Legal Issues in Procurement Fiduciary Forum 2008 Presented by Alison Micheli (LEGIA)

1. Legal Issues in ProcurementFiduciary Forum2008Presented by Alison Micheli (LEGIA)

2. Legal Framework for Procurement Articles of Agreement • Legal Agreement • Procurement and Consultant Guidelines • SBDs

3. Today’s focus will be on several more problematic aspects within this framework • Securities • Conflict of interest • Misprocurement

4. Securities Different uses for securities (guarantees) in the procurement process: • Bid (tender) security • Performance guarantee • Advance payment guarantee • Others (e.g., retention money guarantee, guarantee for missing bill of lading, maintenance guarantee, etc.)

5. Securities Acceptable forms of security (depending on use): Unconditional bank guarantee • Unconditional guarantee (bond) issued by insurance company/financial institution • Irrevocable letter of credit • Performance bond issued by surety • Cashier’s or certified check • [Cash deposit]

6. Securities • All requirements for securities must be disclosed in the bidding documents. • The security must be in the format included in the bidding documents or in another substantially similar format approved by the Client.

7. Securities Unconditional guarantee (demand guarantee) • What is it? • It is the undertaking of a bank (or insurance or other company) as GUARANTOR to pay a sum of money to another party (i.e., the Client) as BENEFICIARY in the event of nonperformance of a contractual obligation by a third party (i.e., the bidder/contractor) as PRINCIPAL. • It is irrevocable, unconditional and payable on first demand. • It is independent. • It is subject to the laws of the issuing bank’s country.

8. Securities Unconditional guarantees (cont.) The World Bank has adopted the ICC’s Uniform Rules on Demand Guarantees (“URDG”) as the basis for bank guarantees in SBDs. • What are the URDG? • Why did the Bank adopt them? • Where do we use them? • How do we use them?

9. Securities Performance (surety) bond • Issued by surety (insurance or bonding company). • Undertaking to pay contractor’s debt (as opposed to bank’s primary obligation to Employer under demand guarantee) • Surety undertakes to pay only upon adjudication or other proof of default in the underlying transaction and only such amount as Employer establishes as being owed • As alternative to payment, Surety may undertake to: • Remedy the defect • Step into the defaulting contractor’s shoes and complete performance • Engage a substitute contractor to complete performance.

10. Securities Irrevocable (stand-by) letter of credit • Comes from US banking laws (which forbid US credit institutions from assuming guarantee obligations vis-à-vis third parties). • Like a demand guarantee, it is unconditional, irrevocable and payable on first demand, and is independent (i.e., legally separate) from the underlying transaction. • Basically fulfills the same purpose as a guarantee.

11. Securities Issuer of security: • Bidder/contractor is given choice between: • a bank/financial institution in the Client’s country. • a financial institution through a “correspondent” bank/ institution in the Client’s country. • a foreign bank directly if acceptable to the Client. • Issuer must be “reputable.”

12. Securities National Competitive Bidding (NCB) • Use of forms available domestically, no mandatory requirements • Clients call securities following their domestic procedures. • The World Bank has to review acceptability of call in the context of domestic law.

13. Securities Bid Security • Purpose? • To secure bidder’s obligation to stand by its bid during bid validity period. • Form? • Unconditional bank guarantee or, if Client agrees, unconditional bond issued by financial institution • Bid-securing declaration • Amount? • As a rule, not to exceed 2%. • Validity period? • Twenty-eight days beyond bid validity period • Evaluation issues

14. Securities Bid securities (cont.) • Evaluation Issues • “Minor” shortfalls/deficiencies • Joint Ventures

15. Securities Performance security • Purpose? • To protect Client against breach of contract • Form? • Unconditional bank guarantee or, for Goods and Works, with Client’s agreement, a surety bond • Amount? • “Reasonable” – normally 10% • For conditional undertakings, should be 100% • Subject to substantial reduction as implementation progresses

16. Securities Advance payment security • Purpose? • Secures Client against breach of obligation to use advance payment for required contractual purpose. • Form? • Unconditional bank guarantee, or, for Works, with the Client’s agreement, a bond. • Amount? • In the amount and currency(ies) of advance payment. • For consulting services, “normally” required to secure advances in excess of 10%.

17. Conflict of Interest Background • 1997 Consultant Guidelines Far-reaching definition [A] firm hired to provide consulting services for the preparation or implementation of a project, and any of its affiliates, shall be disqualified from subsequently providing goods or works or services related to the initial assignment (other than a continuation of the firm’s earlier consulting services) • Difficult implementation

18. Conflict of Interest • 2004 Guidelines revision was intended to differentiate between unfair competitive advantage and conflict of interest. • 2004 Consultant Guidelines (CG), paras. 1.9, 1.10, 4.12 • 2004 Procurement Guidelines (PG), para. 1.08(d)

19. Conflict of Interest Conflict between consulting services and procurement of goods, works or nonconsulting services (CG 1.9(a), PG 1.8(b)) • Examples: • Consultant prepares project design, affiliate bids on project • Consultant supervises project being implemented by affiliate • Solution? • No waiver, no mitigation

20. Conflict of Interest Conflict among consulting assignments (CG para. 1.9(b)) • How to identify? • Where there is a possibility that the objectivity of advice under one assignment may be influenced by another assignment • Examples: • Consultant drafts TORs, then competes for assignment • Consultant audits its own activities • Consultant advises Client on privatization of assets where also representing potential purchaser • Solution? • No waiver • If conflict of interest situation already exists, one assignment should be dropped or scope redesigned to remove source of conflict

21. Conflict of Interest Conflict arising out of relationship with Borrower staff (CG 1.9(c)) • Background • New definition: • Consultants (including their personnel and sub-consultants) that have a business or personal relationship with a member of the Borrower’s staff (or of the project implementing agency’s staff, or of a beneficiary of the loan) who are directly or indirectly involved in any part of: (i) the preparation of the TOR of the contract; (ii) the selection process for such contract; or (iii) supervision of such contract • Solution? • Resolution of conflict in manner acceptable to the World Bank

22. Conflict of Interest Unfair competitive advantage (CG 1.10) • When? • Often occurs when one consulting assignment follows another, even though there is no substantive conflict (e.g., sector study followed by pilot implementation study) • Solution? • Borrower must make available to all shortlisted consultants all information that would give the “incumbent” a competitive advantage

23. Conflict of Interest • A few other issues • Government-owned enterprises or institutions in the Borrower’s country (CG 1.11(b) and (c)) • Government officials and servants (CG 1.11(d)) • Affiliates • “Chinese walls”

24. Misprocurement Policy: The Bank does not finance expenditures for goods, works or services which have not been procured in accordance with the agreed provisions of the legal agreement and as further elaborated in the Procurement Plan. Remedy: In that case, the Bank will declare misprocurement, and it is the policy of the Bank to cancel that portion of the loan allocated to the goods, works or services that have been misprocured.

25. Misprocurement • Notice by TTL and declaration by Country Director • Misprocurement with cancellation is the policy • Misprocurement without cancellation is an exception (RVP decision) provided for in OP/BP 11.00, with reallocation of the funds to other components of the project • Misprocurement following World Bank no-objection • Misprocurement for not seeking World Bank’s no-objection • Distinction between misprocurement, fraud & corruption and non compliance with requirements regarding performance of the contract.

26. THANK YOU!