Journal Issue
Share
Article

Monitoring the procurement process: How the Bank assists in the purchase of goods and services under its loans

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1975
Share
  • ShareShare
Show Summary Details

David M. Sassoon

The tenth and latest version of the Guidelines for Procurement Under World Bank Loans and IDA Credits is now being published. The first Guidelines for procurement of goods and civil works published by the World Bank in June 1964 were an extension of an internal checklist originally prepared in the public utilities division of the then Projects Department of the Bank as a guide for staff who supervised procurement of goods and works in the public utility sector. That checklist was later expanded, and the Guidelines presently cover procurement of goods and works in all lending sectors in which the Bank is active. Thus, what was contained in 1964 in a letter one or two pages long now occupies a substantial volume of printed matter, often taking up as much, if not more, space than all of the other provisions relating to the execution of the project under a loan or credit agreement (excluding the applicable General Conditions). The Guidelines, however, do not cover the procurement of consultant or transport and insurance services financed by the Bank.

This concern over procurement procedures is based upon the provision in its Articles of Agreement that the Bank pay due attention to considerations of economy and efficiency in the use of its loans. Thus the basic aim in the mind of the early framers of the Guidelines was to ensure that the borrower got the best contract at the most favorable price. This was the premise of the first set of Guidelines as instituted in June 1964.

With the passage of time, however, this underlying principle was to some extent compromised by other considerations that find expression in the procurement policies of several governments. For example, the Bank has for the past several years agreed to accept certain margins of domestic and even regional preferences in the comparison and evaluation of bids. Regional preferences apply in the case of customs unions or free trade areas between developing countries and are limited to 15 per cent of the c.i.f. price of nonregional goods or the difference in tariffs, whichever is the lower. Domestic preferences, amounting to the lower of either 15 per cent of the c.i.f. price of imported goods or the customs duties which a nonexempt importer would have had to pay on such goods (duties which are otherwise to be excluded for the purpose of comparison of bids) were initially limited to contracts for the supply of goods or equipment. In January 1974, however, a 7½ per cent margin of preference was extended to domestic civil works contractors in the poorest countries on a trial basis. This preference presently extends to loans granted between January 22, 1974 and January 22, 1976 in the case of 40 countries with a $200 or less per capita annual income. These preferences, which are to be applied at the request of the government of the borrowing country, reflect the broader objectives of the Bank as a lending institution for development and its increased participation in local currency financing. The fostering of domestic industries is clearly an important component of economic development, and a balance therefore had to be struck between this overall objective and the principle of economy and efficiency embodied in the Articles of Agreement. The new Guidelines will also state that “the Bank seeks through its procurement procedures to encourage the development of local industry (and that) suppliers and contractors in the borrower’s country may bid independently or in joint venture with foreign suppliers or contractors,” adding, however, that “the Bank does not approve conditions of bid invitation which require that foreign firms enter into compulsory joint ventures.”

International competitive bidding

The most recent edition of the Guidelines will be divided into Parts A and B, followed by Annexes which contain typical procurement provisions contained in loan agreements with the Bank—for example, those relating to preference eligibility and to the methods of computation of preferences. Part B and the Annexes will be entirely new, while Part A, which is exclusively devoted to international competitive bidding (ICB), is a substantially revised and rewritten version of what was formerly the entire body of the Guidelines. Part B, entitled “Other Procurement Procedures,” for the first time expressly sets forth procedures other than ICB as an alternative means for achieving economy and efficiency. Nevertheless, the Guidelines still proclaim that “the Bank considers that in most cases international competitive bidding is the most economical and efficient method of procuring the goods and works required for the development projects it finances.” At the same time, the interest of the industrial and capital exporting member countries in supplying goods and services for Bank-financed projects is not overlooked, and is in fact expressly acknowledged. “International competitive bidding,” the Guidelines state “also ensures that suppliers and contractors from its members have an opportunity to compete in providing goods and works financed by the Bank.”

“price is only one of the important elements to be considered in bid evaluation”

ICB, which is sometimes also described as the principle of “untied aid,” is thus, inter alia, designed to ensure that procurement will normally be open to suppliers and contractors of all member countries and Switzerland. ICB consists of: (1) notifying potential suppliers through embassies of Bank member countries and Switzerland of the opportunity to submit bids; and (2) advertising the invitation to prequalify or bid, as the case may be (locally, and, in the case of major contracts, internationally also). Where ICB is an inappropriate method of procurement—for example, where it is clearly unlikely that overseas suppliers or contractors would be interested in submitting bids, or where the advantages of ICB would clearly be outweighed by the administrative or financial burden involved—the first requirement is dispensed with. However, generally invitations to bid must still be advertised locally and interested foreign parties would not be precluded from bidding on the contracts in question (except where direct procurement or negotiation of contracts or force account work is permitted because of special circumstances justifying a departure from competitive bidding procedures). This latter procedure is sometimes loosely described as “local competitive bidding,” demonstrating that the essence of ICB under the Guidelines is that information on the invitation to bid should reach potential foreign suppliers and contractors, thus enabling them to participate in Bank-financed projects. Exceptional circumstances, however, may justify a departure from all competitive bidding procedures. Such exceptions will now be expressly recognized in Part B of the Guidelines and will include cases of construction by force account (where this is more economic or efficient, or is the only practical way to get a project constructed); extension of existing contracts; the need for compatibility of equipment or need for spare parts or speed; or the utilization of loan proceeds through an industrial or agricultural financing institution which relends the funds to beneficiaries in accordance with an established commercial practice acceptable to the Bank.

Lowest evaluated bid

The Guidelines provide that in the normal case of competitive bidding the contract is to be awarded to the lowest evaluated bidder which is “not necessarily (the bid) with the lowest submitted price.” In other words, price is only one of the important elements to be considered in bid evaluation, and other relevant factors such as the time of performance, the reliability of construction methods or efficiency of the equipment, and the availability of maintenance services, should normally be taken into account, too, when determining the lowest evaluated bid. The relevant factors (other than price) should be stated in the bid documents and should be expressed in monetary terms or given a relative weight. Price adjustment provisions are, however, to be completely disregarded in bid evaluation.

Bidders should normally be invited to submit bids in their own currency, in a currency widely used in international trade (except for the portion of the price which the bidder expects to spend in the borrower’s country which should normally always be stated in that currency), or in the borrower’s currency. All bids should be compared on the basis of a single predesignated currency (to be stated in the bid documents). Further, the rate of exchange to be used for any conversion should be the rate applicable to similar transactions on the day the bids are opened or on the date of the award, if the exchange rate alters subsequently.

Bids must, of course, be responsive to the bidding documents, but where the invitation permits or requests alternative bids, the evaluation may become a much more difficult task, with more leeway for individual judgment than is usual. To reduce the scope for error in bid evaluation, the Guidelines state that a technical analysis is to be made for the purpose of evaluation and in order “to enable bids to be compared.” Often the Bank also requires that the borrower hire suitably qualified consultants to assist in solving such problems and in administering the procurement of the goods and works to be financed from the proceeds of its loans. The Bank usually requires the preparation of a detailed report on the evaluation and comparison of the bids, the purpose of which is to set forth “the specific reasons on which the decision for the award of the contract, or rejection of all bids, is based.”

Some general principles

Based on the Bank’s extensive procurement experience, the Guidelines contain a brief description of general operational principles. These include, inter alia, a list of factors to be considered in the pre-qualification procedures which are normally required for large or complex projects in order to ensure (in advance of bidding) that invitations to bid are confined to suitable contractors: the type of information that bidding documents ought to contain; the clarity of bidding documents and of conditions of contract; provisions relating to bid and performance bonds and guarantees and to retention money; the use of standards and brand names; provisions of payment; price adjustment clauses; and other technical and legal matters including force majeure and settlement of dispute provisions in contracts. On the latter issue, which is often a matter of great concern to foreign suppliers and contractors, paragraph 2.18 of the most recent edition of the Guidelines will provide:

“It is advisable to include in the conditions of contract provisions dealing with the applicable law and the forum for the settlement of disputes. Experience indicates that international commercial arbitration may have certain practical advantages over other dispute settling methods. Borrowers should therefore consider the advisability of providing for this type of arbitration in contracts for procurement of goods and works. The Bank, however, should not be named arbitrator or be asked to name an arbitrator.”

The brevity of the Guidelines on bidding documents and contract provisions assumes that borrowers (with whom the ultimate responsibility for procurement rests) and contractors alike have made use of the special legal expertise necessary to draft and, where necessary, negotiate the terms and conditions of the procurement documents. Some professional organizations have prepared standard forms or conditions of contract for international works or for the supply of goods. Several of these organizations have approached the Bank from time to time requesting it to recommend their model forms to borrowers, but the Bank has so far refrained from formally sponsoring any of them although there may be some merit in encouraging such standardization from the point of view of procurement administration and supervision.

“there is a real need for more training programs and facilities for officials of developing countries in the field of procurement”

The Guidelines will state that “bids should not be rejected … solely for the purpose of obtaining lower prices, except in cases where the lowest evaluated bid exceeds the cost estimates by a substantial amount, (and that) in these latter circumstances the borrower may as an alternative to retendering and, after consultation with the Bank, negotiate with the lowest evaluated bidder (or failing a satisfactory response, with the next lowest evaluated bidder) to try to obtain a satisfactory contract.” Rejection of all bids is also justified when either bids are not substantially responsive, or when there is a lack of competition. The Guidelines state that when all bids are rejected, the cause or causes justifying the rejection ought to be reviewed to consider whether revisions of the relevant specifications or modifications in the project might be desirable prior to inviting new bids.

Conclusions

Procurement under Bank loans is an important topic for all members of the World Bank Group. For the developed countries which are interested in markets for their products, such procurement is the instrument for preserving or expanding export sales on the basis of rules that afford them an equal competitive opportunity and minimize financial and other risks for the enterprises concerned. For the developing countries (the Bank’s borrowers), the Bank’s untied procurement approach and its almost universal membership helps ensure the best sources of supply. Various studies conducted by the United Nations Conference on Trade and Development (UNCTAD) have clearly demonstrated that restrictions placed on the choice of sources of supply by foreign assistance programs usually result in higher costs to the country that receives the aid.

The amount involved in public procurement by most governments (often representing a substantial portion of their budgets) is very considerable in both developed and developing countries alike. However, the problems associated with public procurement are more serious in the developing countries where resources are scarcer, where sufficient expertise is often lacking, and where the share of imports (whether purchased locally or bought from abroad) in total public sector procurement is normally much larger and requires additional skills that may be unnecessary when dealing with domestic and more familiar sources of supply. It is thus not surprising that the resolution of issues relating to procurement often consumes more time than any other aspect associated with Bank-financed projects; that there are several cases in which slow disbursements of Bank/IDA loan funds are caused by procurement problems of one sort or another, and that consultants hired to assist Bank borrowers on procurement problems largely come from the developed countries. As a result, there is a real need for more training programs and facilities for officials of developing countries in the field of procurement and procurement administration as well as in the related area of supply management.

An important first step in offering such training facilities was taken by the United Nations Institute for Training and Research (UNITAR) in 1972–73 through a series of five regional seminars on international procurement. However, this effort, which was carried out with the support of a Swedish International Development Assistance (SIDA) grant with marginal assistance from the Bank, appears to have come to an end. UNITAR’s program report clearly confirms the need to continue and expand such training efforts, and it is to be regretted that no immediate follow-up to this pioneering initiative is in sight.

Other Resources Citing This Publication