Training: Public Procurement Management

1. Training: Public Procurement Management Session: International Practice in Procurement Shambhu Prasad Uprety Procurement Specialist The World Bank

2. Session Content

3. Session Content

4. 1. Loan Agreement & Legal Aspect Hierarchy of legal documents • Constitution of the borrower’s country (BC) – It is above the loan agreement (LA). Therefore, while making loan agreement), a legal opinion is taken so that the LA does not contradict the Constitution. • Loan Agreement – It is equivalent to international treaty. It should be rectified by the legal system of the BC. Then this LA becomes BC’s law. Sometimes implementation manual also becomes the part of the LA. • Other Laws of the BC

5. 2. Procurement Guidelines Followed in Nepal Applicable Proc. GLs is stated in the LA. For purely GoN funded projects, applicable Proc. GLs is of the GoN. 4 main Proc. GLs are in practice in Nepal: • GoN – Public procurement Act, 2063; Public procurement Regulations, 2064 & SBDs issued by the PPMO. • World Bank (WB) – Procurement Guidelines & Consultant Guidelines. • Asian Development Bank (ADB) – Same • JICA: Very different than ADB/WB - rebidding time = only 15 minutes, 80% evaluation done during bid opening, total bid price counts not item rates, item rates are negotiated.

6. 3.Comparison Between Procurement Guidelines 1. Negotiation for a reduction of bid price, if it exceeds the pre-bid estimate: • ADB permits (GL-2.49) • WB does not permit (GL-2.61) • GoN Proc.Act/Reg. do not permit • JICA permits 2. Bid Security • ADB – more than 2% of the estimate - amount to be mentioned in the notice • WB – not less than 2.5% of the estimate - amount to be mentioned in the notice • GoN – 2 to 3 % of cost estimate • JICA – no need – high level of trust on the part of bidders?

7. 4. Procurement Principles There are 4 main principles: • Economy: Value for money - Finance Ministry’s concern • Efficiency: quick procurement - Project’s concern, but against the Fairness • Fairness: No discrimination – Bidders’ concern • Transparency: Bidders’ concern, Auditor’s concern All of these 4 parameters should be met 100%, but in practice it is not possible. Attempt should be to be in the nearest of this, while meeting the project’s objectives. Procurement should not be done for the pleasure of the procurement. (Story of a new couple – wife asks ques. to her husband …)

8. 5. Reference Documents for Procurement We can’t expect good procurement if you don’t have following documents on your table: • Financing Agreement: …, PAD, Proj. Operational Manual • Procurement Guidelines: WB, ADB, JICA, GoN, • Annual Program & Budget (AWPB) • Procurement Plans: • Master Procurement Plan • Annual Procurement Plan (PP) Note: PP to be prepared with full details based on the PROPOSED Budget. Example of CDC case

9. 6. Procurement Planning “Failing to plan is Planning to fail” - Peter Drucker, Famous Management Guru, USA

10. 6. Procurement Planning – benefits of slicing & Packaging For large or multi-year projects, both of master & annual proc. plans are prepared. Annual proc. plans are prepared as per annual program & budget, but within the framework of master proc. Plan. Slicing & Packaging arrangement • Slicing: Large project is sliced into smaller ones. Benefits are (1) high competition as small contractors can participate, (2) chances for small local contractors to grow, (3) short project duration. Examples – long road projects, multi-dimensional projects like Melamchi. • Packaging: Small jobs can be joined in appropriate package to attract big contractors to achieve economy. Slicing & Packaging principle seems contradictory, but it is not so. Why? Take case by case decision. Note: Market study or knowledge of market is the key to successful procurement.

11. 7. Project Negotiation & Contract Negotiation 7.1 Project Negotiation – Example of some Past Projects Issues • Reimbursement procedure – time consuming • Effectiveness conditions • Tax provisions (Trust Fund) • Use of contingencies amount: Quite different in GoN & WB. Examples – Education projects-SWAp, SESP, EFA, JICA, PforR Bridge Project, PPCR/DHM/MOAD

12. 7. Project Negotiation & Contract Negotiation … • Negotiation for a reduction of bid price, if it exceeds the pre-bid estimate is different under different GLs. • Other points for negotiation are minor deviations, omissions & errors in the bid & any other matters requiring clarification: • Reference price indices for local & foreign bidders (if omitted by foreign bidder) • Finalizing name of Adjudicator to be acceptable for both parties 7.2 Contract Negotiation

13. 7. Project Negotiation & Contract Negotiation … • Work schedule adjustment • Omitted rates for some items • Site office set up – location if rented, construction of temporary shade, etc • Upon reaching an agreement on such points, Employer/ Engineer should prepare a memorandum of understanding (MOU) giving details of agreements made & get signed by the successful bidder. This MOU becomes a part of the Contract. 7.2 Contract Negotiation …

14. 8. Prior Review & Post Review Procurement plan is prepared based on the Prior Review & Post Review threshold as per the Loan Agreement. Even if the estimate of the procurement is near to the threshold amount but still below go as in the case of prior review. Because, while bidding or contract execution it may cross the threshold. In case of need, it is always possible to amend the Loan Agreement. The leading factor is to meet the project objectives. Example of education project – SESP. LA was largely amended during Mid Term Review Mission.

15. 9. ICB Contracts Challenges/Risks Associated: • Large Contracts > Big amounts involved > Contractors, Lawyers, Politicians, Media & General Public are over concerned > Procuring Entity gets easily feared • More legal oriented than development or procurement • Requires in-depth knowledge of procurement documents & experience • Time consuming procurement procedure • Contractors tend to claim more > searching for loopholes • Procuring entity needs always to be aware

16. 10. Letter of Intent & Letter of Acceptance 10.1 Letter of Intent (LOA) • Generally issued in case of large/complex contract when issuing ofletter of acceptance may take longer time due to procedural formalities (Bank Review, budget adjustment, higher authority approval etc). • It is conditional & preliminary acceptance of the bid. • Through this letter employer may permit the contractor to commence any part of the work (e.g. mobilization, materials ordering, letting sub-contract) , if employer’s conditions are acceptable to the Contractor. • Successful bidder should acknowledge the receipt of this letter & acceptance of the conditions. • If contract is not awarded, employer has to pay reasonable costs to the contractor.

17. 10. Letter of Intent & Letter of Acceptance 10.2 Letter of Acceptance (LOA) • Immediately issued to the successful bidder (L1), if there is no need for clarification of the bid. • It should clearly mention: • the Contract Price • the dead line date for the submission of Performance Security (PS) • Issuing of Letter of Acceptance will constitute the formation of the Contract

18. 10. Letter of Intent & Letter of Acceptance 10.2 Letter of Acceptance (LOA) contd… • Upon the submission of PS/Domestic Preference Security by the successful bidder, employer should promptly notify the other bidders that their bids have been unsuccessful. • If the L1 bidder & subsequent L2 & L3 bidders fail to submit the PS or conclude the agreement, their bid security will be forfeited & re-bidding is done. Case:A successful bidder, after furnishing a PS, does not sign the agreement. What are the employer’s options, if any, & what would be his appropriate action?

19. 11. Foreign Currency Aspect in Contracts 11.1 Components • Contract Amount = X% of Foreign Currency (FCR)+ (100-X)% of Local Currency (LCR). • FCR => For imported goods/construction materials + Salary for foreign personnel. • LCR => For local construction materials +Local transportation + Payment to local labors. • Bid amount with lower portion of FCR is encouraged (How?) 11.2 Benefits • Less bid amount - Materials or services are procured in the currency of primary seller – saving in currency exchange commission – bidders quote competitive bid price. • Saving in foreign currency for the borrower country as payment for local materials & labors is made in local currency.

20. 12. Cash Flow Forecast • General • Cash flow forecast is the way of cost planning. • This is the process of allocation of funds for different stages of a project or for different projects to be drawn from the total allocated annual budget. • Benefits of cash flow forecasts • Constant flow of fund is maintained. The progress of work is not hampered. Ensures timely completion of the project. • Ensures cost control & assists thereby to complete the project within the target cost. • Provides project expenditure in regular intervals thereby provides feedback for planning new projects • How to prepare? • Based on procurement plan (activities vs time) • Based on work schedule (activities & quantities vs time) • Based on trimester breakdown of budget

21. 13. Letter of Credit (LC) • LC=Authorization to Pay Meaning of P: • Letter of Credit • Confirmed Letter of Credit • ConfirmedIrrevocable Letter of Credit

22. 13. Letter of Credit (LC)… 1. Contract BUYER SELLER 12. Goods Delivered CIF 5. Goods On Board 10. D o c u m e n t s 2 C r e d i t 11 M o n e y 6. Doc.s 7 4. Advice L/C Issued 3. Letter of Credit 8. Documents 9.Money ADVISING /CONFIRMING BANK ISSUING BANK

23. 14. Interim/Final Bill Payment(PPR-142, 143) 14.1 Interim Bill Payment - Points to be considered: • Receipt of bills & other associated documents as per the contract • Approval of such bills by competent authority • Deduction for discounts, if any • Deduction for prevailing taxes • Deduction for retention money @ 5% of the bill amount (PPR123.4) • Deduction for advance payment Notes: • Any errors found in past payments (over or under payment) shall be corrected in coming bills • Procuring entity may deduct or even may not make payment for the work or part thereof having fault or not done

24. 14. Interim/Final Bill Payment(PPR-142, 143) 14.2 Final Bill Payment - Points to be considered : • Final payment only after whole work acceptance • All requirements as in interim bill payment are also valid for this payment • Release of performance Security (PS) (PPR-110) • 100% of PS released to the contractor after defect liability period expiration • Release of Retention Money (RM)(PPR-123.4) • 50% of RM released to the contractor after defect liability period expiration • Remaining 50% is released to the contractor after s/he submits tax description to the Tax Office & reports this to the Procuring Entity

25. 15. Consultancy Services 13.1 Hiring Methods • Quality-and Cost-Based Selection (QCBS) Method (GL:2.1-2.35)> widely used > short listing + RFP with TP & FP+ Evaluation of Technical Proposal (TP) + Eval. of Financial Proposal (FP) + Calculation of Combined Score (TP@80% & FP@20%)+ Negotiation with highest-score-proposal + Contract sign. • Negotiation (N-1): reducing/increasing scope, revising schedule, confirming taxes, etc. But NO change in remuneration rates. • Quality-Based Selection (QBS) Method (GL:3.2)> used for complex/highly specialized assignments >short listing + RFP with TP & FP + Eval. Of TP + Negotiation with highest-scored TP + Contract sign. • Negotiation(N-2): N-1 plus negotiations on any type of costs including remuneration.

26. 15. Consultancy Services 13.1 Hiring Methods • Selection under a Fixed Budget (FBS) Method (GL:3.5)> used for simple & precisely defined assignments > as QCBS > proposal with highest Tech. Score & Price within the pre-disclosed fixed budget selected + Contract sign. • Negotiation: as in QCBS • Least-Cost Selection (LCS) Method(GL:3.6) > used for standard/routine type assignments (audits, Engineering design of noncomplex works, etc) > as QCBS > proposal securing required minimum qualifying marks& quoting lowest price selected + Contract sign. • Negotiation: as in QCBS

27. 15. Consultancy Services 13.1 Hiring Methods • Selection Based on the Consultants’ Qualification (CQS) Method (GL: 3.7) >used for small assignments/ emergency situations > Selection of the best consultant (only one) + RFP with TP & FP + Eval. Of TP + Negotiation on contract price + Contract sign. • Negotiation: As in QBS. • Single-Source Selection (SSS) Method (GL:3.8) > used in exceptional cases (natural continuation of the job/ in disaster/ if only one qualified/ small value > used for both consulting firm and individual consultants > appropriate consultant identified in the market + RFP (brief proposal) with TP & FP + Negotiation on contract price + Contract sign. • Negotiation: As in QBS.

28. 15. Consultancy Services… 13.2 Training or Transfer of Knowledge/Skills • TOR should contain this provision > objective, nature, scope, time frame, details of trainers and trainees etc • Cost shall be included in the consultant’s contract • Training or transfer of knowledge to employer’s staff or national consultants • Very essential and important for capacity building > benefits: improved design, low construction cost or improved performance

29. 15. Consultancy Services … 13.3 Responsibility/ Liability of Consultants • Professional liability (PL) > insurance on PL not available in Nepal, but available internationally • They are more trusted than doubted • No bid & performance securities are demanded. They are trusted for their job • In case of loss/damage due to design defect, they may be charged not more than their consultancy fee • However, in south Asian countries, consultants, in most cases, have not been able to prove themselves of expected qualities • Sometimes they become burden to the employer rather than assisting • Nevertheless, without their services development works cannot be run. Simply, we need to manage them wisely & skillfully.

30. 15. Consultancy Services … 13.4 Donor Agencies’ Requirement • Donors do not impose, but suggest for or expect better outcome from their support • Conditions they put are not with their bad intention, but are based on their experiences • Borrower is the one responsible for scrutinising all aspects before signing the agreement 13.5 Trend of Dependency on Consultants / Cost-benefit Ratio of Outsourcing • For large contracts there is no way out without consultants • If sufficient manpower with required expertise is managed for in-house design, cost may go further high • International experience shows that govt authority should be involved in monitoring & evaluation of the services for effectiveness

31. 16. Table : Methods of Procurement Under Different Guidelines

32. 17. Record Keeping Procuring Entity should keep Record of payments & different securities as follows: • Record of LC (PPR/Annex-2) • Name of supplier • Name of issuing bank & address, LC No. & date, LC amount • Subject • LC duration, LC closing date, date of LC extension (if any), LC closed date • Advance recording register - page No. • Goods – country of origin, date of manufacture, brand & model No.

33. 17. Record Keeping … • Record of Performance Security (PS) (R-110) • Name & address of contractor/ supplier • Description of contract • Name of issuing bank & address, PS No. & date,PS amount • PS duration, PS validity date, date of PS extension (if any), PS released date Note: In case of front loaded bid, an additional PS of 8% (R-65.3) is demanded to cover the unbalance cost. Thus, PS may be >5% & go up to 13%. If, unrealistically front loaded contract is not awarded.

34. 17. Record Keeping ... • Record of Advance payment Security • As in 2 above • Rate/Formula of repayment – for up to certain amount (30% of the contract amount) no repayment, beyond that amount it is repaid @ of 40% of the interim bill till it is fully repaid. • Record of Domestic Preference Security • Applicable in case of ICB contracts & Foreign contractor/supplier. • As in 2 above • @7.5% & 5% • GoN’s 92-point Instruction = 10% --------------------------------------------------------------------

35. 18. Final Tips for Successful Procurement: • General & Most Important • Practice Yoga/ Pranayam/ Exercise & build a “Can Do Attitude”. • Merely signing of contract is not procurement. Its success depends upon complete execution of the contract & continuation of life time benefit/service. • Team work: • Dedicated project director, Proc./FM staff & others. • Mutual Trust - Inside the Project team & between Borrower’s & WB staff • Close interactions between Borrower and Bank specialists - Face to face meetings, audio/tel. calls, email, video conferences, SMS, & etc. effective communication

36. 18. Final Tips for Successful Procurement… • Project Documents on the Table • Financing Agreement, PAD, PP, Project Implementation Manual, Proc. Manual, etc. • Market Study • Goods: Availability of goods in local/international market and availability of suppliers. Trading practice in the market, suppliers’ interest, etc. Only one manufacturer or only one supplier (medicine) or very few or many – to be identified. • Works: Availability of contractors, their qualifications and their interests. • Consultants: Availability of consultants, their qualifications and their interests. • Analysis of market & Supply Chain

37. 18. Final Tips for Successful Procurement… • Program/budget (AWPB) & Procurement Plan (PP) • AWPB & PP should be prepared together – 6 months earlier than coming FY • PP should be detailed – ritual PP doesn’t work • PP should be prepared based on PROPOSED AWPB & revised after Budget Speech • AWPB should have right budget head & source. Errors to be corrected immediately. • Check for matching fund, tax, etc.

38. 18. Final Tips for Successful Procurement… 6. Capacity Building • Training for staff, auditors & consultants involved in procurement processing (Proc.), reviewing (FM, Program) & decision making (project chiefs & deputies) – different training modules needed – include it in PP. • Workshops, interactions, talk programs, sharing of experience, key note speeches, • Online learning programs by WB (MOOC < www.procurementlearning.org> - The knowledge & learning portal for public procurement.

39. 18. Final Tips for Successful Procurement… 7. Expert Advice • For preparing specs, TOR, cost estimate, evaluation/qualification criteria. Access to appropriate technical experts is important • Proc./FM consultants – They are experts, extended working hands, play vital role for project success, more trusted than doubted (not enemies) • Technical consultants as per need • For small job – experts from other GoN offices

40. 18. Final Tips for Successful Procurement… 8. Project Implementation/ Contract Execution • Project launch workshop - orientation to all project staff - risk mitigation action plans • Effective Supervision: closely identify issues/bottlenecks and seek effective means to address bottlenecks in time. • GP/ e-procurement/ e-bidding • Data Management System: The web based contractors’ data management system initiated (DOR)

41. 19. Procurement Cycle • Planning, budgeting & market study: Including preparation of procurement plan • Bidding process: (i) Design, drawing, specifications 7 cost estimate; (ii) bidding documents; (iii) publication of notice (invitation for bidding=IFB); (iv) Bid evaluation and award decision; (v) Contract signing or contract agreement. • Contract Execution: • Defect Liability Period or Warranty Period: • Long Term (designed life time) Benefit from the procured item (W, G, S, NS) = Strategic Procurement

42. Thank You