SADCOPAC Training Event Nairobi November 2013

1. SADCOPAC Training Event Nairobi November 2013 Auditing public procurement process to improve transparency and accountability Werner Pelzer Bundesrechnungshof 1 Werner Pelzer Auditing Public Procurement

2. Introduction Why auditing public procurement ? • EU- Member States have annual expenses in procurement worth • some 1.5 trillion euro respectivly 16 % GNP. • In Germany this amount equals some 250 billion euro. • properly and timely executed the audit of public procurement • may generate significant savings for the budget. 2 Werner Pelzer Auditing Public Procurement

3. Audit in publicprocurement Preconditions for successful audits 3 Werner Pelzer Auditing Public Procurement

4. Audit in publicprocurement Carrying out successfullaudits in publicprocurementrequiresthat a setofpreconditionsaremet: 1. a sufficientlycomprehensiveand robust mandate 2. professional andwelltrainedstaff 3. adequateauditrules 4. auditprojectsthataredesignedconsistentlyand conducted on therightsubjectandattheright time 4 Werner Pelzer Auditing Public Procurement

5. Audit in publicprocurement • In casethesebasicconditionsarefulfilledaudits in publicprocurementveryoftencontributetosavingpublicmoneyorat least tospendingpublicmoneymoreeconomically. • Somekeyfactorsforsuccessare: • legal committmentforadministrationtoadhereto • principleofeconomywhenexecutingthebudget • followadequatestandarsfortheawardprocedure • b. timing • c. structuralanalysisofprocurementactivities 5 Werner Pelzer Auditing Public Procurement

6. Audit in publicprocurement • Aims of procurement audits • should be determined • such as • Check whether there is a justified motivation for spending public money for a particular good or service • Confirm that relevant laws have been applied • Make sure that the procedure has achieved value for money • Prevent fraud and corruption 6 Werner Pelzer Auditing Public Procurement

7. Stages ofProcurementProcesses Definition of needs Procurement procedure Contract Implementation 7 Werner Pelzer Auditing Public Procurement

8. Audit in publicprocurement • Has the public authority justified the procurement under aspects of economy/effectiveness? • Is the number/scope necessary or would less also be sufficient? • Are the concrete technical specifications indispensable or would a lower level also do? • Did the department consider all reasonable alternatives? • Did the department compare these alternatives against each other, applying accurate figures, include all relevant aspects as well as agreed standards and come to reasonable results? 8 Werner Pelzer Auditing Public Procurement

9. Stages of Procurement Processes Award of contract Contract Implementation Definition of needs Performance description Choice of procedure Notification Evaluation of tenders Scope of procurement law 9 Werner Pelzer Auditing Public Procurement

10. Audit in publicprocurement • Was the performance described clearly, unambiguously and comprehensively, giving precise definition of the characteristics of what to be supplied, making it possible that all concerned understand it in the same way? • Were technical requirements set strict enough to guarantee the desired performance without being unnecessarily tight and thus bearing the risk of excluding favourable bids that don’t comply with all these requirements? • Did technical specifications include no unjustified reference to a specific make or source, to a particular process, to trade marks, patents, types or to a specific origin or production, thus preventing favouring or eliminating certain undertakings or products? 10 Werner Pelzer Auditing Public Procurement

11. Stages of Procurement Processes Award of contract Contract Implementation Definition of needs Performance description Choice of procedure Notification Evaluation of tenders Scope of procurement law 11 Werner Pelzer Auditing Public Procurement

12. Audit in publicprocurement • Did the public authority opt for the one procedure that offers most perfect and open competition under the given circumstances? • When exceptional negotiated procedures were used, did the contracting authority give sufficient and reasonable reasons and evidence for its option, motivating why an open or restricted procedure was not possible? • Did those conditions actually occur? • The auditor should bear in mind that each restriction of bidders may imply • exclusion of potentially favorable offers • enhanced risk of undue influence in assessment • that undue cooperation between bidders is facilitated 12 Werner Pelzer Auditing Public Procurement

13. Stages of Procurement Processes Award of contract Contract Implementation Definition of needs Performance description Choice of procedure Notification Evaluation of tenders Scope of procurement law 13 Werner Pelzer Auditing Public Procurement

14. SADCOPAC Conference • Has the public authority defined clearly the award criteria? • Are the award criteria linked to the subject matter of the contract and suitable to determine the most advantageous offer • Have the criteria been weighed? • Is the evaluation process documented? • Did the contracting authority evaluate and rank bids against all and only those criteria, and relative weighting, which it had published in the procurement documents? 14 Werner Pelzer Auditing Public Procurement

15. SADCOPAC Conference Besides the legal issues the auditor should verify whether the public authority has considered the following performance aspect that might have been suitable to enhance the chances to receive economically favorable offers: Aggregating demand, to make tendering attractive, thus improving competition Contract duration, should be as short as possible to preserve the competitiveness of unsuccessful tenderers and to launch new invitations to tender in time Contract award by lots which enables small and specialized companies to tender, thus improving competition However, the auditor must bear in mind that these measures may be at odds and not necessarily beneficial in all cases. The motivation given by the auditee is important for an assessment. 15 Werner Pelzer Auditing Public Procurement

16. Audit Approach BRH Audit Approach BRH 16 Werner Pelzer Auditing Public Procurement

17. Audit Approach BRH • Audits in public procurement in Germany are carried out as a routine exercise. • Audit work is designed to verify whether • there is an actual need for the particular procurement • the result of the procedure achieves value for money • the public procurement regulations have been adhered to • If the auditor comes to the conclusion that one of these questions has to be negated the administration did not performwell. Werner Pelzer Auditing Public Procurement 17

18. Audit Approach BRH • Characteristicsofgoodprocurement • getwhatyouneed • in numberandspecification • neitherlessnormore • toadequateconditionsconcerning • priceand • quality 18 Werner Pelzer Auditing Public Procurement

19. Audit Findings • Competition • open • nondiscriminating • transparent 19 Werner Pelzer Auditing Public Procurement

20. Audit Approach BRH • How can subject matter and scope of • audits in public procurement be identified ? • Sources of information about procurement activities • budget plan, esp. titles concerning equipment and maintenance • statistics • register containing contracts concluded • auditors projection of possible procurements derived from his • experience • complaints, evidence and petitions rendered by third persons 20 Werner Pelzer Auditing Public Procurement

21. Audit Approach BRH • What is subject-matter of the audit? • Every decision, measure or programme • Individual purchase, leasing or service contracts; framework agreements • Decisions taken to define public needs and prepare procurement activities • The course of the procurement procedure which aims to satisfy the demands • Programmes in context of public procurement such as • planning and rollout of an e-procurement plattform, • implementation of standards and procedures for bundled • procurement activities within the federal government 21 Werner Pelzer Auditing Public Procurement

22. Audit Approach BRH • Which are the documents BRH scutinises? • Evidence may be found in the tender documents • specification • contract (draft or concluded) • notification • written motivation for all steps of the procurement procedure 22 Werner Pelzer Auditing Public Procurement

23. Audit Approach BRH • Which are the criteria BRH applies to assess findings? • Audits in public procurement in Germany are seeking to ensure regularity as well as good performance. • Audit work therefore is designed to verify whether • from an economic perspective • there is an actual need for the particular procurement • the result of the procedure achieves value for money. • from a legal point of view • the procedure has been conducted in accordance with legislation 23 Werner Pelzer Auditing Public Procurement

24. Audit Findings Audit Findings 24 Werner Pelzer Auditing Public Procurement

25. Audit Findings • Unjustified procurements • no need for goods or services • exaggerated specifications • number of devices /scope of service • inadequate 25 Werner Pelzer Auditing Public Procurement

26. Audit Findings • Example • The department procured 250 PC to replace existent equipment which was not yet amortised. • This purchase was said to be necessary because a new software was being implemented which reputedly needed a higher hardware capacity than the former software. • BRH scrutinized this motivation and found out that the new software could have been operated without restriction on the available PC. • In consequence the procurement had to be considered as being not economic. 26 Werner Pelzer Auditing Public Procurement

27. Audit Findings Key data • military procurement • wave of items plus • reduction of operating • cost • direct savings • accurate quantification • + estimate • 1.34 billion € • + some 2 billion € 27 Werner Pelzer Auditing Public Procurement

28. Audit Findings • Restricted Competition • open and concealed • Discrimination • against or in favour of bidders and products; • Intransparent Procedure 28 Werner Pelzer Auditing Public Procurement

29. Audit Findings • Restricted Competition • frequent and unjustified use of restricted award • procedures • inadmissible direct award without any competition • inadmissible extension of contract duration • additional contracts without award procedure 29 Werner Pelzer Auditing Public Procurement

30. Audit Findings • Discrimination • specifications not comprehensive and • equally comprehendible • privileged brands • tenders accepted that do not meet requirements • negotiations with bidders in open procedure • inadmissible criteria for suitability of bidders and • evaluation of tenders 30 Werner Pelzer Auditing Public Procurement

31. Audit Findings • Intransparent procedure • no documentation about decisions and • measures taken, • such as selection or rejection of bidders • motivations given are not plausible and • convincing – • esp. for the selection of the most advantageous offer; • criteria for evaluation of tenders have not • been notified 31 Werner Pelzer Auditing Public Procurement

32. Recommendations • What did BRH essentially recommend so far? • Self-evidently: follow thebinding procedurewhich shall • contribute to attain value for money • Adequate preparationof procurement activities, in particular • proper definition of needs, bearing in mind alternatives. • The definition of needs is the basis for a clear and • comprehensible specification • Provide for as muchcompetitionas reasonably possible • Comprehensivedocumentation 32 Werner Pelzer Auditing Public Procurement

33. Recommendations • What else can be done to enhance economy? • Establishment of professional procurement units • Training of staff • Bundling of needs to make the contract more attractive for • the companies; framework agreements should be taken into • account • Contract duration as short as possible to keep competition up • Formation of lots to encourage participation of SME 33 Werner Pelzer Auditing Public Procurement

34. Guidance • Guidelines andchecklists • issuedby a workinggroupoftheContactCommitteeofthe Supreme Audit Institutionsofthe European Union • Websites ofthe European Union • http://ec.europa.eu/internal_market/publicprocurement/index.htm • http://simap.europa.eu/index_en.htm • SIGMA Briefs • http://www.oecd.org/site/sigma/publicationsdocuments/ 34 Werner Pelzer Auditing Public Procurement

35. Guidance Questions ? 35 Werner Pelzer Auditing Public Procurement

36. Procurement Stages • The award of the contract is governed by a set of provisions on different levels, • the most important of which are • the GPA • the EU- Directives and Regulations • the national rules • based on these international statutory provisions 36 Werner Pelzer Auditing Public Procurement

37. Procurement Regulations • Government Procurement Agreement • Regulations about government procurement initially had been explicitly • excluded from the General Agreement on Trade and Tariffs (GATT) • As result of the Tokio Round a first Agreement on public procurement • took effect in 1981. • In parallel with the Uruguay Round the Parties of the Agreement • extended its scope and coverage to todays Government Procurement • Agreement which entered into force on 1 January 1996. 37 Werner Pelzer Auditing Public Procurement

38. Procurement Regulations • Government Procurement Agreement • The GPA does not establish comprehensive committment on public procurement as it does not apply to all government procurement of the Parties: • The procuring entities which have to apply the GPA in each country are • listed in Annex 1 • GPA covers contracts • - on goods • - on services and construction as specified in positiv lists • - above certain thresholds, which each Party indicates in the Annex • GPA is restricted by a number of exceptions set forth in General • Notes at the end of most Parties schedules 38 Werner Pelzer Auditing Public Procurement

39. Procurement Regulations • Government Procurement Agreement • GPA contains a number of detailed obligations which procuring entities have to fulfill concerning • procedure which has to be followed, ranging from basicly • unrestricted participation up to restricted negotiations under • exceptional circumstances • admissible technical specifications to describe the performance • notification • deadlines • documentation • award and selection criteria 39 Werner Pelzer Auditing Public Procurement

40. Auditee • Who is subject to our audits? • Basically only federal institutions such as the departments and their • subordinate administration. • Any institution which receives public subsidies provided these equal • a certain value • Body of private law, in particular economic operators, which are • property of the federal government. • In recent years many such companies have been established in order to take over the implementation of tasks traditionally performed by public administration. They are not bound to budgetary law and for this reason may act much more flexible on the markets. The Role of the Bundesrechnungshof 40

41. Collegiate decision-making bodies College of Two Audit group Senior Audit Director Audit Director College of Three Divisional senates President/Vice-President Senior Audit Director Audit Director Senate Standing Committee of the Senate President and Vice-President 9 Senior Audit Directors 3 Audit Directors Rapporteur and co-rapporteur The Role of the Bundesrechnungshof 41

42. Planning and conducting audit work planning analyse tasks of audit units select audit matters for medium-term audit planning (3-5 years) sort audit themes according to priorities and resources prepare annual plan audit process audit schedule audit notification conduct of audit work draft of audit record The Role of the Bundesrechnungshof 42

43. Contradictory procedure Management letter to audited body Comments of audited body Evaluation of audit findings Analysis of audited body‘s comments by SAI/regional audit office Finalisation of audit work Evaluation,remedial action Annual report item Advice Special report Parliament The Role of the Bundesrechnungshof 43

44. Reports of the German SAI Two Houses of Parliament and Federal Government Annual report Appropriations Committee, Federal Government, Departments, and Council Advisory reports Two Houses of Parliament and Federal Government, German Central Bank, Special reports Federal Posts and Telecommunications Agency Individual reports Two Houses of Parliament and Federal Government Opinion of Federal Performance Commissioner Federal Government and Departments Other studies The Role of the Bundesrechnungshof 44

45. Processing of Annual report Annual report Bundestag Bundesrat Fed. Government Appropriations Committee • Public Accounts Committee • Deliberation of departmental budgets (federal government departments, SAI) • Finance Committee • Resolution proposal • Appropriations Committee • Resolution proposal • Bundesrat • (plenary session) • Discharge • Bundestag • Discharge The Role of the Bundesrechnungshof 45

46. Special reports (Art. 99 Federal Budget Code) • on matters of particular importance to • Bundestag • Bundesrat • Federal Government • especially suitable for informing general public • procedure is the same as for the annual report The Role of the Bundesrechnungshof 46

47. Advice (Art. 88 Federal Budget Code) • based on audit experience • Bundestag- Appropriations Committee- Public Accounts Committee- specialised committees- rapporteurs • Bundesrat • Federal Government • individual federal ministries; 47

48. Audit Findings Example The Department of Construction and Traffic is responsible for the maintenance of public roads. This task is fulfilled by in-house staff and equipment at several local branch offices. The Departement purchased new machinery for one of those offices, among other things a steam roller, price 50.000 €. To assess whether the purchase was justified in terms of economy the auditor surveyed how many similar items were already operated by the Departement and to which extent. He found that several steam rollers in other locations showed only few operation hours and infered from the available data that some were used less than 30% of their capacity. He came to the final conclusion that the Departement could have abstained from buying a steam roller if only it had considered the alternatives properly and reorganised the distribution of steam rollers in accordance with actual local needs. 48 Werner Pelzer Auditing Public Procurement

49. Audit Findings Key data • military procurement • wave of item • direct savings • accurate quantification • + estimation • 54 mill. Euro • + 1.2 mill. Euro 49 Werner Pelzer Auditing Public Procurement

50. Audit Findings Specifications Example Purchase of personal computers. Specification requires „metal housing, white“ Unless justified reasons are given this specification unnecessarily excludes all products with plastic boxes and different colours. 50 Werner Pelzer Auditing Public Procurement