Report No. 31497-DO Dominican Republic Country Fiduciary Assessment (In Five Volumes) Volume III: Country Procurement Assessment Report (CPAR) - Update April 18, 2005 Caribbean Country Management Unit Regional Operations Department 2 Operations Support Unit State and Civil Society Programs Latin America and the Caribbean Region Division (RE2/SC2) The World Bank Inter-American Development Bank Document of the World Bank, the Inter-American Development Bank and the Government of the Dominican Republic DOMINICANREPUBLIC FIDUCIARY ASSESSMENT REPORT COUNTRY PROCUREMENT ASSESSMENT REPORT (CPAR)UPDATE VOLUME I11 FIDUCIARY ASSESSMENT REPORT VOLUME 111. CPAR - ~~ Abbreviations CAFTA Central American Free Trade Agreement CPAR Country Procurement Assessment Report DGA GeneralDirectorate of Supplies FTA FreeTrade Agreement FTAA Free Trade Area of the Americas IBRD International Bank for Reconstruction and Development (World Bank) IDB Inter-AmericanDevelopment Bank IDF Institutional Development Fund MIS Management Information System OECD Organization for Economic Cooperation and Development ONAP NationalPlanningOffice PAFI Public Administration and FinancialManagement Project PER Public Expenditure Review PROMESE Essential Drugs Program SIGEF IntegratedFinancial Management System STP Technical Secretariat of the Presidency TA Technical Assistance UNCITRAL UnitedNationsConference on InternationalTrade Law FIDUCIARY ASSESSMENT REPORT-VOLUME 111. CPAR TABLE OF CONTENTS ABBREVIATIONS I EXECUTIVE SUMMARY I CHAPTERI.BACKGROUNDAND CONTEXT 1 CHAPTER11. REGULATORYFRAMEWORKFORPUBLIC SECTOR PROCUREMENT 3 Findings........................................................................................................................................................... 3 Recommendations........................................................................................................................................ ...5 CHAPTER111.INSTITUTIONAL AND ORGANIZATIONAL FRAMEWORKAND RESOURCES 8 Findings........................................................................................................................................................... 8 Recommendations......................................................................................................................................... 10 CHAPTER JY. PROCEDURESAND PRACTICES 14 Findings......................................................................................................................................................... 14 Recommendations......................................................................................................................................... 16 CHAPTERV. SUMMARY OFPROCUREMENTACTION PLAN 18 FIDUCIARY ASSESSMENT REPORT VOLUME 111. CPAR - EXECUTIVESUMMARY 1. This report updates the World Bank (IBRD) and Inter-American Development Bank (IADB) 1999 Country Procurement Assessment Reports (CPAR) for the Dominican Republic. While preparation of the two 1999 CPARs was not coordinated, they came to virtually identical findings and recommendations. The 1999 diagnostics identified serious deficiencies within the regulatory and institutional procurement frameworks, ineffective controls, no enforcement mechanisms, inconsistent application practices, and very weak procurement capacity in procuring entities. The combined effects of these problems resulted in a seriously flawed procurement environment that completely lacked transparency and led to inefficiencies and waste of public funds. These findings are fully consistent with those presented in IBRD's June 2003 Public Expenditure Review, which highlighted shortcomings of the procurement system as major obstacles to efficient budget implementation. Among other problems, all three reports pointed to the executive's unbridled authority to award direct contracts circumventing legislative oversight and the absence of genuinely competitive procurement practices. Indeed, these features of the procurement system, facilitated by gaps in the law and a general lack of accountability have, over the years, affected public spending policies and created strong disincentives for real change, as discussed inVolume Iof this report. 2. The 1999 CPARs included actions plans, agreed with the government, that listed major policy, legal, and institutional reforms and other capacity-building initiatives. While some progress has been made in improving the overall financial management system with the support of the IADB-financed Integrated Financial Management Reform program (SIGEF), there has been no significant improvement in the procurement system.' The agreed reform actions were either not implemented, or only partially implemented, with no tangible results. Multiple versions of new procurement legislation have been discussed over the past six years, but prospects for adopting a sound procurement law are still not good. While some isolated better practices exist, the conclusions on procurement capacity and the quality of procurement practices are virtually identical inthe 1999 CPARs and thisjoint update. Procurement issues affecting the two institutions' current portfolios are also the same and the overall conclusion i s that the present environment inthe Dominican Republic poses a highprocurement risk. 3. It was clear since inception that added value could be provided only if this update included a thorough analysis of the political economy and stakeholders' real interests and priorities. Consequently, the CPAR team focused primarily on impact and broadened the range of stakeholders and potential partners beyond government officials to include congressional leaders, ranking members of legislative commissions, the leading opposition party, opinion makers within civil society, key representatives of private sector concerns, and other development assistanceagencies. The main objective of this exercise was to establish a viable basis to engage all interested parties in an active policy dialogue following the May 2004 presidential elections. This dialogue will have to be framed in the context of a comprehensive state modernization strategy. 4. This approach helped confirm the IBRD and IDB staff`s preliminary sense that it was not feasible to expect sound and sustainable procurement reform to take place in the Dominican Republic unless the government and all stakeholders, particularly political parties and civil society, cooperated closely, with donor support, to create a strong enabling environment. The political economy surrounding the reform effort, and the proposed agenda for strengthening public sector management discussed in Volume I,are keys to understanding the constraints, opportunities, and overall changes needed to move forward with a 'Implementation of a June 2003 IBRD Institutional Development Fund (IDF) grant supporting part of the action plan was impaired by the serious lack of counterpart funds affecting the whole portfolio inboth institutions. FIDUCIARY ASSESSMENTREPORT VOLUME 111. CPAR - sound strategy for procurement reform. Important developments since 1999 should be leveraged as the reform strategy i s revised. External drivers include compliance with high-profile internationalagreements such as the free trade agreement (FTA) recently negotiated with the United States, and the Inter-American Convention Against Corruption. The FTA requires significant improvements in regulatory quality, the control environment, and procurement capacity to monitor and enforce consistent application of the agreement. The anti-corruption convention requires establishment of a transparent procurement system as a basic preventive mechanism. Failure to adequately meet these challenges could seriously affect the credibility of government institutions and the Dominican Republic's standing with regionaltrade partners, Internally, there are clear indications that a broad section of civil society may be ready to focus more on a procurement reform agenda utilizing some of the considerable skills and capacity to mobilize demonstratedin its recent support of other initiatives relatedto transparency and state modernization. 5. It i s essential that the government implement a well coordinated outreach and communication campaign to create a common understanding of the procurement reform issues within civil society and Congress, identify and involve champions, buildnew alliances, and cooperate more effectively with other stakeholders, particularly civil society organizations. This campaign must be supported by rigorous data demonstrating the current impact of wasteful and non-transparent practices and the savings and further improvements in public expenditure management that are bound to be generatedby a radically reformed procurement system. While establishing an environment more conducive to adopting a consistent regulatory framework, including a comprehensive procurement law, a Presidential decree with an appropriate level of detail and based on established principles and procedures would provide an effective bridge to begin implementing sound procurement practices throughout government and could help catalyze the desired medium-termsystemic changes. 6. Establishing a procurement regulatory unit within the Ministry of Finance by the same presidential decree or another appropriate legal instrument to support consistent policy development, implementation, and oversight should be a priority. The unit would be the main arm of the government in sustaining the government's effort to implement the reform. This key role would include providing a solid analytical underpinning for the support-building effort, coordination of capacity-building initiatives, close cooperation with donors supporting the reform, development of implementing tools, such as standard documents and manuals, and monitoring and evaluation of the system. This last function is particularly important to measure the procurement system's performance and generate feedback that can be used effectively in the policy-making process to promote further improvements and mobilize political support. All these functions require substantial resources that initially could be provided by external sources, but would eventually have to be available to the unit through the national budget. 7. Inparallel, the government and the donors should ensure that the achievements of the current reform initiatives, such as SIGEF, are preserved, consolidated, and better coordinated, and that their scope i s expanded. Planned training and capacity-building activities should be significantly expanded with a view to completely overhaul the present system and create a new culture of service, ethics, and professional excellence in procurement. Substantial efforts should be directed at improving the government's supply strategy, and existing resources and structures should be used more efficiently. Good examples such as the information system developed by the Ministry of Education and SIGEF's achievements inintegrating financial and contract information should be improved upon, coordinated, and widely applied. Finally, as an initial step toward a comprehensive reform program, the government should continue developing its e- procurement strategy in appropriate stages, with an immediate emphasis on e-transparency, taking into account local capacity, and implementing the management, legal, and institutional changes necessary to better integrate concurrent initiatives. A sound regulatory framework which includes appropriate enabling provisions and strong government leadership are essential to design and implement an effective e-procurement system. 11 FIDUCIARY ASSESSMENTREPORT VOLUME 111. CPAR - 8. In sum, while procurement reform has not advancedto date and significant challenges persist, there are new opportunities, and positive steps have beenundertakenthat could produce better results, if coordinated and applied consistently. The strategy to move forward should be threefold: (i) implement several short-term actions that should be relatively easy to achieve (i.e., the decree and implementing tools discussedabove); (ii) ensure consistency in policy development and the overall capacity-building strategy; and (iii) establish an enabling environment leadingto the adoption of a comprehensive regulatory framework. The resourcescurrently available are not sufficient to fund the overall program, which i s complex and, necessarily, multi-year. However, donors are likely to be forthcoming on such an important initiative, providedthat a sound strategy i s agreedupon, and the government can expect to save more than enough to pay for the costs involved with the gains inefficiency and transparency, which, in turn, will generate better prices andlower administrative costs. Not only is substantial additional funding required,* but it i s critical that donors improve coordination to maximize the impact of their assistance strategiesby agreeing on acomprehensive, government-defined, country-led procurement reform agenda with clearly established priorities. *A total estimate of the technical assistance requiredto support effectively the procurement reform is provided in Annex 9. FIDUCIARY ASSESSMENTREPORT-VOLUME 111. CPAR CHAPTER I.BACKGROUNDAND CONTEXT 1. The CPAR update mission inMarch2004 met with a complete range of stakeholders inall branchesof government and civil society, and visited the main procuring entities to assess whether there had been significant developments in their procurement practices and capacities since the 1999CPARs. 2. While data and records are generally difficultto obtain and often are not reliable, the mission collected sufficient information to generate statistics that support the conclusions of this report and provide a general overview of the government's expenditure profile. A random sample of 109 contracts signed by 5 of the main procuring entities (mostly civil works, of which 52 percent were completed) was reviewed. Services reviewed include designand supervision contracts. 3. With the exception of a few contracts for books, furniture, and perishable goods, the mission could not identify large contracts for goods financed with local funds. Recurrent items are typically purchased as needed and only invoices are maintained in the records. Many purchases are on a cash basis due to the poor credit ratings of many government agencies. 4. The team interviewed staff in these institutions from the purchasing, tendering (whose staff work primarily with donor-financed projects), engineering (responsible for procurement of works), legal, and finance departments. The office responsible for awarding public contracts in the "Oficina de Ingenieros Supervisores de Obras del Estado" (Public Works' Project Management Unit), a dependency of the Executive Power, was also visited and the current portfolio discussed. However, neither the list of contracts nor specific contracts could be reviewed. Complete details of some larger construction projects, which illustrate well the widespread problems identified, as well as additional charts and information, are included as Annex 7. 5. The Presidency i s still the most important institution in terms of public expenditures. While projections for 2004 are lower, historically the Presidency has spent significantly more than budgeted (42 percent more in 2002, and 37 percent in2003). 6. The composition of procurement expenditures of central government agencies in the Dominican Republic i s as follows: Table 111.1CentralGovernmentPublicExpenditureby Type (DR$ millions) 2001 2002 2003 2004 Expenditures 64,312 73,850 92,341 120,927 Of which Goods 4,145 4,970 5,718 6,395 Works 9,043 10,207 8,825 4,563 Services 2,379 3,548 4,440 6,518 Procurement Expenditures 15,567 18,725 18,983 17,476 As Percentageof Expenditures 24.2 25.4 20.6 14.5 1 FIDUCIARY ASSESSMENT REPORT-VOLUME 111. CPAR 7. The main institutions within the central government interms of procurement volumes are: Table111.2 Expenditureby Type, PrincipalCentralGovernment Institutions (DR$ millions) 2002 Goods % Works % Services % Presidizncy 1,206.62 24.3 4,569.4 1 44.8 950.77 26.8 Armed Forces 807.73 16.3 120.69 1.2 177.37 5.O Education 966.34 19.4 771 7.6 174.40 4.9 Health 829.03 16.7 549 5.4 169.42 4.8 Agriculture 89.06 1.8 455 4.5 154.48 4.4 Public Works 45.31 0.9 2,726 26.7 68.24 1.9 79.4 90.0 47.8 2003 Presidency 1,894.57 33.1 4,000.48 45.3 813.56 18.3 Armed Forces 595.25 10.4 67.18 0.8 132.31 3.0 Education 992 17.4 429.09 4.9 439.56 9.9 Health 716 12.5 230.50 2.6 181.90 4.1 Agriculture 69 1.2 489.78 5.5 154.82 3.5 Public Works 47 0.8 2,486.36 28.2 44.61 1.0 75.4 87.3 39.8 Complete informationincludingdata fromthe maindecentralizedinstitutionsi s includedinAnnex 7. InFiscal2003, 17 percent of procurementexpenditures were finance by external funds. Approximately 20 percent is projectedfor 2004. 2 FIDUCIARY ASSESSMENT REPORT-VOLUME 111. CPAR CHAPTER 11. REGULATORYFRAMEWORKFORPUBLIC SECTOR PROCUREMENT Findings The current regulatory framework is incomplete and dispersed in numerous laws and regulations. These sources often overlap, include conflicting provisions, and are not consistent with generally acceptedpublic sector procurementprinciples andprocedures. 8. Procurement provisions are found in several laws and regulations enacted at different times and whose hierarchy or continuing validity is unclear. Inaddition, these sources refer to organs that have never come into existence (BiddingCommission) or exist but no longer carry out their intendedfunctions (General Directorate of Supplies), or require implementing regulations that were never adopted (Law 105 of 1967, which i s generally considered the currently applicable law). Provisions prohibiting the use of public funds to contract foreign firms (found in Law 27 of 2001, which i s reportedly not applied, but was never repealed) and mandating that joint ventures have 50 percent (exceptionally 30 percent) domestic content (Law No. 322 of 1981) illustrate the lack of consistency in the regulatory framework. Inaddition to many other provisions that are outdated, incomplete, or cannot be implemented, the most salient feature of the regulatory framework i s the ample discretionary authority enjoyed by the executive to award works contracts by direct contracting, when deemed in the public interest. In addition, there are no appropriate rules on the selection of consulting services. Regulation of public sector procurement in the Dominican Republic provides very limited basis for consistent implementation and enforcement. Further details of the regulatory framework are includedinAnnex 5. 9. A reform effort underway since 1998 has produced no significant results, and prospects for adoption of a sound regulatory framework inthe short term remain uncertain. 10.Some momentum for procurement reform arose during 2003 around a comprehensive draft law that provided for establishing a regulatory and policy body.3 The bill was approved in the lower house following a first round of discussions, but no agreement could be reached on several proposed amendmentsand that approval lapsed at the conclusion of the legislative period. The draft law included a chapter on concessions previously introducedas a separate bill. The procurement bill, which followed-up on the action plans agreedwith IBRD and IADBon the basis of the 1999 CPARs, had beendrafted by the Ministry of Finance with support from SIGEF, and reflected comments received by both multilateral institutions. Even though the bill was drafted with private sector and civil society participation, and amply circulated and debated, government officials, parliamentarians, and other stakeholders interviewed by the CPAR mission demonstrated different understandings of its content and policy objectives. 11.While most stakeholders agree that a new law is needed, significantly different perceptions remain on what the law should include, and what should be its priority. The bill that failed in the 2003 legislative session has been revised and reintroduced. In addition, a substantially different draft developed within SIGEF was submitted by the President to Congress. The SIGEF draft sets forth a very general framework that includes limited reference to applicable procurement methods and selection procedures. This approach is not likely to be effective in addressing weaknesses in the procurement regulatory framework-in particular its lack of consistency and clarity-because too many fundamental aspects are left to implementing regulations. Both drafts include a number of provisions that should be improved However, several additional drafts were circulated at the same time (e.g. one introduced by the Ministry of Works). FIDUCIARY ASSESSMENT REPORT VOLUME111. CPAR - (See Annex 5 ). However, one positive feature of the drafts is to make persons and companies which are not in compliance with tax obligations ineligible to compete for and receive government contracts. This link is particularly useful in the Dominican Republic, given the pervasive tax evasion highlighted in the PER. 12.Given the long and difficult history of the previous procurement bill, it i s unlikely that a sound procurement law will be enacted in the short term. The general requirements included in the new draft prepared by SIGEF may be perceived as less controversial and generate less heated debate in Congress. However, the ultimate content of this draft cannot be predicted. Compliance with high-profile international agreements can be an important external driver for establishinga sound regulatory environment in the Dominican Republic. Procurement reform is key to ensuringproper implementation of these agreementsand maintaining good relations with major trade partners, increasingforeign investment, and enhancing the credibility and standing of the government of the Dominican Republic. 13.Trade Agreements. Implementation of the 2004 bilateral free trade agreement (FTA) negotiated with the United States, which integrated the Dominican Republic into the Central American Free Trade Agreement (CAFTA), and the Free Trade Area of the Americas (FTAA) agreement i s directly impacted by the quality of the procurement regulatory frame~ork.~CAF?`A includes a chapter on government procurement setting forth principles and procedures that foster open and transparent procurement practices, many of which are either not found in-a are contradicted by- the Dominican Republic's present procurement rules and practice. Neither CAFTA nor the agreement negotiated by the Dominican Republic with the United States requires the parties to adopt new procurement legislation. However, parties cannot develop procurement policies inconsistent with the agreement with respect to contracts above thresholds specified in the agreement. While only large contracts, particularly for works, are covered by CAFTA, adherence to sound procurement practices in the context of international trade relations has been catalytic in improving domestic procurement systems in countries around the world, including Central American countries. The Dominican Republic's capacity to monitor and enforce procuring entities' application of the agreement may be seriously impaired unless regulatory quality improves, the institutional framework i s strengthened, and procurement capacity developed. It i s very important that conflicting, overlapping, and otherwise obsolete provisions be repealed, a clear legal hierarchy established, and a consistent framework developed and adequately disseminated. 14.After some discussion, the United States and the Dominican Republic agreed to include works within the scope of the FTA. Inaddition, the agreementprovides for phasing out offsets (such as the mandatory joint venture provision for works) over 15 years. After the initial five years, a maximum mandatory 10 percent domestic content will be allowed. Thresholds and coverage are the same as negotiated with the other CAFTA countries (US$6,725 for works; US$58,550 for goods and services). However, for the first three years following the entry into force of the agreement, the thresholds for procurement of goods and services applied by the Dominican procuring entities will be US$117,100 and US$8 million for works. A number of other transition mechanisms will apply during the first two years of application (e.g. with The FTAA framework includes a negotiating group on government procurement with the objective of drafting a chapter on transparency, procedural, and market access issues. However, at this time there i s no general agreement on the latter two. The current proposal is to have two versions of the agreements to reflect the two major positions. The agreement limited to transparency is often referred to as "FTAA light." 4 FIDUCIARY ASSESSMENT REPORT VOLUME 111. CPAR - respect to time for bid preparation, time limits to submit bid protests, and publication of notices of contract award). 15.Inter-American Convention Against Corruution. Another important external driver for procurement reform i s provided by the need to comply with the Inter-American Convention Against Corruption, to which the Dominican Republic is a signatory, and which specifically requires member countries to "create, maintain and strengthen" procurement systems to foster openness, transparency and efficiency, and standards of conduct for public employees, oversight bodies, and enforcement mechanisms. The parties to the Convention agreed that a transparent procurement system i s a basic preventive measure (Art. 3). The follow-up mechanism provided for in the Convention is currently being assessed by a committee of experts on whether the Dominican Republic i s complying with this provision and its Articles 14 (which requires the parties to cooperate to investigate and persecute cases of corruption) and 18 (which requires the prior existence or prompt establishment of central authorities responsible for administering the Convention). The committee relies on a standard questionnaire, which becomes public information, and further researches specific issues. Preliminary results confirmed that Dominican Republic does not have adequate preventive and enforcement mechanisms, and, in some cases, i s not even able to produce sufficient data and informationto support assessments. Recommendations I t is recommendedthat the President issue a decree incorporating established procurement principles and practices, which should be widely disseminated. 16.While government, legislators, and civil society organizations collaborate to build consensus on a new procurement law, the decree would provide a useful bridge and could help catalyze a process of change that would be more difficult for reform opponents to reverse. The decree would also serve as basis for drafting a comprehensive law. The decree's positive impact on the procurement environment should be evaluated after a reasonableperiod and this impact used effectively to support the government's effort to build consensus on comprehensive legislation. The decree should have a minimumcontent required to establish a sound regulatory framework (which would facilitate its eventual conversion into law) and mandate, as a minimum: Coverage of all public sector contracts, including those awarded by parastatal organizations, and concessions. Definition of the procurement methods allowed by the law for goods and works and consulting services, and conditions for their application. Effective advertisement. Public bidopening. Possible use of electronic systems (with procedural details to be set forth in a separate decree). Award to the lowest evaluated bidder without negotiations. Use of non-discriminatoryevaluation criteria quantifiable in monetary terms for goods and works and appropriate quality and cost criteria for consulting services. Review of bidder qualifications on a passho pass basis and separate from the evaluation and comparison of the bids. FIDUCIARYASSESSMENTREPORT VOLUME 111. CPAR - 0 An effective mechanismfor reviewingprotests, includingreview by anindependent entity. 0 A provision on standarddocuments and equitable contract conditions (including price adjustment mechanisms, when appropriate). 0 A provision on policy oversight andenforcement. 0 A provision on debarment, includinginvestigation, dueprocess, and decision. The government should establish an enabling environment for procurement reform by implementing an effective communications strategy and better integrate its efforts to reform procurement with those of civil society, theprivate sector, and the mainpolitical actors. 17.Undoubtedly, public procurement i s one of the most sensitive areas of public sector reform in the Dominican Republic. The discretionary award of public contracts, particularly works contracts, i s key to perpetuating the capture of the system by political and economic interests, which has proven a difficult legacy to shed. A bold procurement reform would require significant changes in business practices and could have significant economic, as well as political, impact. Dominican civil society has not focused on procurement reforms as much as other areas, which are perceived as more urgent. Civil society organizations have been pivotal to procurement reforms in other countries '. However, as discussed in Volume I,considerable time i s needed to prepare for, develop, and carry out a reform agenda. Serious financial support to implement procurement and transparency-related agendas was not likely in the Dominican Republicuntilrecently. 18.A well developed communications strategy utilizing qualitative and quantitative arguments is essential to facilitate the procurement reform dialogue and create an enabling environment for a comprehensive reform. The outreach and communication campaign should aim at creating a common understanding of the reform's objectives, buildingalliances, working with champions in Congress, neutralizing or convert opponents, and activating uncommitted stakeholders. 19.The communication effort should be supported by rigorous data showing savings from competitive procurement and waste and corruption linked to the indiscriminate use of direct contracting and other inappropriate procurement practices. The financial impact of payment delays discussed below under Procedures and Practices should also be measured and a direct relationship established between public procurement and the quality of public services. With donor support, the govemment should build on the strength of the major civil society organizations, facilitate their contributions to policy development, and engage them constructively by formalizing public consultation and sponsoring multi-stakeholder discussions. At the same time, current donor-supported efforts to strengthen the capacity of legislative committees should be consolidated and expanded. 20.The procurement legalreform should be framed in a broader context of state modernizationthat sets forth a comprehensive agenda for public sector reform cutting across sectors with a clearly established order of priorities. The government should lead discussions to improve donor alignment and harmonization, buildingon informal coordination mechanisms already in place, and reach agreements There are various examples (e.g. in the Philippines) of highly successful cooperation between the Government and CSOs to build ethics in public office, promote modernization of the procurement environment, build political support, and train public officials in procurement. 6 FIDUCIARY ASSESSMENT REPORT VOLUME 111. CPAR - with donors on financing commitments for specific components or pooling funds to finance an agreed matrix of priority reform actions. FIDUCIARY ASSESSMENT REPORT VOLUME 111. CPAR- CHAPTER111.INSTITUTIONALAND ORGANIZATIONAL FRAMEWORKAND RESOURCES Findings The Dominican Republic has no consistent procurement policy development, oversight, and enforcement functions. In addition, not all the responsibilities envisioned for the regulatory body provided for by the draft laws before Congress are appropriate, the key function of monitoring and evaluating the procurement system is not included among thesefunctions, and it is not clear whether theproposed procurement agency would have adequate resources to be sustainable. 21.The revised 2003 draft bill and the SIGEF proposal both provide for the establishment of a procurement policy and regulatory body within the Ministry of Finance with many of the functions typical of such institutions (develop procurement policy and implementing tools, ensure consistent implementation of the law and regulations, coordinate training programs). However, some of the functions included should be kept separate from the policy development role and assigned to entities carrying out operational procurement responsibilities or other control and oversight institutions. These functions include: 0 Adoption and maintenance of a catalog to be used throughout the public administration to procure goods and services. 0 Establishingand maintainingregisters of suppliers and consultants. 0 Maintaining a list of suppliers that have not complied with obligations included in the law or regulations and the sanctions applied to them (it i s not clear who applies the sanctions, listed in both drafts, and whether due process would be provided). 0 Review of bidder protests. 0 Authorization of direct contracting incase of emergencies. 22. Inaddition, neither the revised 2003 bill nor the SIGEF draft adequately cover the key functions of monitoring and evaluating the reform's impact and measuring the new system's performance. These functions are essential to measure actual progress in terms of increased performance delivery and service quality. 23. SIGEF prepared terms of reference for consultants to be financed by the Institutional Development Fund (IDF) grant signed in June 2003 which is intended to finance some of the actions included in the CPAR action plan `. The scope of these TORSinclude the definition of functions, organization, staffing, and resource requirements of the procurement policy body, design its electronic portal, management The objectives of the IDFgrant are to facilitate the establishment of a sound public sector procurement framework, strengthen of the institutional framework, and enhance transparency, civil awareness, and public confidence in the system. Specifically, the grant supports: (i) preparation of detailed regulations required to implement the chapter on concession of the procurement law; (ii)dissemination o f the new regulatory framework; (iii) establishment of a new procurement regulatory and policy oversight agency; (iv) strengthening of control agencies; (v) installation o f a MIS for the oversight body and an e-procurement system; and (iv) design and piloting of a national procurement training program. FIDUCIARY ASSESSMENT REPORT-VOLUME 111. CPAR information system and the content of a comprehensive procurement bulletin, but no progress could be made to date on the selection of consultants due to the lack of counterpart funding. Given the lack of definition of key logistic aspects, the Ministry of Finance's limited control over budget matters, and the generalized problems with the civil service functions discussed in this report, it i s not clear whether the agency proposed by SIGEF would be able to discharge effectively any of these functions. Substantial resources will be requiredto establish the policy body and support its operations. While initially some of these resources could be provided by external sources, they would eventually have to come from the national budget. Initiatives to streamline the government's supply strategy are neither coordinated nor adequately funded, and the related institutional framework is inconsistent. 24. The General Directorate of Supplies (DGA) was established in 1966 within the Ministry of Finance to meet recurrent procurement needs for the public administration and its functions were revamped and modernized in 19987. The DGA i s still functioning with a staff of approximately 90, but it currently does not exercise any function, as procurement responsibilities have been decentralized to line ministries. In 2003 DGA developed a proposal for an electronic catalog for procuring goods and services, but implementationwas not considered feasible by the government. A similar system had previously been developed by the "Secretaria TCcnica de la Presidentia" (Technical Secretariat of the Presidency or STP), but this was deemed too expensive and not appropriate for the local procurement market. The Ministryof Finance also intends to develop a catalog of goods and services from which all public entities would order. Initial implementation of the catalog i s planned in pilot units (likely to include Health and Education). However, the precise scope and main features, anticipated impact, and sustainability of this project are not yet clear. There are no comprehensive plans or funding sources to implementthe catalog system throughout public sector entities. In general, there i s no real progress or even a clear strategy on the procurement sub-component of SIGEF. There is no plan and resources have not been allocated to systematically build and maintain procurement capacity in procuring entities. 25.There are virtually no training, career track, professional qualification and continuing education requirements, or standardsof conduct for public employees carrying out procurementresponsibilities. The resources available under the IDF grant are intended to be utilized for the initial training of trainers on legal and technical matters (particularly, with respect to concessions, as only concession regulations are included in the IDF's scope), and are not sufficient to support a comprehensive training and capacity buildingeffort or a sustainableprofessional development strategy. Law 295 of 1966 and Decree 262-98 of 1998,respectively. 9 FIDUCIARY ASSESSMENTREPORT VOLUME 111. CPAR - Recommendations The establishment of a procurement regulatory unit within the Ministry of Finance with a clear mandate and adequate resources is essential to provide leadership in policy development, implementation, and oversight, ensure that the reform effort is sustained and coordinated,and that the system is properly maintained. Substantial additional technical assistance is required to ensure that additionalfunctions, such as monitoring and evaluationare developed, and to support the unit's initial operation. 26.Activities planned under the IBRD IDF grant to support establishment of the policy/regulatory unit within the Ministry of Finance should be implemented as soon as possible and their scope expanded. The tasks of creating an enabling environment to ensure that the bulk of the proposed reforms make their way through the Dominican system and to facilitate and monitor their consistent implementationare daunting. First, to make a convincing case to change procurement practice, it is important to gauge the negative impact it produces. Once organizational improvements are implemented, they must be measured in terms of cost savings and increased efficiency and transparency to demonstrate that the recommended course was appropriate, or change it, as needed. Unless the procurement agency has adequate resources to carry out all its important tasks, the real impact of any reform will likely be minimal. Consequently, substantial additional financial assistance i s neededto support the initial period of operation of the unit. While many important functions related to policy development and capacity building can be eventually entrusted to this unit, it i s important to be realistic with respect to the resources required and avoid establishing an understaffed and ineffectual organization. In the short term, only some key activities such as advertisement of contract opportunities, publication of data, and the creation of a few tools (e.g. bidding documents) could be assignedto the procurement policy unit. 27.0ne of the most important tools to ensure that institutional reforms are sustainable is an appropriate methodology to measure the system's performance. The procurement sub-component of SIGEF could be expanded and used to develop a monitoring and evaluation tool interfacing with contact and financial information generated by the system. T h i s tool should utilize quantifiable criteria to measure organizational and procedural aspects of procurement performance that feed into main indicators. The criteria should address key areas such as: Leadership and human resources, includingcommunications, information, and monitoring. Behavior, including skills, transparency, and accountability. Operational management, key procedures and processes including budget, accounting, payment to contractors and financial reporting. Agency-level regulations, including consistency with the regulatory framework and compliance with both. 28.The tool should have the capability to disaggregate results, by types of procurement and sources of funding to compare donor-financed projects with locally funded contracts. While many criteria can be based on generally accepted principles and models for management systems, procurement processes, supply chain management, and contract management, a number of criteria should be based on specific issues identified in the Dominican Republic to measure the real impact of these problems and whether progresshas beenmade inaddressing them. Specific criteria could include: 10 FIDUCIARY ASSESSMENTREPORT-VOLUME 111. CPAR The percentage of contracts financed with open competition versus less competitive methods, in particular, direct contracting, comparing their costs (including a comparison with prevailing international prices for the same items). The percentage of contracts not fully funded through completion and the impact of this practice on contract prices. The percentage of contracts not completed and the cost of this practice. The percentage of contracts won by foreign contractors through open competition (without using local agents) and a comparison of the cost of such contracts with similar contracts awarded to domestic suppliers/contractors following less competitive practices (includingdirect contracting). The extra-budgetary debt incurred by each line ministry to finance contracts which were not originally planned andbudgetedfor. Cost and time overruns in each ministry and the total cost they representfor the government. 29.The indicators should link qualitative and quantitative aspects of "value for money" showing how agencies achieve basic procurement objectives: economy, efficiency, transparency and accountability. Criteria should be included to reflect the private sector's view and level of confidence in procuring entities. Best value for money's composite results would be used to monitor the performance of individual procuring entities and compare it with best practices and average performance across government agencies. Aggregate results at the country level could be linked to macro indicators that measure regulatory quality, external control, enforcement, anti-corruption framework, and other systemic issues. The IBRD/OECD-DAC Working Group on Monitoring and Evaluation and Benchmarking has identified four main pillars that constitute, in broad terms, the main feature of a public procurement system: Legislative and regulatory framework. Central institutional capacity. Procurement operations and market environment. Integrity of the public procurement system. 30.These pillars are broken down into more specific indicators. The value for money's aggregate results could feed into the procurement operations pillar and be combined with other criteria, as appropriate. Aggregate results on agency-level regulations could be linked to the legislative and regulatory pillar to complement the assessment of the primary sources of rules and provide a more complete picture of the regulatory framework. Other consolidated results of the agency-level assessments could be linked to the central institutional capacity pillar to measure whether procurement policy i s consistently implemented and enforced. Finally, results on internal controls, transparency, and accountability could be linked to the procurement integrity pillar. 31.The aggregate performance measurement results would help set priorities for further policy reform, mobilize political commitment, and provide supporters of the reform with focused, and substantiated arguments for change. 32.Various initiatives co-sponsored by IBRD aim at providing governments with effective tools to measure their procurement performance and achievements in implementing reforms. It i s recommended 11 FIDUCIARY ASSESSMENT REPORT VOLUME 111. CPAR - that the Dominican Republic build on these initiatives and tailor them to its needs. Given the current level of interest in the donor community on this topic, government commitment to implement a comprehensive pilot procurement monitoring and evaluation systemwould be likely welcomed and supported as a sign of political will for real change. 33.Achievements of SIGEF and other initiatives should be consolidated and better coordinated, and their scope expanded. The procurement component of the financial management reform program, which now provides only for a generic link between financial and contract information and i s not adequately funded, should be further developed, supported, and implemented consistently throughout public sector entities. The scope of the SIGEF integrated financial management system should be broadened, deepened and adequately funded to complete its implementation and realize its full potential, including important objectives of the systemnot funded by the IDB project. A comprehensive plan for the adoption of an e-procurement strategy should be developed and implementedin stages withan emphasis on e-transparency. 34.While the government has shown strong interest in adopting an e-procurement system, much remains to be done to establish the conditions for its implementation. A sound legal framework which includes appropriate enabling provisions i s key to designingand implementing an effective e-procurement system. While severalentities are likely to be involved in designing and implementingthe system from a technical and operational standpoint, the procurement policy office should have the technical capacity, mandate, and high-level political support to exercise effective leadership in developing e-procurement policy and oversee its consistent implementation throughout government agencies. Transparency in the system can be substantially enhanced simply by introducing a comprehensive electronic procurement bulletin housed on an existing government website or similar portal. All procurement rules and related information, invitations to bid, and awarded contracts could be easily published on line. At a later stage, it would be appropriate to support the procurement processes electronically, including download of bidding documents, registration of suppliers, and even upload of bids. The limited human intervention inherent in the use of automated systems, would reduce opportunities for non-transparent practices. The introduction of e-procurement would also likely result in substantial cost saving-in other countries it has produced price savings of 15 to 25 percent, along with significant reductions in transaction costs. Carrying out even a small percentageof procurement by electronic means would result in significant savings. 35.The e-procurement strategy should be planned in stages. The initial e-transparency stage (i.e. the electronic bulletin) would be extended incrementally to include downloadupload functionalities and, eventually, developed into a full-fledged system fully linking the e-procurement to other government systems, such as those developed within SIGEF. While this phased approach requires a comprehensive strategy that is realistic and takes into account local capacity and resources, the initial phase can be easily achieved and yield quick results. This would serve as a strong incentive and help generate support to implement the more complex phases. A comprehensive methodology which can be utilized to design and implement e-procurement systems has been developed by a multilateral development banks e- procurement working group andcan be found at www.mdb-egp.org. Training and capacity building activities supported by the IBRD IDF grant and the IADB Public Administration and Financial Management Project (PAFI) should be expanded and adequately funded. 36.Creating sustainable service value will require a major training effort. The training's objectives should not be limited to disseminating the new regulatory framework and building skills, but should include developing professional and organizational ethics and values. Training programs should be developed for FIDUCIARYASSESSMENT REPORT-VOLUME 111.CPAR practitioners and policy makers. It would be useful to include the private sector and civil society organizations in some of the training activities. Competitive and service cultures have not fully developed inthe Dominican Republic. Consequently, training programs must be developed andutilized as key tools to support the comprehensive long-term communication campaign required to build political support for the reform to ensure that the new system is sustainable. To achieve voluntary compliance--the most effective enforcement mechaniswacceptance of the rules by the govemment officials is as critical as their understanding them. A comprehensive training strategy should include plans for ongoing professional development of staff to ensure that skills are kept up to date. A certification program for procurement professionals should be established and appropriately linked to a reformed civil service career path. Technical assistance and substantial additional funding are necessary to develop and implement this strategy. 37. It i s recommended that the govemment begin immediately to contract the consultants financed by IDFgrant allowing a tax exemption which could be considered as a cash contribution (i.e. equal to the amount of waived taxes) thereby removing the obstacle posed by the lack of counterpart funds '.The government should also consider requesting additional follow-on IDF grants to implement an incremental program which i s consistent with and buildson the first grant. 'Thereis a serious riskthat the present IDFmay notbe completed if implementationdoes not beginimmediately. FIDUCIARYASSESSMENTREPORT VOLUME 111.CPAR - CHAPTERIV. PROCEDURESAND PRACTICES Findings With very few exceptions, capacity to plan for, implement, and monitor procurement is very weak and contract awards are not transparent. I n addition, there is no consistent approach to improve procurement efficiency by streamlining purchasing practices, achieving better standardization of procedures, improving quality, and controlling cost. 38. Very few contracts are awardedcompetitively, as shown by the figure below. FigureI Dominican Republic: Review of a Sample of 109 ProcurementContracts IHPublic Tender HPrivate Tender OSingle Source 1 In all the "private tender" (limited bidding) contracts reviewed, insufficient time (as little as three days) was given to prepare bids, only one or very few bids were received, and, in some cases, bids were not signed and did not appearto be originals, but documents generatedlater to reflect project contents. 39. There are virtually no procurement planning procedures and capacity, feasibility studies are generally not carried out, and complete designs for works are seldom prepared prior to award. Works often commence without formal contracts and contract amendments are not formalized, or are formalized after the additional work i s carried out. Significant price escalation i s a chronic problem. One of the cases reviewed was a locally-funded project comprising 60 sole-sourced contracts for infrastructure required duringthe celebration of the Pan-AmericanGames in August 2003 (with a total cost of RD$4,037,857). Several of these contracts were dated four months after the end of the games, and all but one suffered significant cost escalation (the final cost was 3.6 times the original budget), and none of the contract amendments were formalized in writing until December 2003. Another large project to construct a Supreme Court buildingconsisted of 31 contracts, with an overall 300 percent increase in total contract prices following significant changes in specifications and design, including new ground studies by the contractors. Only two of these contracts were awarded following competitive processes and about 10 percent of the works could not be completed (as of March 2004) for lack of funds. The original completion date was August 2000. FIDUCIARY ASSESSMENT REPORT-VOLUME 111. CPAR FigureI1 Dominican Republic: Status of Contracts --from a Sample of 109 Contracts-- . 4O/o completion had higher prices PContracts with no Variation 48% 52 OContracts that at completion had lower prices / 40. There i s a serious disconnect between budget allocations and contract commitments. Line ministries frequently enter into contract agreements without corresponding budget allocations. In some cases, public entities incur unrecorded debt with private banks to finance such extra-budgetary expenditures. 41. Because priorities change frequently, even during an administration, funds allocated to complete works underway are diverted to new public works that were not planned. Many public works are started, particularly during election periods, and not completed. For example, when the previous administration took office, 30 buildings were under construction by the Ministry of Public Works, and 13 new buildings were added. Only 17 of these 43 building, were completed. Few of these contracts, as with many others awarded throughout the public sector, are likely to be completed. 42. Chronic delays in contract payment severely affect the construction industry, particular medium- sized companies, significantly impact procurement costs, and frequently lead to bribery to expedite processing or move up inthe payment line. Ingeneral, contract administration capacity i s very low and no tools exist to implement and monitor procurement contracts. No records are kept of formal claims or disputes within locally-financed work projects. 43.Many works are still awarded directly by the Office of the President with extra-budgetary resources, although the extent of this portfolio and the proportion of the national budget it represents are not clear. While the percentage of resources (referred to as "surplus funds") transferred to the Presidential Fund from the budget has been significantly reduced during the past two years? this practice continues. The In 2003 the budget allocated 11percent of central government expenditures to the Office of the President, in the past this figure had been as high as 60 percent. Actual utilizationfor 2003 could not be clearly determined. 15 FIDUCIARY ASSESSMENT REPORT-VOLUME 111. CPAR fund has traditionally beenutilized by the Office of the President to award contracts "deemed in the best interest of the public." This regulatory exception, providedfor inLaw No. 105 of 1967 on procurement of public works, has become common practice also in the main line ministries and i s frequently abused to reward political allies, perpetuating the legacy of political cronyism. 44.Records are poorly maintained and statistical information is scarce and unreliable. There are no inventory systems. All these problems are further compounded by the weak capacity and lack of independence of the organs responsible for internal and external control, and other weaknesses in the financial accountability system. All contracts must be registered with the Comptroller General's Office, which typically takes two months anddoes not add any particular value. 45.The Ministry of Education's initiative to develop a comprehensive information system including a wide array of budget, procurement, and payment information available to the public on the Internet i s an isolated good practice. Some competitive processes were also observed in this ministry, and price escalation was, on average, less significant than in other entities. 46. The Essential DrugProgram (PROMESE) i s an organization which reports to the Ministry of Health and procures most drugs and medical supplies for the health sector (including public hospitals, clinics, pharmacies, and warehouses) for a total annual value of DR$480 million. PROMESE, which i s in the process of modernizing its organization and developing a new procedural manual, coordinates its procurement plans with end users and i s required to follow a competitive process to award annual framework contracts with fixed unit prices and indefinite quantities within specified maximum amounts, and maintain a catalog of health sector goods. However, competition is generally restricted to five registered national suppliers lo.PROMESE, conducts public bid openings, and generally pays suppliers on time. Its procurement staff (four professionals) has relevant private sector experience. However, as also highlightedin the PER, PROMESE has come under heavy public criticism for lack of transparency in its procurement practices, high administrative costs, and poor quality control of the products it purchases. Recommendations Substantial efforts should be directed to improving procurement planning and streamlining the government supply strategy. 46. The government should develop baseline procurement data including all expenses by category, agency, procurement method, and item groups. Different approaches should be employed to target potential savings in each group with a special focus on items where quick and larger savings can be achieved by modernizing approaches. Key inputs in these decisions will be an analysis of local and regional markets structures, specifications and other user requirements, volumes, capacity and other objective limitations, and current procurement processes for the selected items. This information can serve as a basis for decisions on consolidating procurement across government, improving planning and control processes, standardizing procedures, and establishing a supplier evaluation system. 47.Specifications for many recurrent needs (stationery, gasoline, IT products, and general services) should be harmonized and these items procured competitively aiming at achieving economies of scale. The supplier catalog being considered by SIGEF should be developed, taking into account experiences of lo Cases of collusion which have occurred in recent times have been difficult to addressedeffectively due the lack of a clear legal basis and capacity to prosecute such anti-competitive practices. 16 FIDUCIARYASSESSMENT REPORT VOLUME 111. CPAR - other countries that have generated significant savings, but carefully adapting these models to local conditions and capacity. In addition, a rigorous baseline of item groups and costs developed as a result of this exercise and the data generated by further monitoring the system's savings could be linked to the overall monitoring andevaluation systemand usedto sustain political support for further reform. 48.There are different possible approaches to the use of catalogs to streamline the government supply strategy. These range from a simple web-based catalog (from which government agencies select items to meet their operational needs) with biddingprocedures used to procure aggregate packages and purchase orders following traditional, paper-based methods, to fully electronic purchasing systems. Given the Dominican Republic's limited progress in developing a coordinated e-procurement strategy, it i s advisable to begin developing and implementing a simpler e-catalog and a carefully planned implementation of a fully electronic marketplace inthe mediudlong term. 49.As the Ministry of Finance would be entrusted under the planned reform with responsibility for procurement policy oversight functions, a different entity should be identified or established to administer this system. Theproposed procurement decree should be complemented by a set of administrative tools tofacilitate its implementation. 5O.The government should develop standard bidding documents for the main types of procurement and manuals providing further procedural details and guidance on procedural details of procurement processes, and procurement planning, record management, and contract administration. These actions are relatively easy and uncontroversial to implement and typically represent the "low hanging fruits" of procurement reform programs, but can quickly increase efficiency, consistency, and capacity. Financial assistancewill be neededto implement these important actions. Available capacity should be utilized more efficiently to implement developmentprojects. 51. The entity selected or created to administer the government supply system could house a small unit dealing primarily with donor-funded projects. This unit would comprise regular staff with adequate pay (above the normal government salary) to be supported in the incremental portion by donors through project funds, and complement in-house resources with qualified consultants, as needed. This approach would maximize limitedhuman resources, enable this unit to build capacity more rapidly, and, over time, decrease fiduciary risk for donors. 17 x x x x x 3 a a 2 (I) Y e, e E E> 8 3