Weak Public Procurement Cripples Ethiopia

Public procurement has long been a subject of discord in Ethiopia. While other developing countries have managed to use public procurement as an avenue for growth, the procurement system in Ethiopia seems to have become a hotbed of corruption. The arrests of almost 100 government officials to do with mega projects threw the issue further into the public eye. But now, there has been a push to reform the procurement regulations and address the gaps that created an opportunity for improper conduct. EBR’s Ashenafi Endale reports.

In developing countries, public procurement can be a lifeline either for growth, or corruption, but Ethiopia seems to be following the second path. Long before the recent arrest of close to 100 government officials in charge of mega projects on the grounds of grand corruption involving the mismanagement of the public coffers, the Office of the Auditor General reported an audit gap of ETB20 billion each year on average in unaccounted and illegal expenses. Gemechu Dubiso, Auditor General, was among the few people urging the executive body and Parliament to action every year, even though they did nothing to investigate the procurement messes.

The huge sum that disappeared into the pockets of individuals and remains unaccounted for, largely due to holes in the procurement law, could constitute a significant portion of the economy, according to Mesenbet Shenkute, president of the Addis Ababa Chamber of Commerce and Sectoral Association. “Gaps in the public procurement law and the inefficient bidding process is costing the country a great amount of money,” she said.

According to a 2014 study titled ‘Ethiopia’s Procurement System’, public procurement expenditure accounts for 64Pct of the annual budget or 14Pct of the country’s gross domestic product (GDP).

Ethiopia adopted the current law that governs public procurement in 2009 by centralizing the former de-centralised procurement procedure. Immediately after the introduction of the law, the Public Procurement and Property Administration Agency (PPPAA) and Public Procurement and Property Disposal Service (PPPDS) were established.
The PPPDS collects purchase requests from public entities, floats tenders, and stages collective procurement, under the watchful eye of the Agency. Along with the proclamation, starting in 2011, directives were introduced in line with the model law of the United Nations Commission on International Trade Law, the World Bank guidelines and the Common Market for Eastern and Southern Africa’s regulations.

In Ethiopia, public procurement can be done through open bidding, request for proposals, two-stage tendering, restricted tendering, request for quotation, and direct purchase. Open bidding is the main tool for public procurement in Ethiopia, constituting close to 95Pct of procurements. However, regulations also list conditions under which restricted tendering; direct procurement, requests for proposal, two-stage bidding, request for quotation and direct purchase are used.

The PPPDS undertakes the procurement of 402 items on behalf of 172 federal institutions. There are 49 current major suppliers, although close to 50,000 suppliers bid for government procurement contracts annually, according to Setegn Gelan, director of Public Relation and Communication Directorate at the PPPAA. Once they are awarded a bid, major suppliers sign framework agreements for three years.

The current 49 suppliers signed framework agreements two years ago which expire this fiscal year, according to Setegn. PPPDS carries out purchases worth ETB8.1 billion annually on average, mainly of office materials and wheat.

In principle, many agree that the intention of an open bidding procurement mechanism is to create an even competition ground for all interested. “The government prefers centralized procurement for two main reasons. “First, bulk purchases have discounts. Second, centralized procurement minimizes cost and time waste,” explains Asefa Solomon, deputy director of Public Relation and Communication Directorate at the PPPDS.

However, the open bidding process can be exploited in various aspects. Generally, the open bidding process is manipulated by two parties: government officials and suppliers. In an open bidding procurement, corruption can take place during demand assessment, preparation of bid amount and criteria, bid document evaluation, as well as after the final stage.

“There are many mechanisms that officials use to manipulate the procurement process. Criteria are crafted targeting specific suppliers that officials want to win the bid, even though it is open to anyone interested. If a supplier is genuine and not interested in collaborating, officials can take you out of the game, during either the technical or financial evaluation, among other things,” argues Gera Teshome, general manager of Serkalem Cheru General Trading, a company involved in the supply of goods for government.

Gera, who has been supplying goods to the government for the last six years continues. “I rarely win, because personally, I turn a deaf ear to any shady deals with officials. However, I know many bidders who always win large tenders helped by officials.”

According to the 2009 proclamation, the Procurement and Property Administration Unit is the body responsible for procurement. The Procurement Endorsing Committee is responsible for ensuring public procurement is executed according to the law. Except for stating that the responsible body should comply with procurement principles, the law doesn’t specify any mechanism to trace many irregularities. “Since everything goes according to the procurement proclamation, there is no further investigation,” says Worku Gezahegn, procurement expert at PPPDS.

Of course, measures have been taken to penalise some suppliers and government officials caught exploiting and abusing the proper way of doing business. For instance, the names of 123 companies banned for different time spans are posted on the Agency’s website.

The procurement exploitation is worse in the construction industry, according to Maru Matebe, general manager of Matebie Construction, who has been vying hard to win construction tenders since 2010. “Every year, I buy 30 to 40 bid documents but winning is as far away as heaven. To date, I have won only four medium government projects and another as a subcontractor to build a bridge, under a Chinese contractor.”

Maru says he is planning to shift to another business, because it has become difficult to even raise his own children, let alone pay employee salaries. “Outplaying bidders by preparing winner-specific criteria, damaging other bidders’ profiles, miscommunicating the bid terms and deadline, refusing to answer the phone for questions and clarifications, only giving bid documents to selected companies, stating misleading purchase volumes, and outright rejection by bid committee sare some of the techniques usually used by bid officials,” he says.

Stakeholders stress that the law stating that whoever offers the minimum price must win is controversial. “This is because the quality of the goods procured might be compromised. In fact, that is why many public construction procurements are substandard,” Maru added.

Before the proclamation, the procuring institution calculated the real price of the project, before floating a tender. Bidders could offer prices only 20Pct above or below the real price. Maru argues, the government must go back to the old method.

Restricted tendering is the other method of public procurement, and one which is given little attention. This method, used when the required goods are only available from limited suppliers, is mainly applied in newly emerging sectors. iCog Labs is a private company engaged in artificial intelligence (AI). It supplies software and innovative hardware like 3D printing, which is a new business area in Ethiopia. The company recently participated in a bid floated by Gonder University to procure a 3D printer, a procurement that is the first of its kind in the country.

Hiruy Tsegaye, one of the founders of iCog Labs explains the problem he encountered. “The problem starts from the bid criteria. The procuring institution prepares the specifications simply by copying and pasting them from the internet, since it is a new procurement area, unknown in Ethiopia. The bidder also simply copies and pastes from the internet, probably from the same site. “The problem starts with submitting a new idea to the bid committee. The moment you submit the bid document with a new idea, it is given to third party. The bid is awarded to somebody who had no idea at all, while the original owner of the idea is outplayed.”

But the trouble doesn’t end here, according to Hiruy. “Purchase of software, hardware and new technologies are always given directly to foreign companies or big firms already in the bid game. Small firms who have brilliant innovative ideas are blocked out automatically,” he adds. “The fact that Ethiopia’s procurement law is not flexible enough has opened shortcut venues. The law is not open to negotiations and partnership.”

On the other hand, under direct purchasing, which is the method used when there is an absence of competition, goods and services are only supplied or provided by one candidate. For instance, direct procurement is used for high value purchases with difficult to define Terms of Reference, like feasibility and structural engineering designs for mega infrastructure projects. The Ethiopian Sugar Corporation is one of the public entities entitled to direct procurement of contractors for public projects. The corporation started ten sugar projects, awarding the construction to the Metal and Engineering Corporation (METEC) seven years ago. None of the projects are currently operational.
One of the biggest cases is the procurement of goods, service and properties by METEC, without any competition or official bid process. These illegal acquisitions, which are part of some 19 cases filed against former METEC officials, have cost the cash strapped economy billions of birr. The recent disclosure of audit gaps and multiple failures in flagship projects like the Grand Ethiopian Renaissance Dam (GERD) is historic evidence for breaches in Ethiopia’s public procurement laws.

Stakeholders stress that the other problem with mega projects is they are financed by foreign loans. “The Ethiopian government cannot float bids for a project financed by the Chinese government, so obviously the contractor will be Chinese,” explained a legal expert.

“Mega projects are usually intentionally awarded to foreigners because corrupt officials and intermediary brokers get better commissions from them than domestic companies. It is also intentionally done because it is easy for them to stash the commission money in overseas accounts in hard currency. This trend is gradually helping foreign companies like Chinese contractors outplay domestic contractors,” argues the legal expert.

Although few studies have been conducted, research done in 2018 by Rajeesh Kumar (PhD), e-procurement specialist at the Ministry of Finance, recommends continuous improvement of legal frameworks and deploying e-procurement to increase transparency and efficiency of public procurement performance.

Indeed, other African countries, like Rwanda, South Africa, Tunisia, Tanzania and Zambia, have already embraced end-to-end e-Procurement systems, and have managed to improve accountability and efficiency in public procurement significantly.

The proclamation governs public procurement is currently being amended, according to Setegn. “Though tabled before Parliament last year, it was sent back to the Office of the Attorney General for revision. We expect it will be ratified in the current fiscal year.”

The amendment mainly involves three domains. It reduces value addition requirements levied on domestic competitors in international bids from 35Pct to 20Pct. Local medicine suppliers will have a 25Pct preference margin, while small and medium enterprises and large manufacturers will have five percent and 7.5Pct preference margins, respectively, against international competitors.

Secondly, the amendment increases the minimum threshold for international procurements from ETB50 million to ETB150 million for construction works, from ETB10 million to ETB50 million for goods and from ETB2.5 million to ETB7.5 million for consultancy services.

The last major change expected in the amendment is that it will include public development enterprises, which were not so far governed by the public procurement law. Public development enterprises, which include giant corporations like METEC, ethio telecom and Ethiopian Electric Power among others, constitute a huge portion of government procurement. So far, they have been purchasing individually. If the amendment is ratified, their purchases will be under the gaze of the responsible body.

The implementation strategy and roadmap for an Electronic Government Procurement System (e-GP), was launched on November 2018, according to the information obtained from PPPAA. According to stakeholders, e-GP will have a significant impact across the whole procurement system if it is introduced after developing a strategy carefully, taking into account the country’s readiness for e-procurement and the capacity of both the public and private sector.

8th Year • Jan.16 – Feb.15 2019 • No. 70

Ashenafi Endale

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