Applying USG Contracting Principles to International Assistance Programs

2. Applying USG Contracting Principles to International Assistance Programs Breakout Session # 613 Name: Gerry Nash, Senior Director, Procurement, Millennium Challenge Corporation (MCC) Kim Kotnik, Principal, Booz Allen Hamilton Date: July 20, 2010 Time: 4:00 – 5:15 PM 1

3. Purpose of the Briefing • Examine how overarching US Government procurement and contracting principles apply (or don’t) to international assistance programs

4. Every year the USG spends over US$50 Billion on international programs through dozens of agencies The various government agencies coordinate investment planning Each uses different implementation models and procurement and contracting practices Source: Office of Management and Budget Department of State and Other International Programs Budget information 2008-2010

5. The USG agenda mirrors that of other governments, international organizations and private foundations US Government agencies also coordinate investments with other organizations Procurement and contracting rules and practices vary significantly depending on the source of funds

6. We (USG and taxpayers) invest in foreign assistance programs for a variety of reasons Advance US foreign policy goals Constructively engage with foreign governments, private sector, non-governmental organizations and citizens Contribute to improved economic, political and social conditions, and the standard of living Reduce poverty Increase stability Create favorable perception of America and Americans Strengthen current and potential future US trading partners

7. Important changes are underway to improve international assistance results Hard + soft power = “Smart Power” Convergence of Defense, Diplomacy and [international] Development -- the “3 Ds” “Whole of Government” Bush Administration Created the Millennium Challenge Corporation Obama Administration Advancing engagement, partnership and promotion of universal values Recent Remarks by Secretary of State Hilary Rodham Clinton “Building the architecture of global cooperation requires us to devise the right policies and use the right tools. I speak often of smart power because it is so central to our thinking and our decision-making. It means the intelligent use of all means at our disposal, including our ability to convene and connect. It means our economic and military strength; our capacity for entrepreneurship and innovation. It also means the application of old-fashioned common sense in policymaking. It’s a blend of principle and pragmatism.” July 15, 2009

8. Success and results depend (in large part) on effective procurement and contract managements Notwithstanding the UNCITRAL model law, there are no global standard practices/procedures for procurement and contracting Principles, rules, regulations, procedures, processes, tools, training, certifications, etc. Ample vulnerabilities related to fraud, corruption, waste and abuse – intentional or otherwise Hard to ensure effective procurement and contract management in diverse environments and without common standards Note: We recognize that there is harmonization of some standards and principles, however, this harmonization generally does not extend to developing countries.

9. In this session, we share 2 examples where USG principles were adapted for developing countries Case #1: Millennium Challenge Corporation – example of new, innovative US foreign assistance program that is leading the way in many regards Case #2: Private Foundation Public Access Computing Program for Libraries – example of private efforts to advance similar goals

10. Your speakers today are: Gerry Nash 30 years experience in acquisition/procurement, including 26 years experience with DoD weapon systems acquisition 4 years experience with MCC 4 years with Booz Allen Hamilton Work experience with MCC in 7 countries across Former Soviet Union, Pacific Islands, Asia and Africa Kim Kotnik 15 years experience in international economic development 12 years with Booz Allen Hamilton Work experience in 30 countries across the Americas, Europe, Former Soviet Union, Middle East, Asia and Africa 6 years experience in procurement and contracting

11. We represent 2 organizations intimately involved in adapting US practices to fit foreign circumstances Millennium Challenge Corporation (MCC) (www.mcc.gov) Founded: 2004 Mission: Poverty reduction through economic growth So what? Forefront of innovation in international development; creating new procurement and contracting framework that adapts US principles for use in/by developing countries Booz Allen Hamilton (www.bah.com) Founded: 1914 Mission: Deliver results that endure So what? Working with several clients including the MCC to evaluate and adopt innovative procurement frameworks suitable for international development programs

12. Case 1: Millennium Challenge Corporation: innovative foreign assistance institution designed to “reduce poverty through sustainable economic growth” MCC is managed by a Chief Executive Officer and a public-private Board of Directors comprised of: • MCC CEO • Secretary of State • Secretary of the Treasury • U.S. Trade Representative • USAID Administrator • Individuals from the private sector • Two forms of grant assistance with original commitments totaling $7.5 Billion: • Compact Programs: US$7.0 billion • Threshold Programs: US$470 million 11

13. The “MCC model” is based on several overarching principles • Sound governance, economic and social policies: • Support countries who can use assistance effectively • Spur private investment and increased trade, the real engines of growth • Country ownership: • Increases responsibility • Builds capacity • Yields better results • Clear objectives and measurement of results: • Increase accountability • Contribute to development success 12

14. MCC adheres to and promotes four key procurement principles in its operations worldwide Open, fair and competitive procedures Solicitations based on clear and accurate descriptions Contracts awarded only to responsible suppliers and contractors No more than a commercially reasonable price shall be paid 13

15. Applying the principles has not been an easy undertaking MCC must apply the aforementioned principles in 20 Compact countries, many of which have limited prior knowledge, experience or appreciation for the concepts; And apply the principles effectively, efficiently and consistently; And satisfy various oversight agencies that the principles are being applied properly; And work through and with new country representatives, bidders and MCC staff overseeing each new country investment.

16. There are still some very important key constraints Five year implementation period to procure, implement, manage and close out contracts funded by MCC in a particular country Program must be “country led” Predominantly complex projects with many risks at all stages of the project lifecycle Agency has a staffing limitation of 300

17. MCC analyzed alternative procurement frameworks based on what would best advance the principles and mitigate risks Who procures? How do they procure? • MCC • Foreign government ministry • External 3rd party agent (hired through a competitive process) • Hybrid • Centralized or decentralized? • Under an international, US (FAR) or “country system”?

18. Ultimately, several frameworks were tried before MCC began standardizing the approach Who procures? 70% - a host country competitively procured procurement agent services contractor 20% - procurement specialists on the staff of the host country Compact management team (Millennium Challenge Account) 10% - hybrid frameworks using government ministry procurement specialists alongside competitively procured procurement agent services contractor How do they procure? MCC developed “Modified World Bank” procurement guidelines that eventually became the MCC Program Procurement Guidelines MCC developed “Standard Bidding Documents” based on World Bank bidding documents

19. The MCC Program Procurement Guidelines are based on World Bank Guidelines with a US Government twist Similar to World Bank Procurement Guidelines except: Prohibits national preference Verifies bidder eligibility under U.S. laws and policies Requires price reasonableness determination Provides broader advertising requirements Requires that technical scores be based on consensus of the panel vs. averaging individual panel member scores Tightens restrictions on currency use Fair Principles Competitive Transparent Open 18

20. MCC outreach to potential bidders emphasizes some of the unique aspects of the MCC model • Open and competitive procurements. • No preferences for U.S. or domestic contractors: Compacts are “untied”. • Past performance and demonstrated experience with environmental, health, safety, labor standards matter. • Award decisions made by consensus decision of technically qualified experts. • MCC checks and balances to guard against abuse. • Professional independent oversight of contract performance. • All funds are obligated when Compacts enter into force. • Contractors paid directly by USG. 19

21. Results in MCC’s first five years have been positive … Over 1,500 kilometers of roads contracted Over 109,500 farmers trained Over 44,400 hectares of land under production Over 45,000 rural parcels of land mapped Launched 21 threshold programs in 19 countries totaling approximately $470 million

22. We have also gathered numerous “lessons learned” applicable to future MCC countries and other international assistance programs Lessons learned Need to place increased emphasis in the early years on capacity building of the host country team Need to provide additional training and tools to support host country contract administration efforts Need to require early long term planning and improve effective budgeting Difficulty of translating and transmitting procurement principles in foreign environments that are culturally different from the US Flexibility in procurement procedures is key to meeting the challenges that change from country to country

23. Case study 2: Private Foundation Public Access Computing ProgramThis program aims to improve quality of life through increased internet access via libraries Program background Specific program within a large private foundation Goal: Improve the quality of life through increased internet access and use, and through the strengthening of libraries Program funds hardware, software, networking equipment and training Libraries self-fund maintenance (no program funds) Partner countries and individual libraries within countries are selected competitively Great emphasis on “national penetration” including rural and poor areas outside the capital cities

24. Program success depends on many factors including effective procurement Key success factors: Competitive country selection Competitive library selection Competitive staff selection Procurement framework and corresponding responsibilities Control mechanisms for contract management, inventory control and logistics/distribution Some of the challenges: Each country has its own procurement “system” - variable quality Each country has its own process to exempt from country system Varying levels of political will at the national and local levels Varying degrees of corruption and social acceptance of corrupt practices

25. Program leadership determines procurement strategy for each country… How do they procure? Who procures? • National government • Local government • Libraries (centralized or decentralized) • Foundation staff • 3rd party service provider through a contract or grant • Centralized or decentralized? • All at once or in “waves”? • Using local systems, foundation guidelines, specific foreign or international “system,” or hybrid?

26. … and must consider multiple factors as part of the procurement planning process Market research and appropriate bidder targeting Transparency and competition National laws, restrictions Government system strengths and weaknesses Logistics and distribution Ongoing support Warranties and guarantees --- Since private funds are being invested, there are no public sector procurement rules that [must] apply

27. The program considered a similar set of options for Ukraine and Romania, and reached different conclusions due to circumstances • Grave concerns about corruption • Limited government support • Procurement law suspended; no operational system • Weak procurement capacity • Less developed IT sector • Did not allow local procurement • Followed World Bank Guidelines to attract international companies • Procurement managed internally by the program with Ukrainian evaluation panel members • Sufficient industry response Ukraine • Moderate concerns about corruption • Strong government support • Stable national procurement law & system • Moderate procurement capacity • Very well-developed IT sector • Followed local procurement rules • Procurements run by national and local government entities • Training provided to program staff who provided oversight • Strong industry response Romania

28. Lessons learned from Ukraine and Romania have already benefitted other participating countries “Best value” is understood in very different ways Centralization vs. decentralization and large vs. small volume procurement are BIG questions for this (and other similar) program Need better, earlier consensus on “social goals” Payment term expectations vary widely by country – local credit availability and “normal” terms must be considered Evaluation of both cost and technical quality is needed and may be new Although predominantly a goods purchase, training and ongoing support are also key

29. In both of the cases, we encountered serious challenges … Advancing US and “best practice” principles Explaining those principles and making them relevant in foreign contexts and cultures Local capacity gaps Ambiguity of roles, responsibilities and decision rights Cultural norms sometimes at odds with procurement and contract management principles --- Because these are ongoing challenges, we welcome your thoughts and input -- either today or in the future!

30. … that are common to a whole host of other organizations that are also looking for lessons learned and appropriate best practices World Bank United States Agency for International Development Other United States government agencies Government of the UK, Netherlands, Germany and others Other private foundations Health assistance Disaster relief International defense and security sectors

31. International events and trends will continue to influence US thinking and international practice International trends point to greater use of country systems as defined by the 2008 Paris Declaration on Aid Effectiveness Eliminating duplication of efforts and rationalizing donor activities Reforming and simplifying donor policies and procedures Defining measures and standards of performance and accountability in procurement, fiduciary safeguards and environmental protection Better protecting programs from corruption and better encouraging transparency But instability in the host country Governments will complicate the use of country systems

32. Where might we go from here? At the macro level, we need continued strong international engagement and results In terms of tactics, success of overseas investments is intimately tied to procurement and contract management Next steps in international assistance programs are also relevant domestically: Financial capacity guidance for procuring entities Collection, use and protection of past performance information e Procurement

33. Conclusions, Questions, Comments…