Procurement is a very broad term, but there is a consensus from scholars and procurement practitioners that the strategic importance of procurement is directly related to the percentage of overall value a firm’s suppliers bring to the equation. Example, in retailing, the procurement function (normally called mechanizing) is considered the foremost function of the organization. What they buy is the primary component of their strategy. On the other hand, it would be difficult to justify procurement as a core strategic function in any organization. Business enterprises perform eight basic functions namely, the management function, the production function, the human resources function, the finance function, the marketing function, the communication function, the information function and the purchasing or procurement function.
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Each of these functions has separate contexts but each also influences the business as a whole. A mistake in one function oftentimes jeopardizes the whole operation of the business. The management function is primarily concerned with planning, staffing and directing the whole organization. It is composed of top-level management like chief executive officers and managers. The production function is responsible for transforming raw materials into processed products for consumers. The human resource function handles concerns of the personnel like hiring, selection, transfer, promotion, separation, benefits, etc. The finance function comprises of accounting and bookkeeping tasks while the marketing function is concerned with the methods on providing channels for the finished products to reach the market. Furthermore, the communication and information functions are similar in nature. They are focused on establishing relationships between the business and the outside corporate world. Lastly, the purchasing or procurement function, which is the concern in this study, is concerned with providing sufficient materials, goods, services and works, which are required for the continuous operation of the business. The procurement function is often not given prominence it deserves but only referred to as a clerical function which can be done by any Tom, Dick and Jerry. Concisely, very little attention is accorded to procurement function as compared to other support functions. Michael Porter (1985). It is imperative in the business to totally understand this important aspect of procurement function because many businesses have little realization, appreciation and acknowledgment of the value an efficient procurement scheme can have on the performance of the business.
Today governments all over the world have received a great deal of attention as providers of essential services, such as health, education, defense and infrastructure. To be able to meet the demand for these services, governments purchase goods and services from the marketplace. In other words, governments are purchasers of works, supplies and services from the open market, placing their demands alongside those of the private sector. The business operations of governments in the marketplace or public procurement have thus both economic and political implications. Yet, until not too long ago, the subject of public procurement would have received little attention by academic researchers and policy makers, because it was considered an administrative function too mundane to worry about (Wittig, 1986).
The Evolution of Public procurement in Kenya
Before 1974, public procurement in Kenya was largely undertaken by foreign organizations like the Crown Agents on behalf of the Government. This was because the needs of the colonial masters and the independent Kenya were largely met from foreign sources because local sources were still not adequate. However, respective ministries assumed the role and function of procurement of goods and services. The first major shift came in 1974, when the treasury via a circular moved the secretariat from the ministry of works to the treasury and transferred the chairmanship to the treasury.
In an effort to streamline procurement procedures, The East African Community (EAC) developed guidelines under the title East African Supplies Manual for use in procurement. This manual in effect replaced the functions of the Crown agents. With the collapse of the East African Community in 1977, Kenya developed its own supplies guide in 1978 to be used alongside the E.A.C. Manual. In 1980, the government transferred the Central Tender Board (CTB) from treasury to the office of the president and placed it under the Cabinet affairs. The move sought for the re-union for the second time of Central Tender Board and the supplies branch. The role played by the two independent departments was boosted by the fact that they were now answerable to one accounting officer and more importantly the one in charge of Cabinet affairs. During the Government restructuring between 1989 and 1999, this saw many changes for example:
The Central Tender Board was separated with the Supplies branch with the former going back to Treasury while the latter returned to the Ministry of Public Works. With these reforms, it became clear the CTB role was instrumental in the award of contracts and the eventual implementation of the same hence the need to give it the necessary support to operate successfully.
The 1999 reforms saw the management of the CTB rise to the level of the Permanent Secretary as opposed to the earlier arrangements when junior officers controlled it, at the same time the membership also changed and it included the private sector giving the chairmanship while other members were drawn from the ministries with large procurement budgets. The Central Tender Board was done away with in 2001 when its duties were devolved the respective procuring entities. The 1999 saw also the review of countries public procurement procedures hence there was need to have a law to govern the procurement system in public sector and an independent institution whose responsibility would be to oversee that public procurement is done in accordance to the said legal provisions. This saw the establishment of Public Procurement Directorate as an agency of Government under the Exchequer and Audit (Public Procurement) Regulations 2001. The Public Procurement Directorate was the central organ for policy formulation, implementation, human resource development and oversight of the public procurement process in Kenya.
Finally, due to massive corruption and lack of proper authoritative guidelines and manipulation of procurement procedures, the government in conjunction with the World Bank initiated a process of reviewing the procurement laws with a view to addressing these ills. A task force was formed to undertake this work in consultation with the government, development partners and the private sector. A bill was drafted for debate in parliament in line with the task force’s recommendations. This therefore saw the enactment of the Public Procurement and Disposal Act 2005 (PPDA) which came to force on 1st January 2007, and it regulations of 2006. The regulations gave clear interpretation or implementation guidelines for clarity.
Problem statement
The effectiveness of the procurement function in the public sector is one of the key requirements for the attainment of vision 2030 goals. The enactment of the PPDA 2005 and the regulations 2006 as well as the establishment of the public procurement oversight authority (PPOA) are some of the recent developments that serve to promote efficiency, effectiveness and accountability in public procurement. In spite of these, the public sector is still plagued with rampant inefficiency, corruption and non-compliance. Despite the potential for developing local industry through public procurement, many local and international firms do not participate in public procurement because of a perception (and at times the reality) that governments are slow payers, difficult to work with, or have their own favored suppliers for contract awards. In addition to these general complaints, there is also a feeling among suppliers – based on anecdotal reports – that corruption plays a part in contract decisions. Some “corrupt” activities could be caused by lack of understanding of the best practices in public procurement. This study seeks to determine the main factors that constitute hindrances to effective and efficient procurement function in the public arena and why, despite major attempts made in reforming procurement systems in Kenya, corruption is still rampant or prevalent in procurement departments.
Main Objective / Purpose
The purpose of this study is to determine and understand the factors that contribute to inefficiency and ineffectiveness of the procurement function in the public sector in Kenya with a view to recommending the best practices to curb these inadequacies in public procurement.
Specific objectives
To determine how the placement and positioning of the procurement department contributes to its efficiency and effectiveness
To establish whether there is compliance or non-compliance of PPDA (2005) and its regulations (2006), and establish reasons for non-compliance, if any.
To assess the capacity of PPOA and other oversight bodies to oversee effective implementation of PPDA (2005) and its regulations (2006).
To determine human resource related factors that contribute to inefficiency and ineffectiveness in the public procurement function.
Research questions
Does the placement and positioning of the procurement function in the organization affect its effectiveness and efficiency?
Do government institutions comply fully, with the provisions of PPDA (2005) and regulations (2006), and what factors contribute to non-compliance if any?
Do PPOA and other oversight bodies have sufficient capacity to oversee the implementation of the provisions of PPDA (2005) and its regulations?
What human resource related factors specifically hinder the efficiency and effectiveness of the procurement function?
Justification/Rationale
The study will contribute immensely to the knowledge on effectiveness of the public procurement function in Kenya. Among the main beneficiaries of the results of this study are: the government and its regulatory agencies, public corporations and the general public.
The Government of Kenya
The government will be better informed in formulating procurement related policies. It will also be able to deal with the loopholes in the implementation of its procurement policies and regulations as identified by the study.
PPOA
The PPOA, in discharging its mandate, will be better informed on the critical areas that need closer monitoring.
KISM
The Kenya Institute of Supplies management, KISM, will benefit by knowing areas of deficiencies, how procurement function is managed in the public sector and qualifications of personnel manning procurement offices in the public sector.
KACC
The study will expose loopholes leading to corruption and make recommendations on preventive measures that can be undertaken to reduce chances of corruption. Additionally it will determine the extent to which procurement professionals subscribe to ethics from professional bodies.
Limitations and delimitations of the study
Time
The time allotted for the study is quite short to allow a comprehensive country wide study. However the quality of the study will be ensured by purposively picking out a representative sample in Nairobi.
Cost
The cost of data collection is expected to be high if a correspondingly large sample will be selected. However, in mitigation of this, the researcher will pick a small sample purposively while ensuring that all variability in the population is adequately represented.
Poor responses
Due to the nature of the work of procurement officers, some of them might not get time to fill out the questionnaires. In addition, due to the general perception about public procurement in Kenya, some respondents especially the public procurement officers may shy off in answering the questionnaires objectively for fear of unearthing various unethical practices, which may lead to sealing the loopholes after the research. This may not be to their interest. The researcher will design the questionnaire so has to have short, succinct, non- self-incriminatory and easy to understand questions. This will ensure that the respondent is curtailed and discouraged by the mere size of the questionnaire upon receipt. To allay these fears, the researcher, will assure the respondents as part of the questionnaire clear instructions, that the “information sought by him, will only be used for the purposes of academic ventures”.
CHAPTER 2: LITERATURE REVIEW
Introduction
Public procurement is broadly defined as the purchasing, hiring or obtaining by any other contractual means of goods, construction works and services by the public sector. Public procurement is alternatively defined as the purchase of commodities and contracting of construction works and services if such acquisition is effected with resources from state budgets, local authority budgets, state foundation funds, domestic loans or foreign loans guaranteed by the state, foreign aid as well as revenue received from the economic activity of state. Public procurement thus means procurement by a procuring entity using public funds (World Bank, 1995). The items involved in public procurement range from simple goods or services such as clips or cleaning services to large commercial projects, such as the development of infrastructure, including road, power stations and airports.
Public procurement is different from private procurement, because in public procurement the economic results must be measured against more complex and long-term criteria. Furthermore, public procurement must be transacted with other considerations in mind, besides the economy. These considerations include accountability, non-discrimination among potential suppliers and respect for international obligations. For these reasons, public procurement is subjected in all countries to enacted regulations, in order to protect the public interests. It is worth noting that unlike private procurement, public procurement is a business process within a political system and has therefore significant consideration of integrity, accountability, national interest and effectiveness (Wittig, 1998).
In his article, entitled Public Procurement and the Development Agenda, Wittig says that, Public procurement is a business process within a political system. Failure to properly balance these elements can lead to wasted effort and poor development results within the most important single marketplace in developing countries. He further notes that Public procurement remains a big part of the economy of developing countries, accounting for an estimated 9-13% of their gross domestic product. Nevertheless, it is an area in need of attention since resources are not being properly managed in many countries, governing administrations in developing countries can reap benefits from improved management of their public procurement systems. With a more focused approach on the control of resources within this large internal market, greater value can be achieved in national budgets while developing local industry.
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Placement/positioning of the procurement function in the organization and Effectiveness
In the past, purchasing was regarded as a clerical function with purchasing acting as the “transaction accountant” between the buyer and the supplier. However, the purchasing manager has now become a manager of inter-firm information exchanges with responsibility for the selection and maintenance of the entire supplier value chain (Spekman et al.,1994). The supplier network is now viewed as playing an important role in the larger value adding network of the purchasing company with the potential impact and value that the supply network can add in the delivery of products/services to the final customer being recognized (Macbeth, 1994; Ellram and Carr, 1994). With the changing competitive structure of many industries and the need to be more flexible in a world of changing consumer tastes, companies have realized the importance of having an effective supply base. For example, with some 75% of the core components of its aero engine being outsourced, Rolls-Royce realizes that the performance of its suppliers is crucial if it is to compete with its rivals and that appropriately focused performance measures are central to its success (Synon, 1995). The purchasing function affects directly the ability of a firm to compete through its impact on quality, cost, technology, and supplier responsiveness.
The purchasing function is taking on a more strategic role in many organizations. An emerging view is that the purchasing function should be on an equal level of importance in the organization with marketing, human resource management, finance, and the production/operations functions. Purchasing is moving away from the traditional adversarial approach between the buyer and supplier towards collaborative relationships. The make or buy decision is being given more consideration because of its strategic implications. Purchasing plays a key role in corporate strategy through the selection and development of suppliers that support the organization’s competitive position. An understanding of the true cost implications of the purchasing process can make a significant contribution to the achievement of lower costs.
In their study published in the Government Financial Review (USA), McCue and Clifford (2001) sought to identify the patterns of change occurring within local government purchasing. Specific areas examined included the structural arrangements of local government purchasing, who is in charge and under what title, and what are the responsibilities of purchasing professionals when executing the purchasing process in governments. In addition, local government chief purchasing officers were asked to identify trends in the next decade that will impact the purchasing function in government.
In their report, McCue and Clifford (2001) note that as a number of state and local governments explore new ways to reduce costs, provide flexibility to service delivery managers, and integrate their decision-making processes, many are examining their purchasing function as a potential area for increased efficiency.
They further note that it is commonly believed that changing the purchasing process in government can generate substantial cost savings and contribute to overall efficiency by reducing red tape, providing service delivery managers with flexibility, and eliminating the number of reporting channels necessary to procure goods and services. As a number of state and local governments examine their purchasing departments, a common question that arises is: Should the purchasing function be centralized, decentralized, or should a modified purchasing structure be applied?
A central purchasing authority has long been believed to ensure purchasing integrity, fix accountability, and provide for the efficient transition of goods and services between the supplier and the consumer. Further, a central purchasing authority was desirable to limit the power of the agency, to assure professionalism, consistency and accountability in the conduct of public business, to provide for maximum procurement planning, to standardize the purchase of commonly used goods and services, and to link diverse agency needs in order to take advantage of economies of scale.
Recently, the centralized purchasing paradigm has been challenged by the decentralization paradigm. Under the auspices of the “Reinventing Government” movement, many contend that purchasing, especially in government, must be decentralized in order to provide more responsive support to end users, eliminate unnecessary and procedural obstacles to program flexibility, improve inter-departmental coordination, and empower service delivery managers to procure what they need without impediment by a centralized organization.
The federal government’s re-engineering process initiated substantial changes in Federal Acquisition Regulations that provide more authority to program managers to procure needed goods and services. On the state and local level, the National Institute of Governmental Purchasing (NIGP) reported in 1996 that only 40 percent of the respondents to its annual survey considered their government purchasing authority to be centralized (A Report of Procurement Practices, 1996, NIGP). In 1999, the Center for Advanced Purchasing Studies revealed that 39 percent of survey respondents reported centralized purchasing responsibility (Purchasing Performance Benchmark Survey of American Municipalities). Thus, it appears that the traditional model of centralized purchasing may not represent what is found in practice.
Heather Rodgers (2007), the head of HR department at British gas contends that it is only by the procurement department positioning itself as an integral part of the business strategy that it can run more effectively and efficiently.
A good purchasing department maintains a focus on three key imperatives: people, processes, and technology. You can’t have one without the other. In the same vein, purchasing departments that have succeeded in impacting the bottom line have done so with advanced tools, executive-level support, and cross-company commitment. The cross-company approach is what really drives purchasing leverage and ultimately bottom-line impact (MacKinnon, 2005).
Compliance/Non-compliance of PPDA (2005) and Public procurement effectiveness
Kagwe (2006) notes that there is widespread non-compliance of PPDA (2006), especially concerning public officials engaging in private enterprise that lead to conflict of interests. While the objectives of the Public Procurement and Disposal Act (2005) are to: maximize economy and efficiency; promote competition and ensure that competitors are treated fairly; promote the integrity and fairness of those procedures; increase transparency and accountability in those procedures; and, increase public confidence in those procedures, there are loopholes that must be addressed. Kagwe (2006), identified the following loopholes:
Legal Loopholes
First, it has been argued that the Act does not categorically state that all procurement records are public yet the entities are public institutions. Second, sections on disclosure criminalize whistle blowing. Third, the Act gives the minister unfettered discretion in constituting the Public Procurement Oversight Advisory Board yet this is the Body that will determine the effectiveness of the entire procurement process and actual implementation of the legislation.
Furthermore, it has been argued that there are challenges in implementation, where for instance, some public officials would claim urgency as an excuse to award a single contractor without competition; disqualify potential suppliers through improper pre-qualifications; interfere improperly in the work of evaluators; restricting information about contracting opportunities; and breach the confidentiality of suppliers’ offers among others. Generally, to date, the procurement process remains opaque, unfair, and anti-competition and riddled with corruption, whether or not one new law replaces another indicating that the problem runs deeper.
Genesis of the Problem
Dr. Crispin Odhiambo-Mbai traces the origin of the corruption menace in the public sector to early 1970’s. The rain started beating Kenya when the Ndegwa Commission, appointed in 1970, investigated the appropriate structure and remuneration of the public service. While it recommended that public servants be allowed to own private enterprises and hence run business, it also recommended that the office of ombudsman be established. The latter was not done, while the former was permitted, which resulting in widespread corruption and abuse of public office that have continued to plague Kenya since then hitherto.
Various people and reports criticized the above even before five years of implementation were over, but the government was slow to react, if at all. For instance, in 1975, the Habel Nyamu stated: “up to 1970, it was a necessary requirement that civil servants did not engage in trade or any other business… since the Ndegwa report broke this requirement and allowed civil servants to own any kind or property, … no one can stand up and argue that the efficiency of the individual civil servants who took uncontrolled advantage of this relaxation of this tradition was not affected somewhat adversely”. In this regard, professionalism was thrown out of the window while integrity was shown the backdoor.
Similarly, the Waruhiu Report of 1979 further indicated: “we have received overwhelming evidence to the effect that some public servants utilize government facilities in order to benefit themselves. Some are said to tender for government facilities…others are said to be in the habit of accepting rewards for work they are paid to do by the government…it has also been suggested that in the filed of purchasing, commissions are paid into bank accounts maintained by public servants abroad.” This is really tragic, but given that nothing has changed to date, makes it more tragic!
As recent as last year, when the department of public procurement and the European Union conducted a study, the Report indicated that checks and balances lacked in the entire procurement process. The Report also noted that there was inappropriate application of procurement method and authorization in the procurement process. Further, that some goods paid for were never delivered and that there was massive embezzlement of public funds under the pretext that the procuring agents were buying from the lowest bidder / supplier!
Kagwe (2006) concludes thus, “From the foregoing then, how would Kenya get out of the cul-de-sac, the dead end so to speak? While it is appreciated that there are watchdog institutions; however lame, and that there are codes of regulations; however unknown or applied; not to mention the legal provisions, however wanting; there still lacks incentives for good performance and political will. Generally, there is a selective application of sanctions where the “big fish” seldom get imprisoned. Admittedly, the current Executive Director of KACC once stated that “big fish, have big money, have big friends, and have big lawyers” indicating that KACC is riding against a wave of “sacred cows”.
Locally, the current constitutional dispensation and its attendant laws cannot give Kenyans the dose with which to stem corruption unless changed for the better. The unfettered powers in the Presidency, its inner circles and those close to the power would want to maintain status quo. That is, the ruling and political elite prefer to maintain the status quo than to have a procurement system that could put them on a level playing field with other competitors – whether in opposition or in government.
Thus, as Prof Abdalla Bujra, in Democratic Transition in Kenya, states: “since our vocal elite and politicians (especially those out of power and waiting in the wings – for the next election) also shout as loudly [as donors], we become even more suspicious that there is a common interest in using the issue of corruption as a ‘whipping-boy’ in order to divert people’s attention from other serious problems facing Kenyans”. This is, as Michael Holman argued, a “dance-of-make-believe”. The real agenda of the donors and their local “dancing partners” is to hold on to the economic, political and socio-cultural status quo in Kenya. In this regard, wait for no ‘saviour’ from the political elite or donor community; it is citizens themselves who can change.
Oversight Authorities’ Monitoring Capacities and Procurement Effectiveness
Overseeing Integrity and transparency of the public procurement system
The integrity and transparency of a public procurement system rely on a number of control mechanisms, including an effective control and audit system, an efficient appeals mechanism, a comprehensive information sharing system enabling civil society and interested stakeholders to conduct social audit, and effective ethics and anti-corruption measures. Without such control mechanisms, flaws in the procurement system may not be detected and addressed.
PPOA (2007) conducted an assessment of the public procurement in Kenya. The assessment identified a number of factors, which have contributed positively to strengthening the control systems of Kenya’s procurement system in recent years:
Firstly, Sound internal audit mechanism established and complied with: The Internal Auditor General (IAG) is responsible for the internal audit function across government, including in the area of procurement. The work of the IAG is governed by the Public Financial Management Act of 2003 (PFMA), to which Regulations have still to be issued. However, the IAG applies its Internal Audit Manual of 2005. The IAG undertakes internal control in all public entities, excluding parastatals, which are controlled by the State Corporations Inspectorate reporting directly to the Office of the President. Internal audit is carried out on an on-going basis throughout the FY and in accordance with the required annual work plan, thus providing the basis for a sound internal audit mechanism. According to the AIG, internal audit recommendations are generally complied with as they are directly linked to the budget performance report.
Secondly, a well-functioning and independent complaints review and appeals mechanism has been established: The complaints review system is clearly described in the PPDA and Regulations and provides precise conditions and timeframes as well as clear enforcement mechanisms. The Appeals Review Board (ARB) constitutes the first avenue of complaints, and the PPDA provides for ARB decisions which are based on information relevant to the case, which are balanced and unbiased, which are subject to judicial review, and provide for relevant remedies. Judicial review is conducted by the High Court. ARB decisions can be further appealed within the regular court system. The establishment of this well-functioning and independent appeals mechanism is a key achievement in ensuring a functioning and credible procurement system.
On the other hand, Kenya’s control systems are also characterized by certain weaknesses, the most important ones being: Firstly, Poor enforcement and follow-up on external audit recommendations: External audit is carried out on an annual basis by the Kenya National Audit Office (KENAO), which derives its mandate from the Constitution and is further governed by the Public Audit Act of 2003 (PAA). The KENAO conducts financial audit, systems audit and performance audit. Procurement is included in the latter. Unfortunately, implementation of KENAO recommendations remains flawed and lengthy. The KENAO reports to the Public Accounts Committee of the Parliament, and the Parliament then develops a set of recommendations. These are in turn passed on to the Treasury, which issues a Memorandum, which is the instrument upon which implementation of KENAO recommendations is based. The last set of recommendations adopted by Parliament related to the KENAO report for the FY 97/98.
Secondly, procurement audits are non-existing: While both the IAG and the KENAO undertake audit of procurement, none of these institutions are able or see it as their clear-cut mandate to conduct procurement audits. Thus, at present, procurement audits are not being conducted. The PPDA provides the PPOA with the mandate to inspect and audit procur
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