Public procurement: Abuses and challenges

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It’s time to give the rakyat a preview of what ketuanan rakyat economic and social policies will look like, says H A Lee.

 

The Port Klang Free Zone debacle showcases the depravity of our clandestine system of government contracting and procurement, and will inflame the cause of open tenders.

No one can deny that transparency and accountability are necessary. But are these principles and practices sufficient to achieve Malaysia’s delicate imperative of cultivating capacities efficiently while distributing opportunities equitably?

Abuse of public procurement embodies some of the worse elements of the NEP gone astray and aggrieve current and future taxpayers with filthy stinking wastage of their hard-earned dues. Costs must be cut, contracts must be bared, the public must be informed. But, again, are these all that need to be fixed?

The problem is not only the corruption and pillage of public funds. We should also be exceedingly upset that the NEP has inadequately fostered genuine partnerships reflective of our cultural diversity and has failed to cultivate a responsible business ethic.

I believe there is much more we can do to leverage the government procurement system to broaden our development vision, besides ensuring contracts go to the one offering the best combination of price and value. Governments need to be bolder to say, if you want to do business with us, who represent the people and steward their trust, you have to aim to serve the greater economic, social, and environmental good.

Since March 2008, alterations to the tender system, both in Pakatan and BN administrations, offer more procedural than substantive change. Proposed and implemented change amount more to repair and clean-up jobs than fundamental reforms.

One of the more publicised and implemented changes to the government procurement process is the introduction of a lottery system for class F Bumiputera-only contracts. Chief Minister Lim Guan Eng, to his credit, started the ball rolling on that, together with a commitment to open tender for larger projects. But BN can do also, and perhaps out-gimmick its adversary. The Kuala Terengganu by-election grabbed headlines with more online random draws of class F contracts.

BN officialdom acknowledges that the system is broke, but has not indicated what specific policy and institutional reforms will be pursued. The Mid-term Review of the Ninth Malaysia Plan announced, without any details, that “[t]he existing restructuring instruments to enhance Bumiputera participation in the economy will be reviewed. These will include the Foreign Investment Committee Guidelines, public procurement procedures and the Industrial Coordination Act, 1975.”

We have enough information about BN predilections, including the recent liberalisation of the services sector, to extrapolate that much of the deliberation will revolve around ethnic quotas and ownership – and maybe make a few notes about corruption.

NEP legacy

Some will advocate total elimination of ethnic quotas as the supreme solution and deem whatever distribution of contracts as the fair market outcome. In other words, shock therapy. If ethnicity does not matter, it should not factor into the selection process at all.

The chambers of commerce met Lim Guan Eng soon after his appointment as Chief Minister to express their support for his open tender policy. The Penang Malay Chamber President qualified his endorsement by asserting that there must be “a level-playing field for all races”. That is a curious statement; an open tender policy would procedurally give every bidder equal chance and same treatment. Of course, “level-playing field” is code for “do not sideline us”. The implicit warning against bias, whether real or perceived, will be reinforced in the event that Chinese businesses turn out to be main beneficiaries of future tenders.

We should recognise that open tenders will make life harder for perhaps an influential and partisan corps of contractors. They should be pressed to perform and not be coddled anymore, but they should not be dismissed or alienated. A lot is said about non-racialism, and rightly so, but too little about non-partisanship. In this spirit, the concerns of currently Umno-affiliated business must be given a fair hearing.

We may wish and declare that we are in a post-racial, post-NEP age, but alas, the NEP legacy compels us to deal with its shortfalls in cultivating a Bumiputera managerial and professional community. I don’t see how this can be shocked into development. We need to chart a transition path that induces a change in mindset and embraces broader social objectives while continuing to address the failures of past policies.

And that includes the ethnic dimension. The problem is not that ethnicity is part of policy; the problem is that it has consumed policies, which moreover have operated without clear rules.

Compelling change

So, back to the proposal of leveraging the government tender process to compel reform. The unparalleled advantage of this avenue, over regulation and persuasion, is that governments directly tug the public purse strings and can authoritatively set the terms of access to the funds.

This approach could also re-orient us towards providing incentives for businesses to do a range of good things for society, away from the entrenched habits of laying down quotas and getting pre-occupied with ethnicity and ownership.

We can draw on the experience of other countries trying to achieve similar objectives. In South Africa, companies compete for government contracts on price and quality, but can score bonus points for demonstrating composition of ownership, management and employment that are representative of society, as well as for upgrading skills and committing to other socio-economic objectives.

Of course, these thoughts are preliminary – we need to think this through carefully. Unlike the BN-style of top-down quick-fixes with fanfare, let’s have a thorough discussion to formulate a binding set of rules, with a judicious blend of statutes and discretionary space.

The process of awarding government procurement could evaluate bids on the following criteria:

  1. Price and quality of bid and company track record. This criterion must of course take precedence, and be accorded the highest weightage. But there are at least seven other areas worth considering.
  2. Employment creation and training, and remuneration paid to workers. To induce creation of decent, well-paying jobs and skills upgrading, we should reward companies that show a good track record and commit to advance growth in these areas.
  3. Ethnic and gender composition of management. We should reward companies to the extent their management teams are representative of our social tapestry.
  4. Ethnic and gender composition of professional positions, and of workforce on the whole. Priority should be ascribed to companies that demonstrate more commitment to diversity in their ranks.
  5. Development of new enterprises or subsidiaries, through the sourcing of inputs or subcontracting of jobs. Higher priority can be given to companies that have supported the establishment of new upstream or downstream affiliates.
  6. Employment of disabled persons. We can assign bonus points to companies that provide meaningful jobs to members of this long-neglected segment of society.
  7. Environmental conservation. Similarly, this can operate as a bonus: extra points for operating in ways that conserve energy or preserve our ecology.
  8. Social investment. This is a broad category, and deliberately so, to encompass myriad forms of investment that yield profits to society, like health and sports facilities.


Evaluation must be based on past and proven performance, not promises and plans. We can set benchmarks and targets while avoiding rigid quotas.

On the whole, the government procurement system envisaged here will need to strive for a balance of a broader set of objectives alongside the imperative of efficiency. It will be structured to provide incentives, perhaps by adopting a points system according to the above criteria, for companies to do better across a spectrum of desirable outcomes besides price. The lowest bidder may indeed get there by compromising labour and environmental standards.

Applications and approvals must not get choked in red tape; firms should not be overly burdened. We will probably need to inject some degree of flexibility, for instance, exempting small- and medium-scale enterprises from meeting all the criteria and permitting them to select a few to pursue.

But those are details that can be ironed out.

Towards real reforms

The question is, are we going to merely repair or truly reform the way government spends money and engages with business? Pakatan Rakyat is better positioned to offer substantive change, and has taken piecemeal steps to chart a new course.

Now it’s time to give the rakyat a concrete, full-bodied preview of what ketuanan rakyat economic and social policies will look like.

HA Lee is a doctoral student in economics at the University of Massachusetts, Amherst.

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