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

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Icgfm forum march 6 2008

ICGFM forum - March, 6 2008

  • Current Trends in International Public Sector Procurement and their impact on Financial Management

  • Jorge Claro, President

  • Claro & Associates, Inc.


Icgfm forum march 6 2008

Background

  • Reform of the State is one of the most important components of the International fight against corruption.

  • Recently, modernization of procurement systems has been an integral part of the reform of the State efforts in most countries. Such a modernization is difficult and there are many challenges in the road ahead.

  • New evaluation tools to assess capacity to tackle these challenges are being developed by the international and regional organizations such as OECD/DAC, MDBs and others.


Icgfm forum march 6 2008

Background

  • International studies indicate Public Sector Procurement accounts for approximately 15% to 20% of GNP in many countries

  • Procurement has traditionally been poorly managed with inefficiencies adding anywhere between 15% to 20% to the cost of the works, goods and services being procured

  • Corrupt practices add an additional 15% to 20% to the cost of those works, goods or services

  • In other words, inefficiency and corruption combined could account for 2.25% to 4% of GNP in most countries, thus negating growth


Icgfm forum march 6 2008

Background

  • There is a strong demand to increase transparency in public sector management and therefore:

    • Electronic Government Procurement (e-GP) is being or has been introduced in most countries

    • Many countries have also introduced substantial reforms and new mechanisms for procurement

  • in the Americas, a Hemispheric Network of Procurement Officials has been established. The network is successfully exchanging ideas, sharing information and know-how on the reform of the procurement process

    • http://www.compraspublicas.org

  • Many donor-funded procurement reform projects require financial data and information that is not readily available in most countries


Icgfm forum march 6 2008

New Mechanisms

  • These mechanisms are at the core of the new trends and changes being introduced in Public Sector Procurement around the world:

    • Framework Contracts

    • Lease Agreements

    • Reverse Auctions

    • Public-Private Partnerships

  • Countries that have introduced them or plan to do so are facing challenges and opportunities on institutional and legal reform as well as capacity building


Icgfm forum march 6 2008

New Mechanisms

  • The selection, incorporation and use of these new mechanisms will impact all the elements of an Integrated Financial Management System:

    • Accounting

    • Budgeting

    • Cash Management

    • Credit Management


Icgfm forum march 6 2008

Framework Contracts

  • A contract that:

    • Establishes terms and conditions under which subsequent contracts will be placed

    • Does not commit the purchaser to purchase

    • Requires the supplier to supply in accordance with the terms defined within the scope of the contract


Icgfm forum march 6 2008

Framework Contracts

  • Benefits:

    • Reduced administration

    • Competitive pricing (aggregation of demand)

    • Assured quality

    • Legal protection against breach of contract

    • Assured delivery of goods

    • Planned supplier stock levels

    • Continuity of supply

    • Long-term working relationships

    • Improved flexibility and cooperation

    • Multiple awards


Icgfm forum march 6 2008

Framework Contracts

  • What countries need to do:

    • Adapt Standard Contractual Terms

    • Determine what goods and services may be subject to open-ended contracts

    • Adapt standard competitive bidding processes.

    • Train personnel (drafting task orders, managing long-term relationships with awardees)

    • Improve coordination among agencies and entities


Icgfm forum march 6 2008

Framework Contracts

  • From a Financial Management perspective:

    • Introduce systems that are capable of keeping track of multiple-awardee contracts and performance monitor

    • Encourage purchasing units to use them as contracting vehicles

    • Provide data to help negotiators determine acceptable prices

    • Put in place internal and external audits of procurement processes and subsequent awards

      • Budget for training and/or hiring personnel

      • Develop strong internal managerial controls


Icgfm forum march 6 2008

Lease Agreements

  • A distinct type of rent relationship

  • Governments may use lease agreements in order to:

    • Acquire the use of buildings for administrative purposes, such as office space, or

    • Have access to the use but not the ownership of equipment such as computers, photocopiers, cars, machinery and others.


Icgfm forum march 6 2008

Lease Agreements

  • Benefits:

    • Governments have access to state-of-the-art equipment without making substantial investments

    • Continuous access to cutting edge technology

    • Aggregated demand leading to better contractual terms

    • Defective equipment may be replaced or repaired on-demand


Icgfm forum march 6 2008

Lease Agreements

  • Most countries contemplate the use of Lease Agreements for Real Estate

  • Their use as a means to procure goods will require:

    • In-house capacity to manage long term contracts that have an important service component

    • Trained personnel on new technologies and trends.

    • Knowledge and capacity to negotiate the best possible terms and prices

    • Provide effective remedies to lessors since the lessee is a sovereign entity.


Icgfm forum march 6 2008

Lease Agreements

  • From a Financial Management Perspective:

    • Put in place systems to keep updated inventory of leased equipment

    • Carry out cost/benefit analysis to help determine if service agreements should be included in lease agreements

    • Determine the financial risk on leased equipment and the need for insurance (i.e. amount of deposits and damage or loss of equipment)

    • Put in place robust controls on the performance, not just the cost of the lease


Icgfm forum march 6 2008

Reverse Auctions

  • A reverse auction is a mechanisms where suppliers bid against each other for contracts against a set specification, pre-established criteria and price ceiling

    • The roles of the buyer and the seller are reversed

    • Its primary objective is to drive purchase prices down

  • This mechanism is particularly useful for purchasing off-the-shelve, generic items or commodities, where price is the only deciding factor to determine the winner


Icgfm forum march 6 2008

Reverse Auctions

  • In Brazil, the Pregao Eletronico, an Electronic Reverse Auction, has been in use since 2000, generating important savings to the country, both in price and time

  • Benefits:

    • Reduction of paperwork

    • Streamlined processes

    • A shorter negotiation cycle

    • More competitive prices

    • Increased transparency in the award process

    • Faster development of Electronic Government Procurement systems


Icgfm forum march 6 2008

Reverse Auctions

  • Risks

    • The process may become cumbersome or complicated

    • The process may be used for items that are not susceptible to generating savings

    • Markets may be disrupted due to potential cartelization

      • Internal markets may be very small

      • There is a limited number of private sector entrepreneurs

    • The auctions may be susceptible to low-balling


Icgfm forum march 6 2008

Reverse Auctions

  • Countries contemplating adopting this mechanism should consider that:

    • It will require specific changes to be introduced to national and local procurement laws

    • e-RAs need an e-commerce legal framework

    • The e-GP system must be sophisticated enough to support hosting e-RA sessions.


Icgfm forum march 6 2008

Reverse Auctions

  • From a financial management perspective:

    • Put in place a system able to track transactions that do not have a paper trail

    • Ensure timely budgetary allocations and cash flow

    • Establish electronic payment systems

    • Put in place market intelligence mechanisms to ensure that the best products at the best prices are being procured, thus ensuring value for money


Icgfm forum march 6 2008

Public-Private Partnerships

  • A Public Private Partnership is a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies that works to ensure the funding, construction, renovation, and management of an infrastructure or provision of a service

  • Contractually, a PPP is a legally binding instrument

    • Entered into by a government and a private party (usually a business)

    • With the objective of providing assets and delivering services

    • That organizes risks among the various partners


Icgfm forum march 6 2008

Public-Private Partnerships

  • Benefits:

    • Create long-term investment opportunities for the private sector

      • Helps reduce capital investments or the national debt

      • Bridges the gap between the need for infrastructure and the country’s financial capabilities

    • Improve service delivery

    • Improve cost effectiveness (private partner wishes a return on investment)

    • Allow public projects to benefit from private sector innovation, experience and flexibility of services

    • Reduce public sector risk

    • Deliver capital projects faster

    • Improve budget certainty


Icgfm forum march 6 2008

Public-Private Partnerships

  • Countries must consider:

    • PPP must be specifically regulated

      • Investment Laws, Commercial Codes, Procurement Laws

      • Differentiated from Concession Agreements of Parastatals.

    • PPP form long term working relationships that may present difficult scenarios in terms of power sharing and management

    • PPP require high-level management skills, as well as significant planning and strategizing.

    • Due to their nature, PPPs will be corporations subject to government regulation


Icgfm forum march 6 2008

Public-Private Partnerships

  • From a financial management perspective:

    • Demand for interaction with private sector accounting practices and financial systems

    • Determination of the financial soundness of the project and its long-term performance

    • Determination of the overall financial framework

    • Attest to the legality and continuity of operations

    • Report and interpret the results of the activities undertaken by the PPP


Icgfm forum march 6 2008

Conclusions

The mechanisms are being introduced in many countries at a very different pace and corresponding to very different strategies

Procurement reform should not be undertaken in isolation but rather in a broader and participatory context and as an integral part of the reform of the state process

Reforms should be guided by a national strategy that considers the procedural, financial and managerial dimensions of a reform

Introducing these mechanisms can have long-term effects on domestic markets, with financial and administrative implications


Icgfm forum march 6 2008

Conclusions

  • Financial management must provide inputs for decision-making

  • Sound financial management is key to reducing opportunities for fraud and corruption

  • There is a need for qualified professionals and redesigned systems in both the procurement and financial arenas

  • Capacity building and training still represent a challenge in these areas

  • The convergence between procurement and financial management needs to be emphasized and strengthened


Icgfm forum march 6 2008

Thanks

Many thanks for the opportunity to talk to you today

Jorge Claro

President

Claro & Associates, Inc.

10708 Lady Slipper Terrace

North Bethesda, MD 20852

Tel 301 230-9011

[email protected]

www.claroassociates.com


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