder quoted the price as solicited. One bidder quoted the price in French Francs. In its evaluation the employer rejected the bid as it did not comply with the currency provision. The employer proposed to award the contract to the lowest bidder as all the other bid are responsive. The contract will be financed under a credit from World Bank and the rejected bidder protested to the World Bank on the ground that World Bank permitted bids from any member country and currency and his bid was in fact the lowest. What should the World Bank do and Why? Case 2 In an agricultural project, an employer presented papers relating to an advance procurement of two bulldozers for World Bank financing retroactively. The employer/borrower claimed to have followed the World Bank ICB procedures. On review, it was noted that the General Procurement Notice (GPN) and Specific Procurement Notice (SPN) were issued, adequate time provided for the bidding, there was good response and award had been made to the lowest bidder. The only short-coming was the bids were opened by a government committee without inviting the bidder representative. Is the process valid under this circumstance? Case 3 You are the chairman of public procurement administrative review commission. A project includes the procurement of 10 tracks Dozers and excavators to be procured under a single package. The specifications stated the tracks should be powered by an engine with a minimum of 175 horsepower (SAE) at a rated RPM. Firm A offered its dozers with a 165HP. In the evaluation the committee consider the deviation as minor and awarded the contract to Firm A. Firm B