Business Daily (Nairobi)

22 November 2010

Kenya: Transparent and Competitive Public Procurement System Key to a Functioning Economy

opinion

One of the conspicuous characteristics of public procurement in Kenya is its dynamism. Public procurement continues to evolve both conceptually and organisationally. The evolution accelerated in the early 2000s when the government entities came under increasing pressures to "do more with less."

Indeed, all governmental entities are struggling in the face of unrelenting budget constraints, downsizing, public demand for increased transparency in public procurement and greater concerns about efficiency, fairness and equity. Additionally, public procurement professionals have faced a constantly changing environment typified by rapidly emerging technologies, increasing product choice, environment concerns, and the complexities of international and regional trading agreements.

Further, policy makers are increasingly using public procurement as a tool to achieve socioeconomic goals. In this environment, public procurement has become much more complex than ever before, and public procurement officials must deal with a broad range of issues.

They have been walking on a tight rope in balancing the dynamic tension between (a) competing socioeconomic objectives, (b) national economic interests vis-à-vis- global competition as required by regional and international trade agreements, (c) satisfying the requirements of fairness, equity and transparency, (d) maintaining an overarching focus on maximising competition; and (d) utilising new technology to enhance procurement efficiency, including e-procurement and purchase cards.

A sound procurement system is based on four major elements or pillars: legislative and regulatory framework, institutional framework and management capacity, procurement operations and market practices, and integrity of procurement system. A weakness in one of the four pillars inevitably leads to an unsound public procurement system. This contribution highlights the weakness in the current legal and regulatory framework on public procurement--the Public Procurement and Disposal Act 2005.

The principal reason for the enactment of the Act was to have a legal regime that weeds out inefficiencies in the procurement process, remove patterns of abuse, and the failure of the public purchaser to obtain adequate value in return for the expenditure of public funds.

However, these objectives have never been fully achieved in practice. Key provisions of the Act and the regulations are replete with textual weaknesses that have often been abused by procuring entities. Moreover, the Act does not envisage contemporary market realities hence the need to continuously revise it to keep pace with these developments.

First, one of the major weaknesses of the Act is the existence of open-ended definitions. It is juridical unsafe to enact a statute with provisions that are subject to numerous interpretation. The conspicuous example is definition of "procurement" and "public entity".

The Act defines "procurement" as the acquisition by purchase, rental, lease, hire purchase, licence, tenancy, franchise, or by any other contractual means of any type of works, assets, services or goods including livestock or any combination. Besides, it defines "public entity" to include; the courts; the commissions established under the Constitution; a local authority under the Local Government Act; a state corporation within the meaning of the State Corporations Act; the Central Bank of Kenya established under the Central Bank of Kenya Act; a co-operative society established under the Co-operative Societies Act; a public school within the meaning of the Education Act; a public university within the meaning of the Universities Act; a college or other educational institution maintained or assisted out of public funds; or an entity prescribed as a public entity for the purpose of the act. A critical review of these two definitions reveals doubts as to the scope of the Act vis-à-vis the following issues. An enterprise may be privatised, with majority of shares in the company being retained by the state. This is notable in the privatisation of Kenya Power and Lighting Company and Kenya Commercial Bank, where the state often retains a controlling stake in these companies.

It is not clear whether these entities are public entities for the purposes of the Act. Besides, it is not very clear whether the Act covers the execution of Private Finance Initiative contracts by procuring entities.

Secondly, one of the most problematic issues in the Act is the fact that its' key policy objectives lack a comprehensive working definition. This often confuses decision makers who may be faced with tough questions as to which policy objective overrides the other one. In this respect, it is not very clear whether the stated objectives of the Act detailed in section 2 establishes a hierarchy of norms or whether they are mutually exclusive. Besides, it is unclear whether the outlined objectives are exhaustive or merely indicative. Moreover, apart from section 39 and the last paragraph of section 2 all other sections of the Act have more to do with processes than using procurement as a policy tool.

The authors' review of more than 100 decisions from the Review Board and the High Court has revealed an inconsistent implementation of these policy objectives. There are no set guidelines, judicial or statutory, that ought to guide decision makes in the interpretation and application of the policy objectives. It is proposed that the Act is amended to restate and redefine the stated policy objectives.

Thirdly, transparency and non-discrimination are the key pillars of the legal regime on public procurement and disposal. A transparent and openly competitive public procurement system with clear procedures and contract award criteria is a prerequisite to a functioning economy.

A good procurement system must therefore provide watertight provisions amongst others , (a) requiring procuring entities to publish tender notices in good time to allow adequate responses from bidders, (b) clearly stipulating any technical specifications and procedures, (c) outlining bid opening procedures and detailing the terms and conditions of the contract awarded, and (d) requiring the procuring entity to maintain reliable record of proceedings, disclose all relevant information and avail for inspection the name and address of the successful bidder and the value of the winning bid.

Legitimate concerns have been raised regarding the adequacy and effectiveness of some compliance provisions in the present public procurement legal régime. It is genuinely contended that the provisions of the Act are stated in an inherently open-textured manner that leave room for the procuring entity with too much discretion that is often abused to the detriment of bidders.

For instance, when the procuring entity has finalised open-tendering procedures contemplated by Sections 50-71 of the Act and Regulations 35-54 of the Procurement Regulations and has prepared an evaluation report in terms of Section 66(5) and Regulation 51, it is under no statutory obligation to forward the evaluation report to the loosing parties when notifying them of the final decision. This contradicts tenets of transparency in the sense that the procuring entity can doctor the report to the detriment of an applicant seeking administrative review of its decision.

Fourth, the right of unsuccessful tenderer to challenge the award of the tender is a key feature of the public procurement process. An ideal public procurement legal regime should contain bid-challenge procedures that are non-discriminatory, timely, transparent and effective.

A critical review of the Act reveals that while the mere fact of lodging of a request for administrative review to the Review Board automatically operates to suspend the procurement proceedings, there are no concomitant provisions for automatic interim measures when an applicant seeks to challenge the decision of the Review Board by way of judicial review to the High Court.

Judicial review

The granting of judicial review application by the High Court is a discretionary power. Applicants seeking judicial review orders are subject to the discretion of the High Court. The High Court has discretion to grant leave to operate as a stay of the procurement proceedings or grant leave but decline to order stay of proceedings. In the latter, it means pending the determination of the application all procurement proceedings must be stopped while in the former the aggrieved party can file the judicial review application but the decision sought to be reviewed can still be implemented by the procuring entity.

This conflict was played out in the case of Republic Versus the Public Procurement Administrative Review ex parte Egerton University where the Review Board's decision to direct procuring entity to extend the disputed contract for three months was stayed by the High Court. This created a hiatus that led to the completion of the original project thereby rendering the judicial and administrative review proceedings nugatory.

Fifth, the Act requires exclusive preference to be given to the citizens of Kenya where, (i) the funding is 100 per cent from the Kenyan Government or a Kenya body; and (ii) the amounts prescribed are below the prescribed threshold which is 50 million for procurement in respect of goods or services and 200 million for procurement in respect of works. With respect to the margin of preference the law requires, (a) in the evaluation of bids to candidates offering goods manufactured, mined extracted or grown in Kenya the margin of preference shall be 15 % of the evaluated price of the tender; (ii) works, goods and services where a preference may be applied depending on the percentage of the shareholding of locals on a graduating scale, the margin of preference shall be six per cent of the evaluated tender price where the percentage of shareholding of locals is less than 25 per cent and eight per cent of the evaluated price of the tender where the percentage of the shareholding of the locals is less than 50 per cent but above 25 per cent.

The application of these criteria in the administrative and judicial review process has not been consistent. Besides, the set criteria are tailored for high-end procuring participants. Small and Medium Enterprises who submit majority of the bids are normally priced out.

There is need to further revise the existing threshold to facilitate access of the procuring markets by the lower-end participants. This will go a long way in encouraging growth and innovation and will create jobs for Kenyans in the lower income segment.

Sixth, in many countries, the defence sector accounts for large parts of government spending. However, national authorities are often concerned about the confidentiality of the procurement process and its impact on national security. Countries like United States, Spain, Portugal, Belgium, Finland, France and Norway have adopted specific rules for defence procurement.

In Kenya there are no special rules that govern defence procurement. The Act stipulates that its provisions shall apply to defence and national security organs subject to two exceptions, (a) the procuring entity is required to manage their procurement on the basis of a dual list covering items subject to open and restricted procurement respectively, and (b) the procuring entity shall agree annually with the Authority on the category of restricted items to be included in the restricted list and on methods of procurement to be applied to each category of the items on the restricted list.

The restricted list of items is subject to classified audit by the Controller and Auditor-General. Concerns have been raised on the adequacy of these provisions to effectively bring defence procurement within the purview of the policy objectives of the Act while still maintaining the secrecy associated with the process. It may be necessary to reinforce the provisions of the Act to balance the needs of efficiency in process and the national security concerns. Clear regulations should be prescribed to provide for criteria that shall be used to determine the classification of open and restricted items on the list contemplated by the Act.

Currently, this determination is a discretionary power and is subject to abuse. Besides, despite the express provisions in the Act the dual list has never been maintained two and half years after the operationalisation of the Act.

Seventh, legitimate legal questions have been raised regarding the legality or otherwise of the Public Private Partnership Steering Committee that is established by the Public Private Partnership Regulations 2009 and exclusively empowered to play a somewhat oversight role in matters relating to private partnership processes. This appears to take away the statutory functions conferred on the Public Procurement Oversight Authority ('PPOA') by the Act.

Potential legal challenges may be raised and ventilated by the following key juridical points. The Act creates PPOA and empowers it to oversee all public procurement issues including Private Partnership Agreements. It is therefore improper to create a Public Private Partnership Steering Committee as a department in the Ministry of Finance and empower it to play somewhat oversight responsibilities.

The apparent assumption that Private Partnership Agreements do not fall within the confines of the Act, can be successfully challenged by way of judicial review. This is fortified by the broad definition of "public procurement"' the provisions of the Act on contract management, and the fact that the Private Partnership Regulations derive juridical strength from the Act. Besides, it goes against the dictates of transparency, economy and efficiency of the public procurement process to vest oversight functions to an entity comprising exclusively of public officers.

Key weaknesses

Lastly, the policy objectives of the Act should be used to gauge adequacy of the law on public disposals. The key weaknesses of the existing legal regime are identified below. While the Preamble to the Act provide that it shall apply to among other things to disposal of "assets" of a public entity, the substantive provisions of the Act limit applicability of the Act only to disposal of "unserviceable, obsolete or surplus stores and equipment".

The Act defines "procurement" by a public entity to include acquisition of real property. However, by limiting "disposal" under the Act to disposal of unserviceable, obsolete or surplus stores, a serious lacuna is created as regards the substantive and procedures rules on the disposal of real property by a public entity.

The current situation can lead to an undesirable position where a public entity may follow the Act in procuring real property, but disregards its provisions when doing its disposal. A cogent argument can be advanced that real property is not "unserviceable, obsolete or surplus stores and equipment as defined in the Act.

This lacuna was highlighted during the disposal of the Grand Regency Hotel. If the hotel was transferred to Central Bank of Kenya, it could have easily circumvented the provisions of the Act in the disposal of the hotel on ground that it is not unserviceable, obsolete or surplus stores and equipment. Accordingly, there is need to amend the Act to cover real property in the disposal legal regime.

Mr Wanyama is an advocate of the High Court and a member Young International Arbitration Group, London.

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