John A. King
The cost of procuring goods and services under World Bank development projects (including the International Development Association (IDA) after 1960) from the time the Bank opened its doors in 1946 to June 30, 1974 has amounted to $18,770 million. Procurement costs paid by the Bank first reached an annual rate of $1,000 million in fiscal year 1967 and of $2,000 million in fiscal year 1974; during fiscal years 1970–74 they averaged slightly over $1,500 million a year.
The Bank’s interest in procurement under its loans stems directly from the ‘“project” requirement of its Articles which stipulates that it should lend for specific projects, except in special circumstances, and that it should ensure that the proceeds of the loan are used only for its specified purpose, with due attention to economy and efficiency. These requirements, among others, were included in the Articles to prevent a recurrence of some of the unsound practices characterizing international lending in the nineteenth and early twentieth centuries. They make it necessary for the Bank to ascertain what happens to the money it lends, and to supervise the execution of the projects it helps to finance, including the procurement of the necessary goods and services for them. But the Articles do not give much guidance about procurement policy and practice, and not all of the considerations which go into current policy and practice were evident in 1946.
Scarcity was the controlling factor in procurement during the late 1940s and early 1950s. As productive capabilities of Europe and Japan had been extensively damaged by World War II, those countries were not interested in production for export. Virtually the only source of supply for capital goods was the United States. During this time, the Bank’s primary concern with procurement was to help borrowers locate sources of supply for the goods and services they needed and to get the necessary government priorities (usually in the United States) to procure them. International competitive bidding was then irrelevant.
Yet, during that early period the Bank made a crucial policy decision on project execution, including procurement, that is even more appropriate in today’s very different development climate. It decided that the ultimate responsibility for project execution rests with the borrower and not with the Bank. This policy set limits to the Bank’s role in procurement: the Bank can be (and is) a legislator and a judge but never the executive.
Simultaneously, the Bank recognized that its borrowers often lacked the skills to conceive, design, and carry out the development projects which the Bank was being asked to help finance. To assist in meeting these deficiencies the Bank began recommending at an early stage that its borrowers and potential borrowers engage consultants to help carry out this work. The concept of engineering consultants, responsible only to the standards of their profession and independent of manufacturers of equipment or of contracting or construction firms, was the accepted commercial practice in Canada, the United Kingdom, and the United States. This concept, with its obvious advantages of professional competence, integrity, and lack of financial interest in any particular solution, therefore, became an element of the Bank’s procurement policy.
The consultants were selected and engaged by the borrower, after consultation with the Bank, on the basis of professional qualifications and experience but without price competition. However, since firms of independent consulting engineers were not a part of commercial practice in much of continental Europe or Japan, this difference in commercial practice led in later years to some question regarding the fairness of the Bank’s procurement system.
International competitive bidding
By the early 1950s, however, a considerable amount of reconstruction had been achieved in Europe, thus opening up additional sources of supply for the goods and services needed for Bank-financed projects. This change led the Bank to develop a more specific procurement policy, and in 1951 it began introducing international competitive bidding (ICB) as the normal procedure for procurement of the goods and works needed for its projects. ICB is based on international notification of the opportunity to submit bids, clear and fair specifications, and the awarding of the contract according to the bid which, after evaluation, was determined to be the lowest meeting the specifications. This procedure met the requirement of the Articles for economic and efficient execution, by helping the borrower to get the best value for its money while guarding against discrimination and corruption. It also achieved the objective, derived from the Bank’s character as an international institution, of giving all member countries an opportunity to compete in the supply of goods and works, thus contributing to the free flow of trade and facilitating investment for productive purposes. The Bank’s Engineering Adviser at that time, General R. A. Wheeler, played a large role in establishing this policy. General Wheeler came to the Bank from the U.S. Corps of Engineers, which traditionally has been responsible for the execution of large civil works through competitive bidding. His familiarity with these procedures and with the concept of independent consulting engineers undoubtedly helped to establish these concepts as the basis for the execution of projects financed by the Bank. But the Bank could not in the long run have disregarded competitive bidding, the most widely employed safeguard against waste, corruption, and discrimination in procurement by public bodies.
“the ultimate responsibility for project execution rests with the borrower and not with the Bank”
ICB was ideally suited for the type of project which the Bank was financing in the 1950s and early 1960s. The projects, more than two thirds of which dealt with power and transport, consisted of large civil works such as dams, major highways, and ports, or of heavy equipment such as electric generators, locomotives and rolling stock, and steel-making or mining machinery. These projects were designed by foreign consultants, and built by foreign contractors with equipment supplied from abroad. Since very few countries supplied a major part of these goods and services at that time, 55.6 per cent of the payments for them went to manufacturers or contractors in the United States, the United Kingdom, Germany, and France during the period 1946–64.
Expansion and changing concepts
By the early 1960s, however, circumstances affecting procurement under Bank-financed projects began to change. First, the Bank expanded its lending into new sectors. As a result, the Bank today lends for a wide variety of projects in agriculture, education, population planning, tourism, telecommunications, urban and rural development, and water supply, in addition to the traditional sectors of electric power and transport. Lending for agriculture, the single most important sector, amounted to almost $1,000 million for about 50 projects in each of the last fiscal years 1973 and 1974. Further, the concept has evolved from the monolithic, capital-intensive, engineering-oriented project of the late 1940s and the 1950s to projects not only concerned with the transfer of capital but also with policy and institutional changes, the introduction and demonstration of new technology, and the improvement of the well-being of individuals. (See Chadenet and King, “What is ‘A World Bank Project’?” Finance and Development, September 1972.)
This change in both scope and concept of projects has had an impact on procurement. The volume of Bank-financed business has grown greatly, from one $250 million loan in fiscal year 1947 to 174 loans, totaling $4,300 million, in fiscal year 1974, and it is expected to continue this expansion. Lending for power and transport is expected to grow in absolute terms in accordance with this trend, but the share of these sectors is declining. This means a different character of equipment and works to be financed—proportionately fewer turbines, generators, or locomotives and more school furniture, laboratory equipment, and simple farm machinery; proportionately fewer major civil works such as dams and ports and more land clearance, simple irrigation works, rural school buildings and family planning clinics.
“the Bank has become more interested in the emergence of local manufacturers and contractors”
There were also implications for international competitive bidding. The number of countries supplying goods and works has recently increased greatly, making competition more intense. The share provided by the four largest supplying countries (Germany, Japan, the United Kingdom, and the United States) has declined from 55.6 per cent for the period ended in fiscal year 1964 to 43.1 per cent in fiscal year 1974, when nine other countries—Australia, Belgium, Canada, France, Italy, the Netherlands, Sweden, Switzerland, and Yugoslavia—received an additional 20.3 per cent of disbursements. In addition, the pattern of competition among the developed countries has changed during the past decade, with a relative decline in the share of the United Kingdom and the United States and the emergence of Japan as a major supplier to the developing world (see the accompanying table). More important for the future, suppliers from a number of developing countries, such as Brazil, India, and Yugoslavia, are now successfully seeking business from Bank borrowers in other countries. There is also greater participation by manufacturers and contractors from the borrowing country itself, particularly for minor civil works, such as school buildings and feeder roads, and for simple equipment such as small farm machinery or school furniture.
These changes have brought about some modifications in procurement policy. With the growing concern for development and the developmental impact of its projects, the Bank has become more interested in the emergence of local manufacturers and contractors and it has been able to foster such institutions within the framework of its procurement policy through two methods.
First, it developed a policy of accepting a margin of tariff preference in the evaluation of bids for domestically manufactured goods: 15 per cent or the actual tariff, whichever is lower. This policy, formally adopted in 1962, represented a reasonable ad hoc effort by the Bank to reconcile its concern for the development of local industry and the impact of its projects on development with the considerations of economy, efficiency, and international fairness and cooperation that had led to the adoption of international competitive bidding for procurement. For more than a decade, no similar preference was provided for local contractors because it was thought unnecessary in view of the natural advantages already enjoyed by the local contracting industry. In January 1974, however, the Bank’s Executive Directors approved an experiment intended to foster the development of domestic civil works among contracting industries in countries with a per capita gross national product of $200 or less, which are only 40 in number but include such large countries as Bangladesh, India, Indonesia, Nigeria, and Pakistan, through the application of a 7½ per cent preference in the evaluation of bids for bona fide, qualified, domestic contractors. The experiment initially covered civil works in projects approved by the Board during a one-year period ending in January 1975, but it has recently been extended for another year because of lack of experience during the first year to permit evaluation of its impact. The new policy also provides other measures and incentives to help to develop local contractors.
Second, the Bank recognized the need for more exceptions to the ICB procedure, because it was not economic and efficient to require it for the procurement of goods and works that were too small or too dispersed to be of interest to foreign suppliers and contractors. There had always been some exceptions—for example, when the need for standardization made it appropriate to buy new equipment from the supplier of the old units.
There had also been projects for which ICB was not suitable, such as those where the loan was to a financial intermediary, a development finance company, or an agricultural credit agency for on-lending to local borrowers whose individual expenditures would be so small, varied, and extended over time that ICB was impracticable. With the changes in policy, the exceptions to ICB became more common and more extensive. Competitive bidding not notified internationally but advertised locally and carried out in accordance with local procedures (acceptable to the Bank) increasingly became the most economic and efficient way of procuring many project items, and construction by force account or “international shopping” was accepted for other items. Today, procurement is carried out in a variety of ways. Although ICB continues to be the norm, a very large number of transactions are governed by other forms of procurement.
Criticism of the procurement system
Over the years, the Bank’s procurement system has worked very well, in the judgment of most observers, but because the concepts on which it is based are of necessity an attempt to reconcile conflicting interests, it has given rise to frustrations and has been criticized both fairly and unfairly. There are conflicting interests among suppliers of goods and works from outside the borrowing country (usually but not always from developed countries), between suppliers from outside the borrowing country and local suppliers, and between the borrower itself and other concerns of its government. As legislator and judge, the Bank seeks to achieve a balance and equity among these interests.
As legislator, it sets down its rules in advance; these are outlined in its Guidelines for Procurement Under Bank Loans and IDA Credits, which were first published for general use in June 1964 and have been periodically revised since then. The procurement procedures for all project items are established, in conformity with the Guidelines, in the loan documents. Even for contracts entered into before the loan is approved and signed, these procedures must be followed if the Bank is to disburse for expenditures under these contracts.
As judge, however, the Bank has the alternatives of review before or after the event; it can either review the bidding documents before bidding is invited, as well as the evaluation of bids and proposed award before it is made, or it can review the process as a whole after the award is made and when it receives the request for disbursement. In either case it decides whether the procedures established in the loan documents and the Guidelines have been followed. It is the practice today to require prior review for all significant transactions, in order to protect both the borrower and potential suppliers—the borrower from uneconomic procurement and the risk of not being reimbursed, and the suppliers from possible unfairness. This practice is, however, criticized sometimes by borrowers on the grounds that it is paternalistic and causes delays.
|(amount)||(per cent)||(amount)||(per cent)||(amount)||(per cent)||(amount)||(percent)|
|Largest sources of supply|
There are three major areas in the administration of procurement where the Bank has been subject to criticism:
The Bank’s role
As mentioned earlier, the Bank takes the legal position that the ultimate responsibility for implementation of a project, and hence for procurement, rests with the borrower. But as a development institution, it is also concerned with improving the institutional capabilities of its borrowers. These considerations limit its role in the procurement process. If the borrower acts reasonably in selecting its consultants, and if the borrower and its agents prepare the bidding documents reasonably in accordance with accepted practice and evaluate the bids in a reasonable manner, the Bank cannot substitute its judgment for theirs. This role is not always clearly understood by those who wish to supply the needed goods and services, and the Bank is often urged to involve itself more deeply in the selection of consultants, the preparation of specifications, or the evaluation of bids. But such involvement would not be in accordance with the legal responsibilities of the borrower; it would be a mistake as a matter of development policy, and it would be unmanageable administratively.
Inevitably, however, there are more losers than winners, and some of the losers may feel that theirs was the best offer and should have been accepted. Therefore, they may ask the Bank to intervene. The Bank will do so only if, after an examination of the facts, it concludes that the borrower or its consultants acted unreasonably or arbitrarily. And its intervention is limited as well; it cannot compel the borrower to award the contract to the lowest evaluated bidder determined in accordance with proper procedures if the borrower refuses to do so. The Bank’s sanction is limited to refusal to disburse against a contract awarded contrary to proper procedures and to cancellation of that part of the loan.
The role of consultants in the Bank’s scheme of procurement poses several problems. First, the concept of independent engineering consultants is not part of the commercial practice in many developed countries, and in many developing countries there is neither the concept nor the engineering capability in any form. This has led to criticisms of the national allocation of this type of work, when some countries believe that their engineering profession is discriminated against. There may be some foundation for this complaint. In at least one developed country, Italy, where the concept is not part of domestic commercial practice, consulting firms have developed which meet the Bank’s standards and which do a substantial amount of business, financed by the Bank and from other sources, in developing countries. And a number of developing countries, notably Brazil, Colombia, and Mexico in Latin America, and India and Pakistan in Asia, now have a local professional capability, in some cases developed in response to the needs of Bank work.
A related complaint is that contractors and manufacturers from one country are alleged to be at a competitive disadvantage if the consultants are from another country, particularly when both consultants and contractors or manufacturers are from the same country. This disadvantage, it is said, could be the result of both witting and unwitting actions, possibly arising out of differences in national engineering practices and standards. This complaint, however, is not borne out by experience. The Bank watches over this possible danger closely and requires, among other things, that the consultants prepare neutral specifications, so that no bidders from any country are favored. Also, the results of procurement demonstrate that the nationality of consultants is irrelevant; Germany and Japan have been remarkably successful in supplying goods and works for Bank-financed projects but very few consultants from these countries are responsible for the design and implementation of Bank-financed projects, and other countries which have supplied a substantial share of consultants, such as the United States and Canada, do not receive a proportionate number of procurement awards. It is worth noting that in the great hydroelectric projects which the Bank has helped to finance—Kainji, Kariba, Volta, Mangla, and Tarbela-the consultants were of a different nationality from that of the prime contractor. Finally, in these days of national sensitivity, it may be a positive disadvantage to both contractor and consultant if they are of the same nationality, particularly during the implementation phase; they may be suspected of uniting against the borrower in the case of claims or controversies.
In addition, two other criticisms of the consultant system have some merit. First, it is claimed that the system works against the selection of new firms, specialized firms, and local firms and that it favors the selection of large, established firms from the developed countries. The entity responsible for executing the project—for example, a national power authority—is more likely to know about the work of established firms (it may in fact already have a good working relationship with such a firm). In protecting itself against criticism, should something go wrong with the design or implementation of the project, it is safer for the entity to select the firm with an established international reputation than to take a chance with a new or a local firm. The system, with its emphasis on professional qualifications and the absence of competition on price, leans in this direction. In the few cases where the Bank itself is responsible for selecting the consultants (principally in the case of preinvestment studies financed by the United Nations Development Program), it tries to overcome these tendencies.
Second, the system is not always sympathetic to the technological needs of the local economy. Consultants tend to design and implement projects in accordance with the technology they know best—usually that of the developed countries. In many cases, such as fertilizer or steel, this technology is as appropriate for a developing country as for a developed one, but in some situations it is not the most suitable and a new technology appropriate to local needs must be found. The system falters here, although there are sectors or subsectors where innovation is recognized as a prerequisite and consultants are responsive to this need. Local consultants are not necessarily the answer in these situations, because they too may be trained in the technology of the developed countries.
“the Bank believes that it has an interest in helping the borrower to keep costs down and to implement the project on schedule”
Finally, there is the issue of the status of “independence” of consultants. Under the original concept of “independent consulting engineering,” the consultants were given a wide range of independence and authority to supervise the execution of the project, including the approval of modifications and the adjudication of claims, to make sure that the project was completed in accordance with the expectations of the client and within the terms of the contracts with suppliers and contractors. Today, contractors, suppliers, and the consultants themselves believe that this independence has been greatly eroded in practice. They feel that the consultants’ authority has been limited by the terms of their contract with the client or otherwise, in ways not always clear to the suppliers and contractors, so that consultants can no longer fully perform their traditional role. Many observers believe that these changes have an adverse effect on project execution by delaying decisions and by leading to additional disputes and claims with referral of more disputes to arbitration. These situations bring about rising cpsts for some projects and lead to higher contingency allowances in future bids or sometimes even to refusals to bid.
The Bank is often urged by consultants, contractors, and suppliers to strengthen the independence of consultants. The Bank believes that it has an interest in helping the borrower to keep costs down and to implement the project on schedule, but there are limits as to what it can do. It is probably easier psychologically for a borrower with considerable technical competence of its own to give broad authority and independence to its consultants than for one without such competence to do so. And there may be some feelings in developing countries that this “independence” is a form of neocolonialism. The Bank’s most effective contribution in this area is to make certain that the exact extent of the consultants’ authority and any limitations are known to the suppliers and contractors concerned, and to help resolve any conflicts between the consultants and the borrower over project execution as soon as possible.
The “fair share”
From time to time, individual manufacturers or contractors, their trade associations, or their governments complain that they are not receiving their “fair share” of procurement under Bank-financed projects. The developed countries have subscribed a major part of the Bank’s capital; for example, its four largest shareholders—the United States, the United Kingdom, Germany, and France—held 51.2 per cent of the shares in 1961 and 41.7 per cent in 1974. World Bank borrowings have also been concentrated in the developed countries, with the major source being the United States throughout the 1950s and much of the 1960s, but borrowings shifted to other capital surplus countries such as Germany and Japan in the late 1960s and 1970s, and most recently to some of the petroleum exporting countries. The developed countries have also provided the bulk of IDA funds.
The “fair share” argument, which has never been articulated very clearly, is that the capital supplied to the Bank for development by a country should be returned to it through the procurement of goods and services in the same country, in an amount proportionate to the capital it originally provided. This concept, which is analagous to “tied aid” in bilateral terms, appears to reflect feelings that are widely and instinctively held: (1) that a donor country should get a direct and prompt return for “aid given”; and (2) that suppliers from other countries have advantages for some reason over suppliers from the country arguing for its “fair share” in getting information about business opportunities, in dealing with the international procurement system, or in obtaining assistance for exports. As proof, these businessmen and their representatives often point out that they are much more successful in getting business financed through their own national export-financed institution than through international sources such as the World Bank.
An early example of the “fair share”concept can be found in the Kariba project on the Zambezi River in what was then the Central African Federation and is now the boundary between Zambia and Southern Rhodesia. The project was financed by a joint effort which included the Bank, the British Commonwealth Development Corporation, private mining and financial companies, and the Central African Federation. The main contracts were let through international competitive bidding, with the result that the main civil works contract went to an Italian firm. The Times of London received many letters criticizing the use of ICB in these circumstances, and the attitude was summarized in the closing sentence of one letter: “As this is an Empire project it is, therefore, reasonable that a fair share of the contract, should accrue to Great Britain.” Similar views have been expressed in other countries, such as the United States and Canada, when they were doing less well in procurement. But there seems to be no outcry against ICB when it provides a country with more than its “fair share.”
These parochial views obviously run counter to the ICB concept and to the philosophy expressed in the Bank’s Articles, particularly to the requirement that “the Bank shall impose no conditions that the proceeds of a loan shall be spent in the territories of any particular member or members.” (Article 3, Sec. 5(a).) They are also mistaken in several respects. First, they appear to assume that the Bank is just another agency for the promotion of exports and they ignore the interest of the borrower and its country in getting the best value for its money. At the time of the Kariba bidding and awards. The Times also received letters from Africa defending ICB on the latter grounds. International competitive bidding does enable borrowers to take advantage of temporary pockets of excess capacity or localized lack of demand, and this advantage of the system goes not only to the borrower but also to the supplier who finds himself in this situation. Second, these views ignore the indirect consequences of the award. The prime contractor may well purchase goods and services in other countries; this was the case in the Kariba project, for example.
Further, experience suggests that often suppliers who raise the “fair share” argument are either not competing effectively or not competing at all for Bank-financed business. There may be a variety of reasons for this, such as lack of experience in the developing country where the project is located, inadequate local representation, understandings with other suppliers with respect to the allocation of foreign markets, overvaluation of the supplier’s currency, or full order books and a profitable home market.
Until the creation of IDA, the Bank was able largely to ignore the “fair share” argument. Its capital was already subscribed, and its source of additional funds (the private capital markets of the developed countries) shared its view that ICB was generally the most economical and efficient way of carrying out procurement. The private capital markets therefore regarded ICB as a safeguard protecting the funds they made available to the Bank. But with the creation of IDA in 1960 and the necessity of returning periodically to the governments of the donor countries and their legislatures for replenishment of IDA funds, the Bank had to recognize that the “fair share” argument could be a political obstacle to replenishment of IDA at adequate levels. It continues, however, to reject the argument as contrary to the letter and the spirit of its Articles and to its objectives as an international, development institution, while it seeks to convince others that ICB is in the best interest of all Bank members over the longer term.
Procurement under Bank loans is an important activity both for the borrower and for other member countries of the Bank, and one which is complex and sensitive because it requires the reconciliation of conflicting interests. The Bank’s policy and practice in this field has evolved along lines that are consistent with the Bank’s role as an international development institution.