26432 Volume 1 ZAMBIA PEMFAR COUNTRY PROCUREMENT ASSESSMENT REVIEW Volume I MAIN REPORT TOWARDS EFFECTIVE AND TRANSPARENT PROCUREMENT MECHANISMS October 28, 2002 Operations Quality and Knowledge Services Africa Region The World Bank CURRENCY EQUIVALENT Currency Unit = ZMK ZMKI = USD 0.00025 USD1 = ZMK 3966,51' ABBREVIATIONS AND ACRONYMS ACC Anti-Corruption Commission AG Auditor General AIDS Acquired Immune Deficiency Syndrome ASIP Agricultural Training Program of Zambia BOT Build, operate. and transfer BOZ Bank of Zambia CAMEL Capital, Asset quality, Management, Eamings and Liquidity CDD Community Driven Development CIF Cost, Insurance and Freight CIPS Chartered Institute of Purchasing and Supply COMESA Common Market of Eastern and Southern Africa CPAR Country Procurement Assessment Review CSO Central Statistical Office CTC Central Tender Committee DG Director General ESAC 11 Second Economic and Social Adjustment Credit EU European Union EXD Export Declaration FILMUP Financial and Legal Management Upgrading Project FOB Free on Board GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GPA Government Procurement Agreement GRZ Government of the Republic of Zambia GSP General System of Preferences HS Harmonized System IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion Reports IDA International Development Association IFMIS Integrated Financial Management Information System LC Letter of Credit LIB Limited International Bidding LOI Letter of Interest Official Exchange rate, Bank of Zambia March 3, 2002. MAFF Ministry of Agriculture, Food and Fisheries MDD Management Development Division MMD Movement for Multi-party Democracy MOE Ministry of Education MOFNP Ministry of Finance and National Planning MOH Ministry of Health MOLA Ministry of Legal Actions MSL Medical Stores Limited Company MTFF Medium Term Financial Framework MWS Ministry of Works and Supply MZMK Million Kwacha NCB National Competitive Bidding OAG Office of the Auditor General OMC Oil Marketing Companies PAC Public Account Committee PAD Project Appraisal Document PAS Procurement Accredited Staff PCU Project Coordination Units PEMFAR Public Expenditure Management and Financial Accountability Report PIU Project Implementation Unit PS Permanent Secretary PSCAP Public Service Capacity Building Project PSI Pre-shipment Inspection PSRP Public Service Reform Program PSU Procurement and Supply Unit RFP Request for Proposals RFQ Request for Quotation ROADSIP Road Sector Investment Program SADC Southem African Development Community SBD Standard Bidding Documents SGS Surveillance Generale Suisse Si Statutory Investment SIDA Swedish International Development Agency SME Small and Medium sized Enterprises SOE State Owned Enterprise SRP 1I Social Recovery Program 11 TR Tender Regulations TTL Task Team Leader UNICITRAL United Nations Committee on International Trade and Laws USAID United States Agency for International Development VAT Value Added Tax WBG World Bank Group WCO World Customs Organization WTO World Trade Organization ZACCI Zambia Association of Chambers of Commerce ZAM Zambian Association of Manufacturers ZAMIM Zambian Institute of Management ZAMTEL The Zambia Telecommunications Company Ltd ZBIC Zambia Insurance Business College Trust ZCC Zambian Competition Commission ZESCO Zambia Electricity Supply Corporation Ltd ZMK Kwacha ZNCB Zambian National Commercial Bank ZNOC Zambia National Oil Company ZNTB Zambia National Tender Board ZRA Zambian Revenue Authority ZTBA Zambia Tender Board Act MAIN REPORT PREFACE This country Procurement Assessment Review (CPAR) is a joint undertaking between the Zambian Govemment and the World Bank to study and analyze the existing public procure- ment system in Zambia and to recommend suitable actions to improve the economy, effi- ciency, predictability and transparency of the procurement processes. It provides Government with tools to make changes and to improve the public procurement system and institutional framework. It was conducted in January 2002 and in March 2002 by a team comprising offi- cials from the Ministry of Finance and National Planning, and a multi disciplinary Task Force representing various concemed organizations set up by that ministry, a team from Govern- ment's consultants (PLS RAMBOLL) and World Bank officials.2 The CPAR will also be one of three core reports contained in the Public Expenditure Management and Financial Ac- countability Report (PEMFAR) being prepared by Bank and government. The CPAR team interviewed govemment officials and representatives of private sector or- ganizations, major donors, business associations, training institutions and NGOs, just as it vis- ited Local Councils, District Offices and the site of beneficiary projects in two locations. Other activities included a review of tender processing at ZNTB for 14 cases of large value procurement financed by govemment, a review of contract practices for 10 cases of procure- ment financed by the Bank and document research. The Task Force conducted internal meet- ings to collect data and formulate its recommendations. The CPAR team as a whole, including the Task Force, held a series of meetings to finalize this review. This report consists of the Main Report and Annexes. The Main Report presents the major findings and conclusions and related recommendations, and an action plan both short and me- dium to long term. The Annexes volume contains as Annex I the detailed report, including the questionnaires, which discusses each of the major issues in more details and is meant for those readers who would want additional information on these issues. In addition, the main documents referred to in the report are enclosed. 2 The team was led by Subhash Dhingra Senior Procurement Specialist. Other team members were Narayanaswami Viswanathan (Consultant) and from the country office: Mushiba Nyamazana (Economist). Mehmaz Teymourian (Deputy Chief of mission). Fenwick Chitalu (Financial Management Analyst), and Bwalya Mumba (Procurement Officer). The Govemment Team was led by Mr. David Diangamo, Chairperson / Permanent Secretary. Ministry of Finance and Eco- nomic Planning supported by government's consultants and the Task Force comprising. Mr. James Mulungushi. Director of Planning, Mr. B Msimuko. Principal Budget Analyst. Mr. J. B. Makumba. Head of Procurement Unit. Mr N M Shamaila, Director of Audits. Dr. Kabeta Muleya. Director General. Ms S Zyambo. A/Director - Goods and Services. Mr Muyangwa Akolwa, Director - Works. Mr. J K Njolomba. Director - Inspection and Standards, Mr. G. Mwela. Former Director General. Mr. Joshua Banda, Director of Procurement. Mr M K Simwanza. Director of' Procurement, Ms Clara Mangani. Assistant Warehouse Manager. Mr. P J Muyawala. Head of Procurement. Mr. F M Silunduko. Head. Emmas- dale Campus, Ms Betty Sombe. Director of Finance. Mr Richard Healev. President. Zambian Association of Manufac- turers. Ms Viola Mtamila. Chief Planner. Mr. Jason Songwe. Head of Procurement Unit. Mr. S D Chibuye. Head of Pro- curement Unit. Mr. E M Sikazwe, Pnncipal State Counsel. Mr. Tenthani Banda. Director of Administration. Mr. Wedex llunga. T.chnical Services Manager. ZMASIF. Mr. George Sikazwe. Procurement Manager. PSACAP, Mr Lwambe Mondoloka, Chairman. Association of Consulting Engineers. and Dr S M Mashamba. Executive Secretary, National Re- construction Council. The PLS RAMBOLL team comprised Claus B Nielsen (Trade Practice Expert), Claus Thomsen (Private Sector Expert). Soren Staugaard (Legal Exper) and Karen Sondergaard (Procurement Practice Expert). - I - PART I EXECUTIVE SUMMARY I BACKGROUND 1.01 Zambia's economy has not performed well over the past decade. During 1992-2000, av- erage annual economic growth averaged less than 1 percent in real terms. Population growth has averaged 3 percent, implying a drop in per capita income. With per capita income esti- mated at about $320 in 1999, Zambia is one of the poorest countries in sub-Saharan Africa. Its economy is undiversified, and depends heavily on mineral resources and exports, particularly copper, which generates over 70 percent of the country's foreign exchange eamings. Zam- bia's foreign debt makes it one of the world's most indebted states, which resulted in Zambia qualifying for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative in De- cember 2000. The economic outlook worsened further in early 2002, when Anglo-American Plc, a major stakeholder in the copper mining industry, began withdrawing from Zambia. In this context and with little scope for increasing revenue, improving the efficiency and effec- tiveness of public expenditures remains a key to reducing poverty. Development of a well- functioning procurement system, based on transparency, competition, economy and effi- ciency, faimess, and accountability, is-critical3. 1.02 Importance of Public Procurement in Zambia. Public procurement plays an impor- tant role in the Zambian economy. The total volume of public procurement in 2001 was esti- mated at USD 485 million, equivalent to 15 percent of GDP -- this is a higher proportion than the 10% estimated for most countries in Africa. The Central Tender Committee (CTC) of the Zambia National Tender Board (ZNTB) processed and approved procurement valued at 12 percent of GDP while another 3 percent of GDP was procured at a decentralized level by min- istries and provincial administrations. If even a conservatively estimated 10% of this cost could be saved through better procurement policies, practices and institutional arrangements, this would mean a yearly gain to the exchequer of the order of $ 50 million. 1.03 Assistance to and Progress of Public Procurement Reform. Recognizing the im- portance of efficient procurement for the national economy, public procurement system re- form has been on the Zambian govemment's agenda for almost a decade, during which a number of donor-funded projects supported this agenda. The government adopted the Public 3A Country Procurement Assessment Mission. led by Subhash Dhingra. was carried out in January 2002 and in March 2002. The overall objective of the CPAR exercise is to start a process for the government and the World Bank to work together to improve the accountability, integrity, and transparency of the procurement processes and to reduce the scope I. corruption. This exercise also provides the means to respond to the government's request to the World Bank to assist in developing plans for further reforming the public pro- curement system. The CPAR will also be one of three core reports contained in the Public Expenditure Man- agement and Financial Accountability Report (PEMFAR) being prepared by Bank and government. H - Procurement Action Plan (1996) to (a) implement a plan completely decentralizing procure- ment to ministries; (b) facilitate decentralization, establish a cadre of professional procure- ment staff, and support specialized training institutions in building cadre capacity; and (c) strengthen audit and oversight functions. The 1997 Country Procurement Assessment Report (CPAR) observed that the action plan implementation had moved slowly, particularly decen- tralization and establishment of a procurement cadre. The current CPAR concludes that the action plan's overall objectives have still not been realized, inter alia, due to insufficient ef- forts by ZNTB. Though a number of steps were initiated, planned reforms in significant areas have not been efficiently implemented: * Improvement of procurement capacity in the Procurement and Suipply Units (PSlUs) has been slow. In the 1996 action plan, setting up the procurement cadre emerged as a crucial step for delegation of procurement authority to PSUs. The cadre needs a defined career path and an attractive salary structure linked with a well-developed training system. These improvements were not initiated, and the cadre was not created. The capacity in the PSUs remains a problem except where ZNTB has seconded its staff to work in some ministries' PSUs. In such cases, the somewhat better capacity has enabled PSUs to achieve higher grades in the categorization system by which the ministries' procurement capacity is rated. * Implementation of the Action Plan (1996) did not get adequate attention. Examples are: (a) little or no progress in delegation of procurement authority 4 over 6 years. as the ZNTB did not give a single ministry full authority to conduct its own procurement. (b) partly because a procurement cadre was not created, procurement capacity building5 was unsustainable, as recently trained staff left for other jobs, (c) a promised corruption survey. financed by the Bank, was not pursued. and (d) anti-corruption meas- ures remained under-funded. Preoccupied with managino procurement, the ZNTB did not focus on the 1996 Action Plan. 1.04 Drafting of a Strategic Plan. Presently, in coordination with AfDB, the ZNTB has drafted a Strategic Plan (2002-2006) that envisages minor adjustments to legislation and dele- gation of procurement authority but limited to "certifying" all 51 PSUs, over time, but not au- thorizing them to do all their own procurement. The strategy, coverage, and content of this draft Strategic Plan could be enhanced as a result of the current CPAR. II. FINDINGS OF THE CPAR 1.05 Gaps in the Public Procurement System's Intentions and Practices. A gap be- tween intentions and practice pervades various aspects of Zambia's public procurement. De- spite a legal and institutional framework, weaknesses in its structure and content allow unde- sirable practices and procedures. While the ZNTB is expected to enforce procurement rules, Delegation of procurement authority to all PSUs b)y 2002 did not materialize. Of 51 PSUs. 24 are not yet certified; the monetary thresholds for the remaininc 27 are very low. The ZNTB is still involved in process- ing 80 percent of procurement. in practice, it is liberal in permitting exceptions. A system to register suppliers for small-value procurement, for example, has flaws that could engender corrupt practices. While short-lists are drafted on the basis of the registration list, each short-list is subject to misuse to favor par- ticular firms. Further, the registration lists are not systematically updated nor are the means available to check the data applicants submit in registration forms. Moreover, the system is liberally used for larger value items than intended. The ZNTB also has a significant supervi- sory role, but its preoccupation with processing procurement prevents this. The existing sys- tem for handling complaints features a too-narrow scope and design, lacks independence from the ZNTB which is involved in the procurement process, and it suffers from a perfunctory op- eration, causing supplier and contractor dissatisfaction to grow while malpractices continue. 1.06 The slow pace of delegation of authority to procure to the ministries and agencies is partly due to ZNTB's lack of confidence in their capacity. But the there are also other reasons for persistent lack of adequate interest in reform of public procurement. The lack of interest in ministries and agencies to actively pursue even the limited program of delegation of procure- ment authority is symptomatic of underlying causes such as preference for a system of dif- fused responsibility and accountability offered by the current lax systems and procedures and institutional arrangements. Any tightening of the arrangements would affect the distribution of rents be it ZNTB, senior officials or politicians. Though difficult to pin down in any coun- try, political interference in public procurement in Zambia is generally acknowledged. 1.07 This situation, combining poor legislation and procurement practices with political inter- ference and untrained procurement staff, fosters corrupt practices. Though the government has not initiated a survey on corruption financed by the World Bank some time ago, the CPAR noted a common perception in Zambia that substantial corruption is associated with public procurement. Yet the Anti-Corruption Commission (ACC), and the OAG which have roles to play in curtailing corruption, have been hampered by funding and little effective attention to their reports. 1.08 Legal and Institutional Weaknesses. The legal framework6 lacks robustness and fea- tures structural, and content, inadequacies. Basic principles of procurement are not captured comprehensively. Further, aspects that should be in the Act are in the regulations or guide- lines and vice versa. The ZNTB's role is not limited to oversight and policy functions, as it also must manage public procurement through CTC. Also, the neglected oversight functions include: (a) monitoring and gathering statistics on public procurement, (b) developing pro- curement capacities and capabilities, and (c) implementing public procurement reform. 5 Professional procurement staff is required to support delegation of procurement authority. Where the ZNTB has seconded its staff to ministries to operate procurement units with authority delegated to them, such PSUs procurement capacity is better. The legal framework is mainly based on the 1982 Zambia National Tender Board Act (ZTBA), which has limited scope and unclear enforcement mechanisms. It provides for the establishment of the Zambia National Tender Board (ZNTB). - IV - 1.09 Weaknesses in Procurement Procedures and Practices. Two current practices also foster corruption and higher prices: using negotiations as an accepted procurement method and misusing the registration system for purchases from short-listed firms. Further, the ZNTB's capacity to resist ministry pressure promotes acceptance of less cost-efficient and corruption-prone procurement methods. Additionally, relatively low thresholds (USD 300,000 maximum for ministries in the highest category for decentralization) lead to more costly pro- cured goods and civil works. These low thresholds cause ministries to split contracts into smaller sizes to avoid ZNTB involvement. The registration system is then used to buy items beyond the monetary threshold that the registration system normally permits. 1.10 Weaknesses in Procurement Management. In the few departments where they do ex- ist, procurement files are often incomplete. Also, there are no instructions on how to structure an official procurement filing system and to maintain individual files. Without a proper filing system supporting papers (such as performance guarantees) are inadequate for good contract management. Poor contract management produces avoidable losses to government. Also, pro- curement planning as a tool for conducting efficient and economic procurement is largely non-existent. Vital aspects of procurement planning (packaging, selecting appropriate pro- curement method and type of contract) are not planned early in the procurement process. In- evitably, substantial delays in processing and inefficient "urgent" procurement actions result. 1.11 Inadequacies in Budget Allocation and Funds Release System. The funds allocated 7 in the budget for each project and each ministry often are not fully released during the year7, and there are significant delays in the release of even these small amounts. This seriously af- fects efficient project implementation, procurement, and contract management. Consequences of the budget system's weaknesses include: (a) contractors' bills being held up for several months, delaying projects; (b) delayed payments incurring interest charges that are paid from a ministry's limited budget, further reducing funds for product payments, and (c) when con- tracts designated in foreign currencies have protracted payment delays, exchange rate changes cause larger amounts of local currency to be needed than originally planned. All this contrib- utes to higher procurement costs and avoidable losses to government. 1.12 Procurement Cadre. Even though a well-trained procurement cadre is crucial to effi- cient procurement, there has been no progress in efforts to set up such a cadre. Over 600 peo- ple have been trained in procurement at different levels, but most have left their jobs, leaving untrained people in many positions. Trained staff leave because of the lack of a career path, an unattractive salary structure, etc. ZNTB salaries are even lower than the Zambia Revenue Authority's. The ZNTB's staff and those in the ministries do not have defined career paths or a department responsible for managing the cadre and its capacity development. In the budget process. the funds allocated are often lower than the amounts required for good project pro- gress. The practice of allocating a "nominal" I Kwacha for "tentative" projects further strains the budget for other projects when more than the allocated I Kwacha is finally released to such projects. - v - 1.13 Capacity Building. Procurement training institutions8 exist, but need to upgrade their offerings to feature mid-career and specialized procurement training programs to supplement the supply management programs they currently conduct. 1.14 Anti-Corruption Commission (ACC) and OAG Handicapped by Insufficient Fund- ing and Salaries. The activities of the Anti-Corruption Commission and OAG are critical if Zambia is to achieve a well-functioning, fair, and transparent procurement framework. Though President acted recently to strengthen the ACC to fight corruption by creating a spe- cial cell whose role would also include procurement issues, unattractive salaries and condi- tions of service hamper its ability to attract and retain skilled personnel. OAG is also under- funded and its reports remain inadequately acted upon. III. MAIN RECOMMENDATIONS FOR THE WAY FORWARD 1.15 Central to any recommendations that emerge is the need for a "champion" for the Re- form program as it should not be left to be an internal program within ZNTB. Besides, such a program that needs to tackle the various vested interests in the statuis qluo can only be tackled by political will. 1.16 Given adequate attention to the above, the actions described below are priorities for im- proving the Zambian public procurement system. i. Establish a Procurement Reform Task Force (High Level Committee). Set up a High Level Committee that will be responsible for initiating and overseeing implementation of activities in the action plan developed by this CPAR. This Committee must have high- level members from, for example, ZNTB, MOFNP, ACC, and OACi, and members should not be allowed to appoint substitutes. The Committee should have a clear mandate and time frame for concluding its reform agenda. A Procurement Reform Implementation Unit (PRIU) should be created to manage day to day implementation of reforms and to act as the secretariat to the Task Force. This Unit should be separate from the ZNTB and should report to the Permanent Secretary in the Ministry of Finance. ii. Re-establish the Policy and Supervisory Role of ZNTB Immediately. Without waiting for new procurement legislation (see below), prepare refocus ZNTB to its policy and regulatory role already required under existing legislation. As the ZNTB Director General will manage the CTC until its dissolution in 3 years (see below), strengthen the secretariat of ZNTB to support it in this role by enhanced staffing (and possibly splitting it off from the current secretariat). Provide an adequate budget to support this objective. For example, the Zambian Institute of Management (ZAMIM) and Zambia Insurance Business College Trust (ZBIC). - vi - iii. Revise the Legal Framework.9 Ideally, a new procurement act whose content should be guided by the UNCITRAL Model Law and by current international best practices. Among other things, it should provide for a new procurement authority and a complaints system based in the procurement authority but with a separate independent, part time, Appeals Body. A Cabinet Paper should be developed for the new legislation, which Par- liament should enact. New regulations and guidelines should be developed on the basis of the new act. Pursuant to its enactment, a new procurement auitlhority should be estab- lished. A Director General and other staff for the new authority should be appointed to replace the ZNTB immediately on creation of the Authority. The Authority's specialized functions should be described and developed in detail. iv. Finalize the Plan for complete delegation of procurement authority. A phased, 3-year plan for complete delegation of procurement authority should be developed. The plan would give full authority to ministries and agencies to conduct procurement without ref- erence to or approval by the ZNTB or CTC. In the short term, the plan should appoint one or two provinces as pilot provinces for full decentralization. On completion of this proc- ess, CTC will cease to exist. v. Establish a Professional Procurement Cadre. Define the composition of the cadre to be established and supporting measures, including funding an adequately attractive salary structure. Start implementing such measures giving the cadre management function to the ZNTB until the new procurement authority (possibly called Zambian National Procure- ment Authority or ZNPA) comes into effect. The existing system of secondment of ZNTB staff to positions in PSUs directly managed by the Ministries and agencies should apply for all the staff in the procurement cadre. A human resource database should be es- tablished with both cadre members' curriculunm vitae and those applying for membership. A training action plan should be developed. vi. Re-design Registration List System. A revised Registration System should be defined. New guidelines should be developed that restrict its use to small-value contracts only. vii. Anti-Corruption Actions. The planned corruption survey should be implemented. Im- plementation should be coordinated with the Public Service Capacity Building Project (PSCAP). Anti-corruption clauses should be included in the standard bidding documents. *iii. Introduce Procurement Planning and New Filing System. A manual on procurenment planninig should be developed, containing clear instructions for introduction of best prac- tices. Release of budget funds from the budgetary system should be suitably linked to re- The Terms of Reference for the review of the legal and institutional framework, which is currently beinc developed with the AfDB, should be revised to consider the recommendations of the present report. The TOR should state clearly that revisions of procurement legislation should build on the UNCITRAL Model Law. - vii - alistic procurement plans. A separate procurement register should be defined. In addition, instructions and guidelines should be developed for PSUs on establishing and maintain- ing a procurement filing system. ix. Strengthen Training Programs and Training Institutions. A capacity assessment of training institutions should be carried out. The need for supplementary procurement train- ing programs should be defined. Required training programs should be developed and de- livered. - viii - TABLE OF CONTENTS MAIN REPORT ............................................i PREFACE ............................................i PART I ........................................... ii EXECUTIVE SUMMARY ........................................... ii PART II ............................................1 MAIN REPORT ............................................1 1. INTRODUCTION ............................................1 2. THE PUBLIC PROCUREMENT FRAMEWORK .............................................3 a. Legal and Institutional Framework .............................................3 b. Ongoing Legal and Institutional Reforms .............................................5 C. Assessment of the Legal and Institutional Framework ............................................. 6 d. Recommendations ............................................I 1 3. PROCUREMENT PROCEDURES AND PRACTICES ............................................ 14 a. Procurement Procedures ............................................ 14 b. Assessment of procurement practices ............................................ 16 c. Performance on Bank-Assisted projects ............................................ 20 d. Recommendations ............................................22 4. TRADE PRACTICES AND CUSTOMS ............................................ 24 a. The Zambian Trade Regime ............................................ 24 b. Main Recommendations ............................................ 25 5. PRIVATE SECTOR COMMERCIAL PRACTICES ............................................ 26 a. The Private Sector in Zambia ............................................ 26 b. Main Recommendations ............................................ 27 6. GENERAL RISK ASSESSMENT ............................................ 28 7. RECOMMENDED ACTION PLAN ............................................ 32 ACTION PLAN MATRIX ............................................ 35 Sequenced Actions Summarized by Major Categories - ............................................ 35 Short Term ............................................ 35 Medium to long Term ............................................ 38 - ix- ANNEXES (VOLUME I1) ANNEX I - DETAILED REPORT including Questionnaires ANNEX II - LIST OF MEMBERS OF THE TASK FORCE ANNEX HI - VOLUME OF PROCUREMENT IN ZAMBIA ANNEX IV - "CONTRACT REVIEW" OF WORLD BANK FUNDED PROJECTS ANNEX V - WORLD BANK PORTFOLIO ANNEX VI - LIST OF PEOPLE MET ANNEX VII - DOCUMENTATION PART II MAIN REPORT 1. INTRODUCTION 1.01 Background. Zambia's economy has not performed well over the past decade. During 1992-2000, average annual economic growth averaged less than I percent in real terms. Popu- lation growth has averaged 3 percent, implying a drop in per capita income With per capita income estimated at about $320 in 1999, Zambia is one of the poorest countries in sub- Saharan Africa. Its economy is undiversified, and depends heavily on mineral resources and exports, particularly copper, which generates over 70 percent of the country's foreign ex- change earnings.. Zambia's foreign debt makes it one of the world's most indebted states, which resulted in Zambia qualifying for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative in December 2000. The economic outlook worsened further in early 2002, when Anglo-American Plc, a major stakeholder in the copper mining industry, began with- drawing from Zambia. 1.02 Importance of Public Procurement. Public procurement plays an important role in the Zambian economy. The total volume of public procurement is estimated at 15 percent of GDP: In 2001, procurement of a value equivalent to 12 percent of GDP was approved by the Central Tender Committee (CTC) of the ZNTB, and goods, works, and services of a value estimated at 3 percent of GDP were procured directly by ministries and provincial administra- tions. This is a higher proportion than the 10% estimated for most countries in Africa. Al- though a survey on corruption for which the Bank provided financing has not been performned, it is generally accepted that various inadequacies in Zambia's public procurement system con- tribute substantially to corruption. These inadequacies include poor legislation, political inter- ference, poor procurement practices, untrained staff, and inadequate pay to procurement staff. In this context, a well-functioning public procurement system is highly important. Sound pub- lic procurement policies are among the essential elements of good governance, and a well- functioning public procurement system contributes to better service delivery and economic development. 1.03 Assistanice to Procurement Reform. Reform of the public procurement system has been on the Zambian government's agenda for almost a decade. This goal has resulted in a number of donor-funded projects, which have supported, and continue to support, the government's public procurement reform agenda. In 1993, the World Bank and the Zambian government agreed on a Financial and Legal Management Upgrading Project (FILMUP), which among other things, focused on improving the Zambian National Tender Board's and various minis- tries' procurement performance. In the mid-1990s, SIDA provided support for training and capacity building for improved public procurement. In ESAC II (the second economic and -I - social adjustment credit), strengthening and streamlining public procurement was an impor- tant element. The Public Service Capacity Building Project (PSCAP), which is currently be- ing implemented, seeks to strengthen, among other things, the Office of the Auditor General and the ZNTB in their roles of ensuring sound management of public funds. 1.04 Government Action. In 1996, the Zambian government adopted the Public Procurement Action Plan (1996), which aimed to develop the human resources of the public procurement system along with decentralizing procurement to various ministries and agencies and strengthening audit and oversight functions. In 1997, a World Bank Country Procurement As- sessment Review concluded that the action plan implementation had movecl more slowly than expected, particularly with regard to the planned decentralization and the establishment of a cadre of procurement professionals to support improved procurement activities. The current report concludes that, in many respects, the objectives of the 1996 action plan still have not been realized. A number of steps have been taken, but in significant areas, required reforms have not been implemented effectively, or reform results have not been lasting or have been otherwise insufficientlo. 1.05 Objectives of the CPAR. Against this background, the main objective of the Country Procurement Assessment Review (CPAR) is to provide the analytical basis for a dialogue on public procurement reform and to propose practical recommendations for short and long-term actions. To achieve this objective, the CPAR comprises: * A review of Zambia's public procurement structure, including the existing legal frame- work, organizational responsibilities, and capabilities and present procedures and prac- tices; * A risk assessment specifically related to the Zambian public procurement system; * Recommendations for reforms of the public procurement system and of trade and custom practices as well as private sector commercial practices; * A review of the country's trade practices, including customs and trade regulations and practices, and finally * A review of private sector commercial practices, including commercial regulations, regulatory barriers and private sector procurement. 1.06 The CPAR was prepared in the context of the Public Expenditure MJanagement and Financial Accountability Report (PEMFAR). The PEMFAR report is currently being prepared by Bank and Government in the context of Poverty Reduction Strategy support credits which call for assessment of a country's public financial accountability, including an assessment of public expenditure, procurement, and financial systems before the development of a Country Assistance Strategy and/or PRSC program in the country. This CPAR report will form one of the Annexes of this PEMFAR report, as will reports on the other subjects. '° However. the election of a new political leadership in Zambia in December 2001. appearing determined to fight corruption. may open up new possibilities for the efficient implementation of reforms -2- 2. THE PUBLIC PROCUREMENT FRAMEWORK A. LEGAL AND INSTITUTIONAL FRAMEWORK 2.01 Legal Foundations. The legal framework for public procurement in Zambia comprises the Zambia National Tender Board Act (ZTBA) of 1982, the Tender Regulations (TR), and the Procurement Guidelines. The ZTBA provides for the establishment of the Zambia Na- tional Tender Board (ZNTB) and the Central Tender Committee (CTC) in the ZNTB. The Tender Regulations provide for the establishment of tender committees in various ministries, provinces and agencies. They also define basic procurement principles such as procurement methods. 2.02 Some aspects of the regulations are supplemented by procurement guidelines. The ZNTB has issued a set of procurement guidelines (with the status of circulars) for formal ten- ders in procurement of goods and services, consultancy services and civil works, and informal tenders. In addition, there are guidelines on general conditions for contracts and for supplier registration. 2.03 The National Tender Board and the Central Tender Committee. The Tender Board Act establishes the ZNTB as an autonomous institution and defines the functions of the Board as those of regulating, and controlling the procurement, of goods and services for the govern- ment and parastatal bodies. In carrying out these tasks, the ZNTB may - through Ministry of Finance - formulate rules and regulations governing procurement, regulate procedures for the award of contracts, and formulate the conditions under which any rules and regulations gov- erning procurement may be varied or waived. 2.04 TR further defines the role of the ZNTB to resolve coniflicts in procurement matters. When a dispute arises between a tender committee and a contractor, either of the parties may refer the dispute to the ZNTB for a decision. The legislation or regulations do not provide guidance on applying sanctions. Furthermore, the regulation does not prescribe a time limit for the disposal of complaints, and the scope of complaints is limited to those between a ten- der committee and a contractor. The ZNTB's role of complaints resolution conflicts with its direct involvement in procurement processes. 2.05 The ZTBA authorizes the ZNTB to establish tender com,mittees in ministries, parastatal organizations, and provinces. This system includes a Central Tender Committee (CTC), which is explicitly mentioned in the ZTBA. The CTC and ZNTB are closely linked. They share the same location and secretariat, and some members of the CTC are also members of the ZNTB. CTC's role is to examine and authorize all procurement of goods, works, and ser- vices in both government and parastatal bodies above specified monetary thresholds. The CTC meets once a week to review and approve the procurement issues prepared by the secre- tariat. These issues predominately concern (a) tenders of a value that removes them from the - 3 - decentralized tender committees' authority, (b) approval of waivers of rules, and (c) approval of variations to approved contracts. 2.06 Procurement and Supply Units. At the decentralized level (the ministries and agen- cies), the various tender committees are supported by secretariats called Procurement and Supply Units (PSUs). The ZNTB determines the monetary thresliolds below which procure- ment may occur at the decentralized level without prior CTC approval. These limits are based on criteria such as the PSUs' administrative capacity in terms of human resources, office space, and equipment; budgets for daily operation; and experience and track records in pro- curement. 2.07 On this basis, the PSUs are placed in one of four categories: A, B, C, or D. The PSUs in category C are presently allowed to independently conduct procurement up to a limit defined in ZMK whose current equivalent is about USD 300,000. The corresponding limits for PSUs in category B and A are currently equivalent to USD 125,000 and USD 50,000, respectively. The PSUs in category D are "not-certified" units. These PSUs can only procure independently up to a value currently equivalent to USD 7,500. This system and these monetary limits mean that most public procurement must be done through the CTC in the ZNTB. This is supported by the CPAR findings that 80 percent of approvals are handled by CTC and 20 percent by all decentralized PSUs. Table 1. Monetary Thresholds applicable to Certification Categories for Procurement Support Units Category Certificationz Monetary threshold Nunber of PSUs A ZMK 200 million (USD 50,000) 17 B ZMK 500 million (USD 125,000) 4. C ZMK 1,200 million (USD 300,000) 6 D *'Not certified" 24 Total 51 2.08 At present there are 51 PSUs (two of the nine provinces have PSUs). Almost half the PSUs are in category D and, thus, are not certified. Another 21 are in the categories A and B (the two provinces are in Category A). Only six PSUs are authorized to carry out procurement up to a financial limit of about USD 300,000. Since the system began in 1996, not a single PSU has been given full authority by the ZNTB to procure without any monetary limits. -4 - B. ONGOING LEGAL AND INSTITUTIONAL REFORMS 2.09 As detailed above, there have been several attempts in recent years to reform or improve the Zambian procurement framework in different respects, most often in connection with do- nor-funded projects. The status of some issues follows. 2.10 Absence of Private Sector Involvement. As a part of the Public Procurement Action Plan (1996), the Tender Board Act was to be amended and a "Zambia Tender Advisory Coun- cil" introduced. The Council's intended functions included receiving views from organiza- tions and individuals connected with public procurement and making recommendations to the ZNTB. The proposed Council would have a majority of representatives from various stake- holders outside government. The revised legislation (Bill) was sent to Parliament, but has never been enacted. 2.11 Little Progress in Delegation of Procurement Authority. An important objective of the Public Procurement Action Plan (1996) was delegation of procurement authority. A number of PSUs were to be established in the ministries and agencies, and the govemment intended to gradually increase the monetary thresholds below which the PSUs would be allowed to carry out public procurement without central approval. The ZNTB now has a draft "Strategic Plan 2002 - 2006," which reaffirms that the ZNTB should not perform procurement, and the gov- ernment's shall continue this authority delegation process. However, the plan does not propose full delegation but limits it to "certification of all" PSUs into categories A to C should be achieved by 2003 within the related thresholds. 2.12 Stalled Capacity Building Plans. Another objective of the Procurement Action Plan (1996) targeted the professional capacity problem in procurement. The objective was to build a cadre of procurement professionals based on sound principles of (a) a defined and ensured career path, (b) an attractive salary structure commensurate with the skills required and mar- ket conditions, and (c) the establishment of a cadre management agency responsible for de- veloping the capacity of the cadre staff to ensure adequate numbers of skilled staff to satisfy demand, to find suitable placement for individual staff, and to develop capacity- and skills- building programs at various stages in the career path. Further, no permanent cadre of pro- curement professionals was established as originally intended. There has been no sustained progress in creating capacity as staff were trained but did not stay on in civil service jobs. 2.13 Underfunded Anti-Corruption Measures. Traditionally, the political will to fight cor- ruption has not been strong in Zambia. However, this situation may now be changing. The 1996 Anti-Corruption Commission Act first established the Anti-Corruption Commission (ACC) as an autonomous and strengthened institution that is not subject to the direction or control of any person or authority but reports directly to the President. The ACC's functions include prevention measures and powers to investigate and prosecute independent of the nor- mal channels of administrative complaint. By the end of 2000, the ACC had 184 professional - 5- staff plus 62 support staff. However, its offices are spread throughout the country and lack infrastructural support for effectiveness, such as vehicles. 2.14 Following the election in December 2001, there are signs that the political leadership may be willing to implement a zero-tolerance policy towards corruption. The President has initiated the establishment of a special Directorate in the ACC, which will, among other is- sues, investigate compliance with public sector procurement rules. The initiative will be coor- dinated with the ZNTB, the Office of the Auditor General, and other stakeholders. C. ASSESSMENT OF THE LEGAL AND INSTITUTIONAL FIRAMEWORK 2.15 Legal and Institutional Characteristics for a Good Putblic Procurement System. A good public procurement system strives for transparency, competition, economy and effi- ciency, and faimess and accountability. The analysis of Zambia's system is based on compari- son with the following desirable features: * A clear, comprehensive, and transparent legalfraniework. characterized by the presence of legal rules that are easily identifiable and govern all aspects of the procurement proc- ess; * Clarity of funictional responsibilities and accountabilities in the procurement function, which requires clear distinctions between those responsible for implernenting procure- ment and those accountable for proper procurement rules in the buying entities as well as the means to enforce these responsibilities and accountabilities; * An institutionalframework that differentiates between those carrying out the procurement function and those with oversight responsibilities, the latter of which requires separation from operational procurement matters, functional independence, and adequate budget and staff to perform efficiently; * Robust mechanisms of enforcement, in which rules and institutional arrangements are clearly established and duly supported by the proper means to enforcement; and * A wvell-trained procurement staff, necessitating a continuous, focused, and targeted train- ing program. (a) Reform of Legal Framework 2.16 Needed Upgrading of Legal Framework. A comprehensive legal framework for public procurement presently exists in Zambia. However, while the Tender Board Act defines the institutional framework, it does not specify the basic procurement principles of a public pro- curement system, such as procurement methods, basic rights of bidders, evaluation criteria, public bid opening, maintenance of records, etc. Based on experience with the current legisla- tion, the ZNTB is currently working with the AfDB to initiate a review of the legal and insti- tutional framework. It would be advantageous to base an upgraded legal framework on some features of the UNCITRAL Model Law and current international best practices, as it would - 6 - then meet all the criteria spelled out above as well as the recommendations arising from this CPAR. 2.17 Inadequate Oversight Functions. An independent oversight function in procurement serves to ensure public confidence in the procurement system. Important tasks in this respect are the monitoring of public procurement policies and practices and contributions to the de- velopment of these policies and practices. To prevent conflicts of interest from emerging, ef- ficient oversight requires the total separation of regulatory and overview functions from actual procurement, a clear mandate formnulated in legislation, and the necessary powers to enforce legislative objectives. 2.18 The legal framework of Zambian public procurement does not support this. Present leg- islation does not precisely describe the oversight functions relating to public procurement and there is no clear separation between the implementing agencies and the oversight function. According to the TR, the Central Tender Committee "performs the functions of the Board," and there is a significant overlap of the CTC and ZNTB membership. The CTC and the ZNTB are also supported in their daily operations by a common secretariat; in practice, the functions of the two are difficult to separate. The secretariat's Inspections and Standards De- partment represents an attempt to develop the oversight function. However, that function's development has been impeded by requirements to inspect and categorize the decentralized PSUs and the resource demands of examining and approving procurement cases for the CTC. Nevertheless, the current legal provisions do permit the ZNTB to define and implement its policy and regulatory roles, pending greater clarity being built into new legislation, as sug- gested above. 2.19 Insufficient Information on the Volume of Public Procurement. In connection with inadequate oversight and monitoring functions, there is presently no single source that can identify the total volume of public procurement. For the purposes of the CPAR, the Central Tender Committee was able to compile information from which an overview of centrally ap- proved procurement could be constructed. But such information does not form part of the normal monitoring and review efforts of the ZNTB. For the same reason, it was not possible for the ZNTB to provide the corresponding data at the de-centralized level. For a proper su- pervisory role, the ZNTB should obtain this and other relevant data to critically examine the performance of public procurement and take corrective measures. 2.20 Inadequate Complaints System and Unclear Enforcement Mechanisms. The ZNTB is defined in the Tender Regulations as the authority that resolves conflicts in procurement mat- ters but is limited to disputes between tender committees and contractors. It does not cover the larger scope of complaints, for example, by dissatisfied bidders. To ensure confidence in the objective, independent, and efficient handling of complaints, coverage should be more com- prehensive and an independent office, removed from involvement in the actual procurement - 7 - process, should handle the complaints. However, due to the overlap of membership in the ZNTB and CTC and the existence of the joint secretariat of the two bodies, the ZNTB's inde- pendence in this respect is questionable, at best. Furthermore, in present legislation, there is no guidance as to what sanctions are available for the ZNTB. It is, therefore, at the Board's discretion to select and apply sanctions. Nor does legislation prescribe a time limit for the dis- posal of complaints. The lack of an effective system for complaint handling is reflected in complaints being made to various agencies, such as OAG and ACC. 2.21 Unclear Reporting Linkages for the ZNTB's Supervisory Functions. The Tender Board Act does not specify to whom the ZNTB reports on the outcome of its activities. Ac- cording to part IV of the ZTBA, conceming "Financial and Other Provisions," the ZNTB re- ports to the "minister," presumably MOFED. For the legislative framework to support trans- parency and accountability, three elements should be clearly defined: what issues the ZNTB is to report on, who should receive the report, and when the report should be submitted. This will provide focus for the report's content. (b) Delegation of centralization of Procurement Authority 2.22 Insufficient Delegation of Procurement Authority. Despite government commitment to delegate procurement authority, it has proceeded very slowly since 1996. In real terms, mone- tary thresholds beyond which the PSUs are authorized to carry out procurement have not in- creased since 1996. Furthermore, since the adoption of the Procurement Reform Action Plan (1996), not a single PSU has been given full authority to procure without financial limits. The low thresholds for delegated procurement authority have fostered a tendency to split the size of contracts to remain below the threshold. While this avoided referring the proposal to the ZNTB for processing, it led to sub-optimal purchase prices due to smaller procurement pack- ages and decreased competition from a limited number of bidders being invited to bid. 2.23 There are several reasonzs for the slowv pace of delegationz of procurement authoritY'. Delegation of procurement authority requires an efficient framework for monitoring and con- trol and procurement rules, and a professional staff. An analysis of the ZNT]B's inspection re- ports revealed that, in many cases, the required professional staff is not in place. Furthermore, at the provincial and district levels, the Tender Board Act and Tender Regulations are not fully known and understood, causing many cases of non-adherence. The staff responsible for procurement often has other functions as well, and there are examples of tender committees not being established despite the ZNTB's recommendation to do so. Standardization of, for instance, local purchase orders, also is lacking as are proper filing systems. -8 - 2.24 Full delegation of procurement authority at the province level is unlikely to take place in the short term because systems and resources to handle decentralized procurement are not in place. However, according to the ZNTB, approximately 21 professional procurement ex- perts are needed in the nine provinces. It should be possible to reach this target within I to 2 years. To stimulate the process, one or two provinces could be appointed as pilot provinces for full delegation of authority. This would provide valuable experience and enable the le- gitimate experimentation with different practical solutions to problems as they occurred. (c) Procurement Cadre and Capacity Building 2.25 Insufficient Training and Salaries for Procurement Staff. In spite of government commitments in the Public Procurement Action Plan (1996), neither a cadre of highly skilled procurement professionals nor a cadre management agency has been established. Neverthe- less, assisted by donor support, various activities have aimed to strengthen human resource procurement capacities. From 1998 to 2001, around 600 persons received procurement train- ing in ZBIC and ZAMIM at different levels, and a group of 63 persons are currently being trained. 2.26 Even though training activities have been substantial, they have not efficiently ad- dressed the human resource problem in public procurement. This is primarily due to the large share of people who seek alternative employment opportunities after receiving procurement training. In 1998, the ZNTB defined the demand for trained procurement specialists in minis- tries and agencies as 157 positions. By June 2000, as many as 66 positions were vacant, and approximately half of the 91 people employed by the ministries were not trained in procure- ment at all. 2.27 Thze Importance of Pay Structure and Career Paths. The pay structure and career path for procurement professionals is, therefore, a key to the achievement of a procurement cadre. Currently, the staff employed and seconded by the ZNTB receives better pay than those em- ployed as civil servants by the ministries. Even the ZNTB pay structure is inadequate to retain staff. Its pay structure should be more competitive vis-a-vis wages in the private sector. The ZNTB's pay structure could be similar to that of other agencies with attractive salary struc- tures. 2.28 Need for Training Capacity Assessment and Development of Relevant Trainilng Pro- grams. Along with developing a procurement cadre, an assessment is needed of both the ca- pacity of relevant training institutions and the content of their courses as well as the funding available to implement training programs. At present, ZAMIM and ZBIC are the main train- ing providers in procurement. Both institutions currently offer the CIPS-based, l training pro- CIPS is the Chartered Institute for Purchasing and Supply, an international education and qualification body based in the United Kingdom. -9- gram. Additional training programs can be developed based on the expertise and facilities available in these institutions. 2.29 It is relevant to supplement the CIPS training system with various mid-career courses, and those that focus on special issues related to public procurement. Special courses could be developed to cover procurement issues that traditionally are cause for concern and compli- cated to handle. Examples include procurement planning, procurement of consultancy ser- vices, the evaluation process, filing and documentation, contract management, development of terms of reference using the logical framework approach, anti-corruption measures, and donor procurement systems. (d) Anti-Corruption Measures 2.30 Perception of Corruption in relation to Procurement. In 1998, the World Bank funded a planned survey on the public perception of corruption. However, the initiaztive was stopped after the call for proposals to carry out the survey appeared in the media. Another survey is now planned to be carried out within the framework of the Public Service C'apacity Building Project. Thus far, no survey of the public perception of corruption has been carried out. 2.31 It is the perception of the private sector, however, that corruption takes place in connec- tion with public procurement, both in the evaluation of tenders regarding short-listing and contracting, and in supervision of civil works contracts. In general, the private sector per- ceives the procurement system as unfair and nontransparent. Many private enterprises choose not to present proposals for publicly tendered jobs, as the enterprises do not believe that con- tracts are awarded on the basis of a transparent procurement process. Potential suppliers re- ported to the CPAR team that it is a common experience to participate in a publicized tender that is subsequently cancelled, only to find the contract resurfaces later, already having been awarded to one of the bidders without re-tendering. Some of the contracts reviewed by the CPAR team (in the review of 14 large contracts funded by government) exhibited the same phenomenon; the bidding process was "annulled" and then negotiated separately with one of the bidders. 2.32 Insufficient Funding of Anti-Corruption Commission. Against this background, the activities of the Anti-Corruption Commission are highly important if Zambia is to move to- wards a well-functioning, fair, and transparent procurement framework. The recent decision to establish a special directorate in the ACC to investigate compliance with public sector pro- curement rules is a step in the right direction. However, due to unattractive salaries and condi- tions for service, it is difficult for the ACC to attract and retain skilled personnel and, in gen- eral, it has been seriously hampered in its activities due to funding described by the ACC as "erratic and inadequate" in its 1999 report. - 10- 2.33 Code of Conduct for Public Employees ilt Procurement. Other anti-corruption meas- ures are relevant. Precise definitions of what is expected of a civil servant and what consti- tutes a conflict of interest are prerequisites for effective enforcement of procurement regula- tions. There is no general Code of Conduct for the Zambian public sector employees. The only guidance is given in the General Orders that regulate all aspects of public employment, which include a section on Conduct and Discipline but lack a general ban on conflicts of in- terest, and in the Financial Regulations that regulate all aspects of disbursement of public money. A Code of Conduct for procurement professionals was developed as part of the Public Procurement Action Plan (1996) but never implemented. It is still appropriate to consider de- veloping a general code of conduct for civil servants and for procurement professionals. D. RECOMMENDATIONS 2.34 With the objective of promoting transparency, competition, economy and efficiency, and fairness and accountability in the Zambian public procurement framework, the following is recommended: (a) Reform of Legal Framework 2.35 The legal framework should be reformed in the following key areas: * An upgraded legalframework should be adopted, based on the UNCITRAL Model Law. * The revised procurement act should contain2 tlre basic procuremnent prin2ciples of a public procurement system, such as procurement methods, the precise circumstances that call for different procurement methods, basic rights of bidders, evaluation criteria, public bid opening, price adjustment provisions, maintenance of records, etc. It should cover the ob- jectives and functions of a new independent policy and regulatory procurement authority, say, the Zambia National Procurement Authority (ZNPA), to replace the ZNTB immedi- ately on creation of ZNPA. Important functions of ZNPA should be monitoring procure- ment policies and practices, developing and managing the procurement cadre, conducting capacity building and outreach to contractors, consultants, and suppliers to engender a greater share of contracts to local organizations. * A reliable reporting system should be established whereby ZNPA can obtain statistical information on procurement activities at all levels. ZNPA should establish benchmarks and performance indicators to keep track of and measure the progress of procurement re- form and quality of actual procurement processes. * The secretariats of t/e CTC anid ZNVPA stiould be phrysicallv separate. It is expected that CTC secretariat will not be needed when decentralization is completed in 3 years. The au- thority's reporting obligations should be specified. * The establishment of an indepenrdent appeals bodv (part rimre) in conjunction with a well defined complaints system managed by ZNPA which will no longer have a conflict of in- terest as ZNPA will not conduct any procurement. - II - (b) Delegation of Procurement Authority 2.36 A number of steps should be taken to speed up the delegation of procurement authority. Complete delegation of procurement authority to the ministries in a phas,ed manner over 3 years, as proposed below, is feasible if supporting measures are taken in a concerted manner. These supporting measures include setting up the procurement cadre under the ZNTB's man- agement and positioning these personnel to the ministries (as ZNTB does at present except for staff hired directly by the ministries as civil servants) instead of requiring them to recruit and train their own procurement staff, thus rapidly enhancing the training of a cadre of procure- ment specialists, improving salaries, etc. The existing system of categorizing and certifying PSUs for specified monetary thresholds should be phased out and replaced with full authori- zation to the ministries and agencies for procurement decisions. The plan for this change could be the following: * Full authorization should be given to the six PSUs in category C in the first year of imple- mentation, to PSUs in category A and B in the second year, and to "not-certified" PSUs in the third year. The responsible management should be given a maximum of 6 months' no- tice to enable them to assess the capacities needed and adjust the organization. * In parallel with this, the "non-certified" PSUs (in ministries and agencies, including prov- inces) must be given 6 months' notice or more to prepare for complete decentralized au- thority. By the end of the second year of implementation, they should all be able to under- take procurement independent of the CTC. * To stimulate the decentralization process, one or two provinces should be appointed in the short to medium term as pilot provinces for full delegation of procurement authority. This would provide valuable experience. (c) Procurement Cadre and Capacity Building 2.37 A number of human capacity problems should be addressed. The priorities are: * A professional procurement cadre shouild be established based on the elements of (a) a defined and ensured career path, (b) an attractive salary structure commensurate with the skills required and market conditions, (c) the establishment of a cadre management agency responsible for developing the capacity of cadre staff, (d) placement of cadre staff into positions in PSUs based on matching experience and expertise with each PSU's re- quirements, and (e) the establishment of in-career capacity building programs managed by the cadre management agency. * The cadre should be managed bv tlhe new procuirement autlioritr (ZNPA). * To increase the competitiveness of salaries paid to procurement officials, the existing system of staff secondment from the ZNTB should be expanded to cover all procurement staff working in ministries or agencies. Funding for salaries to the cadre should be im- proved to the level of other agencies with attractive salaries. * To identify opportunities to upgrade their ability to deliver mid-career training, training instituitionzs soiould be assessed. Mid-career training programs should be developed (d) Anti-Corruption Measures 2.38 The following is recommended: * Sufficient funding should be ensured for the Anti-Corruption Commission. * The new Directorate of the Anti-Corruption Commission, which is to investigate, inter alia, compliance with public sector procurement rules, should employ procurement spe- cialists to assist with its tasks. * The functions and tasks of the foreseen new Directorate in the ACC should be coordi- nated with the new redefined procurement authority to ensure exchange of information and close cooperation in the fight against corruption in procurement. * public procurement tender procedures to use new anti-corruption clauses such as those used by the World Bank in its standard bidding documents. • The corruption survey presently planned under the PSCAP project should be initiated immediately. - 13- 3. PROCUREMENT PROCEDURES AND PRACTICES A. PROCUREMENT PROCEDURES 3.01 Use of Standard Bidding Documents Not Mandatory. The Procurement Guidelines contain one set of bidding documents for all types of products. The use of these bidding documents is not mandatory. As in the case of the long list of standard bidding documents of the World Bank, Zambia also needs a wide range of bidding documents to support the various types of products and services to be procured. 3.02 Award Criteria. The Tender Regulations do not detail the range and nature of award criteria that should be applied in the various tender methods nor do they detail the procedures for applying them. The only reference to award criteria in the regulations is in the descriptions of the tender committee's functions, where they specify "that the committee must ensure that the criteria used in evaluating tenders is fully consistent with information given in the tender documents." The Procurement Guidelines for services and goods do not provide any guidance on applying award criteria and arriving at the "lowest evaluated bidder." The guidelines for civil works, however, mention both a technical evaluation and a commercial evaluation, list- ing a number of standard criteria for each section. 3.03 Registratiotn System for Small Value Procurement. Zambian public procurement relies on a registration list system for identifying and assessing the potential suppliers' qualifica- tions. The Tender Regulations require the Central Tender Committee to register suppliers of goods, works, and services at the central level and the PSUs to register suppliers at the decen- tralized level. According to the Guidelines, this registration list assists the PSUs with market information and enables them to carry out "informal" procurement (below the monetary limit of ZMK 30 million or about USD 7500) with diligence. The Guidelines provide for central registration of suppliers that sell items of general use for all public sectors at the CTC/ZNTB. In addition, all foreign firms are to be registered at the ZNTB. Each ministry also requires a separate registration for items of non-general use. This leads to multiple registrations for a supplier or contractor. Consultants are not required to be registered in areas such as quantity surveyors. 3.04 The ZNTB/CTC list is circulated to the purchasing ministries or agencies. Application forms are available at the National Tender Board and the PSUs. There is a registration fee of between ZMK 50,000 and ZMK 200,000 (equivalent to USD 12.50 to USD 50). Companies must pay a fee to each ministry or agency where they request to be registered. Both the ZNTB and PSU can refuse applications for registration. The basis for refusal is not defined in detail. There is no appeal, except to the ZNTB itself. - 14- 3.05 Tender Methods. The Tender Regulations and Procurement Guidelines define a number of different procurement methods. These methods differ in terms of their openness to poten- tial suppliers. 3.06 A Formal Tender is required to be advertised in the Government Gazette and is for con- tracts exceeding ZMK 30 million. It is equivalent to an "Open Tender," which is open to all who respond to a national or intemational advertisement. There are no thresholds indicating when to advertise internationally. The Tender Regulations imply the Formal Tender to be the preferred procurement method. A Special Fornmal Tender is an exception to the Formal Ten- der that is used where quotations are requested from a number of potential suppliers. The minimum number of quotations is not specified. An Inffonnal Tender is not advertised. The contract value should not exceed ZMK 30 million for,government bodies or ZMK 30 million for parastatals. The approving authority (CTC, Head of Department in Ministry, etc.) depends on the value of the contract concerned. For Informal Tenders, bids are required to be invited from at least three contractors or suppliers. Another recognized method of procurement is nze- gotiation. The TR permits a tender committee to (i) authorize direct "negotiation" and, (ii) the Special Formal Tender procedure. These exemptions from the preferred Formal Tender method are on conditions that are broad and open for interpretation. For instance, negotiation and the Special Formal Tender may be allowed when civil works of a "specialized and com- plex nature" are involved or "highly specialized" equipment is to be obtained, or when the goods and services to be obtained are of a "personal or professional nature" or "no acceptable tender from all formal tenders previously invited" has been made. 3.07 Single sourcing of consultancy services is not mentioned in the Act but appears in the Guidelines. The criteria for allowing for single sourcing are broad; for example, the preferred company or consultants have a close association with similar projects, have specific expertise that is not widely available, or have undertaken similar assignments before. Single sourcing is not allowed for the procurement of civil works and goods. 3.08 No comprehensive list of procurement methods is definied. The various tender methods are not comprehensive enough. Also, the definitions of the methods are scattered over differ- ent legislative documents. The UNCITRAL Model Law includes a comprehensive description of procurement methods, which can serve as a benchmark for improving the current provi- sions. 3.09 Bid and Opening of Bid. To avoid malpractice, bids should be opened immediately af- ter the announced bid submission time. This important principle is not clearly specified in the procurement regulations. In practice, most bids are opened immediately after the expiry of the deadline. However, delays of as much as a few days in the opening of bids do occur. - 15 - B. ASSESSMENT OF PROCUREMENT PRACTICES 3.10 In assessing procurement practices, an important issue is whether practices support a transparent, fair, and accountable procurement system, which promotes competition among suppliers. (a) Regulatory Framework 3.11 Practices Differfrom Formal Objectives. The Zambian public procurement system is characterized by a divergence between overall, formal legislation and objectives on the one hand and daily practices on the other hand. This divergence is manifest in the general appre- ciation of procurement rules and, in particular, the application of tender methods, registration system, and the enforcement of rules by the ZNTB, which waives its rules liberally. This di- vergence is possible in large part because of the vagueness and imprecision of important leg- islative and regulatory documents. The imprecision enables a number of interpretations and the arbitrary application of procurement rules. Political interference and the weak will of the CTC and ZNTB to enforce their regulations also support this divergence. The result is a pro- curement system that is perceived among potential suppliers as unfair, ambiguous, nontrans- parent, and subject to misuse. 3.12 Informal Tender and Negotiations Widely Used for Procurement. Even though the Tender Regulations imply that Formal Tenders should be the predominant tender method for larger value procurements, this is not the predominant practice. On the contrary, both the In- formal Tender and negotiation methods are widely used. 3.13 While Informal Tenders are to be used only for small value contracts (not exceeding ZMK 30 million, equivalent to USD.7,500), it is a frequent practice for PSUs to seek CTC's waiver for Informal Tenders for larger value contracts. These are then awaried to registered suppliers using the Special Tender method. This circumvents the Formal Tender method re- quirement. In practice, CTC is frequently unable to strictly enforce the rules and tends to bow to the pressure from the PSUs to allow the use of Informal Tenders. This phenomenon was noticed even in the 14 cases of large-value procurement at the CTC reviewed for this CPAR. 3.14 Another frequent practice is to "ainnul" a Fonnial Tenzder procedure mid-way during processing. Immediately thereafter, "niegotiationts" are initiated with bidders from the very tender that was annulled. This undesirable practice of ainnilinenr followed by ntegotiations was observed also in the 14 large-value cases. This practice entails nontransparent procurement and works against faimess and competition. -16 - (b) Inadequacies and Misuse of the Registration System 3.15 Registration List System Considered Unfair and Nontransparent. In all procurement, it is important for the procuring entity to evaluate bidders' qualifications and capacity to en- sure their ability to deliver the promised products. To prevent arbitrary decisions, it is impor- tant that the procedures and criteria used to assess the qualifications of the bidders are open and transparent. Tendering with initial pre-qualification and a subsequent short-listing of bid- ders is one way to achieve this. However, the Tender Regulations do not define these qualifi- cation methods, nor is any guidance on these methods available. Instead, the registration list system described earlier is used. While short-lists are drafted on the basis of the registration list, each short-list is subject to misuse to favor particular firms. Further, the registration lists are not systematically updated nor are the means available to check the data applicants submit in registration forms. Moreover, the registration system is used for much higher value con- tracts than the regulations intend. 3.16 This non-transparent system, which does not truly assess bidder qualifications, is per- ceived as being misused or not used as intended in establishing short-lists. The fee for regis- tering as a potential supplier is perceived as a tax, and the ministries see it as an important revenue generation activity. The system, as currently designed, is a potential source for cor- rupt practices. 3.17 The use of the registration system is widespread even though regulations require it to be limited to small value items (commonly termed as a "shopping" method). Widespread use, including for larger value procurement than intended in the system, enhances the scope for corruption and also results in costlier procurement overall. (c) Administration of Procurement Procedures 3.18 Insufficient Guidelinzes for Procurement of Conzsultancy Services The guiidelinies for consultanzcY services are, in a number of respects, broad and imprecise. A proper definition of "consultancy services" is lacking while the criteria for selecting a method, identifying bidders. and determining selection and evaluation processes are open to interpretation. For certain pro- fessions (surveyors, architects, etc.), the registration system described earlier is used for shtort- listing consultants, in addition to "registers maintained by professional bodies of members of firms." The award process permits opening the best three technical proposals without regard to a minimum threshold of quality. Financial proposals are opened privately by a committee, a process which is not "open" to the bidders. The criteria for the sinigle source selection method are imprecise and allow for liberal use of this method. In all consultancy contracts, negotia- tions are allowed without restrictions, both in regard to substantial elements of the specifica- tions and for unit rates already offered. Such liberal access to negotiation presents a high riskl of collusion and non-equal treatment of bidders. - 17 - 3.19 For donor-funzded consultancy contracts, donor procurement requirernents are followed. In practice, much of the consultancy services procured with governientefuids are for routine assignments such as architects, engineers, and quantity surveyors, where the registration sys- tem (with its attendant weaknesses) is the primary basis for short-listing. An earlier practice of hiring civil servants as preferred providers for consultancy services has been largely, though not completely, abandoned. Today, this practice is known to continue mainly for some gov- ernment-funded contracts. 3.20 Insufficient Proceduresfor Use of Domestic Preference System. The domestic prefer- ence system applies only for goods manufactured in Zambia (15 percent) or for imported goods held in stock in Zambia (5 percent). The SMEs (small and medium enterprises) receive a preference of 25 percent for manufactured goods supplied by them. No preference is permit- ted for domestic civil works contractors. In practice, CTC and the ministries have difficulty applying these preferences as the means of application are not described in any detail. The procedures also do not have provisions requiring a minimum domestic contribution by the manufacturer to be eligible for the preference. No data is maintained on the impact of, or inci- dence of, the use of the domestic preference system for goods manufactured, or goods im- ported and stocked for sale locally. 3.21 Insufficient Filing Systems. A number of shortcomings characterize the present filing system of public procurement. Files on procurement are not always maintained. Where they are maintained, they are not complete and vital documents (example, performance guarantees) are not readily available when needed. There is no clear guidance on what data should be maintained in the filing system and its structure (as government has directed for other filing systems) and no special filing system has been developed for documentation linked to the pro- curement process. There is a lack of appreciation of the importance of and methods for main- taining files. The result is files that are generally incomplete. A review of World Bank-funded projects documented serious problems in managing procurement records. This situation also leads to ineffective contract management when vital documents, such as performance ouarantees or the contract itself, cannot be found when required. 31.22 Insufficient Procurement Planning. Except in isolated ministries, which practice a sys- tem limited to procurement "scheduling, the use of procurement planning as a tool for con- ducting efficient and economic procurement is largely non-existent. The CPAR team was ad- vised that procurement planning is not done as there is no certainty that the funds allocated will be available in full, or in time, when needed. While the funds problem affects contract scheduling, other vital aspects of procurement planning (such as packaging, choosing, the ap- propriate procurement method and type of contract, etc.) are not taking place early in the pro- curement process. Consequently, there were many cases where prior agreement on these as- pects was lacking, which caused delays; when the actual bid documents were forwarded to the - 18- CTC, these choices were questioned. The guidelines are silent on the need for and importance of procurement planning, and on when and how it should be done. 3.23 This state of affairs results in a large incidence of "urgent" cases of procurement. In ur- gent cases, suboptimal methods of procurement must be used, undermining efficient and eco- nomic procurement. The review of 14 large-value procurement contracts in the ZNTB re- vealed that valuable time (as much as 2 to 3 months) was often lost while ministries and the ZNTB discussed the choices made without due process. (d) Payments and Procedures 3.24 Unreliability in Release of Funds Allocated to Ministries in Budget The funds allo- cated in the budget for each project for each ministry are generally not released to the full ex- tent during the year. Also, there are significant delays in releasing even the small amounts that the budget office finally agrees to give. Statistics are not maintained, but it is generally agreed that this occurs too often and seriously affects project implementation, efficient procurement, and contract management. This unreliable state of affairs has several consequences, including: (a) contractors' bills are often held up for several months, which delays projects, makes con- tractors wary of bidding on government contracts, and leads to higher prices, (b) delayed payments incur interest charges, which are paid from the ministry's limited budget, thereby further reducing the funds available for product payments, (c) when contracts are designated in foreign currency and payment delays are protracted, exchange rate changes have been known to cause a larger amount of local currency to be required than was originally provided. 3.25 Further, in the budget process, the funzds actuallv allocated are often lower than the amounts required for good project progress. Also prevalent in the budget system is a practice of allocating a "nominal" I ZMK for "tentative" projects that "may" be approved during the budget year. While this allows such tentative projects to be listed in the budget papers for eli- gibility to use the budget funds during the year, it further strains the budget for other projects when more than the allocated I ZMK is finally released to such tentative projects. Subse- quently, it exacerbates the problem of adequate and timely release of funds. 3.26 External Payments Procedures. The use of Letters of Credit as a means of payment has declined both in the public and private sector since 1992, when restrictions on the use of for- eign currency were abolished. Before then, it was mandatory to go through a central bank and open Letters of Credit on all amounts above USD 5,000. Now it is up to the buyer and seller to agree on the means of payment. Opening an LC takes between I and 2 weeks. The proce- dure, as presented by the banks, is normal compared to practices in other countries. 3.27 An analysis conducted by the Office of the Auditor General provided several reasons for the decline in the use of Letters of Credit, mainly related to goods imported by local agents - 19 - that are contracted as suppliers. Such agents do not have their own financial resources and demand electronic money transfers to bank accounts abroad. The money is then used for buy- ing goods and services. Second, electronic money transfers are preferred because the system makes it possible to evade taxes. Third, companies prefer electronic transfer because it en- ables easy and safe money laundering. For government-financed public procurement, the re- lease of funds in this way, instead of with LCs directly to the foreign supplier, does occur, but a security is obtained before such advances are paid. For payments financed by World Bank, the opening of an LC is facilitated by the World Bank by a system of "direct commitment." For World Bank-funded projects, the incidence of opening LCs without recourse to a direct commitment method is low (statistics could not be obtained). Contrary to reports received by the CPAR team, delays by the World Bank in facilitating the opening of LC(s through provid- ing direct commitment were not found. Another reason attributed by some projects for lesss use of LCs, is the high cost in terms of bank charges. The commercial banks do not find it possible to charge lesser than they do. 3.28 Bonds and Guarantees. Bank guarantees normally give a better security for the buyer than do bonds. However, this requirement prevents a number of smaller companies from par- ticipating in public tenders because, for guarantees, banks require collateral, often in cash, which is difficult for such companies to provide. On the other hand, bonds are riskier as their encashment is not unconditional. Government regulations require that performance guarantees and guarantees for advances released should be obtained. However, govemment does permit the use of bonds in place of bank guarantees due to liquidity problems. PSUs do attempt to encash these bonds but data was not available. It was reported that bonds are accepted infre- quently by most government agencies. However, as mentioned earlier, these documents are often filed improperly and may not be available when needed. C. PERFORMANCE ON BANK-ASSISTED PROJECTS 3.29 The current active portfolio comprises 14 operations with total commitments of USD 463 million. Of this, USD 199.5 million has been disbursed by end of FY02. The Country Portfolio Performance Review for Zambia notes that project performance improved slightly since end of FY 2001 as there are now only two problem projects compared to five then.'2 3.30 Recently a number of procurement-related reviews have been conducted for various reasons. An Independent Procurement Review (IPR) was conducted in 1999 by a consulting firm (M/s Crown Agents). Ex-post Procurement and Statement of Expenditure (SOE) Re- views were conducted (a) in June 2001 for the HSSP and (b) in August 2001 for four other At the end of FY 2001 (June 2001), there were five problem projects: Urban Restructurinn and Water Supply Project (URWPS), Environment Support Program (ESP), Road Sector Investment Program Support Project (ROADSIP), Health Sector Support Project (HSSP), and the Power Rehabilitation Program (PRP). At the end of FY 2002 (June 2002), there are two problem projects: ESP and HSSP as two operations have been closed, and PRP performance has been upgraded to satisfactory - 20 - projects 3. In February 2002, the Bank conducted a procurement review of 10 selected con- tracts that were subject to DA prior review. All these reviews point to similar deficiencies in procurement capacity, procurement management, filing and documentation, and contract management. 3.31 In the case of one project (HSSP), cases of misprocurement were identified and re- ported to government. In the same project, it was discovered that the Special Account was used repeatedly to finance ineligible expenditures. Due to its improper uses of the shopping method, the project was advised to suspend this procurement method and use the National Competitive Bidding procedure instead. However, such serious irregularities were not noted in other projects. 3.32 For all projects, the common problems included: (a) lack of files and documentation; (b) bid opening procedures, etc., not rigorously followed; (c) prior review clearances not ob- tained in time; (d) deficiencies in important features of bid documents; (e) poor contract man- agement, including release of advances without guarantees; (f) deficiencies of capacity and capability in contractor firms awarded civil works contracts; and (g) cost overruns coupled with time overruns. 3.33 Al] these reports drew attention to inadequacies in the capacities of the PSUs. The inadequacies included (a) understaffing, (b) inadequate exposure to and training in procure- ment, (c) inadequate knowledge of filing needs and contract management issues, (d) lack of procurement planning and its use for efficient procurement, and (e) insufficient clarity in in- stitutional and organizational arrangements affecting the capacity of PSUs to perform effec- tively. 3.34 The slow pace of delegation of authority to procure to the ministries and agencies is partly due to ZNTB's lack of confidence in their capacity. But the there are also other reasons for persistent lack of adequate interest in reform of public procurement. The lack of interest in ministries and agencies to actively pursue even the limited program of delegation of procure- ment authority is symptomatic of underlying causes such as preference for a system of dif- fused responsibility and accountability offered by the current lax systems and procedures and institutional arrangements. Any tightening of the arrangements would affect the distribution of rents be it ZNTB, senior officials or politicians. Though difficult to pin down in any coun- try, political interference in public procurement in Zambia is generally acknowledged. Agricultural Sector Investment Program (ASIP). Economic Recovery and Investment Promotion Credit (ERIPTA). ROADSIP, and Social Recovery 11 Project (SRP 11). - 21- D. RECOMMENDATIONS (a) Improve the Regulatory Framework 3.35 The following is recommended for the regulatory framework: * The different tender methods and the precise conditions for their use should be adequately described in a revised procurement act, and not in the regulations. In this connection, a list of procurement methods should be defined consistent with the UNCITRAL Model Law * All applicable award criteria to determine the lowest evaluated bidder should be defined in an act. Their disclosure as part of the bidding documents should be mandatory. The principles for pre- and post-qualification should also be described in the procurement act. * The new procurement act should set very stringent criteria and conditions for negotiation. Recourse to "annulment" followed by negotiations should be banned. * Consistent with the revised legal framework, action should be taken to recast the regula- tionzs and giuidelinies governing public procurement. Regulations should elaborate the de- tails on the process and the technical details separately for civil works, goods, and consul- tancy services. Regulations should clearly specify that bid opening must take place im- mediately after the deadline for bid submission. * Domestic price preference for civil works contracts should be introduced with eligibility requirements similar to the provisions in Bank guidelines. For manufactured goods, a cri- teria of minimum value added should be introduced. The price preference for (a) imi- ported goods held in stock in Zambia should be abolished as this represents a subsidy with limited lasting impact on domestic capability generation, and (b) goods produced by Zambian SMEs should be reviewed as the desired objectives are better achieved by other means. * Requirements regarding docunzenitation antdfiling should be addressed in the revised pro- curement act, and the Procurement Authority should develop detailed instructions for fil- ing, including a checklist to be used by the PSUs. (b) Improve the Registration System 3.36 Regarding the system for identifying qualified bidders, the following is recommended: * The registration system for identifying potential bidders sholuld be redesignzed with the objective of (a) restricting the use of the system to only very small value items (below the equivalent of USD 7500) and (b) providing effective means for administration, enforce- ment, and monitoring of the system. * Private sector representatives should be involved in reviewing the registration list system. * The registration fee should be less expensive and reflect more directly the actual cost of registration. -22 - (c) Enhance the Administration of Procurement Procedures 3.37 The administration of procurement procedures should be reformed in a number of ways: * CTC should enforce the use of procurement metliod and related thresholds much more rigorously and only allow waivers in a few well-justified cases. * A full set of standard bidding documents should be developed. The use of standard bid- ding documents should be mandatory. * For the documentfiling system, a procurement register separate from the main register in each ministry should be established, containing a complete set of documentation for pro- curement activities in one place. The proposed new procurement authority should de- velop detailed instructions for filing, including a checklist to be used by the PSUs. * A manual on procurement planning should be developed. The system of procurement planning should be enforced. Methods of procurement, packaging, etc., should be defined and agreed to well before the procurement process begins and should then be followed. Release of budget funds from the budgetary system should be suitably linked to realistic procurement plans (d) Facilitate Payments and Guarantees 3.38 The present practices for payments and guarantees call for certain reforms: * The system of allocation and release of funds to ministries under the government's budget should be modified to improve reliability and adequate availability of timely re- sources. * The use of Letters of Credit should be mandatory for procurement above a certain value. * In lieu of bank guarantees for bid security and performance guarantees, bonds may be allowed for small enterprises when it can be assessed that they are easily encashable. To secure the interest of the procuring entity, bank guarantees should be mandatory for lar- ger contracts. - 23 - 4. TRADE PRACTICES AND CUSTOMS A. THE ZAMBIAN TRADE REGIME 4.01 Procurement Issues. A central procurement issue in relation to trade is the application of transparent and internationally recognized customs and trade procedures, which allow the effective import and export of goods. A modem customs administration must be able to facili- tate trade flows through smooth import and export procedures and, at the same time, fulfill its role as a key revenue generator to the state budget. 4.02 Trade Policy. Zambia has adopted most of the international standards in terms of trade policies and customs regulations. As a member of COMESA (Common Market of Eastern and Southern Africa), Zambia has moved ahead of other member states in adopting tariff re- ductions of up to 80 percent on most tradable commodities. Zambia is also a member of SADC (Southern African Development Community) and has bilateral trade agreements with South Africa and Zimbabwe. Furthermore, Zambia has trade agreements with the European Union and the United States of America. 4.03 Tariffs and Taxes. Zambia has consistently followed a policy of reducing tariff levels, with significant rate reductions taking place in 1996. The current rates of customs duty range between zero and 25 percent, with 15 percent as the most common rate. In general, a 5 per- cent rate applies to raw materials, a 15 percent rate.to intermediate goods, and a 25 percent rate to finished products and luxury goods. In addition, there is a limited list of duty-free goods including, among other items, books, fertilizers, and primary forms of rubber and steel. The VAT rate is 17.5 percent. 4.04 Registration of Traders. All traders, including foreign firms using a national agent, must be registered. A prospective company must register with the Registrar of Companies at the Ministry of Commerce, Trade, and Industry. After that, a Certificate of Incorporation is issued. Within Customs, an identification number is allocated to traders who import, export, or transport goods. The import licensing system has been abolished. However, a certification procedure is applied for certain goods. Import certificates to clear goods are issued both to importers themselves and to customs brokers. 4.05 Organization and Human Resources. The Customs Department is part of the Zambian Revenue Agency (ZRA). Customs has 32 local offices and 8 regional offices located across the country, staffed with approximately 500 staff members. The staff in lower grades is pro- vided with only 3 weeks of training upon recruitment, whereas higher-grade officers with university degrees receive 4 weeks. There are incidents where newly recruited staff must han- dle work all alone. - 24 - 4.06 Computerized Customs System. In 1998, the computerized customs system, ASY- CUDA, was introduced. It includes all functions needed in a modem customs operation. Ver- sion 2 of ASYCUDA is currently in place, and the latest version, ASYCUDA++, will be in- troduced later in 2002. This version will reduce direct interaction between the customs bro- ker/trader and the customs officer, thereby significantly reducing the risk of corruption. ASYCUDA includes an automatic risk analysis module that supports the identification and selection of consignments, which represent a higher risk and, therefore, should be controlled further. Due to inadequate training, the risk analysis module is not being properly used, lead- ing to a high percentage of consignments (30-50 percent) being inspected. This causes delays and increases procurement lead time. 4.07 Under-invoicing and Forged Invoices. The incidence of under-invoicing and forged invoices is not higher than in other countries, but should be controlled to boost revenues and reduce organized customs and tax fraud. In this context, the Customs Department has intro- duced post-entry control as a supplement to the traditional transaction control at the border. However, to ensure effectiveness, the department is contemplating a more advanced system of integrating this control with VAT and profit tax audits for which it currently does not have the expertise. B. MAIN RECOMMENDATIONS 4.08 As most international standards in terms of trade policies and customs regulations have been adopted, and customs and licensing procedures are generally transparent, the following are recommended: * Basic training for customs officers should be increased at all levels. This would support effectiveness of both private and public sector procurement when goods are imported. Newly recruited officers need more comprehensive introduction and training. * Implementation of ASYCUDA++ should be co,ntinzued anzd suipported bv traininig. The use of the system's risk analysis module should be ensured to minimize corruption and lower the currently too-high inspection rates, which slow customs clearance. This step would also prevent revenue lost due to poor e-mail connections. * International assistance should be requested to improve ZRA's capacirv to redlce un?(der- inivoicing andforged invoices. Control efforts directed towards under-invoicing should be integrated with VAT control and audit of profit tax. * Trainlizng capacitv should be strengthened, and training should be provided for customs officers for carrying out efficient investigations of under-invoicing. -25 - 5. PRIVATE SECTOR COMMERCIAL PRACTICES A. THE PRIVATE SECTOR IN ZAMBIA 5.01 Competitiveness in a Liberalizing Economy. The competitiveness of major parts of Zambia's private sector has been improving steadily since the early 1990s, when Zambia took several significant steps towards a more liberal economy, including privatization of ineffi- cient, state-owned enterprises. Privatization has culminated in recent years with privatization of the mining sector. However, the recent decision of Anglo American to withdraw from Zambia is a seZTBAck in the private sector. 5.02 Private Sector Organizations. There are two major private sector organizations in Zambia: The Zambia Association of Chambers of Commerce (ZACCI) and the Zambian As- sociation of Manufacturers (ZAM). Together, they represent most of the enterprises in the formal private sector. 5.03 Private Sector Growth. Private sector employment has been growing since 1994 and continues to grow, but at a lower rate. At the same time, the private sector production is ex- panding. Private sector output, in general, seems to rise faster than employment, pointing to increased competitiveness and a more sustainable private sector. 5.04 Regulation of Commercial Practices. The Competition and Fair Trading Act of 1994 is the basic legal foundation for regulating commercial activities in Zambia. The Act covers anti-competitive practices, mergers and take-overs, trade agreements, anti-competitive trade- practices by associations, criteria for controlling monopolies and concentration of economic power, and consumer welfare protection. The Act established basic regulations, and neither enterprises nor their organizations find significant flaws in the regulation or have immediate suggestions for any amendments to the regulations. 5.05 Institutional Support to Implement Commercial Regional. The organization set up to implement the Act is the Zambian Competition Commission (ZCC), an autonomous corporate body under the Ministry of Commerce, Trade, and Industry. According to the ZCC, its limited resources make it difficult to exercise its powers. Many cases are not pursued due to the lack of staff. 5.06 Private Sector Procurement and Procurement Procedures. The volume of private sec- tor procurement cannot be estimated on the basis of the available data. Also difficult to esti- mate is the quantitative contribution of the domestic private sector to public procurement. In- dustry estimates the volume of private sector procurement at well below that of public pro- curement. For the majority of companies, there are no formal procedures for procurement, particularly among SMEs. Some large companies, especially the "privatized parastatals," have comprehensive and efficient procurement procedures. - 26 - 5.07 Professionalism and Capacity Building. There is room, and the need, for Zambian sup- pliers to be professionalized to meet the demands of procuring enterprises. The professional- ism and sustainability of suppliers is a major issue for Zambian private sector procurement. Some suppliers are professional in terms of good business practices, but many are not. 5.08 Private sector procurement systems and procedures There also are considerable defi- ciencies in general understanding and recognition of the procurement process. Zambian pri- vate sector procurement procedures can be grouped as (a) those with no formnal procedures for procurement, that is, the majority of companies, especially SMEs, and (b) "frontrunners" in private sector procurement, which applies to some large companies with comprehensive, effi- cient procurement procedures, especially "privatized parastatals." 5.09 However, procurement practices are company-specific and range from simple direct purchase/contracting, to short-listing for quotations, and open tendering, including interna- tional bidding processes. Open tender is more common for goods than for works. The larger the purchase, the more likely it is that an open or international tender procedure is applied. INCOTERMS are frequently used, with CIF and FOB being the most common. Multinational companies follow corporate rules and procedures, and they commonly buy only from corpo- rate-approved suppliers. 5.10 Purchasing and procurement is not generally recognized as a profession, and there is room for greater professionalization of the purchasing, supply, and procurement function in private enterprises. Related problems are unrealistic calculations and promises regarding what suppliers believe they can deliver; failure to deliver the promised goods or services, both in terms of under-deliverance and over-deliverance with claims for extra payment; and non- compliance with time schedules for delivery. There is also little understanding of the payment procedures agreed upon. Many suppliers insist on different procedures of payment than those originally agreed in the contract once they deliver the goods. B. MAIN RECOMMENDATIONS 5.11 The following are recommended: * Training in good business practices could be made available to Zambian enterprises. A training program could be developed and launched in cooperation with private sector in- stitutions such as ZACCI, ZAM and Zambian Enterprise Network Association through donor support. * Development of good business practices in the Zambian business community could be furthered by facilitating the development of a code of ethics for good business practices. ZACCI, ZAM and Zambian Enterprise Network Association should be involved in this work. - 27 - 6. GENERAL RISKASSESSMENT 6.01 In achieving a well-functioning public procurement system, the government should focus on managing the following risks: No. Risk to be managed What can happen How can it happen Risk mitigation I Institutional frame- * Faith in govern- * Oversight role of * Definition of a new work lacks separa- ment's procure- ZNTB unclear in institutional frame- tion between imple- ment system can- terms of tasks work that clearly menting agencies and not be built or and day-today separates those who oversight function maintained performance carry out and ap- * Decentralization * Role of CTC vis- prove procurement slowed down a-vis the ZNTB from those with pol- unclear icy and oversight re- * Conflict of inter- sponsibility est due to overlap of members Enforcement by * Implementing * Even though re- * Provide funding for OAG. ACC, and agencies don't re- ports document institutions procurement author- ceive direction lack of apprecia- * Revise the Audit ity remains weak needed for imple- tion of procure- Act to strengthen partly due to lack of mentation ment rules, it is mandate of OAG of- funding * General belief in not remedied fice the system not * Practitioners tend * Strengthen institu- built or maintained to choose own tional linkages be- because a breach interpretation of tween OAG/ACC of rules has no rules and procurement au- consequence * Those tempted to thority with regular * Corruption contin- misuse the sys- meetings of agen- ues tem to their own cies' CEOs * Even though re- benefit not pun- form plans exist, ished they will not be ef- * Reform plan not fectively imple- coordinated. mented because leading to fund- implementing in- ing provided on a stitutions (OAG, project-by- pro- ACC. ZNTB) do ject basis instead not have sufficient of a total pro- and constant flow gram basis of funds to operate 3 Legal instruments - * Enforcement * Various guide- * Review of legal act, regulations, and weakened with dif- lines developed framework guidelines inade- ferent practices by different quate and used insuf- developing due to PSUs ficiently lack of clarity and authority in rules - 28 - No. Risk to be managed What can happen How can it happen Risk mitigation 4 Lack of faith in the * Companies choose * Late payments * Government to im- government's pro- not to work for continue prove budgeting curement system by government be- * Registration sys- process to ensure the private sector cause of late pay- tem not transpar- availability of funds ments and non- ent for payments transparency in the * Bids rejected on Review of registra- bidding process, arbitrarv basis tion system which provides less competition * Use of short- * Companies that listing instead of work with the gov- open tendering ernment calculate on large contracts higher prices to compensate for late payments, etc. * Companies col- lude, preventing real competition and increasing prices 5 Lack of ability to * Pay structure un- * Procurement * Establishment of retain staff even changed and cadre staff continue to cadre, including ca- though many have not fully developed be hired as civil reer path and com- been trained as planned. High servants petitive and ade- staff turnover con- * The pay structure quate pay structure tinues and trained of procurement based on a grant- staff go to private staff linked to the aided system such as sector, where pay civil serve reform the ZRA. is 5-10 times better program. making * ZNTB seconds pro- * Difficult to attract a short-term solu- fessional procure- the right people for tion unlikely ment staff to im- training because prove the quality of skill improvements procurement proce- not linked to pro- dures and processes motion and better pay * Decentralization slowed down due to lack of capacity in the PSUs 29- No. Risk to be managed What can happen How can it happen Risk mitigation 6 Lack of faith and * Complaints sent to * Need to improve * Review of legal confusion regarding the wrong office the complaints framework and de- the procedures and and not addressed system generally velopment of new possibilities for par- in time agreed on, but complaints system ties involved in bid- * Bidders stop com- new independent enshrined in an act ding to file com- plaining due to institution han- plaints fear of not being dling complaints short-listed in the not identified future * Bidders seek solu- tions through al- ternative means 7 Slow pace of decen- * Management of * Lack of pro- * Establishment of the tralization -PSUs not the ministries and curement capac- cadre and all posi- given higher author- agencies cannot be ity continues as a tions in PSUs filled ity to handle pro- held 100 percent problem in the * Abolishment of the curement without responsible for PSUs PSU categorization continuous approval their procurement * No real com- system with a de- of CTC operation because mitment to de- clared target of 3 of constant CTC centralization years. involvement in ap- policy at political * Full authority given provals level because of to six PSUs by end * Contracts split to desire to be able of 2002 avoid referral to to influence and the CTC control contract * Full authority given * Procurement more awards through fromai003-2004P costly to handle for the present sys- the government tem. * Monitoring system built within new * Procurement procurement author- slowed down ity to ensure en- forcement of pro- curement legislation 6.02 The table below rates the likelihood of the government's ability to manage risks, with 4 representing high risk; 3, medium risk: 2, low risk: and 1, no risk. Risk to be managed Indicative assessment of risk not being managed Institutional framework lacks separation between implementing 3 agencies and oversight function Enforcement of procurement rules remains weak. partly due to 4 lack of funding Legal instruments (acts, regulations, and guidelines) are unclear 3 and inadequately used Lack of faith in the government's procurement system in the pri- 3 vate sector Lack of ability to retain procurement staff even though many have 4 been trained - 30 - Risk to be managed Indicative assessment of risk not being managed Lack of faith in effects and confusion regarding possibilities of 3 filing complaints Slow pace of procurement decentralization 4 6.03 The risk profile can be categorized as medium to high because of the need to adjust basic procurement system elements such as the institutional and legal frameworks. In combi- nation with the lack of funding, this is a high risk factor. - 31 - 7. RECOMMENDED ACTION PLAN 7.01 Central to any recommendations that emerge is the need for a "champion" for the Re- form program as it should not be left to be an intemal program within ZNTB. Besides, such a program that needs to tackle the various vested interests in the stat(s quo can only be tackled by political will. 7.02 The actions described below are of major importance for the improvement of the Zambian public procurement system. (See also the fully developed action plan in the AC- TION PLAN MATRIX at Annex Al and A 2). Actions in the Short Term 1. Establish a Procurement Reform Task Force (High Level Committee). Members should be appointed to a steering committee that will be responsible for initiating and su- pervising the implementation of the activities in the action plan. The committee must have high-level members from, for example, ZNTB, MOFED, ACC, and OAG. The members should not be allowed to appoint substitutes. The committee should have a clear mandate and time frame in which to conclude its reforn agenda. To support this work, a Procurement Reform Implementation Unit (PRIU) should be established. It should be re- sponsible to the Permanent Secretary. Ministry of Finance and National Planning. 2. Finalize the Plan for complete delegation of procurement authority. Develop a 3-year plan for the full delegation of procurement authority, divided into phases. The plan would give ministries and agencies full authority to conduct procurement without any reference to or approval by ZNTB or CTC. In the short term, the plan should appoint one or two provinces as pilot provinces for full delegation of procurement authority. 3. Re-establish the ZNTB's Policy and Supervisory Role Immediately. Without waiting for new procurement legislation, prepare the structure of the ZNTB for this role, which is already required under existing legislation. As the DG of ZNTB will manage the CTC un- til its dissolution in 3 years (see below), strengthen the secretariat of ZNTB to support it in this role by enhanced staffing (and possibly splitting it off from the current secretariat). Provide an adequate budget to support this objective. 4. Define TOR for Revision of Legal Framework. The Terms of Reference for the review of the legal and institutional framework, which is currently being developed with the AfDB, should be revised to consider the present report's recommendations. The TOR should state clearly that procurement legislation revisions should build on the UN- CITRAL Model Law and current international best practices. - 32 - 5. Revision of Legal Framework. A new procurement act should be developed, based on the UNCITRAL Model Law and current international best practices. Among other things, it should contain provisions for the new procurement authority and a complaints system, managed by the procurement authority but with a separate independent, part time, Ap- peals Body. A Cabinet Paper should be developed for the new legislation, and Parliament should enact the legislation. New regulations and guidelines should be developed on the basis of the new act. 6. Prepare Establishment of Professional Procurement Cadre. Define the composition of the cadre to be established and measures for its adoption. Start implementing the measures with the cadre's management function given to the ZNTB until the new pro- curement authority (possibly called Zambian National Procurement Authority - ZNPA) is established. 7. Re-design of Registration List System. A revised Registration System should be de- fined. New guidelines should be developed which restrict its use to small-value contracts only. 8. Implementation of Corruption Survey. The planned corruption survey should be im- plemented. Implementation should be coordinated with the PSCAP project. 9. Establish a Procurement Filing System in PSUs. A separate procurement register should be defined. Instructions and guidelines on establishing and maintaining a pro- curement filing system should be developed for the PSUs. Actions in the Medium to Longer Term 1. Establish New Procurement Authority. A Director General and other staff for the new, Authority should be appointed. The specialized functions of the Authority should be de- fined and developed in detail. Simultaneously with establishment of ZNPA, ZNTB should be abolished. Also establish a part time and independent Appeals body. 2. Continue Implementation of Plan for complete delegation of procurement authoritN. The 3-year plan should be monitored for effective implementation. Delays, as in the past, should not be allowed. 3. Develop the Capacitv of the Procurement Cadre. A secondment system for the pro- curement cadre staff should be developed. A human resource database with the CVs of cadre members and those applying for membership should be established. A training ac- tion plan should be developed and upgraded. - 33 - 4. Develop Manual on Procurement Planning. A manual on procurement planning should be developed, containing clear instructions for the introduction of best. practices. Release of budget funds from the budgetary system should be suitably linked to realistic procure- ment plans 5. Strengthen Training Programs and Training Institutions. A capacity assessment of training institutions should be carried out. The need for supplementary procurement train- ing programs should be defined. Required training programs should be developed and de- livered. 6. Introduce Anti-Corruption Clauses. New anti-corruption clauses should be introduced in the standard bidding documents. - 34 - ACTION PLAN MATRIX Annex A 1. Short Term SEQUENCED ACTIONS SUMMARIZED BY MAJOR CATEGORIES - SHORT TERM Issue Recommended Action TTiming Responsible From To I Establish Pro- Appoint a High Level Committee, which will November November MOFNP curement Re- be responsible for initiating and overseeing the '002 2002 form Task Force implementation of the activities in the Action and an Imple- Plan. The Committee must have high-level mentation Unit members from, for example. ZNTB, MOFNP, ACC, and AOG. The members should not be allowed to appoint substitutes. The Committee will be supported by a Procurement Reform Implementation Unit located in and responsi- ble to PS Ministry of Finance and National Planning. 2. Finalize new * Develop plan for full decentralization of November February MOFNP ZNTB decentralization procurement in phases. 2002 2003 plan * Appoint one or two provinces in first year as February April ZNTB pilot provinces for full decentralization. 2003 2003 * Communicate plan to ministries and agen- February April MOFNP/ZNTB cies and explain the plan's implementation 2003 2003 and their responsibility. 3. Re-establish * Without waiting for new procurement legis- December February MOFNP/ZNTB policy and su- lation, prepare the structure of the ZNTB for 2002 2003 pervisory role of this role and define the tasks. the ZNTB as re- * Prepare the budget for the ZNTB to carry July 2003 July 2003 ZNTB/MOFNP sponsible for out relevant role and ensure availability of public procure- funds. ment policy and * ZNTB to focus primarily on its policy and December January MOFNP/ZNTB regulation regulatory role immediately. Strengthen the 2002 2003 department responsible for support to ZNTB for its regulatory functions. pending com- plete decentralization of ZNTB/CTC ap- proval functions on procurement. * Define and develop specialized functions July 2003 October MOFNP/ZNTB matching tasks, such as monitoring of pro- 2003 curement, data collection on procurement activities, performance indicators and benchmarks. law drafting. drafting regula- tions and guidelines. and management and development of the cadre. and conduct out- reach to private sector for closer involve- ment. - 35 - Issue Recommended Action Timing Responsible From To 4. Revise legal Revise terms of reference. already drafted in November December ZNTB/MOFNP framework cooperation with AfDB, and clearly state 2002 2002 that the revision of the procurement legisla- tion should build on the UNCITRAL Model Law in terms of content and terminology. Develop new procurement law based on March Septem- DG ZNTB UNCITRAL Model Law that provides for 2003 ber 2003 the new procurement authority, complaints function, and a revised price preference sys- tem with more robust criteria. • Develop Cabinet Paper for new legislation. October November ZNTB/ MOFNP 2003 2003 * Obtain Parliament approval of new legisla- January February MOFNP/ZNTB tion, set up ZNPA, and disband ZNTB. 2004 2004 • Develop new regulations based on the new March May 2004 DG of New procurement law. 2004 Procurement Au- thority * Develop new guidelines based on new law March May 2004 DG of New Pro- and regulations. 2004 curement Author- ity • Prepare new versions of standard bidding June 2004 October DG of New documents and incorporate anti- corruption 2004 Procurement Au- clauses. thority 5. Establish the * Describe and define the cadre: level of skills December March ZNTB professional for entry. code of conduct. salary structure, 2002 2003 procurement career path, and role of the cadre cadre administrator (the procurement authority). * Develop secondment system for the pro- March June 2003 ZNTB curement cadre based on attractive salary 2003 system. administered by the procurement authority to replace the current system of mixed civil servants and personnel seconded by ZNTB. * Develop HR database with the curricula of July 2003 Septern- ZNTB cadre members and those applying for entry. ber 20Q3 * Identify and register cadre members who July 2003 Sept. ZNTB can enter the cadre without further training. 2003 * Develop upgrading and training action plan May 2003 July' 2003 ZNTB for both cadre members and potential mem- bers to ensure development and mainte- nance. _ _ - 36 - Issue Recommended Action Timing Responsible From To 6. Streamline the * Streamline the existing registration system. December August ZNTB guidelines and 2002 2003 operation of the registration sys- * Develop revised guidelines for the operation August Oct. 2003 ZNTB tem of the registration system. 2003 a Implement the improved system and ensure Feb. 2003 Sept. ZNTB information to stakeholders. 2003 7. Establish sepa- * Develop: March Sept. ZNTB rate procure- - Concept for separate procurement register 2003 2003 ment filing sys- - Instructions and guidelines to PSUs con- tems in PSUs cerning establishment and maintenance of procurement filing system. 8. Develop manu- * Develop: January July 2004 ZNTB als on (a) pro- - Manuals with clear instructions and tools 2004 curement plan- for introducino best practices for (a) pro- ning and (b) curement planning and (b) contract man- contract man- agement agement - Mandatory training sessions in the subjects for procurement cadre members and con- tract managers from ministries and agen- cies. 9. Enhance effec- * Strengthen the mandate and the funding of Ongoing AG/Cabinet office tiveness and re- the OAG office as suggested earlier by the portinc from PAC, and Improve timeliness of OAG's OAG yearly report. 10. Reduce delays * "The following should be coordinated with October January MOFNP in government the recommendations coming out of the Fi- 2002 2003 payments nancial Accountability Assessment Review: - Change actual release of funds to match the appropriation of funds in the budget and reduce the delays in government payments." I. Conduct anti- * "The following should be coordinated with October MOFNP corruption sur- the PSCAP project: 2002 vey - Ensure implementation of planned anti- corruption survey." 12. Involve private * Inform the private sector of the action plan. Oct. 2002 Ongoino MOFNP/ ZNTB / sector in pro- * Involve private sector in work groups Ministry of curement re- where suitable. Commerce. Trade form and Industry -37 - MEDIUM TO LONG TERM Annex A 2. Mediunm to Long Term Issue Recommended Action Tifming Responsible From To l. Set up ZNPA * Set up ZNPA Feb. 2004 March 2004 MOFNP and Develop and * Set up the Appeals Body upon enact- Feb 2004 July 2004 MOFNP establish new in- ment of legislation based on UN- dependent Ap- CITRAL Model Law provisions that peals body au- mandate a new, independent, part-time thority appeals body to complement the role of complaints handling given to the new Procurement Authority. 2. Implement anti- * Introduce new anti-corruption clauses January July 2004 Procurement corruption in the standard bidding documents. 2004 Authority / clauses MOFNP 3. Create training * Perform a capacity assessment of train- July 2003 Nov. 2003 ZNTB programs and ing institutions. Agree on a capacity conduct capacity building action plan for each institution assessment of with clear targets. Provide funding for training institu- upgraded activities and investment in tions equipment/facilities if needed. * Define the training programs needed to supplement the existing CIPS program, July 2003 Nov. 2003 ZNTB for example, mid-career training pro- grams. Visit international training institutions to collect information on other types of training programs. * Develop and deliver training programs. Nov. 2003 Ongoing ZNTB 4. Strengthen ca- * Develop a new licensing system for November March 2003 ZRA pacity of clearing clearing agents. 2002 agents * Develop a 2-3 day training program for Jan. 2003 Mar. 2003 ZRA clearing agents. Participation should be mandatory for agents to keep their li- cense. * Deliver the training. Apr. 2003 June 2003 ZRA * Develop guidelines and instructions to Sep. 2003 December ZRA clearing agents. 2002 - 38 - Issue Recommnended Action Timing Responsible From To 5. Strengthen ca- * Revise current training programs and Sept. 2002 Dec. 2002 ZRA pacity of customs develop more training on: officers - Basic customs procedures and use of ASYCUDA system - ASYCUDA's risk analysis module - Physical inspection requirements, corruption prevention, and disap- pearance of goods - Reduction of under-invoicing - Improvement of duty-drawback system. * Deliver the training program. Jan. 2003 Dec. 2003 ZRA 6. Implement * Implement ASYCUDA++ and increase Jan. 2003 Dec. 2003 ZRA ASYCUDA++ the processing fee to USD 5 per decla- ration. * Develop training in use of new system. June 2003 Nov. 2003 ZRA * Deliver training. Dec.2003 Ongoing ZRA 7. Develop training * Develop a training program in coop- Sep. 2002 June 2003 Ministry of in good business eration with ZACCI and ZAM on: Commerce, practices for the - Good business practices and ethics Trade, and In- private sector - Purchasing, supply, and procurement dustry - Financial management - Effective communication with customers and public authorities. 8. Improve com- Examine barriers in commercial regu- Sep. 2002 Sep. 2003 Ministry of mercial regula- lations and identify measures to im- Commerce, tions prove regulatory practices. Trade, and In- dustry - 39 -