By Paul Emanuelli

This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

In its 2009 review of Armenia’s procurement practices, the World Bank noted that an overly centralized procurement system can create undue dependence on senior governing bodies and undermine accountability across the public sector. The report warns that multiple overlapping audit and control functions, coupled with a lack of broader awareness and training, actually increases the risk of procurement-related corruption. To help address these issues, the World Bank called for less centralization and more procurement training across the public sector.

The World Bank’s report noted that the centralization of procurement processes under Armenia’s Public Procurement Law (referred to as PPL) removed incentives on the part of healthcare organizations to create their own procurement capacity and undermined the sense of accountability among healthcare officials:

Since the procurement process…is centralized in the SPA both for periodic (framework) and targeted tenders, the MOH and other procuring entities in the health sector has little or no incentive to develop their own procurement capacity…. [T]here is a lack of awareness of the requirements of the PPL, which has led to uneconomic and inefficient procurement. Use of poor quality technical specifications for the procurement of pharmaceuticals combined with the lowest price as the major award criterion, is resulting in procurement and distribution of poor quality and ineffective medicines. Finally, internal and external controls…are weak which adversely affects accountability of public officials involved in procurement.
The case study recommends that procurement authority should be decentralized to the MOH and other health sector procuring entities which should develop their own capacity to conduct procurement.

As the report noted, in order to avoid the erosion of accountability and maintain incentives to improve the procurement system, public institutions need to enhance their internal capacity and implement expanded procurement training programs.

The World Bank report also warned that an overly centralized and non-transparent procurement system, particularly when coupled with multiple overlapping audit and control functions, can actually foster the conditions that lead to corruption. As the report explained, to better protect against corruption, a procurement system requires independent arm’s-length oversight and an increase in the education and awareness among the public servants engaged in procurement activities:

It is recommended that an appeals system be set up which is totally independent of the MOF, AB, SPA and government entities, operates in an environment free from a perception of conflict of interest, builds confidence from participants, and would be efficient [and] effective in providing timely and meaningful remedies. Portals are needed where allegations of fraud and corruption can be reported and followed up. Code of Ethics, asset reporting and disclosure and conflict rules should be implemented in the procurement sector. Appropriate information systems and freedom of information regimes are needed to be vigorously implemented to promote transparency…. Tender, contract and other model documents should be developed and should include provisions which address corruption, fraud, conflict of interest and unethical behavior. The relevant provisions should also set out the consequences and sanctions for such behavior. Debarment and blacklisting system under the PPL needs to be clarified with articulation of applicable procedures and principles to ensure fairness and prevent abuse.
Capacity building and awareness-raising on fraud and corruption in procurement is also essential. This will ensure that employees engaged in procurement have practical understanding of fraud and corruption schemes. The effectiveness of audit mechanisms is questionable in most cases, undermining the intent of the PPL provisions. Furthermore, having undifferentiated, and multiple entities performing “audits”, with no clear demarcation of responsibilities, might provide possibilities for multiple facilitation payments. Similarly, there is generally confusion or overlap of what is considered “audit” and what is “control”, which further undermines the quality and effectiveness of audit. It is recommended that functions of various bodies be reviewed and redefined to exclude unwarranted interference in the procurement process and that pertinent laws or regulation be amended accordingly.
The government must devise a systematic and targeted policy and enforcement mechanism for detection and prevention of certain practices (e.g., collusion, pre-determined winner, anti-competitive behavior, bogus disqualifications). Among others, procurement officials should be trained to focus on red flags indicating unusual bid patterns such as: distinct bids by a systematic or uniform percentage; bids inexplicably too close or too far apart; losing bid prices are rounded or of unnatural numbers; unexplained inflated bid prices; losing bidders become subcontractors; apparent rotation of losing bidders; unusual repeated extension of bid security; delay in completing BER or contract award signing indicating efforts to negotiate corrupt terms; cartel like behavior in the market; and a general scheme of coordination of preparation of bids by designated winner.

As the Work Bank’s report observed, overly centralized systems can undermine efficiency and accountability in public procurement. To better serve the public interest, public institutions need to enhance their self-governance capacities by promoting broader awareness and accountability through broader training initiatives.