Brookings Institution - Transparency and Accountability Project World Bank — Latin America and the Caribbean Region [MM] 2008DRAFT-JANUARY 20, 2008 ii FORWARD ‘Among of the most important functions of governments are the control and management of public resources as well as the planning for the future allocation of such resources. At the same time changes in demographics, global pandemics, increasing energy & food prices, combined in many cases with misuse or mismanagement of public funds, means that more than ever the quality of public spending, in other words obtaining value for money and making each dollar go further, is now of critical importance. Underpinning quality public spending are sound public expenditure management arrangements that include: (i) a comprehensive and transparent legal framework for public financial management and procurement; (ji) a stable institutional framework, made up of agencies with clearly defined responsibilities and adequate numbers of suitably qualified professional staff, iii) leadership that takes seriously its accountability for efficient management of public resources; (jv) procurement arrangements that are supportive of the prineiples of economy, efficiency, competition and transparency; and (v) independent scrutiny, including fiom civil society, of the government's management of public resources. In particular such arrangements should provide for: ‘© A transparent system for allocating and recording resources, which is sufficiently detailed so as to enable verification that expenditures incurred are in line with the approved budget; . A procurement system that ensures optimal delivery of services and goods in terms of scope, timing, quality and price; © Operating systems (treasury operations, personnel management, cash ‘management, procurement planning, contract monitoring, debt management and revenue management) that facilitate the efficient management of resources; . Expenditure controls, which ensure compliance with the authorizing framework while not being so complex and burdensome as to inhibit the efficient conduct of government business; and © Open access to information that enables independent oversight (including by supreme audit institutions, the legislature and civil society) of the government's executive function, Objectives ‘The main objective of this report is to synthesize, based on a sample of countries in Latin America and the Caribbean, how public procurement arrangements, by reference to the above benchmarks, impact the quality of public spending. In particular, the report seeks to identify, from a regional perspective: (a) cross-cutting strengths and weaknesses of procurement systems; and (b) the characteristics of, and lessons that can be eamed from, successful or failed reform programs. In undertaking this analysis, a particular interest is to establish what role, if any, civil society organizations have played in promoting transparency and accountability in the public sector.DRAFT-JANUARY 20, 2008 Scope The report was based on a desk review of publicly available information, primarily ountry Procurement Assessment Reports and Country Financial Accountability Assessments undertaken by the World Bank and its partners and supplemented by interviews of present and former World Bank and InterAmerican Development Bank staff who worked on countries included in the sample, It should be read in conjunction with its companion report Improving the Quality of Public Spending in Latin American and Caribbean Countries: Lessons from the World Bank's Country Financial Accountability Assessments. Both reports are inputs to a larger project, being undertaken by the Brookings Institution, comprising the preparation of a report and strategy on improving the quality of public expenditures, with a particular focus on the role that strengthened ci institutions could play in this process. Both reports will also provide inputs to a second volume, to be undertaken by the World Bank’s Latin America and Caribbean Region, which seeks to provide “how to” advice for countries seeking to undertake reforms in the cross-cutting areas of weaknesses identified in this report. Sample ‘The findings and conclusions in this paper stem primarily from the examination of a sample of ten Country Procurement Assessment Reports undertaken in the Latin America and the Caribbean Region'. The countries in the sample were specifically selected to provide a good cross section, including large countries, sophisticated economies, middle income economies, low income countries, island economies with strong tourism industries, and countries with substantial exports of natural resources. Consistent with a limited sample, there are several limitations to this study. First, the content and level of detail in the Country Procurement Assessment Reports is uneven and there is little quantitative analysis. Information in the Country Procurement Assessment Reports was thus supplemented with other sources such as reports published by World Bank, Transparency International and the OECD. Second, the Country Procurement Assessment Reports in the sample do not deal in much detail with issues relating to civil society oversight. Consequently, though it is possible to establish the direction in which civil society oversight is moving and to identify outstanding issues that need to be addressed to enhance its role, it is hard to draw detailed conclusions on what is happening in this respect in the region. The above limitations do not however detract from the validity of the conclusions of the report in respect to its primary goals - namely identifying common issues across the region and priorities for action, * Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Guatemala, Honduras, Jamaica, Panama, and Paraguay. Other Country Financial Accountability Assessments and Country Procurement Assessment Reports not included in the sample were also reviewed to confirm the validity of the general conclusions.DRAFT-JANUARY 20, 2008 iv Country Procurement Assessment Reports ‘The Country Procurement Assessment Report is an analytical tool to diagnose the health of the existing system in a country and, in the process, generate a dialogue with the government focused on needed reforms”. To accomplish this, its primary objectives are to: * provide a comprehensive analysis of the country's public sector procurement system, including the existing legal framework, organizational responsibilities and control and oversight capabilities, present procedures and practices, and how well these work in practice; © undertake a general assessment of the institutional, organizational and other risks associated with the procurement process, including identification of procurement practices unacceptable for use in Bank-financed projects; * develop a prioritized action plan to bring about institutional improvements, and © assess the competitiveness and performance of local private industry with regard to participation in public procurement, and the adequacy of commercial practices that relate to public procurement. Until 2004 the Country Procurement Assessment Report was one of a suite of core diagnostic instruments that had to be kept current for all countries with which the World Bank was engaged’. Since then procurement diagnostics are expected to be driven by country-specific circumstances and requirements with the nature and scope of analytic work being based on the type and level of World Bank engagement, client priorities and the availability of other relevant information from donor partners and the country itself. Specifically, procurement analytic work should facilitate and encourage country leadership in setting and managing a procurement reform strategy within a multi-year framework of sequenced priorities. In addition, in recent years there has been an increasing international interest in government procurement. This increased interest is triggering a transformation of public procurement into a critical and strategic government function to support economic and social policy implementation and is thus focusing attention on the importance of national procurement systems that meet intemational standards and that operate as intended, Consistent with this the OECD, through its Joint Venture on Procurement (a sub- committee of the OECD Working Party on Aid Effectiveness) has since 2005 been developing a methodology for assessment of national procurement systems which is intended to provide a common tool that can be used to assess the quality and effectiveness of national procurement systems with the Jong term goal that countries will improve their national procurement systems to meet internationally recognized standards enabling greater effectiveness in the use of public funds. Although the Common Benchmarking and Assessment Methodology for Public Procurement Systems is not yet *ups//web.worldbank,ore/ WBSITE/EXTERNAL/PROIECTS/PROCUREMENT/O,,contentMDK:2010835 2 : ~theSitePK:84266,00 htm ‘hey had to be undertaken at least every five years as a result, current CPAR diagnostics, undertaken by the Bank or jointly with its donor pariners, is now in place in substantially all Latin American and Caribbean countries with an active World Benk portfolio,DRAFT-JANUARY 20, 2008 v finalized, the World Bank increasingly adopts many of the performance indicators that have been developed therein when undertaking procurement diagnostic work. ‘Task Team and Acknowledgements ‘This report was prepared, under the leadership of Charles Griffin, Senior Fellow, Global Economy and Development Program, The Brookings Institution and Omowunmi Ladipo, Lead Financial Management Specialist, World Bank by Alfonso Sanchez and was made possible with the generous support of the Global Development Program of The Hewlett Foundation, Country Financial Accountability Assessments and Country Procurement Assessment Reports in the World Bank's Latin America and Caribbean Region are always undertaken, in collaboration with its development pariners. Reflecting this, a number of staff from the InterAmerica Development Bank provided valuable inputs in the preparation of these reports. These were: Fernando Femandez, Principal Advisor Risk Management; Deborah Sprietzer, Formerly Project Financial Management Specialist; Roberto Camblor, Modernization of State Specialist; and Adriana Arroyave, Sr. Financial Management Specialist In addition, a number of other people also gave of their time in undertaking this work and the team acknowledges their contributions with gratitude. These were: Carmen Palladino, Former Accountant General of Argentina, and Barbara Friday, Sr. Anti-corruption Adviser, RTI International. Finally this report would not have been possible without the World Bank Staff who contributed their country perspectives in finalizing the report or, fulfilled the role of peer reviewers. These were: Stefan Koeberle, Roberto Tarallo, Enzo de Laurentiis, Moustapha Néiaye, Snezana Mitrovie, Paul Bermingham, Nicholas Manning, Nicola Smithers, John Hegarty, Els Hinderdael, Diomedes Berroa, Asha Ayoung, Alexandre Arrobio, Linn Hammergren, Patricia De Ix Fuente Hoyes, James Parks, Felipe Saez, Paul Levy, Patricia Mcgowan, Joao da Veiga Malta, Emmanuel Njomo, Chris Patel, Rajeev Swami, Luis Tineo and Andres MacGaul.DRAFT-JANUARY 20, 2008 vi cPl CPIA cps cso IDB LAC OECD WB ACRONYMS Country Procurement Assessment Report Corruption Perception Index Country Policy and Institutional Assessment Country Partnership Strategy Civil Society Organization ‘The Inter American Development Bank Latin American and Caribbean Organization for Economic Cooperation and Development The World Bank Supreme Audit InstitutionDRAFT-JANUARY 20, 2008 vii L ia am. Vv. v. IMPROVING THE QUALITY OF PUBLIC SPENDING IN LATIN AMERICAN AND CARRIBEAN COUNTRIES Lessons from the World Bank's Country Procurement Assessment Reports Contents Executive Summary. ‘The Latin American and Caribbean Region Findings from the Country Procurement Assessment Reports The Legacy. A Fast Changing Function. ‘The Drivers of Change. The Regulatory Framework. é Institutional and Operational Issues... Independent Oversight mmpapp Some Reform Experiences from the Region A. Towards Reforms B. A Tale of Three Reform Programs. C. Success Factors for Reforms’ elu jons and Going Forward ANNEX - Most Common Issues in Public Procurement Page 12 13 15 19 2B 2 27 27 29 3IMPROVING THE QUALITY OF PUBLIC SPENDING IN LATIN AMERICAN AND CARRIBEAN COUNTRIES, Lessons from the World Bank's Country Procurement Assessment Reports 1. Executive Summary 1, In recent years countries in the Latin American and Caribbean (LAC) region have increasingly focused on government procurement as a key tool to promote economic and social development, international trade, sound public expenditure management, end transparency in the public sector. While further progress is required, in most countries, to fully modemize public sector procurement, this renewed interest has triggered a gradual transformation into a strategic government function to support economic and social policy implementation. 2. Comprehensive reform efforts are underway in some countries. For example, in Panama a new procurement law has been adopted by Congress, implementing regulations and a comprehensive procurement strategy were adopted by the Government, and the procurement policy directorate was significantly strengthened, In other countries, procurement policy and strategy are being re-assessed to ensure they are aligned with the government's economic development plans (e.g. Mexico and Peru). In other countries, discrete interventions, initially requiring relatively small regulatory and institutional changes, have proven catalytic to larger systemic reforms and important cultural and behavioral changes (e.g., improvements in efficiency and transparency driven by a strategic use of technology as, for example, in the Brazilian state of Minas Gerais and, in Chile). Finally, the majority of countries in the region have implemented e-Procurement, ranging from systems that simply publish procurement information to systems that are fully transactional. 3. Procurement systems in the LAC region are heavily influenced by a fairly ‘unique confluence of colonial legal heritage and a balance of power that resides with the legislature. The key result is that systems are premised on a compliance and control approach with less focus on issues of efficiency value_for_mone; Legislation is cumbersome and formalise and labs are oflen arated, Wiout input from procurement practitioners and policy makers, and thus fail to incorporate state of the art practice or support the countries’ economic development policies and ‘objectives. At the same time the controls focus on compliance with process has led to. the development of a culture of risk aversion and excessive rigor in application of ‘norms that, in the long term, affects the willingness of firms to compete for business, with the government. It has simply become too costly for them. 4. Procurement systems across the region have common traits and face similar issues given the common factors that influenced their development. However, the impact of existing deficiencies on the efficiency of public expenditures and on theDRAFT-JANUARY 20, 2008 2 behavior of markets depends much on the size of the economy*. This scale factor needs to be considered when assessing the severity of a particular issue and the priorities for reform - public procurement averages between 10 and 15 percent of GDP and up to 38 percent of GDP in others. In smaller countries where the state is the largest purchaser of goods and services, it may become de facto the price setter for the goods and services it demands. On the other hand, it may also be easier for suppliers to collude and artificially increase the prices if competition is restricted to domestie firms and there are few of them, as itis often the case. 5. There are issues that may undermine the credibility and legitimacy of the government regardless of the market size. Examples are the lack of transparency, frequent corruption scandals, substandard quality of products or construction, etc. These always catch the interest of the media and of public opinion and affect publie trust in the government. 6. The triggers for reforms to procurement regulation have often been scandals,’ major corruption cases or accumulated frustration with the system. In thes circumstances, reforms are carried out hastily to minimize political damage by addin, ‘more controls and layers of legislation to deal with crises (transparency equated q more process) but without a full and thorough analysis of the roots of the proble: Business groups have been another important factor in shaping the present regulatory|| framework in the region. Their influence has translated into protectionists measures, for the national industry but also in simplification of processes that they find costly. In some of the smaller countries, the influence of business or interest groups has amounted to almost a de facto capture of the system by private groups. 1. The prevailing institutional model for administering procurement in the region is one of centralized legislation and decentralized management of procurement by individual government agencies and ministries, Detailed regulations and procedures are generally left to each agency resulting in as many regulations as there are agencies. ‘This proliferation of sules makes the system expensive to operate and imposes high costs on all participants. In addition, the procurement function has been neglected the function as they give it no strategic value. As a result, procurement offices are poorly staffed. In most countries in the region there is no single agency Gesignated to take the lead on procurement policy formulation and coordination. In those countries where there is one, it lacks clarity of mandate or political power to exercise a strong influence and some are struggling for survival. Finally, albeit that civil society oversight has increased considerably in recent years, it is limited by cultural prejudice (considered almost subversive in some places), lack of access to information rights, intimidation by elite groups and general illiteracy on procurement that is considered too technical. Al these factors are a formidable legacy that reformers have to overcome. In spite of all these hurdles, there are good examples of systems that work well and overcame the legacy described here, when they are established with a strong focus on efficiency, transparency and value for money. * The case of Honduras is somewhat exceptional because international agencies like the World Bank and the IDB finance around 75% of public procurement that is carried out under the policies and procedures required by the financiers.DRAFT-JANUARY 20, 2008 3 8. Country Procurement Assessment Reports (CPARs) reveal several common regulatory issues across the countries in the region that are consistent with the command and control culture and might result in limiting competition. In almost all countries the regulations establish mandatory requirements to promote the use of local capacity (such as minimum local content in goods works or services or a prohibition against foreign firms bidding for contracts), instead of providing incentives (e.g. via the granting of price preferences) without artificially reducing competition. The,paucily. of information impedes analytical work to assess the impact of regulations on the. efficiency or equity of the systems and promotes the culture of regulating first and then adjusting undesirable effects by adding more regulation. There is a multiplicity of individual agency regulations that fragments the market (vendors tend to specialize in bidding for work at those agencies that they know best) and increases the legal risks and the possibility of abuse. Bidders need to factor the legal risks stemming from the abundant regulation in their prices particularly in a region that is unfiiendly territory to arbitration and other forms of alternative dispute resolution and where courts have a reputation of being slow, unpredictable and bureaucratic. Excessive procedural formality adds to the transaction costs of the bidders that they pass on in the form of higher prices. Finally, exceedingly detailed high-level legal instruments (for example in the procurement laws) introduce rigidity and make it difficult for the system to adapt to the fast changing markets and new procurement strategies and tools. 9. On the institutional and operational front, there is no obvious institutional owner of the procurement function in most countries. This makes it harder to reach consensus on reforms and to find a champion to lead them, ‘There are normally various agencies with powers to regulate or issue rules and procedures that impact procurement. Often these various agencies pursue conflicting purposes (e.g. more competition vs. protection to local industries). The CPARs do not report the existence in any country (perhaps with the exception of Chile) of any formal and substantive interagency coordination mechanism. Interagency coordination is required to reconcile regulations and ensure that they are consistent with the government's policy objectives and development plans, Generally, th integration with other_government systems. For instance, coordination between procurement planning and implementation and budget planning and execution throughout the region is poor. Medium-term budget planning does not necessarily mirror the corporate multi-year plans of government agencies and a similar situation occurs with annual budget and agencies’ operating and procurement plans. 10, In an effort to mitigate the proliferation of regulations and procedures and put some order in the system, several countries have created organizations or units to oversee the performance of procurement operations, carry out analytical work on markets and develop procurement strategies, issué regulations and procedures, formulate policies, provide training, resolve pre contractual disputes etc. However, most of these agencies generally do not have the political standing and power to perform their duties and many are struggling to assert their role. 11. The shortage of skilled procurement professionals at the managerial and operational levels and the lack of a career stream within the civil service are a majorDRAFT-JANUARY 20, 2008 4 hindrance to good procurement operations in the region. All CPARs, with the “exception of Chile, report this as a critical issue. At the same time, most countries in the region have promoted administrative decentralization, including devolution of procurement responsibilities to the sub-national governments. However, institutional weaknesses and lack of procurement skills deepen with decentralization, without adequate support to create capacity for procurement management. These weaknesses coupled with the lack of reliable and comprehensive quantitative information on system operations make it difficult to measure performance and to develop corrective actions. While e-procurement could be a promising tool to help address some of the problems, its rapid expansion and implementation has been crippled by legal, cultural and bureaucratic impediments. 12. ‘There has been progress in creating awareness of the importance of promoting civil society oversight and demand for good procurement and public officials’ accountability. Moreover, most governments now acknowledge that civil society participation lends them legitimacy and credibility. Unfortunately, there seems to be a direct correlation between the weakness of the procurement and control systems and the degree of involvement of Civil Society Organizations (CSOs). The weaker the system, the less involved the CSOs are, To play their role effectively the CSOs must have the right, the tools and the organization and skills to do so. The existence and development of these instruments is far from uniform across the region. Despite the large number of respectable CSOs across the region working on procurement, there is a lack of capacity to organize more basic social oversight initiatives outside the large cities to monitor local programs where controls are weaker and the tisk of abuse in higher. There is much work ahead to strengthen CSOs participation at the sub national level. 13. Facing all these formidable issues but aware of the strategic importance of public procurement, several countries (Chile, Panamé, Paraguay, Colombia) have implemented or are implementing successful reforms that offer important lessons. First, reforms have to go beyond the mere technical fixes into a transformation of culture, Government officials must recognize the strategic value of this function, vendors need to adjust behavior to a more open and competitive system and civil society must take an increasing role in oversight and creation of demand for good procurement, Second, the reforms must be clearly tied to broad government or country developmental and economic objectives. Third, reforms need to be comprehensive and include, in addition attention to the legal framework, a focus on building managerial, institutional, human resource and technological capacity. In all cases that have been successful, reforms were planned in detail, had a high-level champion with direct access to the president or the cabinet, and had political backing, Future emphasis should therefore be placed on developing reform paths that: a) clearly link the procurement system to the government strategic goals; b) integrate procurement with other government systems, most importantly the financial management one; c) emphasize value for money as opposed to control; d) promote universal use of an integrated e-procurement system; d) professionalize the procurement job stream; and e) fosters and enables civil society oversight, particularly at the sub national level.DRAFT-JANUARY 20, 2008 5 14, This paper consists of five sections including this introductory one. Section i gives an overview of the LAC region. Section III describes the impacts of the region's colonial history, changes that public procurement has experienced as a state function in the last ten to fifteen years, their causes and repercussions before going on to provide a closer look at the CPAR findings by reference to the broad common themes that emerge on the regulatory, institutional and operational aspects of public procurement, Section IV discusses recent procurement reforms in the region and attempts to draw lessons from these experiences and, finally, Section VII presents some conclusions and key messages for going forward.DRAFT-JANUARY 20, 2008 6 IL The Latin American and Caribbean Region 15. The LAC region encompasses South America (12 countries), Central America (7 countries), the southern part of North America (Mexico) and the Caribbean (about 14 island countries). 16. The countries range from very large to very small - Brazil is the largest country in the region, covering 3.28 million sq. miles with a population of 186 million; Paraguay is a mid sized country covering 157,000 sq. miles with a population of 5.9 million; and Jamaica, which is small by regional standards but large for the Caribbean, covers only 4,244 sq. miles with a population of 2.7 million people. 17. The countries in the region are culturally diverse. The predominant cultures are Spanish and Portuguese, with Spain having colonized the southern, western and northem regions of South America as well as Mexico, most of Central America and parts of the Caribbean. Portugal colonized Brazil, the region's largest country while other European countries that left colonial roots in the Caribbean area include Great Britain, France and the Netherlands’. United States is the largest trade partner of the region but most countries maintain strong commercial trade and cultural ties with Europe. More recently there has been a strengthening of commercial relations with the Asia Pacific Rim countries and the emergence of regional bilateral and multilateral trade blocks like MERCOSUR, the Central American Common Market and the Andean Community 18. There are vast disparities of wealth among the countries of the region. At the extremes, Brazil’s GDP was US$796 billion in 2005 (USS5,700 per capita), while the GDP for Honduras was US$8 billion (US$1,200 per capita) during the same year. Poverty is broad and deep throughout the region, even among the richest countries. In 2001, the poverty incidence in Brazil was 28%; in that same year, Honduras had a poverty incidence of 64%, as did Bolivia and Colombia, Even the middle income countries of the region with the lowest poverty rates — Chile and the Dominican Republic — had poverty incidences of 17% in 2001 19. Historically, the region’s economies were built on agriculture and extractive industries. This resulted in a stratification of society, which included a small, wealthy cadre of “owners” with the remainder making up the working class. This stratification inhibited the development of a strong middle class. Despite these countries having multi-party democracies, those (including wealthy families) who fund party activities and organizations expect their interests to be served and thus retain the ability to retard or direct changes in government policy. This situation is however evolving as countries indusirialize and become more open. 20. Over the past 50 years, the region’s richer countries, generally the larger ones, (Brazil, Chile, Argentina and Mexico) have all developed a substantial industrial base as well as an active service sector. The quality and pricing of their goods make them 5 Great Britain colonized numerous Caribbean island countries, Guyana and Belize; France colonized Haiti ‘and the Netherlands colonized Suriname and Aruba,DRAFT-JANUARY 20, 2008 7 competitive throughout the region as well as providing them market access to the United States and the European Union. Costa Rica, Uruguay and Colombia have developed a cadre of professionals who enjoy solid reputations throughout the region This growth in non-traditional sectors is enabling the development of an emerging middle class, On the other hand, the region’s poorer countries (Bolivia, Guyana, Haiti, Honduras and Nicaragua) have retained their traditional agriculture and extractive industries economies with limited opportunities for advancement 21. Given the continued economic importance of agriculture and extractive industries, the region is particularly vulnerable to changes in worldwide demand and prices for commodities. The economic crises that engulfed East Asia and Russia in the late 1990s negatively affected growth in the LAC region. However, while East Asia and Russia recovered in the early 2000s, the region experienced an even more significant economic crisis during 2002-03. In essence therefore, since the 1970s, the region has lagged East Asia in economic growth; and, the extent of the lag. has increased steadily and substantially since then, Growth in the region averaged about 1.5% through most of the 1990s; sunk to -0.7% during 1999-2002; and then increased to about 2.4% during 2003-04. More recently, growth has accelerated led by high commodity prices. 22. Another factor that has had a dampening effect on growth is the high level of debt incurred by a large number of countries throughout the region. The problem is not limited to large countries such as Brazil and Argentina. Smaller, middle-income countries like Jamaica have found their budgets constrained by high levels of debt service and their capacity to raise new loans severely limited, while poorer countries like Bolivia, Guyana, Haiti, Honduras and Nicaragua have all sought debt relief under the Highly Indebted Poor Countries program. 23. Governance is also a region wide issue. With the exceptions of Chile, Uruguay, Costa Rica and Dominica, the Transparency International Corruption Perceptions Index ratings for countries of the region are under 5.0°. Most importantly, many government policies are perceived as protecting entrenched interests rather than serving the needs of the broader population. This also has a dampening effect on economic development as suboptimal policies and corruption reduce the availability of public resources, 24. With few exceptions, after deducting government salaries and pensions, debt service, and pre-allocated or earmarked expenditures the LAC countries have very limited fiscal space to undertake public sector investment programs. In Jamaica, debt service payments account for 67.3% of the budget in 2004/05, thus limiting investment expenditures to 2% of GDP. 96% of Colombin’s budget is pre-allocated; the comparable figure in Guatemala is also 96%, with mandatory earmarks accounting for about 40%. In Uruguay, more than 85% of the budget covers personnel costs, pensions and debt service. With such constrained headroom, pro- poor policies in particular have received limited funding, ° Transparency Intemational - 2007 International Corruption Perception Index - Lists 179 positions, The maximum CPI is 10.DRAFT-IANUARY 20, 2008 8 25, Facing this situation, it is imperative that governments find a way to effectively utilize these limited resources. Public procurement, the focus of this paper, offers possibilities to help improve the quality of spending within a constrained fiscal space,DRAFT. ANUARY 20, 2008 9 III, Findings from the Country Procurement Assessment Reports A. The Legacy 26. Procurement systems in the Latin America and the Caribbean region (LAC) reached their present form influenced by the cultural, legal and political heritage of the colonial times. On the legal side, the systems originated in the Napoleonic or Roman law (civil law)’ in which rules are codified and prescriptive, and procedural formalities often take precedence to efficiency. Under this system, contracts between private citizens and the state are public contracts ruled by administrative law and subject to specific judicial control. This legal foundation generates the need for a Actailed.regulation®. This is different from common law countries Where contracts are subject to the jurisdiction of civil courts that treat the government as any other private party to the contract. Moreover, until very recently, procurement systems developed in LAC region primarily as control mechanisms (catch the thief approach) and thus did not have economic efficiency as the main goal (see Box 1)’. Because of this prevailing control orientation of procurement based on compliance with processes, preparation of laws and other legal norms has been almost exclusively the job of legal experts. There has been little or no input from procurement experts, | policy makers or public sector economists to set the policy and commercial objectives as the drivers around which laws ought to be draited. In this kind of context, it is not surprising that control and auditing systems also focus on compliance with norms instead of stressing quality of outcomes and risk management. For the same reason officials have developed a culture of risk aversion and excessive rigor in application of norms that, in the long term, affects the willingness of firms to compete for business with the government. It has simply become too costly for them. q 27. Often the triggers for reforms to procurement regulation have been scandals, major corruption cases or accumulated frustration with the system. In these circumstances, reforms were carried out hastily by adding more controls and layers of legislation to deal with crises (transparency equated as more process) but without a full and thorough analysis of the roots of the problem. With few exceptions, (Chile is one of them) reforms are not the subject of careful planning, gathering of political consensus and competent management. A recent example of this flawed approach is the reform under consideration in a country of the region where a failed bidding (only one bidder offering twice the market price was the winner of a large contract) triggered a flurry of press publicity and an urgency to reform the law, However, in its haste to assuage public concerns and placate the media, the government drafted and submitted a new law to congress with no time for thorough consultations with the stakeholders. The new draft law did not correct major issues that the most recent CPAR had pointed out, missing 2 unique opportunity to modemize the system in preference to political expediency, 7 The exceptions are the English speaking Caribbean countries that have the common law system. “Peter Trepte - Regulating Procurement ~ Oxford University Press - 2004 ° The texts in the boxes of this paper (except for Box 3and 7) are taken from the CPARs, reviewed for this paper or from working papers prepared for the CPARS with minor editorial modificationsDRAFT-IANUARY 20, 2008 10 Box 1- The Evolution of the Procurement Law in Brazil JIn the late 1960's, just as Brazil was about 10 enter the impressive economic boom of the following decade, the Federal Government undertook a significant policy reform in the area of publie management. A 1967 decree consolidated the adniinistrative reform and regulated the general legal faniework that public entities would adopt in order «9 interact with the private sector (Decree-T aw 200/67) The 19 articles of this decree lay down the basie policy features of government procirement (principles and procurement methods), but ail particulars of bidding and Gontiact documents (ie. qualification requirements and types of contract) were left 0 be dealt with in eaeh invitation for bids In 1986, in Fesporse fo public demand for more democratic fistiuiions and clamors for ansparency In public procureiment and contacts, the Goverunient issued 4 new procurement Jaw that had & better structure and was based on sound legal doctrines (Decree-Law 2;300/86) Seven years later, in 1993, the emersence ofthe issue of corruption as a dominant public concem- Gased the Government to pass new legislation regulating procurement (Law 8, 6661/99). Reflccilig that concern, the procedaral requirements of the procitement provess, as estublishied ‘by the 1903 tau. were elaborate and difficalt to modify through administrative action duc fo thoir RUF basis, The Tezislation, which is conreniy effective, is very detsied as indicated by ils many (125) articles on procutement, reflecting the legalistic traditions of the Brazilian public adminisitation. 28. Business groups have been another important factor in shaping the present regulatory framework in the region. Professional and trade associations have pressed for reforms on two fronts. The first is the promotion of protectionist legislation - for example, through exclusion of foreign firms from national bidding or by granting of price preferences or other special treatment to domestic firms. ‘The second is through lobbying for simplification of norms and elimination of requisites and paperwork in bidding to reduce transaction costs. Business influence can be more effective in the smaller countries where it may end up in their de facto capture of the system. While progress has been limited in simplifying the system, the reverse is true concerning protection of local firms. 29, The prevailing institutional model for administering procurement in the region is one of centralized legislation and decentralized management of procurement by individual government agencies and ministries". Detailed regulations and procedures are generally left to each agency. In countries with federal arrangements (Argentina, Brazil and México), the states or provinces have their own laws and regulations. In addition, in most countries there are also special procurement regulations for government-owned enterprises such as oil industries or utilities (for example PETROECUADOR in Ecuador, major public utilities in Colombia), or exclusions from the law (like the army in most countries). A further set of special regulations is also in use for autonomous corporations, with regional or national jurisdictions, and created with varied purposes and objectives. In some LAC countries, as much as 50% of the total procurement is regulated under special regimes. Most of these ' Some countries in the English-Speaking Caribbean have a Central Tender Boards that carry out procurement for the entire government (ie. e. Guyana).DRAFT-JANUARY 20, 2008 n special regimes were necessary because the existing national procurement laws were jadequate to run the business efficiently and lacked required speed and flexibility. Politically it has been easier to come up with a new tailor-made system for new autonomous agencies than to reform outdated national laws. However, it is important to observe that some of these special regimes, developed with increased efficiency in ‘mind can work successfully even in a legalistic culture (see Box 2). 30. Inmost LAC countries there is no single agency designated to take the lead on procurement policy formulation and coordination, In those where there is one, it Tacks clarity of mandate or political power to exercise a strong influence and some are struggling for survival'', The main actors are normally the ministries of finance and planning or their equivalent, the ministries of public works and the large energy utilities. The Comptroller’s office also has an important role in shaping the system: Often, different agencies in government have different or even divergent objectives without an institutional mechanism for alignment and coordination between them and overall government objectives and strategy. ‘Therefore, turf battles for dominance in the procurement arena, which hamper progress toward better systems, are frequent. For example, in Colombia the start of the procurement reform was largely delayed because of the lack of agreement amongst three leading government agencies. 31. The procurement function in the LAC region has traditionally been weaker than other public service functions. Agency managers have neglected the function as they give it no strategic value, In general, the heads of procurement units and staff have not had the expertise and the formal training required to perform the function. Learning has been on the job, perpetuating the vices and practices of the past and depriving the agencies of modernization. Moreover, in almost all countries there is no procurement career stream. Selection and promotion are rarely competitive or \ Examples of agencies dedicated to procurement regulation or oversight arc: Consejo Superior de ‘Compras del Estado - CONSUCODE in Peru; Direcci6n de Compras y Contratacién Piblica - DCP en Chile; the Direceién de Contratacién Piblica ~ DCP in Panama and the Nacional Contractas Comisién in JamaicaDRAFT-JANUARY 20, 2008 12 merit-based, but tend to be based on political, social or professional connections (The one emerging exception to this is the cadres of technical staff working on the technological aspects of e-procurement who are generally well trained.) This is in sharp contrast to the private sector where skill requirements for procurement professionals are high and where senior management pays close attention to the function 32, The role of civil sociely in overseeing good procurement has increased considerably in the last ten years. With the advent of the national chapters of, Transparency International, many other CSOs interested in procurement have also proliferated in the region. Until the late 1980s, most governments considered organized social interventions as opposition to the government and, sometimes, almost subversive, There have been important changes in most counities including egal reforms enabling civil society participation and laws granting public access to information. 33. This legacy is a formidable challenge facing procurement reforms in the region. Reforms, to be successful, must be transformative. The transformation should aim to set off an essential cultural change in the thinking of politicians, policy makers, procurement managers and officers without which technical fixes only will not work as intended. Reform requires a set of explicit strategic objectives around which systems are regulated and organized, not triggered as reaction to crises. Fixing the regulatory framework or the institutions is necessary but not sufficient. The objectives of the procurement system need to be synchronized with the broad government strategic goals. B. A Fast Changing Function 34. Public procurement is one of the fastest changing government functions. Over the past 15 years, procurement has moved from being an administrative function to becoming a strategic responsibility of the state that plays a critical role in fiscal resources management, quality of governance, promotion of economic development and commercial integration. However, the pace and progress of this evolution have been uneven and in many developing economies there are still vestiges of the old conception of procurement as a process function, Moreover, in most countries procurement has not been fully integrated and aligned with the strategic vision and objectives of the government, thus becoming an obstacle to instead of a support in meeting those objectives. The uneven progress is evident in the region, where modem procurement systems coexist with antiquated ones that no longer meet state needs or social demands. 35. Up to the early 1990s, the procurement function was normally confined to the application of rules for government purchase of goods, services and works. Procurement units scattered throughout ministries and decentralized government agencies worked in isolation with responsibilities limited to the processing of purchase orders or administering competitive bids. ‘They delivered contract award recommendations for approval by senior officials and subsequent processing by the legal or financial units in the organization, Procurement units were generally under-DRAFT-JANUARY 20, 2008 1B staffed by officers who had no formal education in the subject, and the function was a back room activity which received little or episodic attention when there was a procurement scandal or mishap. 36. The modem concept of procurement is of an essential support to good ‘government performance and to achievement of the country's economic and social goals. Moreover, procurement is now an integral part of fiscal resource management. This is because appropriate budgeting and professional procurement are crucial to responsible and transparent administration of public funds. Procurement has moved from being a mere processing task to a management- and knowledge-based activity concerned with good government functioning and accountability. The function encompasses the entire process from determination of needs to asset management and disposal, including substantive involvement in the formulation of procurement policies to promote a wide range of government objectives such as environmental protection, social protection or economic development objectives. 37. The procurement profession has been deeply affected by this evolution. At the operational level, procurement officers are no longer the administrators of an activity requiring mere knowledge and application of rules; instead they now increasingly need to be managers of a process requiring a vast array of skills guided by clear ethical and accountability principles. ‘The old empiric procurement bureaucrat is being replaced gradually by a well-trained contract or logistics manager whose job is not only to apply the rules but to operate efficiently within a sophisticated market of ever-increasing commercial and technological complexity. ‘At the policy level, decision makers are more aware of the potential impact that government procurement has on efficient use of resources and service delivery, on providing legitimacy and credibility to the govemment and on supporting economic and social government agendas. c ‘The Drivers of Change 38. Important developments in the early 1990s triggered the change in perspective and importance of procurement as a strategic function. Some of these events forced governments to focus on procurement as they sought to adapt national systems to international trade agreements and to new business concems, Moreover, the rising concern of civil society with corruption and the increased demand for accountability and results put politicians on notice of the importance of procurement as a strategic government function. Key events, during this period, that served as important drivers in reforming procurement were: * The creation of the European Union (EU) put procurement at the center stage of the negotiations as one of the key issues to address. The multiplicity of national procurement systems loomed as an impediment to free trade and forced governments to focus on aligning their national systems with EU agreements. In the early 1990s, the European Commission issued a green paper on public purchasing to open the discussion on procurement with the private sector, theDRAFT-JANUARY 20, 2008 14 contracting bodies and other stakeholders'”. The result was a need for system implification, modernization and flexibility that culminated in the procurement directives adopted in March 2004. The General Agreement on Tariffs and Trade (GATT) culminated with the signature in April 1994 of the Government Procurement Agreement (GPA) and the creation of the World Trade Organization in 1995, The GPA introduced a multilateral framework regarding government procurement with a view to achieving greater liberalization and expansion of world trade, In 1994, UNCITRAL published the Model Law on Procurement of Goods, Construetion and Services. This was “in response to the fact that in a number of countries the existing legislation governing procurement is inadequate and outdated" resulting in inefficiency and ineffectiveness in the procurement process, patterns of abuse, and the failure of governments to obtain value for money in the use of public funds. The creation of Transparency International in 1993 and its early work on corruption attracted substantial public interest and raised awareness and concerns about the devastating effects of corruption in publie procurement. In 1996, the then-President of the World Bank Group, in his speech at the annual meeting, publicly denounced the “cancer of corruption” as one of the major obstacles hindering economic development and committed to fight it. This opened an intense international debate and public interest in the topic and triggered the formulation of the first strategy of the World Bank to engage actively in combating corruption and studying it systematically!’ Procurement was one of the critical activities to consider because of its vulnerability to corruption. In March of 1996, twenty-two member states of the Organization of American States adopted the Inter-American Convention Against Corruption. This was followed shortly after in November 1997, by the adoption by the OECD member countries and five non-member countries, (Argentina, Brazil, Bulgaria, Chile and the Slovak Republic), of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In late 1998, US President Clinton signed into law the Intemational Anti-Bribery and Fair Competition Act of 1998. All these events were in part the result of the wave of international activity in the procurement arena. In the mid 1990s, the international development community shifted the focus of its procurement function from supervising borrower compliance with donor '? The New EU Public Procurement Directives — Ruth Nielse, Steen Treumer -Djof Publishing, Denmark 2008, > UNCITRAL ~ Model Law on Procurement of Goods, Construction and Services, with Guide 10 Enactment ~ United Natiot New York, 1999 ' Helping Countries Combat Coreuption: The Role of the World Bank. - World Bank, Washington, D.C, September 1997.DRAFT-JANUARY 20, 2008 15 policies and procedures to one of systemic analysis, risk assessment and policy advice on how to improve national systems and fiscal management © The technological impetus of the early 1990s made available new tools for electronic procurement that revolutionized the way governments could do business. These technologies made it possible to minimize or eliminate the interaction between procurement officials and bidders, reducing the opportunity for collusive practices. ‘The new technology permitted more efficient procurement methods (such as reverse auctions and catalog purchasing under framework contracts)'®, wider competition as well as the possibility of better monitoring of procurement and more informed planning. All this affected the nature of the function deeply. * In 2006, the Organisation for Economie Cooperation and Development (OECD) started work on producing a standardized diagnostic tool based to assess public procurement systems and their performance'®, The tool is being tested. The long- term objective is that it will gradually evolve into a set of internationally accepted standards for good procurement that can be used by governments as a benchmarking and monitoring instrument. D. ‘The Regulatory Framework 39. Using Incentives Instead of Rules to Influence the Market, This paper described earlier how most regulatory systems in the region have developed with a strong emphasis on control and how efficiency has taken second place to formalities. ‘Under this approach, laws and regulations aim to influence market behavior through specific prohibitions or mandatory requirements instead of via incentives. (Provisions like this might be an indication of system capture by domestic business groups.'”) For example, some countries mandate minimum domestic content in any offer (e.g., in Mexico all bids must incorporate domestic labor and materials for at least 50 percent of the total cost) otherwise, the proposal is rejected. This hampers the ability of the bidder to source inputs freely and thus to make the most economical proposal Similarly, Mexican and Peruvian laws restrict participation in national competitive bids to domestic firms only'*. Foreign firms cannot compete even if they are willing to do it under the rules of national competitive bidding. 'S Terminology for new approaches to procurement is not flly settled, An electronic reverse auction is an ‘online, real-time dynamic auction between a buying organization and a number of suppliers who compete ‘against each other to win the contact by submitting successively lower-priced or betterranked bids during ‘scheduled period, A Framework Agreement bewween one oF more contracting agencies and one or more suppliers or Vendors, the purpose of which is establishing the terms governing coniracts to be awarded during given period, i particular with regard to prices andthe quantities envisaged. "OECD ~ Methodology for Assessment of National Procurement Systems (Based on Indicators from ECD-DACIWorld Bank Round Table) ~ Version 4, July 17, 2006. "There are cases where regulations might work well and can be applied transparently such as allocation of shares of the market to small industries r specific disadvantaged groups. " World Bank and Interamerican Development Bank - PERU - Country Procurement Assessment Report (Update) — March 2005 and MEXICO - Country Procurement Assessment Report September 2007 (draft,DRAFT-JANUARY 20, 2008 16 40. Analytical Approach to Procurement Regulation. There is little or no analytical work in the region on the impact of regulation on efficiency or equity aspects of procurement, Regulations in the region are often based on models from other countries (mostly continental Europe or Multilateral Banks’ policies on procurement) or, as indicated earlier, rules are introduced to address weaknesses revealed by cases of corruption, scandals or under pressure from business or interest groups. However, there is little evidence that the adoption of particular regulation is subject to systematic cost-benefit and equity analyses. For example, there is no systematic cost-benefit analysis of the impact of domestic provider protections in terms of likely higher prices, technological obsolescence or industry inefficiencies In some LAC countries, large firms are already capable of competing successfully in the international market without any protection while, on the other hand, indiscriminate local industry protection might end up fostering oligopoly conditions and enabling a coruptive environment, particularly in small countries, 41. Multiplicity of Systems is Risky and Cosily. The most common model for procurement regulation consists of a national procurement law (in some countries there are separate laws for goods, works and services) and an associated regulatory decree. Each agency covered under the law normally develops its own procedures, bidding documentation and contract forms. In countries with a federal system, they have as many regulatory systems as states or provinces. As explained earlier there are numerous autonomous agencies with special regimes. PETROECUADOR in Ecuador is one example'’, PETROECUADOR procurement managers view the national law as outdated and inadequate to meet their business needs, which were more akin to those of the private sector. 42. The multiplicity of procurement regimes and the diversity of detailed regulations at agency level have a direct impact on costs and results in fragmented or reduced competition because suppliers tend to specialize in bidding for contracts with one or few government agencies. This tends to ereate a “club mentality” and can lead to collusion and other abuses. For example, in Costa Rica contractors indicated thet it is easier for them to specialize in bidding for work at a single or a few agencies, the rules of which they know well. Besides limiting competition, the aggregate transaction costs, to the government and the public, of managing multiple systems ean be significant. ‘The costs to the private sector of preparing documentation to cater to the plethora of requirements by the different agencies are also significant Contractors and consultants interviewed in Chile indicated that, bidding for government contracts is at least twice as expensive as bidding for similar projects in the private sector because of the greater number of government requirements and time involved 43. This proliferation of regulations is a formidable barrier to harmonization between international good practices based on granting access and equal treatment, It '° There othes organizations that enjoy special procurement regimes created with a specific and finite purpose, for instance for reconstruction after “El Nifio” weather phenomenon devastation. While the reconstruction was completed long time ago, the agency remains with responsibility for tasks not clearly related to the original object to take advantage of a more agile and up-(o-date procurement channel to meet other govemnment needs.DRAFT-JANUARY 20, 2008 7 also complicates negotiation of Free Trade Agreements (FTAs) where procurement harmonization is always an important item on the agenda. ‘The existence of multiple regulatory regimes increases legal risks for those doing business with the government. One important reason is that the lack of a unique regulatory function results in each agency developing its own interpretation of the law and jurisprudence (for instance in Costa Rica). Such an environment fosters arbitrariness, and abuse. This issue is particularly critical in a region traditionally adverse to arbitration or other forms of alternative dispute resolution”. Court practice and proceedings, even for relatively simple disputes, are widely considered to be unreliable, unpredictable, costly and slow, a situation that worsens when disputes are settled by provincial or state courts in federal regimes, Bidders therefore factor this risk into their prices or are discouraged from participating. 44, Systems Overburdened with Process. Excessive procedural formality is a constant feature in administering procurement across the region. When issues emerge owing to deficiencies in the system, governments add regulations and controls piecemeal and overlay them on existing ones, creating a package of norms that is, at times, contradictory and adds cost without adding value. Excessive process also fosters an environment where “facilitation payments”, to expedite decisions, are common, encourages fractioning of contracts, or the invocation of exceptional circumstances to circumvent the competitive process. The CPARs for Costa Rica and Brazil cite fractioning as a problem while in Brazil, the federal government also recognizes that 50% or more of federal public procurement takes place through non- competitive methods, mainly in order to avoid the time-consuming bidding proces Box 3 illustrates how excessive process affects procurement operations in Brazil and Panama. 45. In an effort to circumvent their own laws, many countries and agencies resort to the use of United Nations agencies as procurement agents. Brazil, Colombia, Guatemala and Honduras, amongst others, make extensive use of these services not only for emergencies but also for normal operations. ‘The pressure of having to spend the money in a short time before the end of the fiscal year also fuels also the use of these agencies. Even though these arrangements may render short-term benefits, in the long term, they remove pressure to reform the system and add cost to the procurement process. Most of these agencies have as part of their official agenda the strengthening of local capacity and system improvements. There is however no evidence of a formal exit plan to do so, nor is it obvious that it is in their interest to exit this line of activity. 2 Many countries have adopted the Calvo doctrine formulated in the second half of the XIX century to protect countries from intervention by foreign governments in legal disputes with their nationals. An extension of this doctrine precludes foreign firms from arbitrating disputes and requires that these be submitted to local courts.DRAFT-JANUARY 20, 2008 18 Box 3 — The Impact of Process a Panama, the assessment of the line ministries provided some imsight on the intemal bottlenccks ‘which contribute to delays and inefficiencies. For example, in the Ministry of Education, contiacting requires 26 administrative processes divided in 84 sieps, of which all bit One process and 2 steps are intemal requirements of the Minisity. The everage time for a simple shopping process is six months, In the Minisiry of Health, contracting requires 18 administrative processes divided in 69 steps, of which. all but one provess and 2 stops are internal requirements of the Ministry. Typically, the Ministry of Public Works takes 246 days to complete process under Law 56 and 180 within s project which ‘ti}zes UNDP as financial agent for most contracts. Even within this simplified context; MOP needs ts Implement 38 steps before allowing a contractor to mobilize ‘In: razil, the 1993 law gives more weight to formal rather that to’substantive aspects. “Thus 18 a source. of frequent and protracted disputes. which often end up in court Consequently, public apenies have a shoe incentive fo esort to Article 24 ofthe law that allows for twenty-four reasons for departure from ompellive provedures To rewve the problem, the Government has invested in deploying modem ‘nftasinictire and systems, like revere auction (pregao) that provides a rapid-and simple provaremsent process for offthe-shelf ems and non-complex Services, aiming at avoiding dizect purchases. In the ‘period 2001-2002, the use of pregdo reduced by 20% the number of contracts awarded through ton- ‘competitive methods. It is important to apie, however, that the excessive use of direct contracting in Biazil i not necessarily linked (0 corrupt or fraudulent practices but represents att aitempt to avoid public bidding in order to save time. 46. Excessive or Scant High-Level Regulation. ‘The regulatory framework in many countries is too rigid to permit rapid adaptation to fast-changing market conditions and new procurement techniques. In particular, high-level regulatory instruments incorporate excessive detail that are more appropriately included in lower-level instruments like directives, manuals, standard bidding documents and contract forms to provide adaptability and flexibility to the regulatory system, This is the case in Mexico and Brazil. Colombia in contrast has learned this lesson following an experience where it took Congress four years to pass reforms to the procurement law, considerably delaying the modernization of the system. 47. By contrast, there are countries (Guatemala, Honduras, Jamaica) where the law is too vague or has lacunae. In the absence of regulatory responsibility, clearly assigned within the Government, the control agencies end up filling the vacuum, In Costa Rica, the Comptroller General regulates areas of ambiguity through instructions and case law and can overrule the agencies’ interpretation of law in absence of a designated body. Even in countries that have recently reformed their regulatory systems, there is no planning before-hand in terms of what should be included in the law (the most difficult to amend) or in the regulations supporting the law (easier to reform), or in the administrative or operational instructions or documents (easiest to change).DRAFT-JANUARY 20, 2008 19 E Institutional and Operational Issues 48. Unifying Vision and Interagency Coordination. In most countries, there is no obvious institutional owner of the procurement function, This makes it harder to reach consensus on reforms and to find a champion to lead them. In addition to the legislatures, there are typically various agencies with powers to regulate or issue rules and procedures that impact procurement. For example, depending on the institutional model, the ministry responsible for budget or the ministry responsible for industrial development or commerce may issue general regulations on procurement while line ministries or executing agencies often also regulate their own procurement. Further, the objectives of individual agencies are not always consistent with or may even be contradictory to cach other or with the goals of the government. For example while the ministry of finance may be interested in promoting competition to lower prices, the ministry of industry and commerce may be issuing instructions limiting foreign firms’ participation in bidding for government contracts, At the same time, the CPARs do not report the existence in any country (perhaps with the exception of Chile) of any formal and substantive interagency coordination mechanism which is required to reconcile regulations and ensure that they are consistent with the government’s policy objectives and development plans. There have been proposals to create public procurement couneils at the cabinet level to ensure this coordination, but currently none exist, 49. System Management. In an effort to mitigate the proliferation of regulations and procedures and to create some order, several countries have created organizations or units to oversee the performance of procurement operations, cary out analytical work on markets and develop procurement strategies, issue regulations and procedures, formulate policies, provide training, resolve pre contractual disputes ete. Examples of this type of agencies are CONSUCODE (Concejo Superior de Contrataciones del Estado) in Peru, the Secretariat of the Public Administration in Mexico (Secretaria de la Funcién Publica), DGCP (Direccién General de Contrataciones Péblicas) in Paraguay; and the National Contracts Commission in Jamaica. However, most of these agencies generally do not have the political standing and power to perform their duties and many are struggling to assert their role (see Box 4), 30. Procurement and Financial Management, In general, there is poor coordination between procurement planning and implementation and budget planning and execution throughout the region. ‘This is important as such integration would facilitate monitoring of the use of resources and minimize the risk of bribery to expedite payments, Aggregate multi-term plans do not necessarily mirror the multi- year plans of individual government agencies and a similar misalignment occurs ‘between annual country budget and agencies’ operating and procurement plans. Uncertainty and frequent changes of government procurement plans affect private sector preparedness to satisfy public sector demands in time, particularly for goods that require manufacture to order and that need production plant scheduling in advance. Private sector firms thus factor in delays or unpredictability of payments into accordingly increased prices.DRAFT-JANUARY 20, 2008 20 Box 4 — The Struggle of a Regulatory Body ~ Costa Rica According to the stipulations of the Law No. $131, the General Office for the Administration of Adiministrative Goods and Services (DGABCA), a dependency of the Manistry of Finance, is the oversight body for procurement of goods and adnvmnistative procurement and exercises = normative role (guidelines, segulations, policies and information systems). It also supervises ceniral government agencies, which, flom 2002 on, ate responsible for procuring throwgh institutionalized procurement ‘units, Municipalities also have their own procurement units ‘The most significant limitation that DGABCA faces is the lack of support necessary to fulfill its ‘current roles (principally as far as human resources, finance and policy aspects) and the fact thatthe procursinent law limits its range of a¢tion to the ecntral- government; leaving out the autonomous. Institutions whieh tepresent 92 percent budget allocaied. 10 public procurement, DGABCA’s activites have thus concenttated primarily on the development of COMPRARED, which has only Deon impleniented in the central government to date ue In view of this situation, the EPAR recommends that: “Although DGBCA’s detions are moving in the _ right diction, ir would be 4 yood ides to establish consulting supervisory body for the entire public sector lo. provide leadership and oversee tie stratepo vision of the eontracting system. La ord 20 do ‘his, it will be necessary to pass gal reforms that will allow the Heacl Office to full this objective” SL The Dearth of Information. Few systems are capturing reliable and relevant information on procurement operations, performance and outcomes. Comprehensive information is fundamental for assessing the system's aggregate performance, verifying enforcement of the law, benchmarking of prices, analyzing market trends and developing supply management strategies. At the same time, regular publication of reports, with relevant information that is easily understandable is essential to engage civil society oversight. Most systems do not have a central repository of information that is easily accessible by those with a legitimate interest (e.g. planners, comptroliets or civil society). Information is dispersed across the government agencies and its integrity and reliability are uneven. Because of this lack of information, civil society oversight of procurement is often limited to a few individual transactions instead of to entire programs. 52. Insufficient and Unskilled Human Resources. As noted previously, procurement has evolved from an administrative task to a complex knowledge-based function that covers the entire cycle comprising needs assessment, administration, contract. implementation management and asscts disposal. Present public procurement requires well-trained professional managers of procurement operations working in a very complex and sophisticated business environment. Yet, the shortage of skilled procurement professionals at the managerial and operational levels and the lack of a career stream within the civil service are a major hindrance to good procurement operations in the region. All CPARs, with the exception of Chile, report this as a critical issue. Frequent turnover of staff, particularly in managerial positions, and arising from changes in administration and other political intervention, exacerbates this problem. 53. Decentralization Issues. Most countries in the region have promoted administrative decentralization, including devolution of procurement responsibilitiesDRAFT-JANUARY 20, 2008 21 to sub-national governments. This affords a more direct participation of communities in projects and program design and in overseeing procurement. However, institutional weaknesses and lack of procurement skills deepen with decentralization, and many sub-national entities cannot justify having a full time procurement officer. “Training programs, when they exist, focus on the compliance with legal formalities but not on how to purchase well. For example, in Peru CONSUCODE has an. ambitious training program for local offices but is mostly limited to the regulatory aspects of procurement. Normally there are no instructions or manuals, simple models of contracts, or basic instructions for evaluation of small works proposals, Since smal] communities and towns normally exhibit the highest poverty indices, misuse of resources through incompetent procurement has a very high opportunity cost. Finally, as remote communities embark on procurement, control agencies also become weaker and more vulnerable to pressure. Thus, decentralization needs stronger civil society oversight, but there is no evidence of concerted efforts to organize and train communities accordingly. 54, E-Procurement Promising but Challenging. Progress in developing electronic procurement platforms has been encouraging. Most countries see e-procurement as a potential driver of modernization and increased transparency and efficiency. Mexico, Brazil and Chile have pioneered the use of e-procurement. (See Box 5.) Colombia, Panama and Paraguay have completed the first phase of the system to provide information on business opportunities and regulations and are starting the second phase to establish transactional capabilities and links to the financial management system, Development of e-procurement in Guatemala is well advanced but remains underused, while Honduras, Dominican Republic and Jamaica have to develop the basic strategies to establish e-procurement. 55, Notwithstanding progress on technical developments in e-procurement, several factors have impeded the use of its full potential. Outdated legislation originally developed for traditional paper-based methods has hampered progress in some countries (Mexico and Peru). In most countries, larger government agencies prefer to maintain their own e-procurement systems (often seen as symbol of prestige ‘and technical sophistication) because the government carnnot compel them to use a single official site. Persuading those agencies to switch to a new unique system that is unfamiliar to them is a major obstacle to unification. In Guatemala and Chile, it has been difficult to integrate municipalities into the gencral e-procurement system on the basis that it would violate decentralization and autonomy principles. There is also anecdotal evidence from Guatemala that interest groups have captured some of the Jocal markets and are most likely are behind this resistance. In Paraguay, the lack of internet connectivity and its high costs (three times as much as in neighboring countries) made it necessary for the General Directorate of Public Contracting to install internet booths in the municipalities and other public offices to facilitate access to the system. Cultural prejudice has also impeded the widespread use of e- procurement as many bidders still do not trust the security levels of electronic systems and prefer paper-based transactions so governments have to continue to operate parallel electronic and paper bidding.DRAFT-JANUARY 20, 2008 22 - Promoting Participation in e-Procurement ack of participation by purchasing agencies and suppliers du to inadequate knowledge and technicel support was oné ofthe tai easors for failure of the initial phase of CHTLECOMPRA. ‘Therefore, one ol the key elements builtin the PPSSP (Public Procurement Program Swategic Plan) isthe development and implementation of long-term programs of dissemination and teclnical assistance (o users and supplicts and in particular fo regional offices and mubicipalities. As itis expected that procurement riosernization will bring aboist considerable savings, government agencies are required to cover, ont of their own resources, techaical assisiance and teaining expenses: This has apparently not been. 4 major problem for national agencies, but is likely to be a major constrain © small municipalities. “Technical assistance includes the following major activities: (i) intensive dissemination and training of state agencies through the Program of Exccllency in Procurentent Management (Program de Excelencin en Gestion de Abastecivuienio). linked to. the Ministey-of Finance's Program of Management Improvement (Prontani de Mejoramieato de Gestion); Gi) human resources development though on- the job and formal training of siaf incloding the establishient of university courses on procurement Inanagement; and (Gi) technical support to user agencies ou Specific issues related to the operation of CHILECOMPRA, Sappott lo. suppliers. focuses on: (i) establishment of a Notional Registry of Supplies, i dissemination of information on the benefits of CBITECOMPRA, (i) support to smell ancl medius enterprises; and (s) dissemination of national and Jaternational business opportunities 56. In addition to the cost of financing, the proliferation of e-procurement sites generates other problems. First, the standards of maintenance of critical information such as regulatory information may vary between systems. Ideally, there should be only one designated official site to consult information critical to suppliers, contractor and the public otherwise, the possibility of inconsistent information and errors by bidders increases. Second, there should be one site, which accurately captures the whole procurement cycle, to obtain all procurement information for analytical, investigative and output monitoring purposes. This is not happening today because of the multiplicity of e-systems. Third, integration of the procurement and financial management systems is becoming more difficult because of the need to create appropriate interfaces between each individual e-system and the financial system. In some countries, agencies that have their individual systems are obliged to enter the information on their transactions in the general system manually with the attendant increased cost and likelihood of errors. 57. Dispute Resolution. Twenty-three countries in the region adhere to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) under which countries agree to enforce arbitral awards issued abroad, and 19 ratified the Inter-American Convention on International Commercial Arbitration (1975). At the same time, pre-contractual and contractual dispute resolution is an area where much work remains to be done in the region. As mentioned earlier, the region is generally reluctant to resolve conflicts outside the courts. As the region's courts are slow and bureaucratic and in some places vulnerable to corruption, the absence of well-regulated and effective altemative dispute resolution (ADR) avenues discourages competition and increases prices. This deficiency also creates fertile ground for abuse and arbitrariness and detracts from governments’ credibility and legitimacy. Some countries have specialized mechanisms to address pre-contractualDRAFT-IANUARY 20, 2008 23 disputes (Mexico, Panama, Peru, Paraguay and Chile) but in most countries in the region, the contracting agency is the only place to appeal outside the tribunals. ‘There is no general regulation on the procedures, the terms for resolution or the obligation to follow up and post decisions publicly. A similar situation occurs with contractual disputes owing to the reluctance of the governments to accept arbitration or similar ADR provisions as the first option instead of the courts. rR Independent Oversight 58. Compliance Controls vs. Risk Mapping and Mitigation. In all countries of the region, legislatures are responsible for ultimate oversight of procurement operations based on periodic (usually annual) audit reports submitted to them by the Supreme Audit Institution (SAI). In some countries there are intemal audit offices in each agency, but others do not have them (Peru). ‘There is much consistency on issues affecting oversight systems as reported in the CPARs. The most important of these are: « Intemal audit is weak. This results from the lack of technically skilled staff and dependence on management for budget, including salaries, which might affect their independence. An exception is the Dominican Republic where the internal audit offices are under the Comptroller’s General's office. There is a lack of focus on risk identification and mitigation, efficiency, appropriate selection of procurement methods and results. Emphasis is on compliance with process and formal rules which adds little or no value. There is a lack of interaction and communication with management and poor implementation of internal audit recommendations or observations. * Extemal audits suffer from similar deficiencies. In addition in Costa Rica, Panama and Chile there is much focus on ex-ante and concurrent review nearly amounting to a co-management of the procurement process. For example, in Colombia and because of regulatory lacunae, the SAL regulates procurement through its interventions and decisions. But there are also some promising developments. In Chile and Brazil, the SAI prepares risk maps to help audit planning and in Mexico, the Intemal Control Unit of the Secretariat of Public Administration, which is responsible for internal audit units, is modemizing the function with a strong focus on risk detection and mitigation. 59. Civil Society Oversight. There has been progress in creating awareness of the role of civil society in promoting demand for good procurement and public officials* accountability. In most countries, there is awareness that the electoral process by itself does not send the proper message when it comes to issues of resource management and accountability in public procurement. Therefore, many CSOs are increasingly taking direct action and most governments increasingly acknowledge the fact that CSO participation fends them legitimacy and credibility 60. The degree of progress, understanding and involvement of CSOs in public procurement is however uneven across countries and there seems to be a direct correlation between the weakness of the procurement function and the degree of involvement of the CSOs - the weaker the system, the less involved CSOs are likelyDRAFT-JANUARY 20, 2008 24 to be. For example in the Dominican Republic where the system is extraordinarily weak, there are over 5,000 CSOs that could become an important force in generating demand for efficient and transparent procurement. However, there is no CSO with a primary focus on, or strong technical resources in procurement, transparency or anti- corruption issues. By contrast, in Mexico, a Federal Law to Promote the Activity of the CSOs formalizes their participation and there are numerous forms of such participation, In Colombia there is advanced legislation on the matter (Box 6) but implementation is lagging behind. In Peru, civil society is very active and some groups are very sophisticated (Box 7). However, there is a perception that civil society is weak and disorganized. As one person put it during the preparation of the CPAR in 2004, “no NGO or coalition is powerful enough to do anything.” Another mentioned that there are no legal or institutional incentives for the government to listen to civil society, That said, the media in Peru is particularly vocal, and stories of alleged corruption appear regularly. Because of this, numerous other persons indicated that the government pays attention to civil society, primarily via the press. 61. Despite the large number of respectable CSOs across the region working on procurement, there is @ lack of capacity to organize more basic social oversight initiatives outside the large cities to monitor local programs. Knowledge of procurement processes is weak. People consider the subject too technical and there are few programs to train CSOs at district or community level. Little work has been done on organizing social oversight in villages. A complicating factor in those instances is one of security for members of such organizations as they are often the target of intimidation. 62. Access to Information. To play their role effectively CSOs must have the tight, the tools, and the skills to do so. Several countries still’ do not have legislation granting the right of the citizens to access information on procurement. For example, Guatemala and the Dominican Republic still have not regulated public access 10 information. In the case of Guatemala, access to information is a constitutional right, but the lack of regulation makes its interpretation arbitrary”, In the Dominican Republic, there is no freedom of information regulation nor process to resolve matters related to it, ‘Therefore, there is no clear legal basis for requesting public officials to provide information to the public. In general, the culture of disclosure does not exist in the public agencies. Without a clear legal basis requiring government officials to provide information to the public or to respond to requests, monitoring by civil society becomes impossible. 63. Effective civil society oversight also requires that government agencies generate and widely disseminate reliable and relevant information on public procurement on a regular basis. Reports must be easy to understand by the common. citizen. Many governments (e.g. Chile, Mexico, Brazil, Peru, Paraguay) post procurement information in their e-procurement sites but often the public cannot interrogate the system to produce tailor made reports, Data mining and navigation are complicated and e-procurement only covers a fraction of the transactions. The degree °" In December of 2005 the Government issued the “Acuerdo Gubemativo” on General Norms for Access ‘o Public Information that sets out the obligation for government agencies to furnish information within 30, days. However, the Acuerdo does not establish any sanction for those that do not comply.DRAFT-JANUARY 20, 2008 25 of technological literacy needed to access the information is beyond what exists in many of the countries. This issue is particularly relevant to activities being implemented in rural or remote communities.DRAFT-JANUARY 20, 2008 26 Box 7- Peru- What Civil Society Does and Can Do ‘The Peru CPAR team interviewed a cross section of civil soviety representatives, eluding those from the private secior interviewed (Camara de Comercio, MacroConsult, COMEXPERU) and from NGOs (ProFEtica, Transparencia, Ciudadanos Al Dia, Capital Humano ¥ Social, Institato de Defensa Legal) ‘The following are examples of wha they are doing ‘Offer recommendations to improve the system. Promote good governance, One CSO, Ciudadanos Al Dia (CAD), launched a competition to secogiize good practices in government. +) Monitor procurement, Various Gvil society organizations conduct social andits of public ‘agencies atthe national as well ss sub-national level ‘+ Monitor the *Special Ihund” of licit funds. This project, currently on hold, mrenitors the ‘management and use of repatriated flmds that were amassed illeglly Conduct research, surveys, risk: maps.. CSOs conduct research upon which to base potiey -ecounmentations and conducts comiption Surveys that sesk to monaure citizen perceptions, Compile databases. Proftica bas gathered and posts on the Internet information regarding ‘oupensetiot debated assets aid ekpriaice of public officias fer the Regions Govemment of Lambayeoue. |= = — + Prepare proposals for reforms. + Build. demand for change. Civil society can work w alter the dialogue ond demonstrate how “corruption is robbery “against me". To do this Peruvian CSOs regularly organize conferences that ‘promote policy dislogue and bring together public officals with citizens and conduct a variety of ‘ampaigns to increase citizen and public official awareness # Provide training, CSOs provide teaining about ihe prorurement law thal vomplemients « program that LISAID is supporting within CONSUCODE ‘+ Underiake comparative analysis. The aim vould be to see wheter a parvoulae agency or ‘goverment i purchasing hentar certain types oF go0d or if service coverage of if the cost of ‘providing services of Similar quality standards is better in one location hat in anotlier an. wlly ‘Promote strategie alliances between the private and the public sector. A + Design & monitor Integrity Pacts. Using a too! designed by Teanspareney Intemational, CSOs hhaye drafted integrity pacts ainied an inoreasing transparency’ and integrity in public and private secio?tnsitutons + Promote Cross-Country Collaboration. CSOs could sponsor the creation of an international procurement network to Compare ad sliare best practicesDRAFT-JANUARY 20, 2008 27 Iv. § me Reform Experiences from the Region A Towards Reforms 64. Progress in reforming procurement systems in recent years has been less than expected as evidenced by movement between one CPAR and the subsequent update. Of the seven countries that had a CPAR in place prior to the one used for the basis of this report, only Paraguay made substantial progress between the two exercises. Panama and Colombia reported more progress after the second CPAR. Panama enacted a new procurement law and corresponding regulations, started developing, electronic procurement and created a central agency responsible for overseeing, procurement, developing implementation tools, providing assistance and settling pre contractual complaints. In Colombia, despite lack of progress before 2005, the government created a high-level steering committee in 2006 to coordinate a reform process, enacted important reforms to the existing law in 2007 and made good progress in e-procurement, all along the lines of the recommendations of the 2005 CPAR. There is however insufficient information yet on how these reforms have translated into better results and whether there are enough incentives to change old behaviors. 65. Brazil and Chile did not have an earlier CPAR but both have made important progress, in recent years, in furthering implementation of e-procurement. Brazil implemented electronic reverse auctions and Chile made considerable progress in furthering development of its electronic procurement of goods. Costa Rica reported progress in advancing its electronic procurement system. Finally, Honduras enacted a new procurement law in 2001 and revised regulations in 2002 while The Dominican Republic passed its first procurement law in 2006. B. A Tale of Three Reforms 66. The following paragraphs enumerate three different reforms with varying degree of success undertaken in Panama, Dominican Republic and Chile and the general lessons to be learned. 67. Panama. Panama is an example of a reform initiated at a time when internal conditions were ideal and the international development community was prompt in its response. The incoming administration inherited significant public debt, among the highest in the region, arising from off-budget transactions with unregistered contractors. Procurement reform was thus one of the new administration's priotities. The initial plan of the government was to focus on reforming the procurement law, and improving oversight systems to make them more effective and timely. Following the advice of its development partners, the government decided to re-sequence the process by starting with reforms that would not require changes in the law and then follow up with changes in the law 68, During this period, there was intense dialogue among all key stakeholders and as a result, there was consensus that reforming the law was insufficient and that deeper changes were necessary to meet the government’s strategic goals. Thus, theDRAFT-JANUARY 20, 2008 28 government decided to extend the reform to institutional, human resources and technological aspects of procurement. This consensus facilitated the implementation of subsequent reform activities. 69. There are several lessons from the Panama experience, First, the commitment at the highest level and the inclusion of all the relevant actors from the start is critical to gaining support for an effort of this magnitude. Second, it is important in the initial stages to focus on introducing changes that can produce immediate measurable improvements to encourage commitment by all those involved in the process. Third, focusing on the legal framework only is insufficient to capture the full potential of the benefits of a reform, Fourth, sustained presence and timely support in the form of policy advice, technical assistance and funding, provided by development partners, may become critical to facilitate the reforms. Finally, it is critical that the procurement reforms are tied to the broad country strategic objectives to ensure sustainability. 70. Dominican Republic. The 1999 CPAR identified important weaknesses in the procurement system including that some 95% of procurement was carried out without open public competition creating major obstacles for efficient budget implementation, A CPAR update in 2005 concluded that reforms proposed in the earlier studies had not advanced and that significant challenges persisted. The updated report was however timed to serve as a basis for action by the incoming administration. 71. This administration was concemed about these issues and decided to tackle the procurement reform. As a first step, it created an anticorruption committee embarked on a govemance improvement project that included procurement as a component. The minister of justice, with strong backing from the president, was the key champion of the reforms. The government was keen to implement improvements in the areas of procurement policy, training and capacity building for e-procurement and accordingly organized a three-day workshop that resulted in the development of an action plan for implementation reforms. As part of the plan, the government submitted a new procurement law to congress. However, the chamber did not pass it and the plan was not implemented because of the lack of consensus inside the government. 72. Although segments of the government saw the reform as necessary, there was resistance by other groups interested in maintaining the status quo. (There was no procurement law in the Dominican Republic and the executive awarded contracts directly (0 contractors.) Eventually, reforms were no longer deemed a priority and specific programs such as procurement were no longer part of the government’s agenda. However, in July of 2006, Congress passed a new procurement law and the president sanctioned it in August of that year to comply with the requirements of the free trade agreement with the United States. 73. The experience of the Dominican Republic indicates how, even in the presence of social and extemal drivers to propel a reform, it may be impeded or retarded by the lack of political consensus and the pressure of vested interests. This example also shows that, similar to the case with EU Accession countries, sometimesDRAFT-JANUARY 20, 2008 29 the drivers of change may need to be extemalities that coincide with an administration’s global aspirations, 74. Chile. Procurement reforms in Chile have been ongoing, for several years triggered by the economic crisis of the 1980s and the Chilean government's desire to improve the procurement system. Chile now has the most advanced e-procurement system in the region, Chilecompra, and the most developed procurement database. 75. Under President Lagos’ leadership, the government decided to focus on results in the public financial and procurement systems. ‘The government created @ procurement council to oversee and steer the reform program and entrusted the Directorate of Procurement to provide technical support to the Couneil and to speathead the implementation of an e-procurement platform, Chilecompra. The Ministry of Finance championed the development of a stronger focus on managing for results. A remarkable aspect of the Chilean reform is that the initial focus was on making existing systems work better rather than changing them. Modernization followed only after the culture had changed to one of strong results orientation. Also helpful was the existing culture of compliance, discipline and efficiency, 6. Other features of the reform in Chile were: detailed and comprehensive planning; clear assignment of responsibilities for delivery; and a continued interest and oversight from the top. Accordingly, Chile's reforms have been sustained for ten years. 77. The Chilean case shows how a public culture of compliance combined with strong leadership, detailed planning, sustained efforts and a sharp focus on results, can produce dramatic improvements even before major legal or structural reforms take place, Another important lesson is that incremental reforms are viable as far as they adhere to a detailed plan with clear objectives. c Success Factors for Reforms 78. CPARs have now been in use for over a decade. During this time, governments across the region have embarked on multiple procurement reform programs — some at their own instigation and some at the instigation of the international donor community. Several important lessons, critical for the success, have emerged as highlighted above. These are summarized in the following paragraphs. 79. Reforms to transform the fiction not merely to fix it. With the exception of Chile, Panama, and to some extent Paraguay, reforms have focused almost exclusively on the regulatory aspects and on developing c-procurement systems. In Peru, they have emphasized more institutional matters (e.g, the creation of CONSUCODE) or have been limited to piecemeal improvements in specific areas of procurement by individual government entities. Reforms need however to go beyond the mere technical aspects and instead start with a focus on transforming public and policy makers” perceptions from one that sees procurement as an administrative function to one that sees its strategic value. There is now evidence that unless procurement is seen as a strategic function of the government interwoven with many other arcas such a financial management, fiscal discipline, good governance, civilDRAFT-JANUARY 20, 2008 30 service, and international commerce, the chances of having a system that is efficient, and supports strategic goals, are slim. A glaring demonstration is the meager progress made in the last eight years despite extensive work on preparing diagnostics and recommendations. 80. The need for a strategic vision and breadth of reform. There are traditional arguments to justify reforms to the procurement system related to significant potential savings and those associated with transparency and good governance. These continue to be valid but do not convey the strong incentives that policy makers need to embark on reform. Showing the linkage of a good procurement system to the success or failure of a government's program, is a way to justify procurement reform. This approach lends the necessary political support to reforming procurement (Box 8). ‘There is a need for a shared strategic vision on overall policies and objectives agreed to by all government agencies. This vision and related policies must clearly link reforms to improvements in the quality of public expenditures and to supporting the country’s strategic objectives. A tactical reason for establishing the linkage is that the government is not monolithic particularly in regards to procurement and this is a way of aligning all institutions around the reform plan, Box 8 = Panuma = Eambedding Procurement in the Government's Strategic Objectives 4 June 2005, the government of Panania launched an ambitious development plan for the fve-Jear torm of its administration: “Strategie Vision of Geouomic and Employment Development Toward 2009, which articulates the five pillars of the govemment’s econonit antl social development policy. () reduction of poverty andl improvement in income distribution, (i) au economic growths policy to _ Greate employnieie (ii) sefonm of pabliv finance; (iv) development of human capital, and (4) reform and modernization of the State, The third and ith pillars ae of particalar relevance to he CPAR The government's program to. reform the management of public Hhances is already underway. It consists, inter alia, of G) rationalization of current expenditures, inchiding voiding unnecessary ‘Skpenses, with transparent, effective and efflelent public procurement and contracting mechanisms; Gi) nnproved matiagement of the budgetary system geared fo achieve more productive investments; (il) ‘stablishinent of responsible-accounts payable management; and (iv) provision of accurate information through transparent accounting standards ‘The state reforin and micderization area inchides actions ia vetious Gonts, including: @) ensuring Wanspareucy and eradicating comuption from the public seetor: and (j) redesigning the government's functions by getting rid of obsolete activities, simplifying and reducing burcaucratic dealings, and streaunlining administration through improved staff professional training, 81. The emerging body of experience in procurement reforms seems to indicate that these need to be comprehensive and should include institutional reforms, human resources upgrading, risk mitigating measures, informatics improvements, and most importantly, cultural and behavioral changes as exemplified by the Chile (See Box 9) Other critical aspects, that would substantially enhance benefits, are: effective integration between the procurement and the financial management systems; political leadership; sustained commitment at the highest levels of goverment; a visibleDRAFT-JANUARY 20, 2008 31 champion to lead the program; and a detailed path to reform that incorporates clear goals. 82. The Timing for Reforms, Procurement reforms entail a long gestation period because of the multiplicity of interests that need to be reconciled. ‘This includes adequate time for preparation of a credible and shared diagnostic, a clear definition of the objectives of reform, the creation of consensus, the detailed planning and the implementation, All this needs sequencing and may take several years. Experience shows that the chances of seeing a reform through are better if the process can start as early as possible in a new administration as otherwise reform programs already underway are likely to be subject at best to considerable delays while the new administration gets up to speed, and at worst to cancellation if not consistent with newly promulgated priorities. 83, For the same reasons, timing of interventions by intemational development institutions is also eritical to success. Most newly inaugurated governments in the last decade came into office with a promise to combat corruption as part of their agenda - procurement reforms were thus often at the top of the list. Timely, and effective, interventions in this respect have taken place in Panama and Colombia.DRAFT-JANUARY 20, 2008 32 84. Creating an Enabling Environment and Sustainability for the Reform. The need 10 create consensus and public support for reform seems obvious but is often glected, Interest groups and stakeholders that are not part of the consultation process mange to influence legislators and the media to torpedo or capture reforms. Identifying key players and bringing them to the table as well as preparing public campaigns that plainly explain the objectives and outline the potential benefits are a critical factor of success. This includes organizing discussions and workshops with civil society organizations, the media, professional and trade associations. All branches of government need to be on board. The experience in various countries that when procurement is in crisis and becomes the center of attention, the lack of ‘communication between government branches leads to a proliferation of competing initiatives competing for public support. There are recent examples in two countries where the executive was working in isolation on a new procurement law while there were two congressional drafts and one by the office of the comptroller general circulating, These became difficult to reconcile and the reform efforts collapsed in one case and stalled in another as each sponsor tried to defend its project in the political arena. There is finally the issue of the sustained effort required for the reform fo come to fiuition. Often reforms begin with great enthusiasm but efforts falter as political support erodes. Civil society has a critical role to play in ensuring a sustained pace. One option is to create a monitoring and consultative board that includes representatives of the CSOs to monitor progress, help maintain public interest and pressure and keep reform on trackDRAFT-JANUARY 20, 2008 33 v. Conclusions and Going Forward 85. ‘There has been a growing awareness of the importance of procurement as a strategie function of the government to improve the quality of public expenditures. Moreover, governments see that inefficient, wasteful or corrupt procurement affects their credibility and legitimacy as it attracts media and public opinion attention. Equally, governments have scen implementation of their programs frustrated by outdated and rigid procurement systems that are unable to deliver the goods and services in a timely and cost-effective way. This increased awareness is. the consequence of important events in the early 1990s, with the formation of major economic and trade blocs and a growing concern for harmonized procurement systems, transparency and good governance at the international level. The function itself is no longer conceived as an administrative one but rather as a highly specialized and knowledge-based discipline, that comprises management of a complex process in a sophisticated market place. However, because of its pervasive presence throughout government it is hard to identify in most countries a unique center entrusted with overseeing and maintaining the system fit to meet its new demands, This feature of procurement combined with its rapidly evolving role, the increasing integration and sophistication of the markets and modern procurement techniques, make the task of keeping the system up-to-date particularly challenging, 86. In Latin America and the Caribbean region, procurement systems developed, with a strong control approach and less focus on efficiency and value for money. Systems have developed in relative isolation from the rest of public administration, not in anticipation of the needs of the country but rather trailing the evolution of the public sector. Moreover, with some exceptions, reforms occurred rather hastily when crises exposed the deficiencies of the system rather than as a concerted planned process. The World Bank and the Interamerican Development Bank have recently intensified their work on the assessment of national procurement systems and helping governments develop reform agendas. In spite of these efforts, progress has been less than satisfactory. With one or two exceptions, the links between reforms and the broad country strategic objectives are not explicit and clear. Moreover, reforms have focused on fixing the technical features of the system and on the regulations while leaving aside or giving less priority to other critical and complementary aspects of systems operations and management. For example, budget and financial resource management ig not properly integrated with procurement and often procurement planning and implementation does not take into account the budget realities and priorities, leading to implementation issues such a funding shortages, delayed payment to suppliers and contractors and overall management inefficiency. 87. The prevailing institutional model in the region is one of central regulation with decentralized implementation of procurement. While this model apparently provides adaptability to specific agencies’ needs, it also promotes a plethora of detailed regulations and processes that generate substantial legal risks and transaction costs for the private sector. ‘This combines with the excessive and formalisticDRAFT-JANUARY 20, 2008 34 regulation and translates into less competition, higher prices or both. The situation is more complex in countries with a federal system where each state or province has its ‘own regulations. Fragmentation and lack of consolidated information makes it impossible to carry out analytical work for bench-marking in relation to efficiency and results, for comparative analysis to know who gets the best value for money and why. The present intemational wend to mitigate these problems is towards standardization of regulation and instruments while providing the necessary adaptability to specific needs. The mitigation of legal risk is critical in countries unfriendly to extra judicial settlement of precontractual and contractual disputes where courts have a reputation of being slow, costly and largely unpredictable. 88. Control systems follow the pattern of legislation and focus essentially on compliance instead of on risk identification, management and prevention, and on evaluation of outcomes and results. The task of bringing about the massive cultural change needed is daunting and will take decades. A logical starting point is civil society. Those who receive the benefits and pay the costs of good or bad procurement are the most interested in generating demand for good outcomes and accountability for quality performance. This is particularly true with decentralized procurement at the sub-national level where waste and inefficiency affect the most and poorest people and where the risks of political patronage and abuse, or group capture are highest. However, CSOs must have the right, skills and tools to oversee procurement. In several countries, they have none; in many others, they have the right but not the tools, organization or skills. 89. Development banks have given uneven attention in the CPARs to CSOs as important actors in the control environment and in promoting the agenda for change. Almost all CPARs describe the role that the CSOs play but stop short of recommending how to further their effectiveness. Moreover, some CPARs confuse the role of CSOs as generators of demand for good procurement, accountability and transparency. Promoting an agenda for the CSOs and supporting it is an area where the intemational development community can do more with like-minded governments in the region. It makes sense to work on both sides of the procurement operation The activity of the CSOs does not need to be limited to monitoring processes and outcomes in procurement, With the proper budget and technical support, they can contribute to diagnosing weaknesses and strengths of the local systems and make recommendations for improvement. Probably neither the Banks nor the governments can tackle this task given its sheer size. One way of enhancing the role of CSOs is by creating, encouraging and supporting well-established and sophisticated CSOs to set up training programs for the smaller ones and to generate common agendas. 90. Educating the public, the policy makers, the control agencies, the members of the legislatures, and the media can be another task for the CSOs and the governments. ‘The general level of basic procurement knowledge is low, and therefore stakeholders are at a disadvantage when it comes to public discussion of the topic. During the CPAR in Guatemala, members of the legislature asked for more training on procurement matters. The paucity of information and the lack of regular, easily understood reporting to the public exacerbate this ignorance. Even at the policy- making levels of government, procurement is considered too technical and thereforeDRAFT-JANUARY 20, 2008 35 major decision are left in the hands of middle or low-level officers who are process- focused and may not see the connection to the strategic objectives of the system, 91. Reforming procurement systems in the region goes beyond fixing technical or operational issues. What is involved here is a cultural transformation from a control mentality to one that sees procurement as an efficient service delivery system that supports strategie objectives guided by clear ethical, transparency and accountability principles. In spite of little progress in reforming systems, there are examples of reforms in Chile and Panama that are succeeding and progressing at a good pace. Those exhibit some common features. First, in all cases there is a strong commitment from the top and a unified vision of the objectives. Second, the reforms are clearly tied to broad government or country developmental and economic objectives. Third, reforms are comprehensive and inclusive of more than the legal aspects. Fourth, they have been carefully planned rather than reactive, Fifth, there has been a designated high-level champion reporting to the cabinet or to the president, In Panama and Chile, the reforms were embedded as a component of a more ambitious program of government modernization which ensures public and political support.DRAFT-JANUARY 20, 2008 36 92, There are several areas of future emphasis are critical to further the procurement reform agenda: * Developing explicit, supportive and clear links between the procurement systems and the strategic goals of the country; * Integrating procurement with other government systems (now easier with the technology available) including budget and financial management, treasury, taxes and social security; * Streamlining regulation and process with a stronger emphasis on efficiency than on control; * Promoting the further development and expansion of unified e- procurement systems; * Professionalizing and formalizing the procurement officer career in government; and + Fostering the role of CSOs by granting them the right to oversight, the right to information, and by providing the training and skills and the tools for them to perform their role.DRAFT-JANUARY 20, 2008 Annex Most Common Issues in Public Procurement” Regulatory Issues Poor quality of regulatory system 2 2 (vague, vos, overlaps, outdated) Multiplicity of individual agency 33 regulations Tack of Prosurement Manuals and TTS instretions ‘No standard bidding documents Selection of consultants not regulated or inadequate consideration of quality nd price a factors in the selection Coexistence of different regulatory systems Lack of politcal commitment reform and leadership Lack of a comprehensive public procurement vision, siratezy, and plan Shortage of procurement professionals ‘Absence of regular formation and training and accreditation programs. Lack of definition of career path and ‘merit-based promotions ‘Absence ofa designated regulatory bod Several regulatory authorities or Comptroller involved in regulation 2 “Frequent isc" is one reported in atleast four CPARS. 3: High; 2: Medium, 1: Low oral Blank space ~ Nothing reported.~ The Severity of impact reflects a ‘qualitative assessment carried out by the author to identify possible pater of the paper based on the NARRATIVE diagnosis presented inthe CPARs. However, the CPARS do not quantity itDRAFT-JANUARY 20, 2008 ISSUES REPORTED IN THE CPAR COUNTRIES AND SEVERITY OF ISSUES” SLE |e 12 feds la le ele |e12 18 )2 18-18 Pallet le la lite a|/O |e le 18 | 13 |2 1218 OG a Pe.) Serr Le ae ‘Operations and Management Issues Deficient or no procurement planning 3 [3 a3 3 Lack of integration with budget and 3 3 a3 financial management system © Inadequate information and rears leas aye aesaelasatae sien monitoring systems = No consolidation of procurement Hesfenaa|ea3. 3 ial eectea| aa across agencies = Overburdened process and time [3 z 3 [2 required to process contracts © Reliance on external agencies todo | 2 z Saas 1 procurement | + Status of development oFe-OP 7[2]3 ~3}~3 12 a togrity Issues © Focus on ex-ante controls and 3 3 spa 72 _____potential conflict with auditing ‘ é L + Existence, relevance and role of 2 z x] 2 internal controls > Exceedingly legalistic or financial Bees Pal eesiH lies transactions controls as apposed to risk prevention i | * Government publishes information on 2 Sue easels) sainaae| procurement asa matter of course | > Organization and capacity of Civil Beale z 7 Society : i + Independent review ofprecontracwal | 3] 1] 3 spars v4 complaints © Existence, quality and cedibitiy of | 3] 3] 3 T the Alterative Dispute Resolution ‘= Public pereeption of corruption nears ea 3 zp3 [3 Year in sent Procurement Law was | 1993 | 3004 | 1993 | 1996| NA | i992 | 2001 | NA | 2006 | 2003 enacted” TH Ranking 2007 of se se oe om et ae eo * Most of these laws have been subject to amendments after their inital enactment 2 Transparency International - 2007 International Corruption Perception Index - Lists 179 positions.