Introduction to Public Procurement notes

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Introduction to Public Procurement

• Definition of public procurement
• Scope of public procurement
• Purpose of public procurement
• Historical development of legal framework of public procurement in Kenya
• Organisation of public procurement
• Functional relationship between the public procurement and other units in an organisation

 

Definition of Public Procurement

Procurement– describes the process of buying: learning of need, locating and selecting suppliers negotiating prices and other pertinent terms, and follow up to ensure delivery. It entails the following activities:

• Purchase needs identification through liaison with user departments
• Identification of potential suppliers and negotiation
• Selection of suppliers
• Market research for important materials
• Analysis of proposals
• Issuance of purchase orders
• Administration of contracts and resolutions of related problems
• Maintenance of Procurement records

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Procurement– is a broader term and includes Procurement, stores, traffic, receiving, incoming inspection and salvage. Procurement and Procurement are used interchangeably, this is however somewhat imprecise. Procurements process or concept encompasses a wider range of supply activities than those included in the Procurement functions.

It includes the traditional role; with more buyer participation and related material activities. These activities include;

• Development of material and service requirements and other specifications
• Materials research and value analysis activities
• Extensive market research
• Conduct of all Procurement functions
• Suppliers’ quality management
• Management of investments recovery activities (salvage of surplus and scrap)

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N/B: Essentially therefore procurement tends to be broader and more proactive, focusing on strategic matters, rather than mere implementation of Procurement concept.

Public Procurement– it occurs when public entities use public resources to buy goods, construction works or services. It ranges from routine items (e.g. stationery, temporary office staff, furniture or printed forms) to complex spend Areas (e.g. construction, Private Finance Initiative projects, aircraft carriers or support to major change initiatives). There are several definitions given by several authors:

• Public procurement refers to the government activity of Procurement the goods and services needed to perform its functions. Public procurement can be referred to as procurement planning, contract placement and contract administration. (Arrowsmith, 2010).
• According to Odhiambo and Kamau (2003), public procurement is broadly defined as the Procurement, hiring or obtaining by any contractual means, goods, construction works and services by the public sector.
• According to Hommen and Rolfstam (2009), public procurement is the acquisition (through buying or Procurement) of goods and services by government or public organizations.
• Public procurement is concerned with how public sector organizations spend taxpayers’ money on goods and services (Hall, 2009).

Scope of Procurement Management

Public procurement has its origins in the judiciary obligation of government administration to deliver goods and infrastructure, for example roads and harbors and services, health care and education to the population of a country or a specific geographic region, city or town. Public procurement is also defined as the processes where by public sector organizations acquire goods, services and works from third parties. It includes procurement that supports the work of government and ranges from Routine items (e.g. stationery, temporary office staff, furniture or printed forms), to complex spend Areas (e.g. construction, Private Finance Initiative projects, aircraft carriers or support to major change initiatives).It also includes a growing spend where the private and third sectors provide key services directly to citizens in areas such as welfare-to-work, further education, social care and health. Such services may also be provided by the public sector directly, and in some cases even this public provision can be handled through procurement mechanisms. A public body may bid for government work against private sector firms through a formal competitive process.

Public procurement provides a comprehensive analysis of legal and policy frameworks that underpin the regulation of public and utilities Procurement practices. The importance of such frameworks is paramount not only for the successful functioning of the common market, but mostly for the conceptual direction of the public sector of the country in its attempts to deliver services to the public in a more effective and efficient way. Public entities include a company owned by government, company carrying out functions which would have been performed by government, institution which the government has the controlling interest. Public procurement occurs when a public organization uses public resources to buy goods and services such as hiring or obtaining for any other contractual means of goods, construction works or service. Public funds are drawn from state or government budgets or local authority budgets, foreign loans, grants and money raised by the government for various undertakings.

The scope and jurisdiction of the Public Procurement and Asset Disposal and General Manual includes all Procuring Entities. The scope of activities covered by the Manual includes:

1. The institutional arrangements for carrying out public procurement
2. Procurement planning and its relationship to sound budget preparation and execution

• The procurement of goods, works, services and consultancy services

1. Administration of the complete procurement cycle
2. The administration of procurement contracts
3. The disposal of unserviceable, obsolete or surplus stores, equipment and other assets

• The warehousing, inventory management and distribution of supplies
• Contract management

1. Achieving transparency and accountability in public procurement and other related matters

The Public Procurement and Disposal General Manual apply to all procurement covered by the PPADA 2015 and the Public Procurement and Asset Disposal Regulations, 2016.

Purpose of Public Procurement

• Ensure public organisations get value for money
• Enhance transparency and accountability
• Ensure efficiency and effectiveness
• Promote competition and ensures that competitors are treated fairly by use of competitive procurement methods
• Promotes integrity and fairness of procurement procedures
• Restore public confidence in procurement process
• Build public trust to stakeholders
• Facilitate promotion of local industry and economic development
• To ensure that goods and service are obtained at the right price, right quality, right quantity, from right source and delivered at the right place.

 

Core Principles and Pillars

Public procurement in Kenya should be based on eighteen core principles and pillars:

1. Transparency and Accountability. Government procurement processes, therefore, demands a high level of transparency and accountability through its Procurement of goods and services. Procuring entities should ensure there is openness and clarity on procurement policy and its delivery.
2. Efficiency. Encompasses the performance of the procurement process as cost effectively as possible and in a timely manner
3. Consistency. The application of the procurement process should be the same across all procuring entities.
4. Open and Effective Competition. Provision of ample and equal opportunities for participation by interested and qualified suppliers of goods, works or services. Through an open and effective competitive environment the government can gets the best value for money and at minimum cost while making it possible for the suppliers/contractors to fully benefit from doing business within a regulated environment that safeguards against favoritism and profiteering.
5. Ethics and Fair Dealing. Under the Public Officers and Ethics Act (2003), it is an offence for those employed by contracting authorities in their official capacity to accept any gift or consideration as an incentive or reward for acting in a manner showing favor or disfavor for any person or entity. Under the act the courts will assume that any money, gift or consideration received from a person or organization holding or seeking to obtain a contract was received corruptly unless proven otherwise.
6. Integration with other policies. The long-term public procurement policy should pay due regard to other Government policies, rather than cut across them. The current overarching government policy is Kenya Vision 2030 and the corresponding First Medium Term Plan (2008-2012).
7. Legal Framework. Currently includes the Public Procurement and Asset Disposal Act (2015), Public Procurement and Asset Disposal Regulations 20016, Supplies Practitioners Management Act (2007) and national case-law. The legal framework must in the near-term address three key areas: inter-agency collaboration, e-procurement and harmonization with other related Acts.
8. Recognition of International Trade Treaties and Interests. Kenya’s external environment is significantly influenced by the changing international and regional trading arrangement. Procurement policy must recognize multilateral trading arrangements under the World Trade Organization (WTO) and the regional trading arrangement under Economic Partnership Agreement (EPA) between the East and Southern African (ESA) countries and the European Union (EU). In addition agreements under the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC) must come to bear.
9. Due Process and Dispute Resolution. Avenues must be established to allow disputes that may arise between suppliers and procuring entities to be resolved in a professional, impartial and timely manner.
10. Electronic Procurement. E-procurement is a range of technologies that facilitate automation of the procurement process. Benefits of e-procurement include enhanced transparency and compliance, increased performance and quality, and economic development. Implementation of e-procurement should not simply be engrafting electronic technology onto a paper-based procurement process, but should be a focus on reengineering the entire procurement process to take advantage of electronic innovations.
11. Outsourcing. Procuring entities may use the services of public or private procuring agents to advise them or manage their procurement process, especially where they lack the necessary capacity. Smaller procuring entities are especially encouraged to use the assistance of larger ones, who may have additional capacity for a fee.
12. Green Procurement. Is the purchase of products and services that are environmentally friendly, and that should have a lower impact on the environment over their whole life cycle than the standard equivalent. It involves the integration of environmental issues, such as pollution prevention and reduction of waste into Procurement decisions along with traditional factors such as price, performance and quality. Further, it encourages suppliers to safeguard the environment by producing goods or offering services that do not harm the environment or lead to heavy use of resources such as energy.
13. Professionalism: The procurement system requires the input of professionals with honed negotiating skills and a good grasp of market dynamics. The Public Procurement Act 2005 and Supplies Practitioners Management Act 2007 defines the procurement professional and spells out the requisite qualifications. Continuous education and training of procurement professionals within the framework established by the Act should be encouraged with the expressed aim of professionalizing public procurement.
14. Capacity Development. Continuous training and education on public procurement will ensure compliance, learning, innovation and improvement. Such training should incorporate national and international standards, best practices and procedures as the procurement function is key to any organization, and the environment in which procurement is carried out is competitive and continuously changing.
15. Innovation. The procurement process should provide mechanisms that encourage innovation both by the supplier in the goods and services procured, but also in the procurement process itself. The knowledge, experience and technical know-how of suppliers must be allowed to play a role in the decision process, especially during the procurement of complex systems.
16. Procurement Collaboration. Public procuring entities should strive to collaborate across all public procurement functions in order to exploit opportunities that may arise for: better utilization of procurement skills and resources; greater Procurement leverage through aggregation of spend; and spread of best practice. The exercise of pre-qualification of suppliers should also be consolidated and performed by the PPOA or a designated agency for common items and services. Procuring entities would simply check updated lists with PPOA. The prequalification process should be continuous, with those already pre-qualified required to seek re-qualification annually.
17. Increasing Awareness. Every effort should be made to ensure that the strides being made in the reforms of public procurement as well as any new or amended guidelines, policies, best 7 practices, manuals, etc. are widely publicized to all procuring entities and suppliers in particular, as well as the general public.
18. Suppliers’ Charter. The Government recognizes the need for effective procurement systems that enhances value for money. To this end, suppliers and contractors have a key role to play. Therefore, in order to promote mutual benefits the Government and all procurement entities should commit themselves to tenets of a Suppliers’ Charter.

Historical development of legal framework of public procurement in Kenya

Pre-independence

Kenya was a colony state under Britain. The economy was arranged to serve the colonial masters where Kenya was converted into cheap source of raw materials and manufactured goods were to be imported from Great Britain. To facilitate the process of procurement, the following structures were in place:

• Crown Agents– handled overseas purchases on behalf of the Government.  Its prominent role continued into 1970s.
• Central Tender Committee (CTB) was established in 1955 through a Treasury Circular.  CTB was to handle all government tenders.

At 1959 there was well defined procurement system. The Procurement and Supplies Unit existed for the entire government under the Ministry of Public Works. Treasury provided a vote for each ministry and this vote was used to order goods and supplies by the ministries.

1960

The Procurement and Supplies Unit was converted to Supplies Branch which exists to date but with much reduced mandate. Financial regulations were issued by the Treasury for the purposes of providing common user services to the ministries. To date the Supplies Branch of the ministry of roads still operate under these regulation. Market Research, Inspection of Materials and Central Tender Board were established and were responsible for the procurement and award and they had three sections namely: the local, the overseas and country wide contracts. The Chief Storekeeper was appointed the chairman and members were drawn from various ministries.  All Government Departments were to obtain their common-user supplies from Supplies Branch.

NB//: It should be appreciated that during this period the government organization was small and therefore Procurement and Supplies was centralized.

Post-Independence

1963-1978

Kenya attained independence from the British Colonial rule in 1963 and like all other structures, supplies services continued as they were during the pre-independence period whereby Crown agents organized Procurement for the government up to 1970s.  However, in 1974 there was a major shift when the CTB was placed under the Treasury from the Ministry of Public Works.  The Chairman was the Deputy Secretary, Ministry of Finance and the Secretariat was managed by the Supplies Staff.  The Secretary was the chief Executive Officer.  Another major introduction was the Supplies Manual in 1978.

For a while, the Supplies Manual became the main guiding document in supplies matters.  A major flaw of the document was that it never unified procurement in the government.  It further did not cover corporations and Parastatals.  Another major development in this era (1963-1978 was the establishment of the office of the Head of Supplies Services (HSS).  The first occupant of this office was Mr. Wan’goo. The main responsibility of HSS was to ensure observance of the manual.

Those of us who joined the supplies services then were perplexed and confused at the number of circulars we were to refer in order to make a procurement decision:

1. Many Treasury Circulars some superseding each other at high speed
2. Circulars were also emanating from the Ministry of Public Works that was also to clear a department when getting common user supplies outside Supplies Branch.
3. Other circulars were emanating from the office of the President.

The above scenario became riddled with corruption and thievery of public money.  Above all works were not covered by the Supplies Manual. The Ministry of Public works and the office of the President had a free hand on public works.

1978-2001 – Era of World Bank Reform

In 1997, the World Bank conducted country wide review on Public Procurement and reported the following weaknesses:

• Reduced effectiveness of Public Financial Management
• Government inability to deliver services effectively
• Obscure rules not based on fair competition and transparency rendering the system to abuse
• No legal framework to enforce procurement rules.

During this period the most famous Procurement policy document was the Blue Book (Nyachae Book) that regulated Procurement in the era of District focus for Rural Development Strategies.

Era of Public Procurement Reform 2001-2010

This “Golden Era” saw major reforms in Public Procurement with far reaching results.

2001. Enactment of the Exchequer and Audit (Public Procurement) Regulations, 2001.

Major changes were: CTB was abolished, and Public Procurement Directorate and Public Procurement Appeals Board were established.  The Chairmen of the Tender Committees were to come from the private sector.  Corporations and parastatals were for the first time subjected to the Public Procurement Regulations just as was the Central Government.  Each public procuring entity was to establish a procuring unit within it and all Procurement and disposal processes were to be managed by the same unit.  This was the genesis for the establishment of the current Procuring Department in the University under the Procurement Manager.  Before then, procurement (Tender) and Procurement were under Personnel Division and Finance Department

1. Public Procurement and Disposal Act, 2005

The Public Procurement and Disposal Act, 2005 was approved and gazetted in 2005.  The Act had to wait for the approval of the Public Procurement and Disposal Regulations, 2006 to be approved by the Minister for Finance then Mr. Uhuru Kenyatta in order to operationalize the Act.  The Act, 2005 came into operation in 2007.  Henceforth, Public Procurement and Disposal came under one legal regime.

• Public Private Partnership

The Government found that it did not have enough financial resources to carry out projects it deemed necessary to enhance economic growth and public welfare.  As a result, the above regulation was enacted to assist in mobilizing financial resources in the private sector to be used in public projects under specific conditions.

The above Public Procurement Law & Regulations that started in 2001 have dramatically changed the landscape of Public Procurement functions hence the profession has been upgraded significantly from its obscure position in 1970s through 1980s.

2010 – PRESENT DAY

1. The new Constitution, 2010 has outlined principles for Public Procurement and Disposal i.e.:

• Fair
• Equitable
• Transparent
• Competitive
• Cost-effective

1. The Public Procurement and Disposal (Preference and Reservations) Regulations 2011

These regulations cover groups or regions that have been disadvantaged over time and cannot be able to compete favorably with more established firms and hence must be given preference.  The target groups include:

• Small enterprises
• Micro enterprises
• Disadvantaged groups
• Citizen contractors
• Local contractors
• Citizen contractors in joint venture with foreign forms

The objective of the Regulations is to promote local firms/industries and disadvantaged groups or individuals.

• Public Procurement and Disposal (County Governments) Regulations, 2013

The Regulations, 2013 focus on Procurement and disposal within the newly established County Governments.  The purpose of the Regulations is to operationalize the application of the Public Procurement and Disposal Act, 2005 in County Governments and promote local industries.  Otherwise the principles and tenets of Public Procurement and disposal remain the same.

1. Public Procurement and Asset Disposal Act 2015

PPAD Act, 2015 is the most current and was assented on 18^th December, 2015 and was operationalized on 7^th January 2016. It was created to provide procedures for efficient public procurement and for assets disposal by public entities; and for connected purposes. It provides for a system that is fair, equitable, transparent, competitive and cost-effective. The Act also provides for procurement by the County Governments and makes provisions for E-procurement. It includes all public entities including state organs, departments, state corporations, county governments, companies owned by public entities and bodies in which the national or county government has a controlling interest, among others.

The most significant changes were:

• The abolishment of the tender committee.
• The head of Procuring Entity became the Chief Accounting Officer
• Procurement at the Counties
• Tender Security (It should not exceed 2% of the tender as valued by the procuring entity).
• Use of ICT in procurement
• Citizen contractors and County Reservations (20% of procurement at the County level will be reserved for County residents).
• New procurement methods which include: two-stage tendering; design competition; electronic reverse auction; force account; competitive negotiations; and framework agreements

1. Public Procurement and Asset Disposal Regulations 2016

The regulations will be formed in exercise of the powers conferred by section 180 of the PPAD Act 2015 to the Cabinet Secretary for the National Treasury to make them. The regulations are still in draft form awaiting operationalization.

1. Establishment of the Public Procurement and Asset Disposal Services Agency

Established as an unincorporated body for the purpose of procurement of common user items on behalf of procuring entities at the national government level

Relationship between public procurement and other units in an organization

• Procurement and finance/accounts department:
• Finance/accounts department prepares budget allocation for goods/services to be purchased in a given time period
• The purchase department establishes and forwards to finance/accounts department value analysis report for goods/services to be purchased
• Finance/accounts department briefs the Procurement department on issues based on supplier payment
• Procurement department gives accounts department information based on damaged items and obsolete items
• Procurement department gives out information based on stock movement to the accounts department
• Procurement/supplies department works together with accounts department during stock taking exercise which is based on assessing the variance status of the company’s inventory.
• Stores personnel who work under Procurement/supplies department work together with the accounts personnel when it comes to the issue of receiving goods from the supplier(s). The accounts personnel check whether the amount indicated in the invoice correspond with the amount indicated in the local purchase order (LPO).
• Procurement and design department:
• Preparation of specifications for purchase of materials and components
• Quality assurance or defect prevention
• Value engineering and value analysis
• Information to departments regarding availability of materials, suppliers and costs
• Agreement of alternatives when specified materials are not available
• Creation of library of books, catalogues, journals and specifications for joint use by the design and Procurement departments
• Procurement and production (User department)
• Preparation of material schedules to meet just in time requirements
• Ensuring that delivery schedules are maintained
• Control of inventory to meet production requirements
• Disposal of scrap and obsolete items
• Quality control or defect detection and correction
• Approval of ‘first-off samples’
• Make or buy decisions
• General involvement in such techniques and systems as optimised production technology, computer integrated technology, materials requirement planning (MRP) and manufacturing resource planning (MRP 2)
• Procurement and human resource development:
• Procurement professionals give out technical expertise when prospective Procurement staff is being interviewed for a job.
• Human resource personnel liaise with Procurement managers on checking the performance of Procurement employees through job appraisal analysis.
• Human resource development relates with Procurement department when it comes to issues of arranging training and seminars for the Procurement staff.
• Human resource development work hand in hand with Procurement department through provision of motivational incentives for the Procurement staff. This entail the acknowledgment of best employees through giving out awards, presents and so on.
• Procurement department works also with human resource development on disciplinary matters of the employees.
• Procurement and marketing:
• Provision of sales forecasts on which Procurement can base its forward planning of materials, components etc
• Ensuring that through efficient buying, Procurement contributes to the maintenance of competitive prices
• Obtaining materials on time to enable marketing and production to meet promised delivery dates to the end-customer
• Exchange of information regarding customers and suppliers
• Marketing implications on partnership sourcing
• Procurement and information technology department (IT):

Procurement department and IT have an increasing number of interdependencies. In some cases IT function is outsourced by the Procurement function. To this extent therefore its performance is evaluated accordingly by the Procurement department. Also the manager of IT works closely with Procurement manager to develop automated procedures and reports in line with Procurement. To add on that IT department establishes computer devices to purchase and to this extent the IT manager prepares purchase order requisition (POR) for such items and forwards the same to Procurement department. On the other hand the Procurement department sources for such devices on behalf of the IT department.

Organization of Public Procurement in Kenya

A procurement office or department is typically organized within the finance portfolio of a large organization. There are two organizational structures used for procurement: centralized and decentralized. In a centralized procurement office, all procurement requests and activities are managed by a central administrative group. In decentralized structure, each department or branch of the organization has its own procurement office.
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Centralized Purchasing
Centralized purchasing refers to the purchase of materials by a single purchase department. This department is headed and managed by a purchasing manager. Under centralized purchasing, all purchases are made by the purchase department to avoid duplication, overlapping and the non-uniform procurement. A company has to follow the centralized purchasing of materials for ensuring proper materials control as well as efficient store keeping. Under this system, the purchasing department purchases the required materials for all the departments and branches of the company.

Advantages of Centralized Purchasing

– Bulk quantity of materials can be purchased at a low price with favorable purchasing terms.

– The service of an efficient, specialized and experienced purchase executive can be obtained.
– Better layout of stores is possible in centralized stores.
– Economy in recording and systematic accounting of materials.
– Transportation costs can be reduced because bulk quantity of materials purchased.
– Centralized purchasing avoids reckless purchases.
– Centralized purchasing discourages duplication of efforts.
– Centralized purchasing helps to maintain uniformity in purchasing policies.
– Centralized purchasing helps to minimize the investment on inventory.

Disadvantages of Centralized Purchasing
– High initial investment has to be made in purchasing.
– Delay in receiving materials from the centralized store by other departments.
– Centralized purchasing is not suitable, if branches are located at different geographical locations.
– In case of an emergency, materials cannot be purchased from local suppliers.
– Defective materials cannot be replaced timely.

Decentralized Purchasing
Decentralized purchasing refers to purchasing materials by all departments and branches independently to fulfill their needs. Such a purchasing occurs when departments and branches purchase separately and individually. Under decentralized purchasing, there is no one purchasing manager who has the right to purchase materials for all departments and divisions. The defects of centralized purchasing can be overcome by decentralized purchasing system. Decentralized purchasing helps to purchase the materials immediately in case of an urgent situation.

Advantages of Decentralized Purchasing

– Materials can be purchased by each department locally as and when required.

– Materials are purchased in right quantity of right quality for each department easily.

– No heavy investment is required initially.

– Purchase orders can be placed quickly.

– The replacement of defective materials takes little time.

Disadvantages of Decentralized Purchasing

– Organization losses the benefits of a bulk purchase

– Specialized knowledge may be lacking in purchasing staff.

– There is a chance of over and under-purchasing of materials.

– Fewer chances of effective control of materials.

– Lack of proper co-operation and co-ordination among various departments.