Report No. 35068-PE Peru Country Procurement Assessment Report (CPAR) Update November 2005 Peru Country Management Unit Operations Support Unit--Procurement Team Country Division 3 (Peru) Latin America and the Caribbean Region Regional Operations Department 3 The World Bank Inter-American Development Bank Document of the World Bank and the Inter­American Development Bank REPUBLIC OF PERU-FISCAL YEAR January 1-December 31 CURRENCY EQUIVALENTS (as of January 27,2005) 3.468Nuevo Sol = US$1 WEIGHTS AND MEASURES Metric System SELECTEDABBREVIATIONS AND ACRONYMS CND National DecentralizationCommission NCB National CompetitiveBidding CFAA Country Financial and Accountability Assessment NGO Non-Governmental Organization CGR Controller General's Office OCDE-DAC Organization para la cooperacion Economica y COMEXPERU Sociedad de Comercio Exterior del Peni (Foreign Desarrollo (DevelopmentAssistance Committee) Trade Agancy of Peru) OGA Oficina General de Administracidn (General CONFE Comisidn de Coordinacidn y Administracidn de la AdministrationOftice) ejecucidn de 10s proyectos con Financiamiento PAAG Programa de Adrninistracion de Acuerdos de Externo Gestion(Administrati0n in Agreements of CONSUCODE Consejo Superior de Contrataciones y Management) Adquisiciones del Estado (National Procurement PBI Producto Bruto Interno (Internal Gross Product) Council) PACE Portal de Adquisicionesy Comprasdel Estado CPAR Country ProcurementAssessment Report PCM Presidencia del Consejo de Ministros CSO Civil Society Organization (Presidencyof the Council of Ministries) DECSAL Decentralization and Competitiveness Structural PPP Public PrivatePartnerships Adjustment Loan PRG Partial Risk Guarantee DlSA Direccidnde Salud PROETICA Consejo Nacional para la ~ t i c a Pliblica EGP Electronic GovernmentProcurement (NationalCouncilof Ethics Publisher) FONAFE Fondo Nacional de Financiamiento de la Actividad PROINVERSION Agencia de Promocidn de la Inversidn Privada Empresarial del Estado (National Fund of (PrivateInvestment Promotion Agency) Financing of the Enterprise Activity of the State) PRONAA Programa Nacional de Asistencia Alimentaria FONCODES Fondo Nacional de Compensacidn y Desarrollo (NationalProgram of Nourisng Aid) (National Development Fund) PS PurchasingSystems FONCOMUN Fondo de Compensacidn Municipal (Municipal SEACE Sistema Electronico de Adquisiciones y Compensation Fund) Contratacionesdel Estado (Electronic System for GDP Gross DomesticProduct GovemmentProcurement) GOP Governmentof Peru SIAF Sistema Integral de Administracidn Financiers IADB Inter-AmericanDevelopment Bank (IntegratedFinancial Administration System) IBRD International Bank for Reconstruction and SIGA Sistema de Gerencia Administrativa (Integrated Development Managementand Administration System) ICB International CompetitiveBidding SISMED Sistema Integrado de Suministro de IDA International DevelopmentAgency Medicamentos en Insumos Medicos (Integrated IDB Inter-AmericanDevelopmentBank System of Provision of Medicamentos and IDF InstitutionalDevelopmentFund Medical Insumos) IEP lnstituto de Estudios Peruanos (Peruvian Studies SM SupplyingMarket Institute) SMEs Smalland Medium Enterprises IMF InternationalMonetary Fund TAL TechnicalAssistanceLoan MEF Ministerio de Economia y Finanzas (Ministry of UGEL Unidadesde GestionEducativaLocal Economy and Finance) USA United Statesof America MINEDU Ministerio de Educacidn (Ministry of Education) USAID United' States Agency for International MlNSA Ministerio De Salud (Ministryof Health) Development MYPES Micro y Pequeias Empresas (Micro and Small WB World Bank Enterprises) WBG World Bank Group IBRD IDB Vice President: Pamela Cox Regional Deputy Manager: Country Director: Marcelo Giugale Director: Vladimir Radovic Sector Manager: Bernard A. Beck Manager: Rodolfo Hernandez Task Manager: Enzo de Laurentiis/ Keisgner Alfaro Task Manager: GabrielCastillo REPUBLIC OF PERU COUNTRY PROCUREMENT ASSESSMENT REPORT Contents Preface Executive Summary.................................................................................................................. i Summary of Action Plan........................................................................................................vii I. Background.......................................................................................................................... 1 A. Country Environment.............................................................................................. 1 B. Decentralization Program........................................................................................ 2 C. The Role of Civil Society........................................................................................ 4 II. Institutional and Regulatory Framework........................................................................... 5 A. Institutional Framework.......................................................................................... 5 B. Regulatory Framework............................................................................................ 9 III. Management Of The Procurement Function.................................................................. 13 IV. Conclusions And Recommendations............................................................................. 19 A. Short-term Actions................................................................................................ 19 B. Mid-term Actions.................................................................................................. 23 C. Long-term Actions ................................................................................................ 26 Annexes Annex I. The Regulatory FrameworkDetailed Analysis.................................................. 29 Annex II. Summary of an E-Government Procurement (E-GP) Assessment..................... 41 Annex III. National Supply Strategy: Government Procurement High Level Assessment 45 Annex IV Public Procurement System: Modalities, Procedures and Thresholds for Use of Procurement Methods....................................................................................... 51 Annex V. List of Officials Met And Documents Reviewed............................................... 56 PREFACE World Bank (WB) and Inter-American Development Bank (IADB) Staff jointly produced this Country Procurement Assessment Report (CPAR) Update in close cooperation with the Government of Peru. The report documents progress made towards implementing the actions recommended in the 2001 CPAR. It also outlines a strategy for sustaining and deepening the process of reform in the short and medium-term. One of the key objectives of this exercise is to maintain an ongoing policy dialogue on issues affecting public procurement in Peru not only in the period immediately preceding the forthcoming May 2006 presidential and congressional elections, but also thereafter. Consequently, the CPAR team broadened the range of stakeholders and potential partners consulted and included, in addition to government officials, a wide array of opinion makers within civil society and representatives of the private sector and other development partners. The main text summarizes this dialogue and sets forth high level recommendations. These recommendations are based on extensive legal and institutional reviews and consultations with local partners and counterparts following the inception mission and continuing up to the drafting of the report. In addition, a series of more detailed individual studies are being provided to the government as "just in time" technical inputs to aid ongoing reform efforts. These reports include: (i) a complete institutional assessment of CONSUCODE; (ii) a detailed e-procurement readiness assessment; (iii) an assessment of Peru's anti-corruption and transparency framework (with a particular emphasis on the role of procurement) from the perspective of a leading civil society organization; (iv) a brief report with recommendations on streamlining the government's purchasing strategy, which will serve as a basis to launch a more comprehensive study; and (v) a comprehensive procurement capacity assessment of the health and education sectors. These reports focus on key areas identified during the ICM mission as being of specific interest to the Government. The members of the joint IABD/WB team wish to express their gratitude to all Government and private sector officials and organizations for the time generously spent in this effort and for the valuable ideas and information provided during the inception (November 2004), fact-finding missions (February 2005) and workshop (September 2005) conducted to produce the draft report delivered to the Government for review and comments. A complete list of individuals who provided said contributions as well as a list of all materials reviewed is included as Annex IV. Enzo de Laurentiis and Kesigner Alfaro, Senior Procurement Specialists for the WB, and Gabriel Castillo, Country Coordinator, for the IADB, jointly managed this task and the report's preparation. Additional members of the joint team included Carlos Pimenta and Gonzalo Deustua, State Modernization Specialists, Juan Manuel Leaño, Infrastructure Specialist, João N. Veiga Malta, e-procurement Specialist, Sabine Engelhard, Sr. Procurement Specialist, Karina Diaz, Local Procurement Specialist, and Juan Carlos Perez-Segnini, Sr. Counsel for the IABD, and Luis Tineo, Sr. Procurement Specialist, and Patricia de Baquero, Sr. Procurement Specialist for the WB. Team consultants included Alfonso Sanchez, PROETICA, Roland Berger Strategy Consultants, Lionel López, Oswaldo Patino, Jorge Vargas, Barbara Friday, Daniel Triveño, and Jennie Alfaro. EXECUTIVE SUMMARY Overview of Recent Progress 1. This report describes the findings and conclusions of a country procurement assessment review (CPAR) of the Peruvian public procurement system. The review analyzes the current Peruvian system in the context of international good practices in procurement and describes the progress made towards achievement of such practices since the previous CPAR report in 2001. As part of the earlier effort, an Action Plan for modernization of the public procurement system was agreed with the government. It also assesses the potential risks which may affect the continuity of the procurement reform process in the near future and proposes concrete actions aimed at increasing procurement capacity, reducing transaction costs and the costs of goods, works and services procured in the public sector. These actions would generate savings that could be used to finance additional needed investments and would also improve the overall quality of public spending. 2. Since the 2001 CPAR, Peru has made considerable progress in setting in motion the right conditions to improve public procurement. The primary regulator for procurement, the High Council for Government Procurement (CONSUCODE), has been strengthened; the development of the e-GP system has begun; significant training initiatives are underway; and important amendments have been made to the procurement law and its regulations. In addition, a very good Integrated Financial Management System (SIAF) has been implemented in all public sector entities. 3. These initial achievements in procurement reform have complemented a deepening democratization process and Peru's impressive macroeconomic performance over the last few years. Macroeconomic and fiscal reforms resulted in: high GDP growth, lowered country risk, stimulation in private investment and export, a broadening of the tax base, and lowered inflation. 4. While not all planned anticorruption initiatives have been implemented and a more comprehensive anticorruption strategy needs to be developed, the Government is more transparent than ever and almost every government agency has a web page that includes wide ranging information about agency activities. Freedom of the press has increased dramatically and both corruption and transparency are now part of the policy dialogue. 5. Several institutions play important roles, defined by law, in public sector procurement. However, there is no unifying vision of the system's objectives and priorities. Consequently, the initial reforms implemented by the Government were not framed within a comprehensive policy that includes a consistent strategy on how to move forward with the reform program and establishes clear leadership. Key Drivers for Further Procurement Reform 6. There is a general perception, based on empirical evidence,1 that the persistent inefficiency in the procurement system is compounded, amongst other aspects, by the effects of complex budgetary planning and execution rules as well as logistic deficiencies, all of which 1. For example, the procurement cycle for medical supplies, from authorization to launch the process to delivery, is 450 days. i result in slow service delivery. Due to strict budgetary rules and low technical capacities relative to procurement, some public entities are not able to fully execute their budget, which further exasperates the problem. The combined effect of the limited fiscal space and slow service delivery has adversely affected the Government's ability to meet service targets and to make significant headway in poverty reduction. 7. Consequently, the implementation of viable strategies to generate public savings and increase procurement efficiency constitutes an important priority for the Government. Among other initiatives, the Government intends to reduce transaction costs and achieve better economies of scale through aggregated purchases of high volume/low cost items. 8. There is still a high degree of fragmentation in the system with significant variations in the capacity to administer procurement and procurement practices have proliferated, particularly at the local government level. Peru began a process of decentralization in 2002 that increased citizen participation. However, this task proved to be a formidable challenge due to the large number of local governments (there are 1,800 municipalities) and the poor programming, budget execution and low financial management capacity of the same. 9. Finally, the actual impact of the massive training effort remains unclear and it is critical for the Government to institute more effective monitoring of individual transactions. Efforts must also be made to evaluate the performance of the system to ensure the consistent application of the reform and its ability to produce value for money. Additionally, emphasis must be placed on generating further improvements based on lessons learned. Analysis of Key Constraints 10. While the overall procurement framework has improved, there are multiple and complex factors that hinder the reform process and limit its ability to produce the desired impact. 11. The lack of consensus on a clear policy framework resulted in poor institutional coordination and an overlapping of actions to develop the e-government procurement system. For example, an adequate interface between the financial management system and the e- procurement system has yet to be established. In addition, there are no clear operational arrangements to implement framework contracts and reverse auctions introduced by the new procurement law. Additionally, no analysis of the government expenditure profile and the relevant markets has been made. 12. Currently, a higher priority is assigned to procuring entities' compliance with the requirements and conditions set forth in the local regulatory framework than to improving the overall procurement management efficiency. Therefore, more emphasis is placed on control issues than on efforts to increase capacity building and improve quality and efficiency with low consideration to cost-effectiveness aspects such as reduction of transaction costs and attainment of cost savings in the procurement of goods and services. This is a legacy of Peru's recent history and one which, while allowing significant improvement in oversight and control of procurement transactions, has also contributed to the consolidation of a rigid control culture and promoted overlapping roles and duplication of requirements (e.g., central registry of bidders as a condition to bid for contracts, ex-ante external control instead of using pre- and post-qualification systems when appropriate, and strong internal controls). While the impact of the procurement law adopted in December 2004 cannot be assessed yet, many of its provisions are still influenced by ii the aforementioned control culture, which subsequently results in a procurement process that is unduly onerous. The complexity of the regulatory environment and legalistic approach of oversight agencies continue to adversely affect the system´s efficiency. The results in some cases restrict competition rather than enhance transparency. In addition, the combination of very detailed requirements and personal financial and criminal liabilities for public employees often causes delays in decision making. 13. This environment helps explain why there has been little progress in the fundamental areas recommended by the 2001 CPAR and/or in the priorities identified by the government, both of which could contribute to substantially improving procurement performance. Tools that are critical to the consistent and efficient implementation of the reform (e.g., standard bidding documents) have not been adopted; the control function is assigned higher priority and budget resources than those allocated for prevention of inefficiencies; the implementation of important initiatives such as the e-GP system and cost reduction strategies is lagging and, as a result, potentially significant savings are not being achieved. Current Environment for Change 14. Despite political fragmentation and institutional difficulties, there is general consensus that new channels should be opened to bridge gaps and create consensus on public policy priorities. All key stakeholders agree that there is an urgent need to sustain and deepen the reform to help create more fiscal space and support Peru's further economic growth and a fairer distribution of the benefits of development. In addition, key institutions agree that while it has been useful to establish stricter controls in the initial phase of the reform, this approach needs to be reassessed to ensure that it does not hamper policy oversight and implementation or the efficiency of procurement processes. 15. Civil society is working to raise awareness of the waste of taxpayer money in public procurement and is conducting surveys to measure citizens´ perceptions while leading transparency initiatives in local and regional governments. But this is a relatively phenomenon in Perú which is growing steadily. 16. A better partnership among all key stakeholders- including civil society- based on a common vision of the central importance of procurement within the public financial management system as opposed to the creation of varying visions reflecting the interests of individual institutions is possible and is key to establishing an enabling environment for further improvement. It is critical to provide these efforts with a new impetus and ensure that the pace of the reform is sustained beyond this Government into the next. Emphasis must also be placed on consolidating earlier gains. Summary of Recommendations 17. It is recommended that the Government of Peru adopt an action plan capable of contributing to the key objectives discussed above. The Plan should prioritize actions that are less complex and achievable in the short-term while developing consensus for more compounded actions considered critical to sustaining and deepening the reform process during the remainder of this administration and into the next. The action plan should take into account the political environment leading to the upcoming election in May 2006; the difficulty of introducing further iii reforms in the recently revised legal framework; the critical need to closely coordinate with broader ongoing public sector reforms; and the significant challenge of transitioning from a culture based primarily on control to one that places greater emphasis on the efficient management of public resources. With these objectives in mind, a workshop was conducted on September 8-9, 2005 with the participation of Government authorities, the Inter-American Development Bank and the World Bank. This workshop was useful in identifying actions relevant to boosting procurement reforms. The workshop conclusions were included in an Aide Memoire made available to all of the participants. 18. Short-term actions can have an important impact on improving the procurement system´s efficiency. However, to sustain and deepen the procurement reform in the medium/long-term, it is critical that key institutions broaden their vision beyond individual agendas and focus on a shared vision of improving the efficiency of public procurement to achieve savings, taking into account lessons that can be learned from international best practice. The following actions take into account these objectives and constraints and are listed in a proposed order of priority. A. Short-term Actions 19. Bring all key institutions to an agreement for a detailed reform strategy with clearly defined leadership and objectives. The Government of Peru should appoint a leading group that is capable of and responsible for conducting and taking over implementation of reforms while providing a shared vision and carrying out a follow up on progress achieved. This group must be able to make other agencies responsible for their performance and should offer solutions for current disagreements in an objective and realistic fashion. 20. The Presidency of the Council of Ministries (PCM), CONSUCODE, MEF and the Comptroller's Office should develop a consensus on a set of specific areas to be targeted over the mid- and long-term for the purpose of continuing and consolidating the reform's initial achievements. This leading group should outline the responsibilities and duties of main entities involved and resolve gaps or overlaps that may exist. Moreover, the reform strategy should be aimed at specifically reducing transaction costs and maximizing efficiency by streamlining procurement processes and making a better use of the technology resources available. This vision and strategy should also be discussed with main procurement related entities, key stakeholders in Congress and civil society. A strong and wide basis of support for change should be created in the forthcoming 18 months. 21. Emphasize prevention over control and consolidate the supervisory role of CONSUCODE. CONSUCODE should shift its focus of attention from procurement transaction control to system policy making and supervision. This focus will permit a more efficient use of resources, the development of implementation tools and the carrying out of a system follow-up. Both the Government and CONSUCODE should assess and agree on different financing mechanisms (i.e., allocation of a fee from each contract awarded to winning bidders) in addition to the current fees paid by Registry users to ensure CONSOCUDE´s continuity. Such mechanisms should not be onerous to potential bidders or act as a barrier to competition. A comprehensive analysis of likely financing options and of the costs and benefits of income derived from the current Registry is recommended. 22. Adopt a set of tools in the short-term to facilitate implementation of the reform. CONSUCODE should prepare a suite of standardized bidding documents and user manuals with iv good practice advice for use throughout the public sector. This set should include tool kits for the municipalities containing simplified documents and templates appropriate for local procurement processes. A monitoring and evaluation system to measure the performance of procurement entities and their ability to achieve value for money would greatly enhance CONSUCODE's oversight role by allowing it to better monitor the implementation and impact of the reform and incorporate lessons learned into the policy making and capacity building processes. 23. Carry out in-depth market studies, review the Government supply processes, and implement cost reduction strategies. In order to implement effective cost reduction strategies utilizing the contractual arrangements introduced by the new law, it is essential to analyze the market structure (e.g., small markets cannot withstand the reverse auction approach); the complete expenditure profile by procurement item group (e.g., hospital/medical services, hospital/medical equipment IT equipment and systems, legal services, administrative support staff, printing services, vehicles, gasoline, telecommunications, etc.); the current purchasing arrangement; and identify the procurement item groups that present the greatest opportunities for generating savings. This analysis would support alternative approaches based on target amounts of potential savings. For example, a similar study carried out last year in a comparable environment demonstrated that an amount equivalent up to 15 percent of the total annual procurement volume could be saved by implementing relatively simple changes (e.g., consolidation of purchases, standardization of technical specifications, etc.). 24. Accelerate the development of e-GP. Peru is setting off on the right path by creating several of the foundations required for successful e-GP implementation. However, there is a high level of duplication at this stage of the reform and some important steps need to be implemented in order to address this flaw. Interim solutions should be avoided; SEACE and SIAF should be fully linked, and 100 percent coverage of procurement opportunities in the system should be achieved. An e-government strategic plan that addresses issues such as: the adoption of information standards, the determination of a business plan for the sustainability of the system and the generation of a development timetable should be adopted as soon as possible. The two competing approaches to e-procurement promoted by CONSUCODE and MEF respectively must be reconciled in order for the system to achieve its intended results. It is estimated that the introduction of electronic procurement for small purchases, soon to be put into effect, could save the Government as much as US$30 million per year. B. Mid-term Actions 25. The regulatory framework needs to be further streamlined to better support the strategy discussed above. While the new procurement law and regulations represent a major step forward, the regulatory frameworks for both procurement and concessions should be amended to be more consistent with established international practice and to eliminate barriers to competition, subjectivity in the evaluation of proposals, and other sources of inefficiency and unnecessary costs. With respect to concessions, it is particularly important to better define the role of PROINVERSION, selection procedures, and the different types of concessions while developing an independent administrative review of appeals. 26. The Government should engage civil society participation in a more constructive fashion. There are neither legal nor institutional incentives that allow the Government to cement the participation of civil society groups in a constructive way. As a result, the Government v missed an opportunity at the beginning of this administration to benefit from the interesting dialogue with more developed organizations in terms of policy design and social auditing. Cooperative efforts would also allow the Government to effectively inform the general public on significant achievements and the challenges ahead and generate a broader basis of support as well as greater appreciation of the Government's constant efforts to improve public sector management. C. Long-term Actions 27. Human resource infrastructure must be significantly strengthened. The Government needs to give higher priority to professionalizing public sector procurement. Ongoing civil service reform should incorporate this aspect, which will necessarily require a long-term effort. 28. CONSUCODE is in a unique position to help formalize and structure the procurement function within the civil service system. CONSUCODE should work closely with the Office of the Prime Minister, Congress, and the agencies responsible for human resources policy and administration to provide technical inputs for the ongoing debate on civil service reform (e.g. accreditation and entry requirements, retention, careers, accountability, etc.) In addition, as CONSUCODE refocuses its approach by shifting more resources from the control function to capacity building, it should be better able to meet the currently overwhelming demand for training. Finally, CONSUCODE should involve the private sector, civil society, and development partners more actively in the training programs' design, delivery, evaluation and follow-up. 29. Strengthen procurement capacity of local governments. A massive training initiative is overly ambitious, inefficient, and not necessarily effective. However, a combination of actions can be implemented to support the decentralization process and enhance the quality of municipalities' expenditures and their contributions to growth. These actions could include simplification of the legal requirements to alleviate the burden on the weakest local governments, shifting the emphasis in current and planned training programs from legal content to processes. Smaller local governments should join together to share resources and capacities to implement procurement and improvements should be encouraged in coordination efforts amongst all pertinent entities including, in particular, the National Decentralization Commission (CND), CONSUCODE, and donors. vi COUNTRY PROCUREMENT ASSESSMENT REPORT (CPAR) UPDATE Summary of Action Plan Medium/Long Short Term Term Comments and Recommended Action (2005­06) (2005­08) Potential Sources of Funding 1. Adopt a vision and a strategy to ensure X Launch of dialogue facilitated through that reforms are sustainable in the medium Consensus-building workshop(s). term. 2. Disseminate, build wide-based X Dissemination strategy proposed by consensus and implement the strategy. CPAR. 3. Create a leadership group to lead the X While actionable in the medium-term, reform. dialogue should be prioritized. 4. Further improve the regulatory X Consistent with detailed framework for: (a) procurement and recommendations provided by the CPAR. concessions and (b) Public Private As possible components of a Public Partnerships.(PPPs) Sector Reform Loan. TAC Infrastructure Transactions (IDB). 5. Strengthen capacity of local X Combination of actions that includes but governments. is not limited to training, as discussed in Chapter VI. DECSAL TAL (WB). Modernization and Decentralization Program (IDB). 6. Creating a Human Resources X Modernization and Decentralization Infrastructure. Program (IDB). 7. Develop a comprehensive e- X Modernization and Decentralization procurement strategic plan to be Program (IDB). implemented in stages and accelerate development of the system. 8. Adopt a comprehensive strategy to X Possible Public Sector Reform Loan. streamline the government's supply strategy. 9. Develop basic tools (e.g. documents, X Modernization and Decentralization M&E system). Program (IDB). 10. Support CONSUCODE's plan to X IDF (WB); Possible Regional Technical establish a regional network of Cooperation Program. procurement authorities. vii viii I. BACKGROUND A. Country Environment 1.1 Peru, a middle-income country, has had one of the best performing economies in Latin America in the past two years. Major progress has also been made in consolidating democratic institutions and re-establishing broad participation in the political process. 1.2 Sound macroeconomic and fiscal policies have contributed to accelerated growth, low inflation and internal and external stability. However, while the economic and social indicators have risen, both the legislative and the executive branches of government continue to enjoy only limited political consensus. One of the reasons for the unfavorable public opinion ratings is the perception that the fruits of the high GDP growth are not reaching the majority of citizens at an adequate pace.2 1.3 Peru lags behind other middle-income countries in most public infrastructure sectors with coverage gaps between urban and rural areas being among the highest in the region. Investment in public infrastructure (water, transport, telecoms and energy) has declined significantly to its current low level of 1 percent of GDP due to reductions in public investment (0.5 percent of GDP) and a sharp decline in private infrastructure investment. Delivery of services in the health and nutrition sector has been mixed.3 1.4 Public service delivery is widely perceived to be insufficient and of low quality. Several factors have contributed to hinder the ability of the Government to improve service delivery to the majority of the Peru's citizens. The major constraints have been a limited fiscal space for public investment and an inefficient public expenditure system. Public expenditure has been capped to meet macro targets. On the fiscal front, the share of current and fixed expenditures is relatively high, making it next to impossible to reduce the same in the short-term and free additional resources to finance visible social programs that benefit the majority of citizens. The costs of the central government bureaucracy take up 40 percent of total government spending, or 6.6 percent of the GDP. 1.5 Although it is true that severe limitations on investment exist, some public entities are not able to fully utilize the budget resources assigned to them due to persistent inefficiencies in the procurement process (e.g. unduly burdensome requirements), limited procurement capacity, and strict norms that regulate budget execution that are often not well understood by execution units.4 This slows service delivery and impedes faster economic growth. This is the case of, for example, the majority of sub-national governments that receive funds under the decentralization program but find themselves unable to spend allocations in a timely and efficient manner. Inefficiencies in management of public procurement and service delivery are also compounded 2. Although the stage appears set for the continued decline of poverty, and given the current and expected positive economic growth, poverty is likely to remain a critical political and economic issue for years to come. 3. For example, while the transfer of food programs to local governments has increased the percentage of resources spent in the poorest districts, the local chapter of Transparency International estimated that a significant percentage of the resources fails to reach the intended beneficiaries (Vaso de Leche). 4. For example, the complete procurement cycle for medical supplies and equipment, from the authorization to distribution to the DISAs, was estimated at 450 days in 2004. 1 by fears of prosecution by procurement officials if fail to comply with the procurement rules and legal requirements. 1.6 One promising and viable alternative for generating savings include increasing the efficiency of procurement of public goods and services. For example, the introduction of electronic procurement of small purchases, which will soon be in effect, could save the government up to US$30 million per year. Another option is to streamline the government supply strategy and achieve better economies of scale, as discussed below. 1.7 There is also a perception that corruption continues to be a factor in reducing the effective delivery of public services to the people and that a comprehensive and effective anti- corruption strategy is still missing. Indeed, although the public ranks the current administration as much more transparent than its predecessors, the Transparency International Corruption Index rate for Peru actually declined from 3.7 in 2003 to 3.5 in 2004.5 Despite the public´s perception that corruption has yet to abate, the Peruvian government is more transparent than ever. Almost every government agency has a web page and press freedom has increased dramatically. Due in no small measure to wide press coverage of these issues, both corruption and transparency are now part of the policy dialogue. As a result, there is a good foundation upon which to engage public officials, civil society actors, and the next government on anti-corruption and transparency issues. This foundation includes a legal framework,6 a high degree of public sensitivity and awareness, and a number of highly sophisticated civil society organizations (CSOs) focused on the issue. 1.8 Despite the lack of political support for the Government, there is general agreement among almost all political and social actors that open democratic channels are the means through which disputes should be resolved and public policy priorities decided. A National Accord has been agreed upon with different political parties and members of civil society to help create consensus among political, civil and religious groups on a series of reforms. B. Decentralization Program 1.9 In 2002, the Peruvian Government began implementing an ambitious program to decentralize the funds and responsibilities assigned to regional governments and municipalities, which are expected to assume a more important role in the economic development of the country. The majority of these resources are transferred to the municipalities from the Municipal Compensation Fund (FONCOMUN). Larger provincial municipalities, which are able to produce more revenues, will be less dependent on the transfer than smaller district-level municipalities.7 A sample review of 61 provincial municipalities shows that the average annual procurement volume is NS1.3 million (approximately 57 percent for goods, 34 percent public works and 9 5. 10 is the best, most transparent, 1 is the lowest, least transparent. 6. The government has launched a series of reforms aimed at reducing corruption in government. These include the Public Employment Law (Ley Marco de Empleo Publico), the Civil Service Career Law (Ley de Carrera Publica), and the Civil Servants Salary Law (Ley de Remuneraciones) which contain principles and regulations on the public service, including ethics in public office, and provide for an authority to manage the civil service system. 7. On average, approximately 77 percent the provincial municipalities' budget is the result of the transfer; the district-level municipalities, however, depend on the transfer for more than 87 percent of their budgets. The poorest municipalities, such as Huanuco, receive 90 percent of their budget from the transfer. 2 percent consulting services).8 Small purchases represent the majority of procurement within this sample (69 percent) and only 8 percent is carried out by means of public bidding, with the balance being mostly selective bidding. 1.10 An ongoing study financed by the World Bank is evaluating the financial management systems of 43 municipalities9 (representing a sample of the approximately 250 larger municipalities with at least 20,000 people). Preliminary results suggest that all sampled municipalities are heavily indebted10 and have very weak financial management systems. A significant portion of this debt is not registered.11 The Peruvian Studies Institute (IEP) also carried out an assessment, sponsored by CONSUCODE, of the capacity of 187 sample municipal governments (rural and urban) to apply the procurement system. In addition to reviewing these reports and discussing the strengths and weaknesses of decentralization with key concerned agencies and donors, the CPAR team assessed the capacity of the Municipality of Lima. While more capable and better organized than most municipal governments in Peru, the Municipality of Lima was an interesting example because of its very high degree of decentralization. 1.11 These studies and discussions suggest that the pace of the decentralization process does not fully account for significant differences in the municipalities' technical, organizational and logistic capacities and that the process has failed to implement effective measures to address or mitigate the associated risks present in many municipalities. Analysis has determined that most municipalities at the rural and district level as well as many municipalities at the provincial level fail to prepare procurement plans and have no procurement staff, instead relying on external accountants for advice on procurement. According to the study prepared by IEP, the majority of these municipalities also are insufficiently familiar with procurement rules and are in need of an adequate IT and connectivity infrastructure to implement the incipient e-procurement system. Many citizens and officials at sub-national levels have an insufficient understanding of technical aspects (financial management, budget execution norms, and procurement) and lack knowledge of rights and obligations under law (e.g. on access to information). Various government agencies are undertaking programs to create capacity at the local level and several donor agencies are financing capacity building programs to support the decentralization process. However, the bulk of these capacity building initiatives focus on training in regulatory aspects and controls with less emphasis on the practical "how to do" aspects. 1.12 The World Bank has been supporting the decentralization process with a series of Development Policy Loans and two decentralization structural adjustment loans; a third Structural Adjustment Loan for Decentralization and Competitiveness (DECSAL III) is expected to include the strengthening of municipal financial management systems in its policy matrix, and a related Technical Assistance Loan (DECSAL TAL) to support necessary capacity strengthening actions. 8. According to a recent study of the Peruvian Study Institute (IEP) as commissioned by CONSUCODE. 9. There are 1,800 municipalities in total. 10. New local administrations often do not honor previous debt. Approximately 50 percent of the accumulated debt is labor and social costs and contingency debt is growing as the weak budgeting and accounting capacity significantly slow down payments. 11. 27 percent of the municipalities interviewed said that their debt was not fully registered. 3 C. The Role of Civil Society 1.13 An active civil society, although a relatively recent phenomenon in Peru, is increasing its influence on a daily basis as democracy deepens. Civil society representatives, including those from the private sector (Camara de Comercio, MacroConsult, COMEXPERU) and NGOs (ProEtica, Transparencia, Ciudadanos Al Dia, Capital Humano y Social, Instituto de Defensa Legal) are multiplying and active both domestically and abroad. 1.14 Civil Society Organizations (CSOs) conduct corruption surveys to measure citizen perceptions and are leading transparency initiatives in local and regional governments. Peruvian CSOs regularly organize conferences that promote policy dialogue and bring together public officials, citizens and CSOs. Themes include transparency, access to information and procurement. CSOs conduct a variety of campaigns to increase the awareness of citizens and public officials regarding pertinent issues. For example, the local affiliate of Transparency International, ProEtica, has signed an agreement with the Regional Government of Lambayeque to gather and post information on their respective websites regarding compensation, declared assets, the experience of public officials, the city budget, expenditures and contracts.12 Ciudadanos Al Día has launched a competition with national and international financing to recognize good practices in government.13 1.15 CSOs examine public management issues and conduct social audits of public agencies at the national, regional and local levels. The professional associations of lawyers, accountants, and engineers and the chamber of commerce and media are implementing a USAID-financed project to increase citizen monitoring of government activities, including procurement, and have developed a series of indicators to measure transparency. Ciudadanos Al Dia has audited each ministry and its procurement practices and prepared numerous reports on procurement.14 Using a tool designed by Transparency International, CSOs have drafted integrity pacts aimed an increasing transparency and integrity in public and private sector institutions. 12. For more information, visit: www.proetica.org.pe/FuncionariosPublicos 13. Awards will be given in the following categories: Transparency and Access to Information, Process Simplification, Efficiency in Public Sector Procurement, Customer Service, Citizen Consultation and Participation, Economic Development, and Other Improvements in Public Management. Awards will be announced in May at the conclusion of the first round during a 2 day conference where best practices will be shared. For complete information, please consult: http://www.ciudadanosaldia.org/premiobpg 14. "Transparencia en las Contrataciones y Adquisiciones de los Ministerios", "Principales Proveedores del Estado, 1999-2002", "Nivel de Transparencia en la Publicación de Información sobre Contrataciones y Adquisiciones en los Ministerios: Transparencia Fiscal". www.ciudadanosaldia.org 4 II. THE INSTITUTIONAL AND REGULATORY FRAMEWORK A. Institutional Framework 2.1 The institutional set-up is particularly complex because there are multiple institutions that play important roles. Coordination is insufficient and there is no agreement on leadership or a unified vision of the role of procurement within public sector management. Congressional oversight is exercised through review and discussion of the reports submitted by the Auditor General, but there is limited follow-up on the procurement problems identified. The principal institutional actors in Peru for public sector procurement are: 2.2 The Office of the Prime Minister. Located at the Presidency of the Council of Ministers (PCM), the Office of the Prime Minister has the responsibility of coordinating the actions of the executive branch, including those of the agencies involved in public procurement, modernization of the state and decentralization. Political instability has recently affected the Office of the Prime Minister's ability to maintain a sustained effort and play a strong coordinating role- there have been four Prime Ministers in three years- which has produced a subsequent turnover in technical staff in the executing units of the IADB-financed Decentralization and State Modernization Project. 2.3 CONSUCODE.15 CONSUCODE, created in 1997 as a decentralized agency of the Office of the Prime Minister, is the authority responsible for overseeing and administering the Peruvian government procurement system. CONSUCODE has technical, functional, administrative, economic and financial autonomy. According to amendments to its basic legislation in 2002 and 2004 16, its principal responsibilities include setting, enforcing and interpreting procurement rules and documents; developing and administering the National Vendors' Registry17 and the e-GP system;18 developing systems for the implementation of framework agreements and reverse auctions; acting as a tribunal of last administrative instance on procurement objections in cases of public tendering and public contests; and, in the future, in the oversight of Reverse Auction processes, with or without the use of Corporate Procurement and Framework Price Contracts. Finally, CONSUCODE informs the Auditor General of instances of negligence and corruption detected while carrying out its functions. CONSUCODE's institutional vision is to implement a culture of transparency and professionalism by overseeing the bidding and contracting process. CONSUCODE's main source of funding comes from the fees charged to vendors for registration in the National Vendors Registry. Registration is a condition for bidding for government contracts. 2.4 Since its creation, CONSUCODE has had important achievements in promoting new procurement legislation, training public officials (particularly at the municipal level), developing the e-GP system, and establishing the protest review and arbitral tribunals. CONSUCODE has established itself gradually as the agency leader in the sector and is well respected by all stakeholders. In addition, CONSUCODE has taken leadership in promoting a regional network 15. Consejo Superior de Contrataciones y Adquisiciones del Estado (High Council for Government Procurement) 16. See Section 5. Legal Framework 17 . Registro Nacional de Proveedores (National Vendors' Registry) 18. SEACE ­ Sistema Electrónico de Adquisiciones y Contrataciones del Estado 5 of procurement regulatory agencies to exchange good practices and jointly develop new approaches. 2.5 CONSUCODE's main source of funding comes from the fees charged to vendors for registration in the National Vendors Registry. Registration is a condition for bidding for government contracts, as mentioned above. 2.6 CONSUCODE will face considerable challenges in the future as decentralization progresses, and will take on different roles in order to effectively respond to new challenges that include, among others, those related to the identification of new priorities in the procurement system and functions (some of which are proposed in this report). 2.7 The Ministry of Economy and Finance (MEF).19 The Ministry of Economy and Finance (MEF), as part of its function to plan, direct and control the fiscal, financial, and treasury operations, established a highly effective integrated financial management system (SIAF20) to register all national government expenditures and revenues and to authorize payments. SIAF has three elements: (1) a single registry of transactions with virtual transmission to the Budget Office, the Treasury Office, and the Auditor General; (2) cash payment management for payments financed by the Treasury´s ordinary resources; and (3) financial reporting. The implementation of the system has resulted in overall efficiency gains with reductions in financial transaction duplications, payment lags, transaction costs, and risks of fraud or lost/stolen checks. The system is structured in a client-server architecture covering almost 600 execution units in all regions in the country21 . In the future, SIAF coverage expansion and its overall impact on the public financial management face some challenges. They basically deal with the need: i) to integrate SIAF at the national and local levels; ii) to complete the Action Plan for improving the functionality of the Single Treasury Account and; iii) to implement an operational inter-phase with SEACE that enables a better integration between public budget and procurement planning and execution tasks and provides a statistical information source for monitoring and measurement of performance and management quality. 2.8 The Auditor General.22 The Auditor General is the state agency responsible for the National System of Control. It is in charge of ensuring legality in the implementation of the national budget, and supervising public debt operations and the administrative performance of public agencies subjected to control. As the lead controlling entity, it issues guidance and procedures for the execution of governmental control in terms of supervision, monitoring and verification (checks and balances) of actions and outcomes of public management. It also evaluates the overall management of public officials in government agencies and identifies potential responsibilities. Thus, the Auditor General's main function is to exercise external control ex-post and --only on an exceptional basis-- ex-ante control as provided for under explicit regulations. Also, as a lead control agency, it develops the strategy to introduce preventive control measures in public procurement management and contracting through the use of social control (veedurías sociales). Moreover, the Auditor General is the only entity with the ability to hire external auditing firms to carry out financial audits to government agencies. With respect to public procurement and contracting, the agency has four main responsibilities: (i) to exercise 19. Ministerio de Economía y Finanzas (Ministry of Economy and Finance) 20. Sistema Integrado de Administración Financiera del Sector Público 21. http://transparencia-economica.mef.gob.pe/gobiernocentral/ 22. Contraloría General de la República (Comptroller General of the Republic) 6 control ex-ante and issue a prior no objection for the procurement of goods and services defined as secret military transactions; issue authorizations ex-ante (no objection) at the contract execution stage of works contracts when the increments in the aggregated exceed 10 percent of the original contract price;23 or in work supervision contracts when the increments in the aggregated exceed 15 percent of the original contract price;24 (ii) to perform a selective control ex-post of procurement processes through specific control actions such as special reviews, financial audits and management audits; (iii) to engage in special control activities through the evaluation of procurement contracts directly awarded (exoneraciones) which must be in accordance with the legal framework and reported to the Auditor General's Office; and (iv) to conduct due diligence on claims filed by public authorities, professional associations, bidders or the general public on procurement processes managed by public entities. In 2004, the Auditor General created the Procurement and Contracts Department with the primary objective of strengthening the control function on procurement processes performed by government agencies with an emphasis on preventive control, irrespective of external financial audits. 2.9 The Auditor General has taken several steps towards improving its performance, including implementing a national deconcentration strategy;25 increasing its staff;26 placing greater emphasis on prevention through training public sector employees (particularly in the provinces);27 and strengthening control beyond financial auditing through the establishment of a Procurement Directorate. Nevertheless, the Auditor General's capacity is stretched to the limit. In fact, the staff of this entity is able to process only 40 percent of the citizen complaints received each year and few cases result in conviction.28 2.10 The Auditor General has implemented a Government Procurement and Contracting Portal (PACE) on its web page that contains information on procurement as of 2001. The PACE system's main objective is to lend transparency to public procurement by preventing fraud and corruption. It provides a database that is useful for control action planning and publishes information on bid advertisements, tendering documents and award decisions in procurement processes performed by public agencies as foreseen under Article 2 of Law No. 26850. Said database also provides information on other agencies exempted from procurement process management according to the aforementioned law. It does not produce aggregate reports and relies on the quality of the information provided by the procuring entities. 2.11 Line Ministries and Autonomous Agencies. The Peruvian procurement system is decentralized ­ each entity carries out its own procurement without having to request additional authorizations from other entities. However, these entities must also comply with strict budget planning and execution norms- a process whose timing is not clear and which typically results in underperformance of expenditure plans during the fiscal year. Decentralization is also the rule within each entity: Procurement for larger amounts is carried out by a Special Committee 23. Per the Fifth Final Provision of the Law No.28411 -Law of the National Budget System- 24. Per Article 42 of the Law No. 26850 -Procurement and Contracting-, not modified under the Fifth Final Provision of the Law No.28411 25. The Controller General has established local offices in 10 of the 24 regions and plans full coverage over the next three years. 26. From 615 approved positions at the time of the CFAA to a target of 2,400 by 2007. 27. In the IDB-supported "Plan Nacional de Control", loan for the Modernization of Controller General's Office and Deconcentration of National Control System (PE-L1002) approved in November 2004. 28. In January 2004, 33 new criminal cases were introduced; however, only 30 were concluded out of a backlog of 1,100. 7 (Comité Especial) appointed for each procurement procedure with members (at least one from the user department) appointed by the entity's head. Contract signing is the responsibility of the head of the agency,29 and Special Committee members are jointly responsible for ensuring strict compliance with the law and reporting any irregularities in the procurement process. The user department carries out procurement for smaller amounts (adjudicación de menor cuantía) for the equivalent of US$ 35,200 or less, which does not require public bidding. Perú's annual budget is approximately US$10 billion; approximately 2 percent of public procurement was externally financed in 2004. 2.12 The CPAR team carried out in-depth procurement capacity assessments for the education and health sector with an eye on advancing fiduciary work for possible SWAP or PBA operations. Procurement in these sectors comprises mainly pharmaceuticals, text books, school furniture, and small public works projects (i.e. improvement and maintenance of schools and hospitals). Particularly in the health sector, small purchases represent the vast majority of all procurement transactions. 2.13 Procurement capacity is considerably weak in both the education and health sectors with respect to procurement planning, operation and internal control. As discussed above for all sectors, the budgetary norms, processes and timing are not well implemented, which results in significant underperformance of expenditure plans. There are a number of interesting similarities between these two sectors with respect to procurement capacity issues; these, in turn, exemplify some of the wider systemic problems related to decentralization and capacity as discussed above. Both sectors encompass a large and diverse portfolio of programs and budgetary priorities. These complex portfolios are executed by an array of different government entities. Decentralization is a significant issue given that municipalities and autonomous decentralized entities30 are increasingly absorbing more functions and resources. Procurement practices, capacity and outcomes vary greatly within this universe of implementing entities; subsequently, implementation is generally inefficient and difficult to monitor or assess. In both sectors, with a few exceptions (e.g. PAAG, MINSA's OGA, large municipalities like Lima, or long established entities such as CONFE, the DISA-Lima Norte, the Instituto de Salud del Niño or the UGEL, Lima and Callao), the more decentralized the budget or program the weaker the capacity to implement it. Neither the procurement law nor CONSUCODE's implementing guidelines are applied consistently. In fact, many transactions are off the Auditor General´s radar screen as the external control system fails to adequately capture procurement processes and transaction outcomes at small-scale, decentralized levels. Mirroring a situation common throughout the public sector, much of the procurement staff has no tenure and is contracted on a consultant basis and as such enjoys no possibilities for career advancement or incentives. However, more encouraging examples exist in some of the decentralized entities (e.g. CONFE, OGA-MINEDU, OGA-MINSA, and SISMED) that could be further developed and replicated throughout the sectors with CONSUCODE's coordination and substantial technical assistance. 29. This responsibility may also be delegated but not to the Special Committee. 30. For example, COMPFE plays key roles in managing specific programs such as the Programa de Educación Básica para Todos, the Huascaran Program. 8 B. The Regulatory Framework 2.14 In addition to an explicit constitutional requirement for public bidding (Art. 27 of the Constitution of Peru), public procurement is regulated by the Government Procurement and Contracting Law31 and its implementing Regulations.32 A separate set of instruments applies to concessions and includes two supreme decrees33 and various laws for individual sectors. In addition, rules affecting procurement are found in budget laws. 2.15 The Procurement Law and Regulations, which became effective in December 2004, apply with no exceptions to contracts by all public sector entities. This new regulatory framework represents good progress in many areas; regardless, there is considerable room for improvement of specific provisions aimed at reducing inefficiencies and final costs of goods and services; broadening the basis for competition; and increasing transparency, economy and efficiency in management of procurement. Effective improvement in the national competitive scenario could be made by allowing foreign bidders to participate in the public bidding process for works. Additionally, registration of local and foreign suppliers in the Registry -other than the one being developed under SEACE- could be made mandatory for contract signing. The participation of said suppliers may actually help broaden the basis for competition in procurement processes and aid in the attainment of savings in procurement of works, goods and services. It is important, however, to keep in mind that the current use of price bands for bid evaluation does not necessarily ensure the selection of the lowest price bid and the utilization of point systems does not exclude subjectivity in the evaluation of bids. With regard to granting of preferences to MYPES, the system could be improved by establishing the use of more objective criteria in market and production areas in which MYPES have clear comparative advantages and where the same entities' fellow suppliers exist in sufficient numbers to ensure broader competition and lower costs than those offered by other less competitive suppliers. 2.16 The Procurement Law contains various provisions that are inconsistent with established international practice and the requirements of the two Banks34. Moreover, it is unclear whether the regulatory framework, enacted as of December 2004, provides for the primacy of legal agreements with financial entities over the local legislation in case of conflict between the lenders' procurement policies and local rules.35 A detailed commentary of the legal framework for procurement is included in Annex II. 2.17 Peru and the USA are coming to a closure in the negotiation process for a Free Trade Agreement. Procurement has already been discussed in several negotiation rounds in which Peru and the other Andean countries have been focusing, inter alia, on the thresholds upon which the agreement's requirements would apply (granting the other party's bidders free and open access to the domestic procurement market) and the agreement's coverage. Negotiations also included the elimination of preferences, inclusion of rules that safeguard non-discriminatory treatment for the other party's suppliers, and consistent enforcement throughout public institutions. Both governments agree on the need to compromise on limited exceptions, given that it is in the 31. Ley de Contrataciones y Adquisiciones del Estado (Decreto Supremo No. 083-2004-PCM). 32. Decreto Supremo No. 084-2004 -PCM 33. Decretos Supremos Nos. 059-96-PCM and 96-060-PCM 34. For details, see Annex II, Section II. 35. While apparent contradictions exit in other provisions, there is a requirement that the lender finance at least 60 percent of the contract and that the rules of the lender be consistent with domestic law. 9 interest of both parties to protect politically sensitive sectors. Clearly, the final agreement will require further amendments in the domestic regulatory framework to ensure consistency between the two sets of rules. 2.18 The objective of the Concessions Law and Regulations is to promote private investment in public works for infrastructure and public services and other Public-Private partnerships (PPPs). Due to macroeconomic constraints,36 the government is engaged in promoting private investment through PPPs; long-term project investment needs have been estimated at approximately $18 billion in the roads, electricity, gas, communications, water and health sectors, while the total value of short- and mid-term project investments is approximately $1.5 billion. The multilateral community is supportive of the Government initiative to implement a transparent and orderly process of PPPs37. Due to the significant value of investment transactions foreseen in the future, it is recommendable to review the legal framework so that increased conditions of transparency and competition in bidding processes --which is the only instrument available for implementation of PPP processes-- can be ensured in the absence of a broader framework Law. 2.19 A central government agency, PROINVERSIÓN38, is generally responsible for identifying projects, awarding concession contracts, and deciding on how to select the concessionaire. However, it is not clear in the regulatory framework whether PROINVERSION has a mandatory role in the selection of the concessionaire or if the sector agencies can proceed independently. 2.20 Despite the fact that sector laws do not require competition, the Concession Law provides for two selection procedures. However, few details are provided on said procedures and it is unclear when they are to be used.39 According to the Law´s provision, the award criteria should be specified in the bidding documents and granted according to the "technically and economically most convenient bid". Different types of concessions and Public/Private participation projects are not well defined. 2.21 The Concession Law and Regulations require that bidders deposit a 1 percent guarantee in order to submit a protest -- a significant amount given the average size of concessions. This condition may act as a disincentive for bidders wishing to access this important right to review.40 Finally, different procedures apply to sub-national governments. The Concessions Law provides 36. In 2004, public investment in Peru reached only 3 percent of GDP; in infrastructure said investment was less than 1 percent of GDP- one of the lowest in the region. Peru also faces challenges related to levels of indebtedness and fiscal restrictions, making it impossible to significantly increase public investment. 37. The multilateral banks are supportive of PPPs processes through issuing of project-specific and global guarantees for project stocktaking. While recognizing the importance of promoting investment through PPPs, there are significant risks relating to the opportunity costs of implementing projects with use of PPPs and to likely contingent arrears. In this respect, IADB is supporting the GOP to implement reforms aimed at improving policy framework (e.g., legislation, regulation, fiscal accounting, transparency); public management, and public spending quality and oversight, at the central and regional levels. 38. PROINVERSIÓN = Agencia de Promoción de la Inversión Privada (Agency for the Promotion of Private Investment) 39. Licitación Pública Especial - Special Public Bidding, and Concurso de Proyectos Integrales - Selection for Comprehensive Projects. 40. Only the award of contract may be challenged and objections can be raised exclusively at the moment of award presentation. The body making the decision is a PROINVERSIÓN Special Committee. This entity is also the last administrative review instance. 10 60 years as maximum duration of a concession, but does not specify if such limit includes or allows contract extensions. Finally, it should be noted that different procedures to award concessions may be found in sub-national governments. Given that a significant proportion of investment needs with the use of PPPs is required by sub-national governments, any legal reform should be able to ensure consistency throughout all government levels, taking into account existing differences in capacities among them. 2.22 Detailed commentary on the review of the legal framework for procurement is included in Annex I. 11 12 III. MANAGEMENT OF THE PROCUREMENT FUNCTION 3.1 Institutional Vision Alignment. Important progress has been made towards improving public procurement since the last CPAR in 2001: CONSUCODE has been strengthened; e-GP implementation has begun; and important amendments have been made to the procurement law and its regulations. Another positive development is the increasingly active and organized participation of civil society in overseeing public procurement, as discussed above. Overall, the progress since 2001 is commendable considering that these achievements were driven mainly by the political will of the authorities and donor technical assistance, with the notable absence of policy based lending to promote the reforms. 3.2 Nevertheless, the period was marked by the absence of clear leadership at the central ACTIONS RECOMMENDED IN THE 2001 CPAR level and a Government global strategy on how Achieved or Partially Achieved to move forward with the necessary reforms. 1. Establishment of an electronic procurement system Most agencies involved in public procurement (partially achieved). have a vision restricted to their own short and medium-term objectives without a clear 2. Alignment of the procurement legislation with connection with the overarching objective of international practice (partially achieved). making the overall Government procurement 3. Establishment of a training program for government system more efficient and effective. In fact, at procurement officers (partially achieved). the highest institutional level, a Government 4. Strengthening of technical capacity of entity / group with strong political support to CONSUCODE (partially achieved). conduct the procurement reforms in a coordinated, consistent and integrated fashion is 5. Development of Conciliation and Arbitration System. missing. These problems result in poor institutional coordination and overlapping Not Achieved actions among institutions. This in turn, 6. Preparation of Standard Bidding Documents wastes valuable time and generates unnecessary 7. Development of legislation for selection and costs. This lack of coordination had caused contracting of consultants significant delays in the implementation of the e-government procurement system. There is a 8. Development and implementation of a Code of Ethics for procurement officers. need to provide decisive leadership that is capable of coordinating the global performance 9. Improvement in procurement planning practices. of all agencies involved in procurement reform 10. Establishment of a national professional formation and modernization activities. This leadership program in public procurement. must be bound together by a common vision and clearly defined short- and mid-term 11. Establishment of procurement training programs for objectives. Once a single vision is achieved, it the private sector. will facilitate the determination and 12. Establishment of training programs for the private development of individual agency objectives. sector on public procurement matters. 3.3 Addressing Gaps, Overlaps, and System Fragmentation. There is a need to address deficiencies, make them right and fill in the gaps -perceived or real- of performance within key institutions. For example, there seems to be an overlap of responsibility for certain functions between CONSUCODE and the Auditor General. Several different government agencies have already identified the need to address said system deficiencies. A complete mapping of the 13 different agencies' public procurement duties would be a useful first step to better define and address gaps, overlaps and potentially conflicting roles. 3.4 The large number of procuring entities (2,506) involved in public procurement, each with independent responsibilities for process management, poses a significant challenge for the consistent application of the system. The disproportionate reliance on ex-ante control, the lack of standard documents, and the excessive emphasis placed on procedural compliance over effective monitoring of the consistent implementation of procurement policy has contributed to a proliferation of procurement practices. This has bee particularly evident in regional governments, where decentralization has tended to accentuate fragmentation. 3.5 CONSUCODE, MEF and the Auditor General have ambitious agendas but need substantial technical assistance to broaden their visions beyond the institutional agenda and focus on the national objective of improving overall budgetary planning, procurement and expenditure efficiency. These agencies need funding to meet their objectives in light on this new, expanded vision. For example, CONSUCODE's outreach programs to sub-national governments are primarily oriented to the dissemination of the legal aspects of public procurement and falls short of producing toolkits and hands-on assistance that may effectively contribute to reducing management risks and increasing agency capacity throughout the procurement administrative cycle (i.e. with respect to budgetary planning and execution cycle, bid evaluation, contract drafting, supply management, etc.). The necessary assistance could be arranged through existing or new operations financed by the Banks, but the scope and nature of the assistance needs to be developed and tailored in detail. 3.6 The Control Culture. The anti-corruption strategy tilted heavily towards detection and prosecution and less attention was given to prevention. This contributed to the consolidation of a control culture throughout the relevant government agencies. Considerable time and money have been spent on investigations and prosecution with limited results in terms of conviction and punishment of the parties who allegedly engaged in corrupt behavior. The backlog of cases to be prosecuted is constantly increasing. 3.7 Government agencies charged with control and enforcement functions contend that the need to establish a "zero tolerance" culture to counter the legacy of past scandals and respond to public expectations resulted in this unbalanced strategy, but that the climate is now ripe to begin shifting the emphasis to a preventive approach. As part of the Comptroller's Office's strategic plan for 2004-2006, this entity is implementing an anti-corruption initiative ­which involves cooperation and information exchange with local private sector and other relevant civil society groups- focused on activities aimed at the prevention and reduction of corruption risk through a continuous monitoring of management processes and the provision of guidance to public agency officials involved in procurement. 3.8 However, the system is still designed to force compliance through ex-ante control rather than relying heavily on the establishment and promotion of more transparent practices and more effective procurement management, implementation of risk reduction systems, and the construction of capacity. Finally, the presence of complex and highly legalistic processes combined with strict personal and financial liabilities for public servants created a climate of fear that often paralyzes decision making. 3.9 This control approach has been necessary due to the lack of tools to facilitate the implementation of an efficient and transparent procurement system (e.g. effective internal 14 controls, standard bidding documents, a fully developed e-procurement system, specific rules for consultant selection, a monitoring and evaluation system, and a procurement code of ethics); nonetheless, its permanency over time may adversely affect the overall efficiency of procurement in public sector. 3.10 The 2001 CPAR stressed the need for both CONSUCODE and the Auditor General to strengthen their capacity at the central and municipal level. This has been achieved, in part, by adding new staff, opening regional offices of the Auditor General and an agreement with CONSUCODE that allows the latter to leverage on the Auditor General's regional presence to increase its own outreach. However, when it comes to policy oversight and enforcement, CONSUCODE's functions are not clearly distinguishable from the external control of procurement processes belonging to the Auditor General. This is due in part to CONSUCODE´s use of ex-ante supervision tasks in procurement processes. This type of supervision privileges compliance with legal requirements instead of emphasizing qualitative follow-up and analysis functions in order to facilitate the assessment progress achieved and impact on procurement reform to continuously improve policy design by building upon outcomes and lessons learned. These overlapping roles limit CONSUCODE's ability to focus its efforts on its regulatory and capacity building mandates and develop the key tools discussed above. Some of these tools (e.g. an e-procurement system which appropriately interfaces with SIAF, standardized bidding documents) could also be utilized by the Auditor General from its own perspective to streamline external control and make it more efficient. 3.11 Aggregate Purchases. There consensus exists in the Government concerning the importance of expediting a program that aggregates purchases (compras corporativas) of high volume items (stationery, fuel, etc.) for several agencies under contracts implemented by only one procuring agency. In July of 2005. PCM enacted Supreme Decree No.046-2005-PCM, establishing a pilot mandatory regime for the corporate procurement of certain goods and services. The decree also designates the public agencies responsible for designing the technical specifications and features of said goods and services, and creates a total of 3 Procurement Units reporting to and coordinated by PCM. 3.12 An in-depth assessment of the current purchasing and contracting strategy and a cost/benefit analysis of streamlining it to increase efficiency is urgently needed. Another pressing need involves using the current supply chain management system and international, national, and local market structures (competitiveness, supplier's reach, government purchasing power, largest suppliers, etc.) to underpin strategic decisions. It is essential that the Government identify the areas and procurement item groups where it intends to pursue aggressive cost reduction strategies, prioritizing those with the greatest expected impact in consideration of risks and barriers, before implementing a streamlined purchasing strategy. Both the current regulatory framework and implementation vehicles/methodologies such as e-procurement could be conducive to the successful implementation of this strategy, provided that certain safeguards and improvements are introduced. The Banks recently delivered a high level study of the current supply strategy to the Government with proposals to realize quick savings. This assessment should serve as platform to launch a detailed study (i.e. to include complete details on objectives, scope, content and cost of the comprehensive study and the technical assistance required to implement the recommendations), and begin building consensus on the revised strategy. 3.13 The Office of the Prime Minister is coordinating the first round of framework contracts. Article 90 of the Regulations stipulates the entity's ability to determine the list of goods and 15 services that must be procured through corporate procurement. It also indicates the agencies involved and the Government Procurement Unit responsible for corporate procurement processes. For future rounds, an agency that is not involved in policy generation or control functions must be formally designated to develop and administer the contracts in question. 3.14 Electronic Procurement. The Government of Peru (GOP) is in an initial stage of adopting a national electronic Government Procurement (e-GP) program with corresponding benefits in terms of increased economy and efficiency. A single website for the publication of procurement information with simple format procurement notices is already operational and generating savings for the government. The rules and functionalities of the e-GP system are still under development. CONSUCODE was assigned the responsibility for the development and implementation of the e-GP program. Based on the e-GP readiness assessment tool of the Multilateral Development Banks, Peru's e-procurement strategy is on the right path. Although there is still a high level of information duplication given that agencies frequently publish the same information on their websites, Peru has created many of the necessary foundations for successful e-GP implementation. 3.15 The IDB is financing a project that supports the implementation of the e-GP program. The first phase of the project has focused on information and involves setting up the procurement information publication system. Currently SEACE, CONSUCODE's website, publishes 40 percent of GOP agencies procurement opportunities and 100 percent of procurement plans as well as GOP procurement policies and procedures. However, SEACE will need to expand its coverage as it does not currently include municipalities. 3.16 The objective of the next phase of the project is the introduction of e-purchasing through price quotations. The GOP estimates that this phase will generate annual savings of NS100 million (US$30 million). Approximately 80 percent of procurement occurs in Lima where connectivity does not appear to be an issue. In addition, the widespread availability and use of "internet cafes" in the urban and rural areas provide extensive internet coverage throughout the country. A summary of the Electronic Government Procurement Assessment can be found in Annex II. 3.17 Capacity Building to Administer Procurement. The demand for budget planning, procurement, and financial management training in the public and private sectors is staggering. There are 2,685 public entities subject to the budget and procurement laws (860 central government agencies, 24 departmental governments, and 1,800 municipalities), and about 40,000 Peruvian government officials are involved in procurement at various levels of government. Some 180,000 individuals or corporations are legally registered as private suppliers. Of these, approximately 137,000 are small and middle size companies with very little knowledge of procurement processes.41 3.18 To increase the level of professionalism in public procurement, it is essential to complete the reform of the civil service and intensify training of procurement officials at all levels of government. In addition, budgetary and financial management expertise needs to be strengthened, particularly at the sub-national levels of government. Without civil service reform, training will continue to take place in an environment that lacks quality control of the staff's qualifications and performance and which is in need of incentives for employees to increase their 41. These figures reflect the total number of government and private professional staff that would require training in procurement. Data provided by CONSUCODE during the data and fact finding mission in January 2005. 16 knowledge and productivity. Presently, there are no minimum qualifications required to be a government procurement official. The absence of a well established career path for procurement officials and the lack of a structured civil service create vulnerabilities for employees and increase the risk of undue political pressures to bend the rules in exchange for keeping jobs. Moreover, the high rotation of technical staff prevents consolidation of institutional knowledge and makes it impossible to create a well qualified cadre of procurement officers. As a result, there is limited knowledge throughout public administration on key aspects of the procurement process, including: coordination of procurement planning with budgetary planning and execution, the evaluation process and contract administration, which in turn produce a proliferation of inconsistent practices. 3.19 There has been a significant increase in the number of training opportunities over the last five years. CONSUCODE has played a key role in this area by training more than 48,560 people (including government officials and private sector representatives) during 376 training events. USAID financed a project known as "Transparencia en las Adquisiciones Estatales" and has spent $1.3 million on developing a training program for municipal and regional governments in seven departments (San Martín, Cusco, Junín, Huánuco, Ucayali, Ayacucho and Pasco). The project has produced manuals on the procurement law, trained trainers, and held 37 events for 1,209 municipal officials and 585 regional officials. Other significant efforts include a pilot project known as "Diploma in Procurement," which is being jointly developed by CONSUCODE and the University of Lima. 3.20 In addition to CONSUCODE, potential training providers are the Auditor General's National School of Control, the NGO "Instituto Pueblo y Desarrollo", the Construction and Management Institute, the Peruvian Engineers' Association, the Lima Bar Association, the Lima Chamber of Commerce, the Chiclayo Engineers' Association, the Arequipa Engineers' Association, the Huancayo Chamber of Trade and Industry, and the University of Lima, which offers a one year graduate degree in "Strategic Management for Government Procurement." There are also frequent procurement workshops and round tables sponsored by different organizations. In the context of decentralization, these capacity building efforts require better coordination and specific tailoring to address the needs of sub-national governments. 17 18 IV. CONCLUSIONS AND RECOMMENDATIONS 4.1 There are a number of actions that are not controversial, do not require legal or institutional changes, and can be readily implemented in the short-term. These actions could help reduce fragmentation, facilitate monitoring and system development, mitigate the present service delivery inefficiencies, and create more fiscal space and transparency in the use of public resources. 4.2 The uncertainty about the elections in May 2006 and a highly fragmented political structure (13 registered parties and 16 unregistered) pose a serious risk that procurement reform and other important public sector reforms will be placed on the "back burner". In order to be realistic, the action plan should take into account the complexity of implementing further legal and institutional reforms in this political climate. In addition, it is very important that comprehensive procurement reforms be coordinated with the broader public sector reforms currently underway, particularly in the area decentralization. 4.3 However, given the considerable progress made by GOP since the last CPAR in creating the conditions to improve public procurement, it is also critical to ensure that the pace of the reforms be sustained beyond this government and into the next in order to consolidate gains. In spite of the political challenges facing the government, the present environment (recent progress in new legislation, increasing civil society interest and willingness to support a coherent agenda to reduce waste and corruption) represents a window of opportunity for the government and the donor community to engage key political actors (politicians, private leadership, CSOs, media, etc) in the dialogue on procurement reform and vigorously promote a comprehensive reform agenda in the medium/long-term. While the following short-term actions may result in quick gains and as such should be implemented on a priority basis, the policy dialogue on medium and long/term actions should also be initiated immediately using the next 18 months to build broad- based support for change and supplement the short-term agenda with a medium-term Action Plan (to be implemented by the next government) to provide continuity and consolidate the gains of this period. A. Short-term Actions Bring key participants and stakeholders to agree on a common vision and a comprehensive strategy for the reform, including an agreement on clear leadership arrangements to ensure the coherence and continuity of procurement system reforms in the mid- and long-term. 4.4 A lack of clear leadership, vision and common objectives to be pursued by pertinent public agencies led to the implementation of isolated and individual actions. Much time and energy is being lost in delimiting areas of competence, deciding who does what; and solving conflicts among entities. 4.5 At the workshop conducted on September 8-9, 2005, with a view towards discussing the recommendations included in the report and the future work program, consensus was achieved with regard to the creation of a Steering Committee to be comprised of representatives from key entities under the overall responsibility of PCM. The committee's role must be defined in detail but in principle it would have the following functions: 19 a. Confirm the vision and objectives for the local procurement strengthening program at the short-, mid- and long-term; b. Establish a detailed action plan to achieve the objectives and implement the report recommendations; c. Determine the distribution of responsibilities amongst the various government agencies involved, the implementation timeframe and specific benchmarks to achieve in each case; d. Periodically assess the progress achieved and introduce modifications in the plan as needed; e. Coordinate tasks in order to ensure as much synergy as possible among all participating actors; f. Serve as a communication channel on reform issues for other government entities and the general public; g. Decide on issues on which consensus among all participating agencies is not attained. 4.6 The Committee could be temporarily expanded through further incorporation of other institution members as appropriate. At a minimum, PCM, CONSUCODE, MEF and CGR would be members of the Committee. Among other activities, this group would provide coordination on state reforms and modernization programs, e-government and other efforts that are relevant to procurement reforms. One of the initial tasks for this leading group would be to outline the overall duties and responsibilities of the main agencies involved (whether assigned by law or carried out de facto) in order to resolve any gaps or overlapping functions. Emphasize prevention. 4.7 CONSUCODE and other control institutions need to place more emphasis than they have in the past on prevention of bad practices and abuses. Currently, the disproportionate emphasis on control tasks and legal compliance with procedures brings about a limited impact on the change of culture and on the promotion of higher ethical standards in public procurement. Mechanisms that stress stronger internal controls based on a comprehensive risk prevention strategy must be implemented on a priority basis and a management strategy should replace a largely extended ex-ante control system. Additionally, a national anti-corruption policy consistent with pursued objectives of prevention should be adopted. 4.8 A clearer separation between the roles of control, policy making and supervision is needed, with more resources allocated to the latter objective. The review of procurement processes performed by CONSUCODE should place less emphasis on compliance with legal requirements and, consistent with the reform objectives, concentrate more on quality supervision, performance evaluation, progress and the impact achieved. The system´s capacity to create value for money should also be carefully examined. With the aforementioned in mind, a consensus was reached during the workshop to produce an urgent recommendation in the report to compel CONSUCODE to develop and implement management indicators to measure the procurement system´s performance. The Banks provided CONSUCODE with a tool to design and implement 20 baseline indicators with which to monitor and supervise the quality and performance of the procurement system and procuring entities.42 These indicators should facilitate the establishment of a baseline for the continued monitoring of the procurement system and the progress achieved during the implementation of reforms. The consensus is that CONSUCODE should take on this supervisory role. Moreover, this supervision should include a systematic analysis and evaluation of bidding processes to determine the existence of unnecessary procedures or delays that can be avoided and to improve efficiency in procurement management. The Bidder Registry system needs a comprehensive review and more robust financing mechanisms for CONSUCODE's functioning. 4.9 CONSUCODE's budget is primarily based on service-generated income. Its most important revenue source is the Registry fee (equivalent to 80 percent of CONSUCODE's total annual budget; the same is expected to increase to 87 percent in 2005, and is likely to exponentially multiply in the next 2 years given that goods and service suppliers must also register). During the workshop, it was confirmed that more robust financing mechanisms for CONSUCODE were needed given that currently any changes in the supplier registry make CONSUCODE's financing vulnerable. The participants agreed that an in-depth study of the entity's corporate program, including costs, a timetable and likely alternative sources of financing must be performed. Said study should assess the sustainability of each financing source, its related risks, advantages and disadvantages. It was noted that among available options, COSUCODE should be given preference as a public service fully financed by the Government. 4.10 Currently, the National Registry system includes a pre-qualification procedure based on criteria not always relevant or adequate to purposes intended, such as the establishment of contractor categories that require the presence of a firm representative. As of 2006, the physical presence requirement will be applied to all firms (to date this requirement applies only to construction and supervision firms). It should be noted that given CONSUCODE's actual capacity, the entity could face difficulties in maintaining the Registry updated. If the National Registry continues to exist, the following must be avoided: a) it becomes a barrier to competition and; b) duplicates other systems currently in place. The first issue is critical to ensure open competition, and is particularly important to enable the participation of foreign suppliers and contractors in a manner consistent with international commitments agreed or to be agreed, as part of the negotiations of free trade agreements. In this respect, CONSUCODE stated that in order to participate in a competitive bidding process a potential bidder may actually register via Internet with the use of streamlined, inexpensive procedures and submit relevant supporting documentation later on. Regardless, it is necessary to continue improving the system until registration as a bidder, which is currently only permissible at the beginning of the process when potential participants are registered, can take place any time before contracts are rewarded. Consistent with e-government initiatives currently led by PCM, it has been agreed that the National Registry System can be integrated with other registry systems such as the National Registry of Companies or the National Taxpayers Register for bidder registration purposes. 42. The tool was developed by OCDE-DAC/World Bank for the Consolidation of Procurement Capacity in Developing Countries and evaluation of key elements of a satisfactory procurement system. 21 4.11 Overall, assigning bidders categories for participation in tendering processes -based on a pre-qualification, or post-qualification system, or pre-determination of bidder capacity- has proven not to be a good practice. The extent to which discretionality may be used is high and the risks of abuses are significant. Therefore, the Registry's purpose should be limited to the verification of suppliers' real or apparent existence and their eligibility for contracting with public sector agencies. The bidders' contracting capacity should be determined ad-hoc by appointed Bidding Committees on a case-by-case basis through the use of pre- or post- qualification system, as international practice largely suggests. Accelerate the development of the e-government procurement system. 4.12 In order to achieve expected savings, the potential of an e-government procurement system requires substantial development up to post-implementation and beyond. To this end, it is necessary to develop an e-procurement strategic plan that encompasses all technical and institutional issues, and includes an implementation timetable and an operations plan for system financing43. Costs associated with the implementation of temporary solutions should be avoided in favor of using allocated resources to create simple and viable e-procurement solution for the entire public sector. CONSUCODE and MEF should work together to agree on system requirements and processing. Also, it is necessary to clearly define MEF's information requirements for monitoring purposes along with communication standards for information transfer by CONSUCODE so as to ensure consistency and a full interface between budget information and procurement. In developing SEACE, auditing needs must be taken into account and due coordination with the Comptroller's Office must be made to enable this entity to utilize the system for monitoring and control purposes. Adopt basic implementation tools. 4.13 There is an urgent need to develop standard bidding documents and user manuals for use throughout the system. CONSUCODE should produce a suite of standardized bidding documents and user manuals need to include good practice guidance. In addition, CONSUCODE should prepare and disseminate tool kits for local governments with templates of the documents and other tools that are most frequently used in the local procurement processes. Finally, CONSUCODE should develop a procurement monitoring and evaluation system to assess progress on implementation of procurement and budget plans, the impact of the reform, feedback lessons learned and outcomes of the policy making process. It is necessary to accelerate procurement training in critical areas. 4.14 In the short term, it is important to provide training in procurement planning, development of skills for managing procurement processes without deviations, and basic logistics for procuring agency staff. In the mid- and long-term, the use of previously subscribed agreements with qualified academic institutions and professional associations should be promoted for the implementation of training programs in procurement management. 43. A more complete list of related issues on e-GP systems can be found in the IADB web site: www.mdb- egp.org. 22 The current government's purchasing strategy should be streamlined to make it more efficient and cost effective. 4.15 The complete expenditures profile of the Government should be assessed including, as a minimum, expenses by category (e.g. salaries, debt payments, mandatory tax revenues transfers, investments, procurement, etc.), government agency; and procurement item group (e.g. civil works, hospital/medical services, hospital/medical equipment, IT equipment and systems, legal services, administrative support staff, printing, vehicles, telecommunications, etc.) Procurement item groups, which represent the largest share of the government's procurement expenditures, should be identified and the most efficient procurement methods to improve the economy in the selected item groups further assessed. This assessment would include aspects such as risks and opportunities, time, ease of activity implementation, and technologies available in the regional marketplace and elsewhere. 4.16 The assessment should focus on Purchasing Systems (PS) as well as the Supplying Market (SM). The analysis of the procurement arrangements for the selected item groups should assess the needs and requirements of management and users of said items and identify improvement opportunities to reduce costs (including, for example, procurement volumes, prices, present and future demand, suppliers' competitiveness, evaluation criteria, restrictions, specifications, and processes. The review of the Supplying Market (SM) should include an analysis of factors such as the national and local market structure, the government share of the purchasers market, relevant technologies and market competitiveness. The Government procurement strategy should also consider the impact of the strategy in question on mid- and small-capacity suppliers so that a trade-off in terms of economy and efficiency can be attained without adversely affecting this sector. 4.17 For the implementation of mandatory corporate procurement, it is recommended to appoint an entity--not engaged in regulatory or policy design functions--with the technical capacity and political leadership necessary to design and coordinate a comprehensive coherent strategy. This entity should also have the authority to call and group together the greatest number of purchasing entities to purchase relevant items in order to achieve the greatest cost reduction. Additionally, it should act as a Central Procurement Agency to ensure: an adequate standardization of goods and services to be procured; a broad level of competition; the efficient coordination of procurement processes; a consistent application of procurement procedures; an effective workload rationalization among procurement entities involved; and compliance of agencies involved in corporate procurement processes with contractual commitments agreed upon with awarded suppliers (see Annex III). B. Mid-Term Actions The regulatory framework needs to be further improved. 4.18 Both the Procurement and Concessions Laws should be amended to harmonize them with established international practice and agreements, promote competition, and reduce both subjectivity in the evaluation of proposals as well as other sources of inefficiency and unnecessary costs. One of the key drivers to further reform the procurement law is the need to ensure consistency with the trade agreement currently being negotiated with the United States. Appropriate legal reforms may also enable the eventual use of the country system for the 23 implementation of operations financed by the Banks and would facilitate compliance with international trade agreements. 4.19 The government should draft the recommended amendments to the laws and regulations and discuss the viability of obtaining Congressional approval as soon as possible. The specific objectives of these amendments should be, inter alia to: a) eliminate unnecessary barriers to participation; b) eradicate uncertainty and incorporate more objective criteria for evaluation of bids, c) streamline processes; d) eliminate preferences or reduce them to a minimum; and e) simplify the Law by including only basic principles while leaving the details to the body of regulations. 4.20 With respect to concessions, the Government of Peru should first adopt a more comprehensive strategy and clearer policies (e.g. on concessions methods and selection procedures), so as to ensure consistency of application across different sectors and government levels and compatibility with other local laws (e.g., use of a deposit for protests). It is suggested to give consideration to the use of a pre-selection or pre-qualification system and two-stage bidding. An amendment to the Concessions Law would support this policy and allow for increased clarity and coherence with established practices, laws applied in sectors, and with other governing principles and applications at sub-national government levels. In the mid-term, the Government should give consideration to a broader strategy such as a Framework Law for Public Private Partnership (PPPs) due to its incremental utilization, variety of forms and application beyond the infrastructure sector. A more effective partnership with civil society should be developed to tap its expertise for policy development and social audit initiatives, and implement an effective communication strategy on the importance of the procurement reform. 4.21 A broad cross-section of civil society actors interviewed by the CPAR team cited many constraints to a transparent and efficient procurement system that are consistent with those discussed in this report. This clearly suggests that public procurement is a major issue on these actors´ agenda. A better partnership with civil society may help rekindle the intense and productive dialogue of the early days of the administration and supplement the ongoing reform effort. There are various ways in which civil society can be engaged constructively by the government including to: · Promote Good Governance. CSOs can assess and recognize good practices in government. · Monitor Procurement. CSOs conduct social audits of public agencies at the national as well as regional and local level, examining public management issues. · Conduct Research, Surveys, Risk Maps. CSOs conduct research upon which to base policy recommendations. · Compile Data Bases. CSOs gather and post Internet information on procurement. · Prepare Proposals for Change. Based on their research, surveys and data bases, CSOs can prepare proposals for change. · Provide Training Options. CSOs could provide training to complement current programs run by CONSUCODE and other institutions. 24 · Organize Conferences and Workshops and Conduct Campaigns. CSOs regularly organize conferences that promote policy dialogue and bring together public officials with citizens and CSOs; they also conduct a variety of campaigns to increase citizen and public official awareness about relevant procurement issues. · Promote Strategic Alliances. Given the largely technical focus of procurement, strategic alliances with CSOs would help inform both politicians and citizens of the importance of procurement and the government's efforts to improve it. · Design Integrity Pacts. CSOs can draft integrity pacts aimed at increasing transparency and integrity in public and private sector institutions. 4.22 The communication strategy should be twofold, taking into account that different stakeholders have different interests and objectives. On one hand, the strategy should focus on the stakeholders who are directly involved in the procurement process: the government and the contracting community. On the other, it should mobilize the support of civil society organizations, the media and politicians. 4.23 The media play a critical role in Peru and any legal, political, social, or institutional reform requires wide and consistent media coverage and support in order to be effective. It is essential to generate interest in the procurement reform within the serious press. This requires a focused communication and capacity building effort focusing on high level social and economic aspects that are easy to explain to the public, rather than concentrating on technical and legalistic aspects (for example, the coverage should focus on examples of potential savings and how these savings could be reinvested). Developing a cadre of journalists who understand the subject well is as important to generating support for the reform as creating a corps of procurement professionals within the public administration is to ensuring that the reform is implemented. 4.24 Pamphlets, television and radio spots and other informational material should be specifically tailored for this purpose. Messages focusing on procurement within social sectors would be particularly effective. Indeed, the Ministry of Education could be an effective partner in the communication campaign. Universities, professional and business associations could also be very important players. Topical workshops should be held to explain to politicians the objectives and benefits of the reform, including the potential political capital that can be generated. 4.25 The communication strategy, including the use of media, must be tailored to local capacity and interests. Clearly, the strategy for Lima needs to be substantially different from efforts to target small municipalities. For example, in Lima, television is likely to have the most impact. Newspapers are also important because people who tend to be more educated and involved in public life read them. However, newspapers have relatively limited circulation. In the majority of provinces, the radio is the most influential media. 4.26 It is important to forge alliances with the media and journalists who have strong credibility with the widest, most diverse audience and political clout. These include, for example, the newspapers La República, El Comercio, Perú 21, and Correo y Gestión. The latter has limited circulation, but is read by many businessman and professionals both in the public and private sectors. There are several radio and television stations (e.g. Radio Programas del Perú and Corporación Peruana de Noticias) that would be effective in Lima and the major cities. The 25 local stations and programs with the greatest potential impact should be identified in each province. C. Long-term Actions An adequate human resources infrastructure should be created. 4.27 The civil service reform will need to ensure the stabilization and professionalization of a public procurement career and the professional development of public procurement specialists. In addition, the training demand is increasing dramatically as decentralization progresses and can be fully met only through effective partnerships between CONSUCODE and other public and private sector providers, as discussed above. CONSUCODE has indicated its keen interest in continuing to promote partnerships with relevant actors. As a starting point, it seems convenient to carry out an assessment of training activities performed to date not only in terms of procedural issues but also in terms of procurement management and impact on public procurement. In the very least, the assessment should provide a baseline to measure future training results (rather than the number of trainees) and can contribute to improving strategy definition, methodology and instruments of intervention. Decentralization should be facilitated by a combination of actions aimed at simplifying requirements, maximizing limited human resources, and building capacity in local governments. 4.28 While a massive capacity building effort in each provincial government would not be efficient, an appropriate capacity building strategy to support decentralization may include alleviating the burden on the weakest local governments by simplifying requirements; facilitating voluntary associations of municipalities that share procurement resources; creating toolkits of standard procedures and guidelines appropriate to local procurement; focusing training efforts on provincial municipalities which, in turn, could assist smaller local governments in their procurement; and better coordination of efforts of all involved agencies- including the National Decentralization Commission (CND) and CONSUCODE- and donors. The same leadership group responsible for coordinating the procurement reform initiative could provide overall coordination for this effort. 4.29 It is critical to review the nature and scope of processes and adopt requirements that can guarantee minimum fiduciary safeguards but are appropriate to the type and size of municipal budget, procurement, and financial management needs. The objective should be to put on hold or postpone the newly imposed requirements while municipalities strengthen their capacity. In addition, the leadership group should designate an agency to coordinate different donors' initiatives to make them less onerous and more efficient for the local governments. Ideally, this agency would be CONSUCODE where a specialized unit could be created to provide technical assistance and monitor execution of the municipalities' annual plans. A simplified version of the integrated Management and Administration System (SIGA) and of the SIAF could be developed for municipalities. Finally, CONSUCODE should continue its present efforts focusing more on process/practical aspects of procurement as opposed to concentrating primarily on legal aspects. Both the World Bank's Technical Assistance Loan, currently being prepared to supplement the 26 DECSAL III, and existing IADB loans for State Modernization and Decentralization and to Strengthening the Auditor General, could support coordinated and integrated training initiatives. 27 28 ANNEX I. THE REGULATORY FRAMEWORK--DETAILED ANALYSIS I. DESCRIPTION OF THE PROCUREMENT LAW AND ITS REGULATIONS A. Overview of the Regulatory Framework AI.1 Peru's regulatory framework for public sector procurement includes Article 27 of the Constitution, Law 26.850 of 1997, amended most recently on November 29, 200444 (known as the "Ley de Contrataciones y Adquisiciones del Estado", hereinafter the "Law"), and the Law's implementing regulations, ("Reglamento de la Ley de Contrataciones y Adquisiciones del Estado",45 hereinafter the "Regulations"). Additional provisions affecting procurement are included in annual Budget Laws, which establish the thresholds for use of the different procurement methods, and other laws that created various exceptions to the Law and the Regulations. AI.2 Art. 27 of the Constitution requires that procurement of works and goods financed with public funds be carried out by means of public bidding and signed contracts, and contracting of services of the nature and cost defined in the Budget Law on the basis of a competitive selection procedure (concurso público). The Constitution refers to ordinary legislation for the definition of applicable procurement procedures, exceptions, and responsibilities. AI.3 The Law comprises seven chapters and 69 articles. The Regulations are extremely detailed and comprise 324 articles. Both texts include Complementary, Transitory and Final Provisions. B. Key features of the system established by the Law and the Regulations 1. Comprehensiveness and Uniformity AI.4 The comprehensiveness and uniformity of the regulatory framework (i.e. a single Law and one set of Regulations that apply to most procurement of goods, services and works46) are positive features of the Peruvian system.47 However, because of their numerous and very detailed provisions, many of which could be included in lower level instructions or guidelines, the Law and Regulations are not "user friendly" for either procurement entities or bidders. 2. Decentralization AI.5 The procurement system is fully decentralized. Each procuring entity carries out its own procurement and awards and enters into procurement contracts without further authorizations. 44. Pursuant to Decreto Supremo No. 083-2004-PCM, the amendments became effective 29 December 2004, except for the requirement to register in the Registro Nacional de Preveedores (see Art. 8 of the Law) that will become effective 29 May 2005 45. Amended recently by Decreto Supemo No. 084-2004-PCM of 29 November 2004. These amendments became effective 29 December 2004. 46. (Arts. 2.1 and 2.2) 47. Exception include concessions, which are regulated by a separate law, external audits, micro-purchases (under a threshold defined as one tax unit, or "Unidad Impositiva Tributaria"), procurement of food under national programs such as PRONAA and "Vaso de Leche", and procurement by the Peruvian foreign service entities carried out abroad, and other minor items. 29 Each procurement entity must designate a department responsible for procurement and the head of each entity may further delegate procurement functions, although the head of the entity remains jointly accountable for the results of the delegated actions.48 In addition, each entity appoints ad hoc Evaluation Committees (Comité Especial)49 responsible for carrying out all stages of each selection procedure, except for contract signing. No Special Committee is required for small contracts that are directly awarded by the procurement department. The Evaluation Committees' award decisions do not require further authorization. Decisions are adopted by a majority of votes and Committee members are jointly responsible for the strict compliance with the law and for any irregularities that may occur during the procurement process.50 3. Agency responsible for Procurement Policy Formulation and Oversight AI.6 CONSUCODE51 is established by the law as the regulatory and policy oversight authority. CONSUCODE reports to the Office of the Prime Minister (Presidencia del Consejo de Ministros) and has legal capacity and "technical, functional, administrative, economic and financial autonomy". The President of the Council of Ministers appoints the president of the Consejo for a three-year period, which is renewable. In addition to policy formulation, the entity is responsible for: · Enforcing the law and its regulation and disseminating the same. · Interpreting the law and its regulation and giving advice on procurement related issues. · Resolving procurement protests on appeal. · Operating the Registro Nacional de Proveedores, i.e. the mandatory register intended to measure the capabilities of perspective bidders. · Organizing and administering conciliation and arbitration, although it may not act as conciliator or arbiter. · Suspending bidders from participating in public procurement processes for periods ranging from 3 months to 2 years, on the grounds specified in the law. Suspensions may result in permanent debarment when, in a period of 3 years, the same person or entity receives two or more sanctions that when added together result in suspensions of more than 24 months. · Informing the Auditor General (Contraloría General de la República) whenever it identifies cases of severe incompetence, negligence, or corruption in the exercise of procurement responsibilities. · Supervising procurement processes. 4. Procurement Tribunal AI.7 CONSUCODE administers a procurement Tribunal (Tribunal de Contrataciones y Adquisiciones del Estado) responsible for imposing sanctions and providing a third and final 48. (Arts. 4.2 and 5) 49. (Arts. 23 and 24 and R 41 through 52) 50. (Atr.24). 51. (Arts. 58 through 65). 30 independent instance for resolution of bid protests. The Tribunal comprises various sections (salas) composed of three judges each. The Prime Minister appoints these judges for three-year renewable terms. 5. Bidders' Registry (Registro Nacional de Proveedores)52 AI.8 CONSUCODE administers a mandatory Registry. Registration procedures include an evaluation of the legal, as well as technical, financial and organizational aspects that results in the determination of a maximum capacity of prospective bidders in tendering processes for procurement of civil works or goods. 6. Bidding Documents AI.9 The second Complementary Provision of the Regulation requires CONSUCODE to adopt standardized bidding documents for mandatory use by all public entities. Specific bidding documents are prepared by the Special Committees and approved by the head of each entity. The Law establishes the minimum content of the bidding documents. 7. Basic Selection Procedures53 AI.10 There are four basic selection procedures,54 depending on the estimated amount of the purchase (public bidding, limited bidding, a simpler form of limited bidding requiring a minimum of three suppliers, small purchases, and selection of consultants). Thresholds are updated annually in the Budget Law or set by the National Fund for Public Sector Enterprises (FONAFE) for parastatals.55 Consulting services are selected following a procedure which is almost identical to that used for public bidding for goods and works.56 8. Special Procedures AI.11 There are four special procedures contemplated by the Regulations: · Corporate Purchasing. 57 Several procuring entities may voluntarily decide or be mandated to consolidate their procurement processes for certain goods or services with the purpose of obtaining better prices through economies of scale.58 · Reverse Auction.59 Under this procedure, procuring entities may purchase low value, high quantity standardized goods by auction that may take place electronically or with bidders present. 52. Article. 8 and R 6­17. 53. Articles 14­17 and R 77­R 80 y 97­101. 54. (Arts.14 to 17) 55. Article 11.2 of the Budget Law. However, the threshold amounts for state owned firms are slightly different from those applicable to central and local government entities. 56. When the estimated value of the services is S/. 200,000 (US$ 61,225) or higher. For lower amounts, the procedure is Direct Award. 57. Compras Corporativas. R 88 through 96. 58. When the framework contract arrangement is mandatory, the Office of the Prime Minister issues a Supreme Decree listing the goods or services to be included in the contract, the names of the participating entities, and the entity that will act as the procuring entity. When voluntary, the participating entities define by agreement the rights and obligations of each of the parties are included. 31 · Standard Price Agreement.60 Under this procedure, one or more entities individually or collectively select one or more suppliers of goods or services to provide certain goods or services at a pre-agreed price. However, the award does not constitute a contract to the extent that there is no obligation on the part of the entities that took part in the Standard Price Agreement to purchase the goods or services.61 · Use of Procurement Agents. Under Decree 25565 of 16 July, 1992, entities of the public sector may contract specialized procurement institutions to carry out their procurement procedures. 9. Direct Contracting.62 AI.12 Entities may procure by means of direct contracting in the following cases: (i) Procurement that takes place between entities of the public sector. (ii) Selection of a public services concessionaire in the fields of energy, telecommunication, sanitation or services of a similar nature, to the extent that they include "specific tariffs set by the regulatory authority" and are not "subject to agreements between the procurement entity and the concessionaire." Concessions not complying with these conditions do require the use of competitive selection procedures to select the concessionaire. (iii) "Situations of imminent shortages or of lack of supplies".63 If the occurrence of this event was the result of negligence on the part of an official or officials of the entity, the resolution authorizing the exception must also contemplate the necessary measures to determine any civil, administrative or penal responsibilities of the officials involved. (iv) Emergency situations. These are defined as being caused by catastrophic events, situations of grave danger or that affect national defense. (v) Procurement of a "secret nature, military secret or of internal order" carried out by the Armed Forces, National Police, or entities related to National Intelligence. Goods, services and works must be specifically designated as secret in nature, military secret or as an internal order generated by a Supreme Decree and approved by the Counsel of Ministers. 59. Subasta Inversa. R 175 thorugh 186. 60. Convenio Marco de Precios R 187 thorugh 195. 61. As the Regulations state, "the parties have only agreed to the possibility of making a purchase." The system may be used when: · given the characteristics of the goods or services, frequent purchases may be required; · given the nature of the objects, the amounts required may be difficult to quantify beforehand; · due to certain circumstances it may be more advantageous to purchase by means of periodical supplies with partial deliveries; and · several entities need to be supplied with the goods or services included in the SPA. Entities are even required to check for better prices before purchasing under SPA agreements. The perceived advantage of this procedure is that entities that have adhered to SPA agreements may purchase directly from the suppliers selected under the agreements without having to follow a new competitive procedure. 62. Arts.19 through 22; and R 139 through 148. 63. Situación de desabastecimiento inminente. Art.21 32 This exception also requires the prior approval of the Contraloría General de la República. (vi) Situations where the goods or services have no substitute and there is a sole . The Regulations make clear that both conditions must be present for this exception to operate. (vii) Highly professional services.64 Involving unique qualifications or experience. Said services may not be subcontracted.65 AI.13 When direct contracting is used, the law requires the following safeguards: · Only the highest authority of the procurement entity may authorize the exception and this authority may not be delegated; · A technical-legal report must be issued to justify an exception; · Exceptions must be published in the official newspaper; and · Copies of the resolution approving the exception as well as of the technical- legal report that must be issued to justify the exception must be sent to both the Contraloría General de la República and to CONSUCODE within 10 working days of the approval of the exception. 10. Preferences AI.14 The following local preferences are provided for: (i) Law 27143 grants a 10 percent preference in bidding for goods to bidders offering Peruvian goods. Later on, this percentage was increased to 20 percent through enactment of the Law No.27633 providing this modification. This percentage of preference is to be added to the total points of both the technical and economic evaluations. (ii) Law 27767 requires government entities to acquire food products grown locally exclusively from small farmers or from micro or small firms, except for purchases of anchovy, which follow different rules. The regulations of this law establish an ad hoc public procurement procedure for these acquisitions. (iii) Law 28015 creates certain benefits for micro and small firms and said benefits are common to both categories of firms. (a) The first benefit is not entirely clear: "In the procurement of goods and services, government entities prefer (sic) bids by micro and small firms to the extent that they comply with the required technical specifications." There is no indication as to how this preference is to be implemented. 64. Servicios personalísimos. R 145 65. The Regulations list the following services as being of a highly professional nature and therefore automatically included in this exception: publicity services rendered to the state by the televised, radial, written or any other type of media; life insurance, accident, personal and medical insurances services for members of Congress and certain other categories of public servants. 33 (b) In supplying goods or services that must be provided on a continuous basis, in lieu of performance securities, these firms may opt for a 10 percent deduction from the total value of the contract. (c) Government entities must "set aside at least 40 percent of their procurement needs so that said need may be supplied by micro and small firms to the extent that these firms are able to provide these goods and services." (d) In case of a tie score, awards must be made to micro or small firms. (e) Local or regional micro and small firms shall receive "preferences" (sic) in bidding for goods or services over firms that are not local or regional with regard to the place where the procurement takes place. The extent of the preference is not defined. (f) These firms are also given certain advantages regarding the reception of information relative to the procurement needs of State entities and when bids will take place. 11. Electronic procurement.66 AI.15 The Law establishes an electronic procurement system and refers to it as the Electronic System for Government Procurement. (Sistema Electrónico de Adquisiciones y Contrataciones del Estado) ("SEACE"). CONSUCODE is responsible for establishing, operating and administering the system that is mandatory for all procuring entities. AI.16 The main features of this system are: · Government entities are required to publish the call for bids as well as the bidding documents in SEACE. 67 · Procuring entities must notify bidders in the call for bids or in the bidding documents if the rest of the bidding procedure will take place both physically and electronically. If this is the case, technical and economic offers must be submitted electronically and kept in a safety vault. · Bidders may make inquiries or observations electronically within the periods established. Answers to said inquiries or observations are also made by the same means. · On the date and time agreed for the opening of the technical bids, the public official representing the procurement entity enters SEACE in the presence of the Special Committee and a notary public and downloads the technical bids (and opens those bids not submitted electronically) and distributes a copy of the technical bids to the Special Committee for evaluation. Prior to said distribution, 66. Arts. 66 through 69 and R 307 through 324 and Transitory provision 4 of the Regulations. 67. However, Transitory Rule no. 2 of the Regulations allows entities that do not have access to the Internet to carry out all these procedures manually. 34 the notary public must sign each bid. The same procedure is followed for the opening of economic bids. · The Committee must prepare minutes regarding the opening of bids and said minutes must be published on the same day in SEACE. · After technical and economic proposals have been evaluated, the Committee makes the corresponding award. Minutes of the award are drafted and distributed among the bidders upon request as well as printed in the Web. · The Fourth Transitory provision of the Regulations states that SEACE shall be implemented gradually in two stages, but does not give dates as to when the stages are to be completed. 12. The Responsibility of Public Officials68 AI.17 Public officials are accountable for the proper implementation of the Law and its Regulations. The head of each entity must evaluate the performance of the procurement staff; for this purpose, he or she may carry out periodic and selective specialized audits. The Law establishes sanctions for public officials who do not comply with procurement rules and regulations.69 13. Dispute Resolution AI.18 To resolve procurement disputes during the execution of a contract, the Law and the Regulations provides for conciliation and arbitration. If the parties select arbitration, they may choose to include a suggested arbitration clause provided for in the Regulations in their contract70 or agree on another clause. Arbitration awards are binding and generally enforced. The text of the award must be submitted to CONSUCODE, which is responsible for ensuring that the award is enforced. 68. Arts. 47 and 48. 69. These include written warnings; suspension without pay for periods between 30 days to one year; and dismissal. 70. R 274. The text of the clause is as follows: "All conflicts that derive from the execution or the interpretation of this contract, including those that refer to its nullity or invalidity shall be resolved by means of arbitration that shall be final and unappealable, in accordance with the procurement policies of the State." Parties may also opt for another similar suggested clause issued by the Sistema Nacional de Conciliación y Arbitraje del Consejo Superior de Contrataciones y Adquisiciones del Estado (SNCA-CONSUCODE) and also included in this same Article. 35 II. ASPECTS OF THE REGULATORY FRAMEWORK THAT SHOULD BE IMPROVED 1. Key Aspects · Mandatory registration is inefficient and may affect access to government contracts, limiting the benefits of open competition. The aspects assessed in order to register contractors should be limited to legal requirements (i.e. not include capacity and experience), and registration should be a condition only for contract signing and not bidding. In addition, decision rejecting the registration of bidders should be subject to administrative and Tribunal review. · The appeal mechanism should allow bidders to protest the choice of the procurement method. In addition, the deposit/bond required to submit a protest should be eliminated or substantially reduced in value, and should be cashed in only if the protest is deemed as frivolous by the tribunal. · The current evaluation system based on points does not provide a minimum degree of objectivity. The evaluation criteria used either in the "licitación pública" or "concurso público" for goods and works should be objective, expressed in monetary terms or as pass/fail requirements, and should not be mixed with bidder qualification criteria nor linked to the estimated budget or price brackets. Qualification criteria should be used only to determine the qualification of the bidder and this determination should be made on a pass/fail basis and be kept completely separate from the evaluation and comparison of bids. The contract must be awarded to the lowest evaluated bid meeting all requirements established in the bidding documents] · Regulatory/policy and process-related supervisory/control functions should not be carried out by the same agency (i.e. currently CONSUCODE). · The use of ICB should be required above a specified threshold (based on local market capacity), and foreign firms should be allowed to bid in NCB processes for goods and works. · Current contradictions in the legal framework with respect to the rules of financing institutions or otherwise agreed under international treaties should be eliminated and these rules should prevail in case of conflict with domestic law. · Bidding for goods and works should use a one envelope system including technical and financial aspects of the bid. · There should be separate rules for consultant selection following a short list process and utilizing evaluation criteria based primarily on quality considerations. Other methods for the selection of consultants could also be included. 36 1. Detailed comments 2.1 State Procurement and Contracting Law (Consolidated Text) · art.2.3 (k): the text does not apply to concession contracts. There is a concession law (Supreme Decree No. 059-96 PCM) and Implementation Decree (Supreme Decree No. 060-96 PCM) as well as various sector laws. These laws provide for competitive selection, but do not include adequate detail on the processes. The solicitation and award processes are not clear or conducive to transparency and there is some confusion on modalities and functions. To submit a protest a firm must present a 1 percent guarantee, which is very high and may discourage firms with valid reasons. Contract types used are not clearly defined. · art.8: the mandatory registration of bidders in the national register as a requirement for bidder participation affects the openness of the competition without ensuring the up-to-date qualification of bidders; the fact that public entities maintain internal lists of providers makes the process even less open and transparent. · art.9 (g): prohibiting shareholders who have been personally sanctioned for previous procurement is too wide; the prohibition should apply only to controlling shareholders, associates or managers. · art.9 (h): the situations leading to a potential conflict of interest are confusing; it is not clear under which conditions conflict of interest may arise. · art.14 to art.16: "licitación pública" applies to work and good contracts while "concurso público" is for general services and consultant contracts; however, there are few differences between the two methods and both lead to the award of the contract to the bidder with the maximum points; the latter method is not appropriate for works, current services and goods. · art.18: fractioning of procurement to allow participation of small and medium enterprises should not be authorized as it may reduce the benefits of open competition. However, since social objectives are equally legitimate, the same results would be achieved by setting aside certain contracts for SMEs. · art.26: the publication of the estimated value of the procurement, with the provision requesting the rejection of any bid over 10 percent of said estimated value, (art.33) may affect the truthfulness of the bids. · art.33: bids under 70 percent of the estimated value are rejected with no further examination. In said case, the bidder should be given the opportunity to justify the makeup of his price in writing before being rejected. · art.36: modifications to the contract documents should not occur once released to the bidders. In case some clarification or correction is required in the contract, the information should be advertised to all bidders; 37 · art.38: procurement law should not interfere in the commercial relations between a foreign contractor and its domestic sub-contractors. · art.42: termination of the contract due to errors in the specifications should be considered as a termination for convenience, with payment of corresponding damages to the contractor, including expenses incurred for anticipation of future contract performance.art.52: the amount of the deposit required to submit a protest should be substantially reduced and the deposit should be forfeited only if the complaint is frivolous. · art.54: it is not clear why the bidder complaint is limited to the "lack of response from the entity" in case of "adjudicación directa" and "menor cuantía" (see comment under art. 161 of the Regulations). · art.59 (k): CONSUCODE (Consejo Superior de Contrataciones y Adquisiciones del Estado), in charge of procurement regulatory functions should not be in charge of supervising procurement proceedings. · art.61: it would be useful to include experts in the Procurement Tribunal for Public Procurement and Contracting to affirm the independence of this Institution. 2.2 Regulations of the State Procurement and Contracting Law · art.7: public work contractors and public work consultants are automatically considered qualified as long as they are registered in the national repository of providers. A pre-qualification process conducted for each major work contract and post qualification for other contracts would be more efficient and effective to guarantee the qualification of bidders. Keeping the registry updated is complicated and requires substantial resources. · art.14: the registration in the repository is valid only for one year, and can be renewed only if a new request is submitted by the providers. In addition, the registration is submitted to the payment of a fee. These provisions may create obstacles to the open access principle of government contracts. · art.17: See previous comment under art.14. · art.35: publishing the estimated value of the contract may influence the real price of the bids and may lead to collusion between bidders, especially when deviations from more than 10 percent over the estimated price or 30 percent under this price automatically lead to the rejection of the bids. · art.36: authorizing the splitting up of procurement to favor SMEs may lead to non- competitive bidding behavior and hence may reduce the benefits of open competition (see comment under art.18 of the "Texto Unico"). · art.40: it may be useful for review purposes to require entities to keep records of direct contracting. 38 · arts.45 & 46: drafting bidding documents may be too technical for the "Comité Especial Permanente" giving the qualifications of the members of this Committee. · art.54: the indication of the maximum and minimum amounts for bids may affect the truthfulness of the proposed prices. In addition, as discussed above, bidder qualifications should be evaluated either before bids are submitted (pre-qualification) or once the award evaluation has been completed (post-qualification). · art.58: when the contract is financed by the contractor, the contract is either a supplier credit or a project investment remunerated by a fee paid by users. In the latter case, it is a concession contract rather than a government purchase contract, and the provisions of the law and regulation do not apply. · art.65 - art.67: qualification criteria of the bidders fails to adequately evaluate the winning bid: bidder qualification and bid evaluation need to be separated and qualification and evaluation criteria should not be mixed. · art.69: the contract must be awarded to the lowest evaluated bid meeting all requirements established in the bidding documents, on a pass/fail basis. The lowest evaluated bid may not necessarily be the one offering the lowest price as there may be other factors (for instance, delivery time, equipment performing efficiency, etc) subjected to evaluation as long as consideration is given on a monetary basis. A system of evaluation based on points is appropriate for consultant services evaluation, but risky for other types of procurement. · art.77: the terms chosen for shopping ("adjudicación directa") and direct contracting ("adjudicación de menor cuantía") do not reflect the selection methods behind these terms. Shopping should be used also for contracts of low value in place of direct contracting. · art.78: the choice of procurement proceeding is not necessary based only on the estimated value alone; it could be chosen according to special circumstances: exclusive rights, unsuccessful bidding. · art.98: the deadlines of a minimum of 20 days between the publication of the procurement notice and the bid submission, and 5 days between sending the bidding documents and bid submission are too short. · art.120: the system of two envelopes (one containing the technical proposal, the other the financial proposal) deprives the process of the benefits of bid opening ­ the bidder loses control over its price bid and could be rejected on a summary review of its qualification documents · art.123: the bids should not be rejected without opening and evaluating the financial proposal. · art.125: correction of arithmetical and clerical errors should be allowed, based on methodology described in the invitation documents. 39 · art.127: the determination of the qualification of bidders and the bid evaluation should be separated. · art.132: bid evaluation should not mix bid evaluation criteria with bidder qualification criteria. · art.134: the "distribution" of the award between different bidders should not be permitted unless the contract has been previously divided in lots. · art.144: the existence of only one provider at the national level should not be used t justify direct contracting; however, if this bidder owns exclusive rights at the national level, then direct contracting may be required. · art.145: "special professional services" is a concept too vague to justify direct contracting. In addition, it is not clear why direct contracting is justified for selection of publicity services as these services are not "highly skilled services" and multiple providers usually exist. · art.149: It should be possible to challenge the bidding documents, for example when based on biased or narrow specifications. · art.151: The procurement method, along with the decision taken in the time period transpiring between the publication of the procurement notice and the signing of the contract, should be protestable. · art.161: complaints rejected by the contracting entity can be submitted to the "Tribunal de Adquisiciones" in case of "Licitación Pública" or "Concurso Público". As discussed above, it is not clear whether bidders can appeal to the "Tribunal" when complaints rejected by the contracting entity refer to the selection method or in case of direct contracting and shopping proceedings. · art.187: "framework agreements" are available when procurement requirements are unknown at the time of invitation. Framework agreements should state a maximum price or quantity and should be better defined and regulated. · Use of "reverse auction" should be limited to electronic procurement. · The Third Complementary Provisions of both the Law and its Regulation establish that the procurement rules of international financing institutions apply if the institution is financing at least 60 percent of the contract and if such rules comply with the principles included in the Law. The Regulations add that local law shall prevail, whenever "legal gaps exist or there are deficiencies in the procedures included in the Loan Agreement." However, the Law includes an apparent contradiction, because Art.2.3 (n) provides that the Law does not apply to "international contracts" (which appear to be subject to the particular treaty under which they are financed or by which they are regulated). Finally, Budget Law 28411 of January 1, 2005 adds confusion by stating in Article 68.1 that: "Entities that use public funds from donations or official credit operations shall follow, regarding the regulation of expenses and the rules for public bidding and the selection of services 40 including consulting services, the provisions set forth in the corresponding contracts." It appears that the Budget Law should prevail over the provisions of the Law as it was enacted a few days after the Law and has the same status. 41 ANNEX II. SUMMARY OF THE ELECTRONIC GOVERNMENT PROCUREMENT (E-GP) ASSESSMENT A. Current Status AII.1 The Government of Peru (GOP) is in an initial stage of adopting a national electronic Government Procurement (e-GP) program. The use of technology can have a major impact on the procurement process through: · Just in time delivery · Virtual warehousing · Compliance ­ elimination of maverick buying · Monitoring · Strategic planning · Audit trail · Contract management AII.2 While a single website for the publication of procurement information including procurement notices in a simple format is already operational, the rules and functionalities of the e-GP system are still under development. AII.3 Based on an e-GP readiness assessment tool of the Multilateral Development Banks Peru is on the right path, having created several of the foundations required for successful e-GP implementation. However, there is a high level of duplication at this stage of the process as many agencies also publish the same information on their own websites. AII.4 As one of the most important foundations for the system, GOP places the responsibility at for the development and implementation of the e-GP program at a high level by giving the mandate to CONSUCODE. Inline with best practices, the GOP will maintain dual (paper and electronic) processes for the foreseeable future; these processes will nevertheless be identical. AII.5 The IDB has financed a project to assist the GOP with the implementation of the e-GP program. The project includes the introduction of transactional stages. The first phase has been the publication of procurement information. Currently 40 percent of GOP agencies procurement opportunities, as well as 100 percent of the procurement plans are published on CONSUCODE's website SEACE. The GOP also publishes its procurement policies and procedures in SEACE. AII.6 The following phases will include purchasing through the use of price quotations; the GOP estimates that this will generate savings of S. 100m (US $30M) per annum. Given that the GOP estimates that approximately 80 percent of procurement occurs in Lima where connectivity doesn't appear to be an issue either for buyers or suppliers, this objective should be achievable. The widespread availability and use of "Cabinas de Internet" in urban and rural areas provides broad coverage throughout the country for both buyers and suppliers. No municipality is currently included in SEACE. AII.7 The GOP also wants to adopt aggregated procurement as a means to increase the efficiency of government procurement in Peru. The adoption of e-GP is instrumental to this end given that the advantages of aggregated procurement can be capitalized upon. 42 AII.8 The GOP has also indicated it plans to adopt e-Reverse Auctions as a modality of government procurement: this is an area where further study is required as well as an in-depth analysis of the procurement market and suppliers. AII.9 In the area of product codification, the GOP has indicated that it will adopt an international standard, UNSPSC, which will be rolled out by 2007. AII.10 Government wants to introduce electronic/digital signatures as a precondition to the adoption of e-GP; this is an area that requires further consideration given the implications associated with its application. AII.11 The sustainability of SEACE is planned to come from the funds generated by the supplier registry; firms will have to pay to register and up-date information. This is an area that the GOP will need to look at and possibly identify other sources of resources, possibly from the expected savings that the application of e-GP will generate. This would be in line with the practice applied in countries that have successfully introduced e-GP into the public sector. AII.12 The registry in itself will need further study as the regional experience with registries has not been positive. In fact, registry often becomes a barrier to private sector participation in the government procurement market, thus limiting the potential benefits of e-GP. B. Risks AII.13 The successful adoption of e-GP in Peru, whilst on the right path, is nevertheless not assured. There are several key risks that will have to be addressed by the GOP if success is to be forthcoming. AII.14 There doesn't appear to be an e-GP strategic plan. Said plan would address issues such as a buyer and supplier enablement strategy, adoption of standards, a business plan for the sustainability of the system and a development timetable (a more comprehensive list of issues can be found at the Multilateral Development Bank's e-GP website www.mdb-egp.org ) AII.15 The adoption of reverse auctioning, which will account for approximately 15 percent of total government procurement, should be studied in greater detail. To adopt reverse auctioning without this analysis may lead to negative impacts both in government procurement as well as in the private sector. AII.16 The introduction of electronic/ digital signatures as a condition of system implementation will most likely not lead to a successful outcome and should be reassessed in light of international experience and best practice. AII.17 Once the system is developed, CONSUCODE should make it available to the entity which is ready to operate it, given that CONSUCODE should not be operating the system. C. Recommendations AII.18 The following is recommended to ensure that E-GP remains on track and produces the desired impact: 43 · A clear government decision should be made and publicized as soon as possible regarding the entity chosen to be responsible for the administration of the e-GP system once it is ready to operate. · CONSUCODE and MEF should define system and process requirements (commitment of funds and payment) before going to market for the system. The information requirements of MEF should be defined, together with the communication standards for the transfer of said information, so as to ensure that both procurement and budgetary requirements are met. · Market analysis should be undertaken before reverse auctioning is adopted. · An e-GP strategic plan should be created. 44 45 ANNEX III. NATIONAL SUPPLY STRATEGY GOVERNMENT PROCUREMENT HIGH LEVEL ASSESSMENT Background AIII.1 In general terms, procurement transactions as performed in the public sector relate to the process of purchasing non-consulting services, goods and equipment supplies encompassing a wide range of items from consumables, real estate property, assets equipment (e.g., computers), infrastructure construction (e.g., hospitals, schools and roads, and so on), general services (e.g., cleaning and security), and consulting services (e.g., policy advisory and engineering design, amongst others). AIII.2 In addition to representing an important share of total governmental costs, procurement of Procurement Overview in 2005 goods and services by government agencies has a · In 2005, the Government of Peru significant impact in the quality of service delivery planned procurement for approximately and in the overall government fiscal situation. $4,258 millions (or S/.14,768 millions) in goods, services and infrastructure to Therefore, the procurement strategy is critical for an be executed by 2,706 procuring units efficient use of public resources. throughout all government levels. AIII.3 In order to add value for money, the · 2005 was the first year in which the procurement system should provide for a proper Government has procurement plans regulatory and institutional framework, contracting provided by procuring units and processes and capacity strong enough to ensure advertised in the procurement management information system transparency, economy and efficiency and, at the (SEACE). This is a significant step same time, to enhance the overall quality of goods forward in terms of opportunities for and services being acquired. Notwithstanding the consolidation of procurement items and systemic elements noted above, the Government creation of synergies. should implement a supply chain management According to information available in system. Said system should provide for · procurement plans, approximately 37 procurement strategies to reduce unnecessary costs percent of the procurement of goods and and ensure further savings. Many governments have services is to be awarded with the use of already implemented similar ongoing programs public competitive bidding; 25 percent with an eye on achieving these results, usually with through use of restricted competitive bidding; 22 percent with procedures use of catalogues; high-value assets consolidation; similar to shopping; and the balance e-procurement; strengthened control systems; with the use of other methods, including budget constraints on specific item spending; and direct award amongst others. standardized procurement documents, among others. · Up to March of 2005, only 16 percent of total planned purchases had been awarded. Executive Summary AIII.4 The study performed focused on a high-level diagnostic of the current government procurement strategy; an analysis of selected procurement item categories; an estimate of potential savings feasibly attained through implementation of a based volume consolidation strategy and adequate use of key factors critical for a successful implementation of said strategy; and a high-level action plan that proposes a move to a detailed second phase of analysis and 46 detailed assessment and includes the preparation of a national purchase and supply strategy for the public sector. Said supply strategy includes a review of the current market structure and position in order to better respond to the goods and services demands as determined by the strategy. The diagnostic performed is based on a thorough high-level cost-benefit system analysis whose considerations and conclusions is aimed at mainstreaming the supply strategy and, if properly implemented, achieving reduced prices on goods and services to procure as well as a reduction in procurement transaction costs. An additional benefit involves an increase in transparency in the management of procurement processes. AIII.5 The analysis was performed on the basis of information provided to CONSUCODE on annual procurement plans (for 2005) implemented by public procuring agencies governed by the provisions of the State Procurement and Contracting Law and on the selection of the procurement item categories most commonly used in public sector. The procurement plans included information provided by 1,300 procuring entities (approximately 48 percent of total number of agencies,) which carry out approximately 85 percent of total procurement scheduled for 2005. Methodology Used for Review of the National Procurement Strategy AIII.6 The approach to design and implement the supply strategy encompasses two development stages. The first one already covered refers to a high-level diagnostic that allows a review of the government's current purchasing strategy and permits an estimate of potential savings. The second stage should entail, for each of the selected procurement item categories determined as having a significant potential for savings and found to be representative of other areas to be assessed: (i) the definition of a detailed procurement strategy (e.g., procurement method); (ii) the design specifications and consolidation of volumes; (iii) the preparation of bidding documents for procurement of bulk selected items; (iv) management and oversight of the bidding processes and; (v) the preparation of a subsequent "shockwave" or purchasing process. This latter stage should also include a review of the supply chain management system. The Regulatory Framework and Overall Assessment of Current Local Procurement System Development AIII.7 An overall review of the procurement system indicates that the system´s current rules and regulations are adequate enough to carry out bulk procurement options and consolidation of goods and service items in amounts capable of producing benefits regarding price conditions and economies of scale. The analysis of selected goods and service items based on the information provided by CONSUCODE reveals that the current level of item consolidation remains very low and fails to represent a grouping with the potential to bring about the changes noted above. AIII.8 The technology platform currently available in SEACE and several procuring entities seems to be appropriate to ensure a wide dissemination of bidding opportunities for procurement of goods and services in public sector. Its level of development could be ranked from middle to high, with high potential for utilization as a procurement management tool in the future. AIII.9 As of December 2004, the State Procurement and Contracting Law has incorporated new procurement methods and instruments (e.g., reverse auction, and framework contracts) for specific use with electronic means. Preparation of regulations for implementation of said 47 procurement modalities is underway and is currently mid-way through development. Overall, procedures defined for use of procurement methods, as well as bid criteria evaluation, are developed according to specific details as described in the law and its regulations. The current level of use of framework contracts is very low due mainly to the recent enactment of the procurement law reform. The high level assessment concluded that the framework contracts could be utilized by public entities in the procurement of highly demanded standardized goods and services that are required in significant amounts and on a steady basis for normal operation and service provision. AIII.10 The use of price control mechanisms and contract management and oversight is low and requires an expanded development effort to enhance both the credibility of the reference budget and the predictability of public procurement of goods and services. Review of Transaction Costs in Public Procurement AIII.11 The high level review performed on key factors potentially affecting transaction costs and otherwise promoting cost savings (e.g., value for money) in the purchase of goods and services suggests that considerable room exists for improving procurement opportunities and cost savings through the better use of factors such as those described below. This improvement will generate added value for the procurement system. AIII.12 Restructuring of Public Procurement Demand. The analysis of information related to specific procurement items selected for review concluded that, in general, the procuring entities do not know or give consideration to their own demand profile (e.g., overall public sector demand for specific items not determined nor characterized in terms of standardized specification) and virtually exert no control over either local or external factors affecting the demands in question. Currently, demand profile identification and procurement arrangements are completely separate amongst public agencies involved in the purchase of similar items (e.g., gasoline and lubricants). This prevents them from making better use of the public funds available for the fulfillment of common needs. It can be concluded that insufficient knowledge of highly-demanded item-specific profiles and the use of an erratic procurement strategy lead to low levels of transparency and efficiency in the use of budget allocated resources. AIII.13 Search for economy-of-scale effects. Except for a few exceptions, no cases of consolidation and centralization for procurement of specific high-demand highly-consumed items were detected. AIII.14 Specificity of Supply Market. It was observed that most of the procurement items reviewed were acquired locally due to the specific features of said items (e.g., administrative labor; cleaning and security services; office material and supplies, computer equipment and accessories). AIII.15 Design of specifications per procurement item. Overall, it was found that specifications for procurement of goods and equipment are customized according to each procuring agency´s specific needs. In the case of computer equipment, open-code specification of clones and operational systems may be considered a normal procurement practice. AIII.16 Standardization of Goods and services. By and large, there is a need to define performance and/or service standards of goods and non-consulting service items to be procured. 48 This may enable the grouping of procurement items into large packages and enhance the efficiency and transparency of procurement processes. AIII.17 Utilization of Goods Catalogues and Services. The purchase of services lacks definitions and benchmarks with regard to unit prices, which are useful as a reference for price control and validation when considering local and foreign markets. Distribution of Evaluated Items by Procurement Methods AIII.18 The distribution of contract reference values proposed in the Annual Procurement Plan 2005, along with the use of different procurement methods as established in the State Procurement and Contracting Law, indicates that there exists a fair balance in the use of different methods to procure the types of goods and services subjected to analysis. At the end of April of 2005, contract awards totaled only S/.2,017 million (equivalent to approximately $582 million) out of the total of S/.12,634 million (equivalent to approximately $3,643 million) reported in the annual procurement plan71. As such, it is clear that opportunities would exist to consolidate items in high demand by procuring entities if said items were to be grouped into large packages and procured with the use of any of the new procurement methods, such as corporate procurement and/or framework contracts, which have recently been incorporated in the Peruvian Procurement Law. Potential Savings Estimate Based on Government's Procurement Plan 2005 AIII.19 Based on estimated reference values and contracting activities proposed in the Procurement Plan 2005 made available by CONSUCODE and on similar experiences implemented in countries with comparable economies and public contracting systems, the assessment concluded that opportunities exist for savings up to S/.1,290 million (equivalent to approximately $372 millions) as a result of the implementation of corporate procurement using conservative savings percentages that could be increased up to S/.1,800 million (equivalent to approximately $519 million) if a more aggressive purchasing approach were to be implemented. An estimate of expected savings to be obtained for each of the procurement items analyzed with the implementation of either purchasing scenario is shown below. Overall Framework of Government Procurement of Peru in 2005 AIII.20 By end of April 2005, a total of 1,300 public agencies from the central, regional and local government levels had included procurement processes in their procurement plans for a total consolidated amount of S/.12,634 million (equivalent to approximately $3,643 million) out of a total S/.14,768 million (equivalent to approximately $4,258 million) estimated in the national budget for the year noted above. A total of 1,406 entities from local governments had not yet reported their procurement plans for the balance of the S/.2,134 million (equivalent to approximately US$615 millions) included in the national budget. It should be noted that national procurement regulations do not require public agencies to report purchases of goods and services in procurement plans for contracts with estimated values below a certain threshold as provided in the annual budget law. The total accumulated value of government procurement reported in the 71. This amount does not include infrastructure works contracts in 2005 for a total of S/.2,261 millones, or approximately $652 millions. 49 Procurement Plan 2005 represents approximately 30 percent of the national fiscal budget, amounting to S/.49,117 million (equivalent to approximately $14,163 million). AIII.21 According to the contracting plans, procurement of goods and non-consulting services, including infrastructure contracts, rise to S/.14,768 million (approximately US$4,258 million or 30 percent of national budget); administrative staff support rises to S/.13,283 million (approximately 3,830 million, or 27 percent of national budget); and procurement of several other items not included under these categories rises to S/.21,066 million (equivalent to $6,074 million or 43 percent of national budget). AIII.22 According to information on contracting amounts available in reported procurement plans, approximately 80 percent of the total amount is procured by 9 agencies from the central government out of a total of 851 procuring entities at this level of government. The 20 percent balance of procurement is performed by a total 1,855 procurement units located amongst 26 agencies of the local government level. Likewise, approximately 80 percent of total procurement undertaken at the sub-national government levels is performed by no more than 500 procurement units out of 1,855 entities distributed amongst the regional and local government levels. Detailed Assessment of Specific Purchase Items at Selected Public Sector Entities AIII.23 Specific purchase item categories were selected for a detailed analysis based on the review performed of information from a wide range of government procuring agencies; said information was available in the procurement plans posted in the SEACE Portal. Categories were chosen on the basis of the identification of common features, including: most were fungible and of recurrent consumption (e.g., oils and lubricants, and office supplies); their technical specifications were of low-level complexity; they were procured on a routine and independent basis; and the procuring units acquired the items identified with no consideration of the existence of similar needs at other procuring units. AIII.24 Based on the common features noted above, eight procurement item categories were selected--namely oil and lubricants; food; administrative labor; cleaning services and utensils; security services; printing services and office equipment and supplies. More information concerning the analysis performed on selected item categories is available in the high-level Quick Gains Report completed in May 2005 and subsequently delivered to the Government. AIII.25 The findings and conclusions of the analysis performed on selected categories suggest that approximately 75 percent of total purchases scheduled in the procurement plan can be grouped into large packages and purchased using a corporate procurement approach. Main challenges include providing adequate coordination and consistency across a number of different procuring agencies requiring the same items in order to ensure the smooth and expeditious management of procurement and contracting processes. Entities such as the Presidency of the Council of Ministers (PCM) and the Ministry of Economy and Finance (MEF) could implement the joint mechanisms necessary to ensure efficient coordination through management of procurement processes under a corporate approach. Technical assistance (e.g., in designing technical specs, service standards, and so on) and leadership in the procurement processes could be provided by government agencies with the greatest accumulated experience in the purchase of specific items. 50 Recommendations for the Start-up of a Quick Gains Program towards Generation of Savings in 2005-2006. AIII.26 In the short term, the launching of a quick gains program aimed at generating savings in the period 2005-2006 could be implemented by giving due consideration, inter alia, to the following elements: · The procurement of goods and services to be consolidated in large amounts should be easily implemented. · Clearly, the procurement items to be selected should have a frequent and recurrent consumption pattern, standardized specifications, and should be demanded in large amounts by a significant number of entities. · Leadership should be assigned to public agencies that purchase the largest amounts of each item and/or which possess the greatest accumulated expertise and knowledge in procuring the items in question. The leading agency may coordinate the procurement processes with the participation of other relevant entities. · A corporate procurement approach should be applied in order to achieve the most favorable price and quality conditions possible. AIII.27 The program should be implemented within the government with the highest visibility and transparency levels in mind. This requires: · The corporate procurement processes must be supported at the highest government level · The Quick Gains Program must be monitored by a multi-institutional team comprised of entities such as PCM and MEF, amongst others, to provide adequate oversight in the management of procurement processes and the achievement of savings related objectives. · The Comptroller´s Office should implement a concurrent control process to ensure that suppliers meet the technical and commercial terms and conditions agreed upon in contracts and apply remedies and sanctions in cases of non-compliance. AIII.28 The Quick Gains Program should be implemented in gradual and successive phases or "shockwaves". The implementation sequence should start with the purchasing of the lowest- complexity technical specification items that represent the highest potential for savings given that the process turnover is quick and generates concise results in the short-term. The sequence to be followed would be determined according to the detailed purchasing strategy to be prepared in the stage following this high-level assessment study. The outcomes of the initial procurement processes may help the coordinating team to extract lessons from past experiences and provide feedback that is useful in the preparation of subsequent purchasing processes either of the same items or others with greater complexity levels and decreased potentials for savings, which could be achieved by utilizing the key parameters provided by the national procurement and supply strategy. 51 ANNEX IV. PUBLIC PROCUREMENT SYSTEM: MODALITIES, PROCEDURES AND THRESHOLDS FOR USE OF PROCUREMENT METHODS. AIV.1 The legal and regulatory framework is defined in the State Procurement and Contracting Law enacted through the Law No.26850 and its most recent modifications in the Law No.28627 and its Regulations. Said Law provides four modalities or basic procedures for the procurement of goods, works, and services that are mentioned in decreasing order of competitiveness, as follows: public competitive bidding; public competition ("concurso público", for procurement of either general services or consultancy); abbreviated competitive bidding ("adjudicación directa", a sort of public competitive procedure for contracts with values lower than the established thresholds for public bidding); and small value procurement (a simpler lower form of limited bidding requiring a minimum of three suppliers).72 AIV.2 With few exceptions made explicit in the regulations and in Table A shown below, management of procurement process proceeds through the following stages: call for tenders; bidder registry; submission of consultations and remarks by bidders and responses; incorporation of changes in bidding documents; bid submission and evaluation; and contract award. AIV.3 Public Competitive Bidding. It is the method used for procurement of works, goods and services contracts with reference values within certain ranges specified in the Annual Procurement Law and the use of country-wide advertisement and free concurrence of bidders. In the case of works contracts, this modality could be applied to tender processes in which foreign bidders may or may not be allowed to participate depending upon local bidder capacity to satisfactorily carry out the contract. Under NCB procedures, only bidders registered locally and operating in the country are allowed to participate, while ICB procedures can be used whenever the characteristics and requirements of specific works allow foreign bidder participation. AIV.4 Procurement of works with the use of this method is applicable to contracts with estimated values equal to S/.1,150,000 ($331,600). For procurement of goods, the estimated value of the contract must be not less than S/.450,000 ($129,750). AIV.5 Public Contest. This method is used within specific thresholds established in local budgetary norms to procure services regardless of whether their provision requires either employment of consultants for services of an intellectual or advisory nature or specialized services demanding considerably greater use of physical efforts and/or equipment and technology. AIV.6 In 2005, the lower thresholds for procurement of services with the use of this modality is set at S/.200,000 ($57,670). Calls for services to be procured with Public Contest and Public Competitive Bidding are openly advertised through notices posted in SEACE and other locally available advertisement means. AIV.7 Abbreviated Bidding (Adjudicación Directa). This local method is applicable to goods, non-consulting services and works to be procured under contracts with values estimated in a specified range of thresholds provided in the Annual Budget Law. Procedures for the use of said modality require the invitation for bids from at least three bidders or suppliers without 72. Proposed procurement processes must be in the Annual Procurement Plan to be approved at the outset of each fiscal year. With regards to small value procurement processes, they should be included also in the Plan to the extent that their scheduling is feasible. 52 specifying a minimum number of bids that must be obtained in order to ensure a minimum basis of competition. There are two approaches to the use of this modality: Public Abbreviated Bidding (Adjudicación Directa Pública) and Selective Abbreviated Bidding (Adjudicación Directa Selectiva). The latter utilizes only direct invitation. AIV.8 The approach to Public Abbreviated Bidding (Adjudicación Directa Pública) is proposed in the Law and Regulations whenever the reference contract value is fifty percent (50 percent) higher than the upper threshold (S/.225,000 or $64,900) established in the local budgetary norms for Abbreviated Bidding (Adjudicación Directa). This type of bidding is openly advertised in SEACE. As provided in the Annual Budget Law, this modality is set for goods contracts with values between S/.225,000 ($64,900) and S/.450,000 ($129,750); works contracts estimated to cost more than S/.575,000 ($165,800) but less than S/.1,150,000 ($331,600); and general services and consulting services estimated to cost more than S/.100,000 ($28,835) but less than S/.200,000 ($57,670). AIV.9 The use of Selective Abbreviated Bidding does not require advertisement. Instead it requires the issuance of written invitations to at least three suppliers for quotation submittal. Under this modality, the procuring entity must also send a written notification to PROMPYME (the Commission for Promotion of Small and Micro Enterprise in Peru) so that its affiliates will have an opportunity to participate, provided that the contract-specific subject may be related to any of the economy sectors in which competitive supply from small- and micro-enterprises may be available. These economic sectors have been established through the issuance of a Supreme Decree. This sub-modality can be used in procurement of goods contracts with reference values equal to fifty percent (50 percent) or less of the upper threshold (S/.225,000 or $64,900 approximately) set for limited competitive bidding in the Annual Budget Law down to a lower threshold of S/.45,000 ($13,000). For procurement of works, contract values must be between S/.115,000 ($33,160) and S/.575,000 ($165,800). In the case of general services and consulting services, contract values must cost more than S/.20,000 ($5,770) and S/.100,000 ($33,160). AIV.10 Under the modality referred above, whenever is not possible to get a minimum of three (3) quotations from invited suppliers and where the goods or services requested are meant to fulfill the procuring entity´s specific needs, the agency´s top management authority may, on an exceptional basis and with due justification, carry out a non-competitive procurement process. AIV.11 Small Value Procurement. This sub-modality of Limited Competitive Bidding can be used by any public entity for the procurement of goods, services and works when the contract value is lower than a tenth of the minimum threshold established in the Annual Budget Law for Public Bidding or Public Contest, as the case may be. Requests for quotations are issued through letters of invitation to one (1) or more suppliers depending upon timeliness, estimated value and the level of complexity of the contracting involved. Evaluation of quotations uses a two-stage procedure and point system. In the case of procurement processes for goods and services in which only one (1) supplier has been invited to submit a quotation for purposes of contract awarding, a favorable quotation evaluation is considered sufficient as long as said quotation meets required technical specifications. AIV.12 This method is used to procure works, goods or services of a non-consulting or consulting nature as defined in accordance with a set of thresholds in the Annual Budget Law provided as follows in number 13: 53 AIV.13 For procurement of goods with contract values ranging between S/.3,300 ($950) and S/.45,000 ($13,000) or for general services and consultant services between S/.3,300 ($950) and S/.20,000 ($5,770). In the case of works contracts and works-related consultant services, thresholds have been set at values ranging from S/.3,300 ($950) and S/.115,000 ($33,160). 54 . Evaluation Committee Required Required Required Required essl essl essl (un (un (un Opening Bid Public (unless otherwise provided) Public otherwise provided) Public otherwise provided) Public otherwise provided) 60,1 ractt ractt s => => < Con ldoh above:ro <$57,670 <$33 Con nsulting cta nsulting res Co Co Th Contracts $331,600 Contracts $129,750 equal $57,670 $165,800 Contract <$331,600 $64,900< Contracts <$129,750 and s : $165,800< Contract $13,000< <$64,900 and : $5,770< <$33,160 ldoh · · · · · · · · res Works: Goods: Services Works: Goods: Services rviceseS $28,835