Integrity challenges in public procurement

An honest senior civil servant lamented that sometimes public procurement ends up in a situation where a product procured falls short of the quality intended and expected. He gave an example of where the purchase was for a motorcycle but instead the government received a bicycle and ended up paying the price of a car.

Public procurement is vulnerable to fraud and corruption because it involves huge amounts of money.

Procurement fraud

Among the types of procurement fraud are conflict of interest, bid-rigging, and awarding contracts to unqualified contractors and cronies.

• Conflict of interest may arise when procurement officials have an undisclosed interest with a contractor that may lead to corrupt practices
• Bid-rigging or collusive tendering schemes involve collusion between competing companies during the bidding process
• Awarding contracts to unqualified contractors and cronies can happen only without the knowledge of any outside parties

Collusive bidding by contractors

Bid-rigging in public procurement involves schemes among the contractors in the bidding process:

1. Bid suppression is where contractors participating in a tender agree among themselves not to bid to ensure the pre-agreed contractor wins
2. Bid rotation is where bidding companies collude by taking turns to be the winning bidder
3. Market division is where contractors agree to bid and divide markets based on product, customer, service, or geographic areas
4. Complementary bidding is merely to give the appearance of a genuine bid but is actually intended to fail
5. A phantom bidder involves contractors creating a dummy company and submitting a variety of bids on one contract without the intention to win

Bid-rigging damages the industry, leads to corruption, higher prices which consumers have to pay, and hurts the economy.

Collusion between corrupt civil servants and corrupt bidders also often happens.

The corrupt officials usually will provide insider information, allow contractors to submit their own proposals, tailoring specifications to the corrupt bidder, shortening tender periods, and taking a cut of the profit as a bribe.

The red flags of collusive tendering include the following:

Collusion between procurer and bidder

• A particular contractor always wins
• Multiple awards for similar work given to the same contractor
• Various irregularities in the bidding process
• Improper acceptance of late bids
• Bids very close to budget
• Unreasonably short time limit to bid
• Change in tender after other bidder’s prices are known
• Unexplained changes in contract shortly after the award
• Disqualification of suitable tenders
• A qualified bidder fails to bid
• Disqualifying other legitimate and qualified bidders
• Awarding tender not to lowest acceptable tenders

Collusion among contractors

• Joint venture bids are submitted when they can bid on their own
• Certain contractor’s tenders are at a very high price for no logical cost justification
• Bidders always submit either highest or lowest offers
• Losing bidders get sub-contract work from the winning bidders
• Withdrawal of the lowest tenderer who then becomes a sub-contractor
• Award tenders for sub-contractor work to a company that submitted the highest tenders
• There appear to be patterns of tendering by a group of companies
• Quality of work performed, or goods supplied are substandard
• Bidders buy bid packages but do not submit bids
• Bidders using similar paper, same font, template addresses, email, telephone numbers, and spelling or grammar errors
• Any kind of pattern on geographic areas (divide markets based on product, customer, service, et cetera)

Direct negotiation

Awarding projects through direct negotiations is not wrong but it is only appropriate when it is implemented with full transparency and integrity. The projects might concern matters of national interest, an emergency situation, or if nothing is done would lead to detrimental consequences.

Any direct negotiation projects should also meet certain criteria and must not be implemented according to one’s whims and fancies.

To prevent the nation from procurement fraud and incurring losses, direct negotiation projects should only be awarded to competent and reliable contractors.

One of the primary reasons for open tender is to promote and foster the culture of integrity among all parties involved. However, this may not achieve its objective if it still has elements of corrupt practices.

The government must stop lobbying for projects by big or unqualified crony companies who later sell the project to another contractor. Sometimes these companies can even create up to five layers of contracting without any value-added reasons but instead provide inferior quality supplies or products in order to save costs.

At times the system needs to be simplified, but all "handlers" including the technical committee as well as the finance committee and the "board" should consist of people with integrity. This is to ensure that all parties involved will carry out the process in a more transparent manner and resources are utilised at the most optimum level.

One of the most effective deterrence to bid-rigging is to set pre-qualifications of companies or contractors by requiring them to submit audited financial statements for at least the last five years.

The government should stipulate that procurements follow five principles: public accountability, transparency, value for money, open and fair competition, and fair dealings.

However, the recent Auditor-General Annual Report repeatedly suggests that these principles have not been adhered to.

Every year, the Auditor-General’s report highlights cases of procured goods, services, and works that are paid for above market prices, are under-utilised, and sub-standard in nature.

It is pointless for the government to develop good policies if the majority of civil servants, contractors, and businesspersons are not ethical and have good moral fibre to implement the policies with integrity and accountability.

Fraud and corruption in procurement are still common in Malaysia.

Our priority must be to prevent abuse and to enhance the procurement process within strong institutions with a high degree of integrity, accountability, transparency, with adequate controls and safeguards. We must start now.

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AKHBAR SATAR is president of Malaysia Association of Certified Fraud Examiners. - Mkini

The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.