a country procurement assessment review financial

November 2003

Document of the World Bank

Report No. 26162-ZA

ZambiaPublic Expenditure Management andFinancial Accountability Review

Financial ManagementOperational Quality and KnowledgeAfrica Region

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Country Procurement Assessment Review Annex, Volume III:

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Zambia Public Expeniture Management and Financial Accountability Review

PS PSCAP PSI PSRP PSU RFP

ROADSIP SADC SBD SGS S I SIDA SME SOE SRP I1 TR TTL UNICITRAL USAID VAT WBG wco WTO ZACCI ZAM ZAMIM ZAMTEL ZBIC zcc ZESCO ZMK ZNCB ZNOC ZNTB ZRA ZTBA

RFQ

Permanent Secretary Public Service Capacity Building Project Pre-shipment Inspection Public Service Reform Program Procurement and Supply Unit Request for Proposals Request for Quotation Road Sector Investment Program Southem African Development Community Standard Bidding Documents Surveillance Generale Suisse Statutory Investment Swedish International Development Agency Small and Medium sized Enterprises State Owned Enterprise Social Recovery Program I1 Tender Regulations Task Team Leader United Nations Committee on International Trade and Laws United States Agency for International Development Value Added Tax World Bank Group World Customs Organization World Trade Organization Zambia Association of Chambers of Commerce Zambian Association of Manufacturers Zambian Institute of Management The Zambia Telecommunications Company Ltd Zambia Insurance Business College Trust Zambian Competition Commission Zambia Electricity Supply Corporation Ltd Kwacha Zambian National Commercial Bank Zambia National Oil Company Zambia National Tender Board Zambian Revenue Authority Zambia Tender Board Act

MAIN REPORT PREFACE

T h i s country Procurement Assessment Review (CPAR) i s a joint undertaking between the Zambian Government and the Wor ld Bank to study and analyze the existing public procurement system in Zambia and to recommend suitable actions to improve the economy, efficiency, predictability and transparency o f the procurement processes. I t provides Government with tools to make changes and to improve the public procurement system and institutional framework. I t was conducted in January 2002 and in March 2002 by a team comprising off i- cials from the Ministry o f Finance and National Planning, and a multi disciplinary Task Force representing various concerned organizations set up by that ministry, a team from Govern- ment’s consultants (PLS RAMBOLL) and Wor ld Bank officials.* The CPAR will also be one o f 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 government officials and representatives o f private sector organizations, major donors, business associations, training institutions and NGOs, just as it vis- ited Local Councils, District Offices and the site o f beneficiary projects in two locations. Other activities included a review o f tender processing at ZNTB for 14 cases o f large value procurement financed by government, a review o f contract practices for 10 cases o f procurement financed by the Bank and document research. The Task Force conducted internal meetings to collect data and formulate i t s recommendations. The CPAR team as a whole, including the Task Force, held a series of meetings to finalize this review.

Th is report consists of the Main Report and Annexes. The M a i n Report presents the major findings and conclusions and related recommendations, and an action plan both short and medium to long term. The Annexes volume contains as Annex I the detailed report, including the questionnaires, which discusses each o f the major issues in more details and i s meant for those readers who would want additional information on these issues. In addition, the main documents referred to in the report are enclosed.

’ 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 o f mission), Fenwick Chitalu (Financial Management Analyst), and Bwalya Mumba (Procurement Officer). The Government Team was led by Mr. David Diangamo, Chairperson / Permanent Secretary, Ministry o f Finance and Eco- nomic Planning supported by government’s consultants and the Task Force comprising, Mr. James Mulungushi, Director o f Planning, Mr. B Msimuko, Principal Budget Analyst, Mr. J. B. Makumba, Head o f Procurement Unit, Mr. N M Shamaila, Director o f Audits, Dr. Kabeta Muleya, Director General, M s S Zyambo, ADirector - 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 o f Procurement, Mr M K Simwanza, Director o f Procurement, Ms Clara Mangani, Assistant Warehouse Manager, Mr. P J Muyawala, Head o f Procurement, Mr. F M Silunduko, Head, Emmas- dale Campus, M s Betty Sombe, Director o f Finance, Mr. Richard Healey, President, Zambian Association o f Manufac- turers, M s Viola Mtamila, Chief Planner, Mr. Jason Songwe, Head o f Procurement Unit, Mr. S D Chibuye, Head o f Pro- curement Unit, Mr. E M Sikazwe, Principal State Counsel, Mr. Tenthani Banda, Director o f Administration, Mr. Wedex Ilunga, Technical Services Manager, ZMASIF, Mr. George Sikazwe, Procurement Manager, PSACAP, Mr Lwambe Mondoloka, Chairman, Association o f 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 Expert) and Karen Sondergaard (Procurement Practice Expert).

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PART I

EXECUTIVE SUMMARY I BACKGROUND

1.01 Zambia’s economy has not performed well over the past decade. During 1992-2000, average 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 estimated at about $320 in 1999, Zambia i s one o f the poorest countries in sub-Saharan Africa. I t s economy i s undiversified, and depends heavily on mineral resources and exports, particularly copper, which generates over 70 percent o f the country’s foreign exchange earnings. Zam- bia’s foreign debt makes it one o f the world’s most indebted states, which resulted in Zambia qualifying for debt re l i e f 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 l i t t le scope for increasing revenue, improving the efficiency and effectiveness o f public expenditures remains a key to reducing poverty. Development o f a well- functioning procurement system, based on transparency, competition, economy and efficiency, fairness, and accountability, i s critical2.

1.02 Importance of Public Procurement in Zambia. Public procurement plays an important role in the Zambian economy. The total volume o f public procurement in 2001 was estimated at USD 485 million, equivalent to 15 percent o f GDP -- this i s a higher proportion than the 10% estimated for most countries in Africa. The Central Tender Committee (CTC) o f the Zambia National Tender Board (ZNTB) processed and approved procurement valued at 12 percent o f GDP while another 3 percent o f GDP was procured at a decentralized level by ministries and provincial administrations. If even a conservatively estimated 10% o f this cost could be saved through better procurement policies, practices and institutional arrangements, this would mean a yearly gain to the exchequer o f the order o f $ 50 mill ion.

1.03 Assistance to and Progress of Public Procurement Reform. Recognizing the importance o f ef f ic ient procurement for the national economy, public procurement system reform has been on the Zambian government’s agenda for almost a decade, during which a number o f donor-funded projects supported this agenda. The government adopted the Public

A 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 i s to start a process for the government and the World Bank to work together to improve the accountability, integrity, and transparency o f the procurement processes and to reduce the scope for 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 procurement system. T h e CPAR will also be one o f three core reports contained in the Public Expenditure Man- agement and Financial Accountability Report (PEMFAR) being prepared by Bank and government.

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Procurement Action Plan (1 996) to (a) implement a plan completely decentralizing procurement to ministries; (b) facilitate decentralization, establish a cadre o f professional procurement 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 decentralization and establishment o f a procurement cadre. The current CPAR concludes that the action plan’s overall objectives have s t i l l not been realized, inter alia, due to insufficient efforts by ZNTB. Though a number o f steps were initiated, planned reforms in significant areas have not been efficiently implemented:

9 Improvement of procurement capacity in the Procurement and Supply Units (PSUs) has been slow. In the 1996 action plan, setting up the procurement cadre emerged as a crucial step for delegation o f 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 i s rated.

. Implementation of the Action Plan (1996) did not get adequate attention. Examples are: (a) l i tt le or no progress in delegation o f procurement authority over 6 years, as the ZNTB did not give a single ministry full authority to conduct i t s own procurement, (b) partly because a procurement cadre was not created, procurement capacity building4 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 measures remained under-funded. Preoccupied with managing 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 delegation o f procurement authority but limited to “certifying” al l 5 1 PSUs, over time, but not au- thorizing them to do al l their own procurement. The strategy, coverage, and content o f this draft Strategic Plan could be enhanced as a result o f the current CPAR.

11. FINDINGS OF THE CPAR

1.05 Gaps in the Public Procurement System’s Intentions and Practices. A gap between intentions and practice pervades various aspects o f Zambia’s public procurement. De- spite a legal and institutional framework, weaknesses in i ts structure and content allow undesirable practices and procedures. W h i l e the ZNTB i s expected to enforce procurement rules,

Delegation o f procurement authority to all PSUs by 2002 did not materialize. O f 51 PSUs, 24 are not yet certified; the monetary thresholds for the remaining 27 are very low. The ZNTB is st i l l involved in processing 80 percent o f procurement.

in practice, i t i s 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 o f the registration list, each short-list i s subject to misuse to favor particular f i rms . Further, the registration l is ts are not systematically updated nor are the means available to check the data applicants submit in registration forms. Moreover, the system i s liberally used for larger value items than intended. The ZNTB also has a significant supervisory role, but i t s preoccupation with processing procurement prevents this. The existing system for handling complaints features a too-narrow scope and design, lacks independence from the ZNTB which i s involved in the procurement process, and it suffers from a perfunctory operation, causing supplier and contractor dissatisfaction to grow while malpractices continue.

1.06 The slow pace o f delegation o f authority to procure to the ministries and agencies i s partly due to ZNTB’s lack o f confidence in their capacity. But the there are also other reasons for persistent lack o f adequate interest in reform o f public procurement. The lack o f interest in ministries and agencies to actively pursue even the l imited program o f delegation o f procurement authority i s symptomatic o f underlying causes such as preference for a system o f dif- fused responsibility and accountability offered by the current lax systems and procedures and institutional arrangements. Any tightening o f the arrangements would affect the distribution o f rents be it ZNTB, senior officials or politicians. Though diff icult to pin down in any country, political interference in public procurement in Zambia i s generally acknowledged.

1.07 This situation, combining poor legislation and procurement practices with polit ical interference and untrained procurement staff, fosters corrupt practices. Though the government has not initiated a survey on corruption financed by the Wor ld Bank some time ago, the CPAR noted a common perception in Zambia that substantial corruption i s 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 litt le effective attention to their reports.

1.08 Legal and Institutional Weaknesses. The legal framework5 lacks robustness and features structural, and content, inadequacies. Basic principles o f procurement are not captured comprehensively. Further, aspects that should be in the Ac t are in the regulations or guide- l ines and vice versa. The ZNTB’s role i s 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 procurement capacities and capabilities, and (c) implementing public procurement reform.

Professional procurement staff i s required to support delegation o f procurement authority. Where the ZNTB has seconded i t s staff to ministries to operate procurement units with authority delegated to them, such PSUs’ procurement capacity i s better. The legal framework i s mainly based on the 1982 Zambia National Tender Board Act (ZTBA), which has limited scope and unclear enforcement mechanisms. It provides for the establishment o f the Zambia National Tender Board (ZNTB).

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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 f i rms. Further, the ZNTB’s capacity to resist ministry pressure promotes acceptance o f less cost-efficient and corruption-prone procurement methods. Additionally, relatively l o w thresholds (USD 300,000 maximum for ministries in the highest category for decentralization) lead to more costly procured goods and c iv i l works. These l ow thresholds cause ministries to split contracts into smaller sizes to avoid ZNTB involvement. The registration system i s 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 exist, procurementfiles are often incomplete. Also, there are no instructions on how to structure an official procurement filing system and to maintain individual f i les. 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, procurement planning as a tool for conducting efficient and economic procurement i s largely non-existent. Vital aspects o f procurement planning (packaging, selecting appropriate procurement method and type o f 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 in the budget for each project and each ministry often are not fully released during the year6, and there are significant delays in the release o f even these small amounts. This seriously affects efficient project implementation, procurement, and contract management. Consequences o f 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 contracts designated in foreign currencies have protracted payment delays, exchange rate changes cause larger amounts o f local currency to be needed than originally planned. All this contributes to higher procurement costs and avoidable losses to government.

1.12 Procurement Cadre. Even though a well-trained procurement cadre i s crucial to efficient procurement, there has been no progress in efforts to set up such a cadre. Over 600 people have been trained in procurement at different levels, but most have l e f t their jobs, leaving untrained people in many positions. Trained staff leave because o f the lack o f 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 i t s capacity development.

In the budget process, the funds allocated are often lower than the amounts required for good project progress. The practice o f allocating a “nominal” 1 Kwacha for “tentative” projects further strains the budget for other projects when more than the allocated 1 Kwacha i s f inally released to such projects.

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1.13 Capacity Building. Procurement training institutions’ 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 o f the Anti-Corruption Commission and OAG are critical if Zambia i s to achieve a well-functioning, fair, and transparent procurement framework. Though President acted recently to strengthen the ACC to fight corruption by creating a special cell whose role would also include procurement issues, unattractive salaries and conditions o f service hamper i t s ability to attract and retain skilled personnel. OAG i s also underfunded and i t s reports remain inadequately acted upon.

111. MAIN RECOMMENDATIONS FOR THE WAY FORWARD

1.15 Central to any recommendations that emerge i s the need for a “champion” for the Re- form program as it should not be l e f t to be an internal program within ZNTB. Besides, such a program that needs to tackle the various vested interests in the status quo can only be tackled by polit ical will.

1.16 Given adequate attention to the above, the actions described below are priorities for improving the Zambian public procurement system. i. Establish a Procurement Reform Task Force (High Level Committee). Set up a High

Level Committee that wil l be responsible for initiating and overseeing implementation o f activities in the action plan developed by this CPAR. This Committee must have high- level members from, for example, ZNTB, MOFNP, ACC, and OAG, and members should not be allowed to appoint substitutes. The Committee should have a clear mandate and time frame for concluding i t s reform agenda. A Procurement Reform Implementation Unit (PFUU) should be created to manage day to day implementation o f 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 o f Finance.

ii. Re-establish the Policy and Supervisory Role of ZNTB Immediately. Without waiting for new procurement legislation (see below), prepare refocus ZNTB to i t s policy and regulatory role already required under existing legislation. As the ZNTB Director General will manage the CTC until i t s dissolution in 3 years (see below), strengthen the secretariat o f ZNTB to support i t in this role by enhanced staffing (and possibly splitting i t o f f from the current secretariat). Provide an adequate budget to support this objective.

’ For example, the Zambian Institute o f Management (ZAMIM) and Zambia Insurance Business College Trust (ZBIC).

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iii. Revise the Legal Framework.’ Ideally, a new procurement act whose content should be guided by the UNCITRAL Model Law and by current international best practices. Among other things, i t 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 o f the new act. Pursuant to i t s enactment, a new procurement authority should be established. A Director General and other staff for the new authority should be appointed to replace the ZNTB immediately on creation o f 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 o f procurement authority should be developed. The plan would give full authority to ministries and agencies to conduct procurement without reference to or approval by the ZNTB or CTC. In the short term, the plan should appoint one or two provinces as pi lot provinces for full decentralization. On completion o f this process, CTC wil l cease to exist.

v. Establish a Professional Procurement Cadre. Def ine the composition o f 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 o f secondment o f ZNTB staff to positions in PSUs directly managed by the Ministries and agencies should apply for al l the staff in the procurement cadre. A human resource database should be established with both cadre members’ curriculum 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 i t s 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-cormption clauses should be included in the standard bidding documents.

viii. Introduce Procurement Planning and New Filing System. A manual on procurement planning should be developed, containing clear instructions for introduction o f best practices. Release o f budget funds from the budgetary system should be suitably linked to re-

s The Terms o f Reference for the review of the legal and institutional framework, which i s currently being 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.

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alistic procurement plans. A separate procurement register should be defined. In addition, instructions and guidelines should be developed for PSUs on establishing and maintaining a procurement filing system.

ix. Strengthen Training Programs and Training Institutions. A capacity assessment o f training institutions should be carried out. The need for supplementary procurement training programs should be defined. Required training programs should be developed and de- livered.

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TABLE OF CONTENTS

MAIN REPORT ........................................................................................................................ i

PREFACE .......................................................................................................................... i

.. PART I ...................................................................................................................................... 11

EXECUTIVE SUMMARY ...................................................................................................... ii

PART I1 ..................................................................................................................................... 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

Assessment o f the Legal and Institutional Framework ................................................. 6 C . d . Recommendations ........................................................................................................ 11

3 . PROCUREMENT PROCEDURES AND PRACTICES ................................................ 14

a . Procurement Procedures ............................................................................................... 14 b . Assessment o f 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 . Ma in Recommendations ............................................................................................... 27

6 . GENERAL R I S K 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

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ANNEXES (VOLUME 11)

ANNEX I - DETAILED REPORT including Questionnaires

ANNEX I1 - LIST OF MEMBERS OF THE TASK FORCE

ANNEX I11 - 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 VI1 - DOCUMENTATION

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PART I1

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 1 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 i s one o f the poorest countries in sub- Saharan Africa. I t s economy i s undiversified, and depends heavily on mineral resources and exports, particularly copper, which generates over 70 percent o f the country’s foreign exchange earnings.. Zambia’s foreign debt makes it one o f 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 withdrawing from Zambia.

1.02 Importance of Public Procurement. Public procurement plays an important role in the Zambian economy. The total volume o f public procurement i s estimated at 15 percent o f GDP: In 200 1 , procurement o f a value equivalent to 12 percent o f GDP was approved by the Central Tender Committee (CTC) o f the ZNTB, and goods, works, and services o f a value estimated at 3 percent o f GDP were procured directly by ministries and provincial administrations. Th is i s 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 performed, it i s generally accepted that various inadequacies in Zambia’s public procurement system con- tribute substantially to corruption. These inadequacies include poor legislation, political interference, poor procurement practices, untrained staff, and inadequate pay to procurement staff. In this context, a well-functioning public procurement system i s highly important. Sound pub- l ic procurement policies are among the essential elements o f good governance, and a well- functioning public procurement system contributes to better service delivery and economic development.

1.03 Assistance to Procurement Reform. Reform o f the public procurement system has been on the Zambian government’s agenda for almost a decade. T h i s goal has resulted in a number o f donor-funded projects, which have supported, and continue to support, the government’s public procurement reform agenda. In 1993, the Wor ld 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 ministries’ procurement performance. In the mid-l990s, S IDA provided support for training and capacity building for improved public procurement. In ESAC I1 (the second economic and

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social adjustment credit), strengthening and streamlining public procurement was an important element. The Public Service Capacity Building Project (PSCAP), which i s currently being implemented, seeks to strengthen, among other things, the Office o f the Auditor General and the ZNTB in their roles o f ensuring sound management o f 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 o f the public procurement system along with decentralizing procurement to various ministries and agencies and strengthening audit and oversight functions. In 1997, a Wor ld Bank Country Procurement As- sessment Review concluded that the action plan implementation had moved more slowly than expected, particularly with regard to the planned decentralization and the establishment o f a cadre o f procurement professionals to support improved procurement activities. The current report concludes that, in many respects, the objectives o f the 1996 action plan s t i l l have not been realized. A number o f 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 insufficientg.

1.05 Objectives of the CPAR. Against this background, the main objective o f the Country Procurement Assessment Review (CPAR) i s 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 o f Zambia's public procurement structure, including the existing legal framework, organizational responsibilities, and capabilities and present procedures and practices; A r isk assessment specifically related to the Zambian public procurement system; Recommendations for reforms o f the public procurement system and o f trade and custom practices as well as private sector commercial practices; A review o f the country's trade practices, including customs and trade regulations and practices; and finally A review o f private sector commercial practices, including commercial regulations, regulatory barriers and private sector procurement.

1.06 The CPAR was prepared in the context o f the Public Expenditure Management and Financial Accountability Report (PEMFAR). The PEMFAR report i s currently being prepared by Bank and Government in the context o f Poverty Reduction Strategy support credits which call for assessment o f a country's public financial accountability, including an assessment o f public expenditure, procurement, and financial systems before the development o f a Country Assistance Strategy and/or PRSC program in the country. This CPAR report will form one o f the Annexes o f this PEMFAR report, as will reports on the other subjects.

However, the election o f a new polit ical leadership in Zambia in December 2001, appearing determined t o fight corruption, may open up new possibilities for the efficient implementation o f reforms

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2. THE PUBLIC PROCUREMENT FRAME WORK

A. LEGAL AND INSTITUTIONAL FRAMEWORK

2.0 1 Legal Foundations. The legal framework for public procurement in Zambia comprises the Zambia National Tender Board Ac t (ZTBA) o f 1982, the Tender Regulations (TR), and the Procurement Guidelines. The ZTBA provides for the establishment o f the Zambia Na- tional Tender Board (ZNTB) and the Central Tender Committee (CTC) in the ZNTB. The Tender Regulations provide for the establishment o f tender committees in various ministries, provinces and agencies. They also define basic procurement principles such as procurement methods.

2.02 Some aspects o f the regulations are supplemented by procurement guidelines. The ZNTB has issued a set o f procurement guidelines (with the status o f circulars) for formal tenders in procurement o f goods and services, consultancy services and c iv i l 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 Ac t establishes the ZNTB as an autonomous institution and defines the functions o f the Board as those o f regulating, and controlling the procurement, o f goods and services for the government and parastatal bodies. In canying out these tasks, the ZNTB may - through Ministry o f Finance - formulate rules and regulations governing procurement, regulate procedures for the award o f contracts, and formulate the conditions under which any rules and regulations governing procurement may be varied or waived.

2.04 TR further defines the role o f the ZNTB to resolve conflicts in procurement matters. When a dispute arises between a tender committee and a contractor, either o f 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 o f complaints, and the scope o f complaints i s l imited to those between a tender committee and a contractor. The ZNTB’s role o f complaints resolution conflicts with i t s direct involvement in procurement processes.

2.05 The ZTBA authorizes the ZNTB to establish tender committees in ministries, parastatal organizations, and provinces. Th is system includes a Central Tender Committee (CTC), which i s explicitly mentioned in the ZTBA. The CTC and ZNTB are closely linked. They share the same location and secretariat, and some members o f the CTC are also members o f the ZNTB. CTC’s role i s to examine and authorize a l l procurement o f goods, works, and services 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 secretariat. These issues predominately concern (a) tenders o f a value that removes them from the

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decentralized tender committees’ authority, (b) approval o f waivers o f rules, and (c) approval o f variations to approved contracts.

Category A B C D

Total

2.06 Procurement and Supply Units. At the decentralized level (the ministries and agencies), the various tender committees are supported by secretariats called Procurement and Supply Units (PSUs). The ZNTB determines the monetary thresholds below which procurement may occur at the decentralized level without prior CTC approval. These limits are based on criteria such as the PSUs’ administrative capacity in terms o f human resources, office space, and equipment; budgets for daily operation; and experience and track records in procurement.

Certijkation Monetary threshold ZMK 200 million (USD 50,000)

ZMK 1,200 million (USD 300,000)

Number of PSUs 17 4 6

“Not certified” 24 51

ZMK 500 million (USD 125,000)

2.07 On this basis, the PSUs are placed in one o f four categories: A, By 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 i s 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. T h i s i s supported by the CPAR findings that 80 percent o f approvals are handled by CTC and 20 percent by al l decentralized PSUs.

Table 1. Monetary Thresholds applicable to Certification Categories for Procurement Support Units

2.08 At present there are 51 PSUs (two o f the nine provinces have PSUs). Almost ha l f 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 o f about U S D 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.

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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 o f some issues follows.

2.10 Absence of Private Sector Involvement. As a part o f the Public Procurement Action Plan (1 996), 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 organizations and individuals connected with public procurement and making recommendations to the ZNTB. The proposed Council would have a majority o f representatives from various stakeholders outside government. The revised legislation (Bill) was sent to Parliament, but has never been enacted.

2.1 1 Little Progress in Delegation of Procurement Authority. An important objective o f the Public Procurement Action Plan (1996) was delegation o f procurement authority. A number o f PSUs were to be established in the ministries and agencies, and the government 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 government's shall continue this authority delegation process. However, the plan does not propose full delegation but limits it to "certification o f all" PSUs into categories A to C should be achieved by 2003 within the related thresholds.

2.12 Stalled Capacity Building Plans. Another objective o f the Procurement Action Plan (1996) targeted the professional capacity problem in procurement. The objective was to build a cadre o f procurement professionals based on sound principles o f (a) a defined and ensured career path, (b) an attractive salary structure commensurate with the sk i l l s required and mar- ke t conditions, and (c) the establishment o f a cadre management agency responsible for developing the capacity o f the cadre staff to ensure adequate numbers o f skilled staff to satisfy demand, to find suitable placement for individual staff, and to develop capacity- and ski l ls- building programs at various stages in the career path. Further, no permanent cadre o f procurement 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 c iv i l service jobs.

2.13 Underfunded Anti-Corruption Measures. Traditionally, the political will to fight corruption has not been strong in Zambia. However, this situation may now be changing. The 1996 Anti-Comption Commission Act f i r s t established the Anti-Corruption Commission (ACC) as an autonomous and strengthened institution that i s not subject to the direction or control o f any person or authority but reports directly to the President. The ACC's functions include prevention measures and powers to investigate and prosecute independent o f the normal channels o f administrative complaint. By the end o f 2000, the ACC had 184 professional

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staff plus 62 support staff. However, i t s 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 s igns that the political leadership may be willing to implement a zero-tolerance policy towards corruption. The President has initiated the establishment o f a special Directorate in the ACC, which will, among other i s - sues, investigate compliance with public sector procurement rules. The initiative will be coordinated with the ZNTB, the Office o f the Auditor General, and other stakeholders.

C. ASSESSMENT OF THE LEGAL AND INSTITUTIONAL FRAMEWORK

2.15 Legal and Institutional Characteristics for a Good Public Procurement System. A good public procurement system strives for transparency, competition, economy and efficiency, and fairness and accountability. The analysis o f Zambia’s system i s based on compari- son with the following desirable features:

A clear, comprehensive, and transparent legal framework, characterized by the presence o f legal rules that are easily identifiable and govern a l l aspects o f the procurement process; Clarity of functional responsibilities and accountabilities in the procurement function, which requires clear distinctions between those responsible for implementing procurement and those accountable for proper procurement rules in the buying entities as wel l as the means to enforce these responsibilities and accountabilities; An institutional framework that differentiates between those carrying out the procurement function and those with oversight responsibilities, the latter o f 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 well-trained procurement staff; necessitating a continuous, focused, and targeted training 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 Ac t defines the institutional framework, it does not specify the basic procurement principles o f a public procurement system, such as procurement methods, basic rights o f bidders, evaluation criteria, public bid opening, maintenance o f records, etc. Based on experience with the current legislation, the ZNTB i s currently working with the AfDB to initiate a review o f the legal and inst i - tutional framework. It would be advantageous to base an upgraded legal framework on some features o f the UNCITRAL Model Law and current international best practices, as i t would

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then meet a l l the criteria spelled out above as well as the recommendations arising from this CPAR.

2.1 7 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 o f public procurement policies and practices and contributions to the development o f these policies and practices. To prevent conflicts o f interest from emerging, efficient oversight requires the total separation o f regulatory and overview functions from actual procurement, a clear mandate formulated in legislation, and the necessary powers to enforce legislative objectives.

2.18 The legal framework o f Zambian public procurement does not support this. Present legislation does not precisely describe the oversight functions relating to public procurement and there i s no clear separation between the implementing agencies and the oversight function. According to the TR, the Central Tender Committee "performs the functions o f the Board," and there i s a significant overlap o f 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 o f the two are diff icult 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 o f examining and approving procurement cases for the CTC. Nevertheless, the current legal provisions do permit the ZNTB to define and implement i t s policy and regulatory roles, pending greater clarity being built into new legislation, as suggested above.

2.19 InsufBcient Information on the Volume of Public Procurement. In connection with inadequate oversight and monitoring functions, there i s presently no single source that can identify the total volume o f public procurement. For the purposes o f the CPAR, the Central Tender Committee was able to compile information from which an overview o f centrally approved procurement could be constructed. But such information does not form part o f the normal monitoring and review efforts o f the ZNTB. For the same reason, i t was not possible for the ZNTB to provide the corresponding data at the de-centralized level. For a proper supervisory role, the ZNTB should obtain this and other relevant data to critically examine the performance o f public procurement and take corrective measures.

2.20 Inadequate Complaints System and Unclear Enforcement Mechanisms. The ZNTB i s defined in the Tender Regulations as the authority that resolves conflicts in procurement matters but i s limited to disputes between tender committees and contractors. It does not cover the larger scope o f complaints, for example, by dissatisfied bidders. To ensure confidence in the objective, independent, and efficient handling o f complaints, coverage should be more comprehensive and an independent office, removed from involvement in the actual procurement

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process, should handle the complaints. However, due to the overlap o f membership in the ZNTB and CTC and the existence o f the joint secretariat o f the two bodies, the ZNTB's independence in this respect i s questionable, at best. Furthermore, in present legislation, there i s no guidance as to what sanctions are available for the ZNTB. I t is, therefore, at the Board's discretion to select and apply sanctions. Nor does legislation prescribe a time limit for the disposal o f complaints. The lack o f an effective system for complaint handling i s 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 Ac t does not specify to whom the ZNTB reports on the outcome o f i t s activities. Ac- cording to part IV o f the ZTBA, concerning "Financial and Other Provisions," the ZNTB reports to the "minister," presumably MOFED. For the legislative framework to support transparency and accountability, three elements should be clearly defined: what issues the ZNTB i s to report on, who should receive the report, and when the report should be submitted. This will provide focus for the report's content.

@) Delegation of centralization o f Procurement Authority

2.22 Insufficient Delegation of Procurement Authority. Despite government commitment to delegate procurement authority, i t has proceeded very slowly since 1996. In real terms, monetary thresholds beyond which the PSUs are authorized to carry out procurement have not increased since 1996. Furthermore, since the adoption o f the Procurement Reform Action Plan (1 996), 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 o f 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 l imited number o f bidders being invited to bid.

2.23 There are several reasons for the slow pace of delegation of procurement authority. Delegation o f procurement authority requires an efficient framework for monitoring and control and procurement rules, and a professional staff, An analysis o f the ZNTB's inspection reports revealed that, in many cases, the required professional s ta f f i s not in place. Furthermore, at the provincial and district levels, the Tender Board Ac t and Tender Regulations are not fully known and understood, causing many cases o f non-adherence. The staff responsible for procurement often has other functions as well, and there are examples o f tender committees not being established despite the ZNTB's recommendation to do so. Standardization of, for instance, local purchase orders, also i s lacking as are proper filing systems.

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2.24 Full delegation o f procurement authority at the province level i s 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 2 1 professional procurement ex- perts are needed in the nine provinces. I t should be possible to reach this target within 1 to 2 years. To stimulate the process, one or two provinces could be appointed as pi lot provinces for full delegation o f authority. T h i s 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 StafJ In spite o f government commitments in the Public Procurement Action Plan (1996), neither a cadre o f 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 training in ZBIC and ZAMIM at different levels, and a group o f 63 persons are currently being trained.

2.26 Even though training activities have been substantial, they have not efficiently addressed the human resource problem in public procurement. T h i s i s primarily due to the large share o f people who seek alternative employment opportunities after receiving procurement training. In 1998, the ZNTB defined the .demand for trained procurement specialists in ministr ies and agencies as 157 positions. By June 2000, as many as 66 positions were vacant, and approximately ha l f o f the 91 people employed by the ministries were not trained in procurement at all.

2.27 The Importance of Pay Structure and Career Paths. The pay structure and career path for procurement professionals is, therefore, a key to the achievement o f a procurement cadre. Currently, the staf f employed and seconded by the ZNTB receives better pay than those employed as c iv i l servants by the ministries. Even the ZNTB pay structure i s inadequate to retain staff. I t s pay structure should be more competitive vis-a-vis wages in the private sector. The ZNTB's pay structure could be similar to that o f other agencies with attractive salary struc- tures.

2.28 Need for Training Capacity Assessment and Development of Relevant Training Pro- grams. Along with developing a procurement cadre, an assessment i s needed o f both the capacity o f relevant training institutions and the content o f their courses as wel l as the funding available to implement training programs. At present, ZAMIM and ZBIC are the main training providers in procurement. Both institutions currently offer the CIPS-based" training pro-

'' CIPS i s the Chartered Institute for Purchasing and Supply, an international education and qualification body

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gram. Additional training programs can be developed based on the expertise and facilities available in these institutions.

2.29 I t i s 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 o f consultancy services, the evaluation process, filing and documentation, contract management, development o f terms o f 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 o f corruption. However, the initiative was stopped after the call for proposals to cany out the survey appeared in the media. Another survey i s now planned to be carried out within the framework o f the Public Service Capacity Building Project. Thus far, no survey o f the public perception o f corruption has been carried out.

2.3 1 I t i s the perception o f the private sector, however, that Corruption takes place in connection with public procurement, both in the evaluation o f tenders regarding short-listing and contracting, and in supervision o f c iv i l 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 contracts are awarded on the basis o f a transparent procurement process. Potential suppliers reported to the CPAR team that i t i s a common experience to participate in a publicized tender that i s subsequently cancelled, only to find the contract resurfaces later, already having been awarded to one o f the bidders without re-tendering. Some o f the contracts reviewed by the CPAR team (in the review o f 14 large contracts funded by government) exhibited the same phenomenon; the bidding process was “annulled” and then negotiated separately with one o f the bidders.

2.32 Insufficient Funding of Anti-Corruption Commission. Against this background, the activities o f the Anti-Corruption Commission are highly important if Zambia i s to move towards 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 procurement ru les i s a step in the right direction. However, due to unattractive salaries and conditions for service, i t i s diff icult for the ACC to attract and retain skilled personnel and, in general, it has been seriously hampered in i t s activities due to funding described by the ACC as “erratic and inadequate” in i t s 1999 report.

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2.33 Code of Conduct for Public Employees in Procurement. Other anti-corruption measures are relevant. Precise definitions o f what i s expected o f a c iv i l servant and what consti- tutes a conflict o f interest are prerequisites for effective enforcement o f procurement regulations. There i s no general Code o f Conduct for the Zambian public sector employees. The only guidance i s given in the General Orders that regulate al l aspects o f public employment, which include a section on Conduct and Discipline but lack a general ban on conflicts o f interest, and in the Financial Regulations that regulate al l aspects o f disbursement o f public money. A Code o f Conduct for procurement professionals was developed as part o f the Public Procurement Action Plan (1 996) but never implemented. I t i s s t i l l appropriate to consider developing a general code o f conduct for c iv i l servants and for procurement professionals.

D. RECOMMENDATIONS

2.34 With the objective o f promoting transparency, competition, economy and efficiency, and faimess and accountability in the Zambian public procurement framework, the following i s recommended:

(a) Reform of Legal Framework 2.35 The legal framework should be reformed in the following key areas:

An upgraded legal framework should be adopted, based on the UNCITRAL Model Law. The revised procurement act should contain the basic procurement principles o f a public procurement system, such as procurement methods, the precise circumstances that call for different procurement methods, basic rights o f bidders, evaluation criteria, public bid opening, price adjustment provisions, maintenance o f records, etc. It should cover the objectives and functions o f a new independent policy and regulatory procurement authority, say, the Zambia National Procurement Authority (ZNPA), to replace the ZNTB immediately on creation o f ZNPA. Important functions o f ZNPA should be monitoring procurement policies and practices, developing and managing the procurement cadre, conducting capacity building and outreach to contractors, consultants, and suppliers to engender a greater share o f contracts to local organizations. A reliable reporting system should be established whereby ZNPA can obtain statistical information on procurement activities at a l l levels. ZNPA should establish benchmarks and performance indicators to keep track o f and measure the progress o f procurement reform and quality o f actual procurement processes. The secretariats of the CTC and ZNPA should be physically separate. I t i s expected that CTC secretariat will not be needed when decentralization i s completed in 3 years. The authority’s reporting obligations should be specified. The establishment o f an independent appeals body (part time) in conjunction with a well defined complaints system managed by ZNPA which wil l no longer have a conflict o f interest as ZNPA will not conduct any procurement.

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(b) Delegation o f Procurement Authority 2.36 A number o f steps should be taken to speed up the delegation o f procurement authority. Complete delegation o f procurement authority to the ministries in a phased manner over 3 years, as proposed below, i s feasible if supporting measures are taken in a concerted manner. These supporting measures include setting up the procurement cadre under the ZNTB’s management and positioning these personnel to the ministries (as ZNTB does at present except for staff hired directly by the ministries as civi l servants) instead o f requiring them to recruit and train their own procurement staff, thus rapidly enhancing the training o f a cadre o f procurement specialists, improving salaries, etc. The existing system o f categorizing and certifying PSUs for specified monetary thresholds should be phased out and replaced with full authorization 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 f i rst year o f implementation, 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 o f 6 months’ notice 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 provinces) must be given 6 months’ notice or more to prepare for complete decentralized authority. By the end o f the second year o f implementation, they should a l l be able to under- take procurement independent o f the CTC. To stimulate the decentralization process, one or two provinces should be appointed in the short to medium te rm as pi lot provinces for full delegation o f procurement authority. This would provide valuable experience.

(c) Procurement Cadre and Capacity Building 2.37 A number o f human capacity problems should be addressed. The priorities are:

A professional procurement cadre should be established based on the elements o f (a) a defined and ensured career path, (b) an attractive salary structure commensurate with the sk i l ls required and market conditions, (c) the establishment o f a cadre management agency responsible for developing the capacity o f cadre staff, (d) placement o f cadre staf f into positions in PSUs based on matching experience and expertise with each PSU’s requirements, and (e) the establishment o f in-career capacity building programs managed by the cadre management agency. The cadre should be managed by the new procurement authority (ZNPA). To increase the competitiveness of salaries paid to procurement officials, the existing system o f s t a f f secondment from the ZNTB should be expanded to cover a l l procurement staff working in ministries or agencies. Funding for salaries to the cadre should be improved to the level o f other agencies with attractive salaries. To identify opportunities to upgrade their ability to deliver mid-career training, training institutions should be assessed. Mid-career training programs should be developed

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(d) Anti-Corruption Measures 2.38 The following i s recommended: 0 Sufficient funding should be ensured for the Anti-Corruption Commission.

The new Directorate o f the Anti-Corruption Commission, which i s to investigate, inter alia, compliance with public sector procurement rules, should employ procurement specialists to assist with i ts tasks. The functions and tasks o f the foreseen new Directorate in the ACC should be coordinated with the new redefined procurement authority to ensure exchange o f 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 i t s standard bidding documents. The corruption survey presently planned under the PSCAP project should be initiated immediately.

0

0

0

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3. PROCUREMENT PROCEDURES AND PRACTICES

A. PROCUREMENT PROCEDURES

3.0 1 Use of Standard Bidding Documents Not Mandatory. The Procurement Guidelines contain one set o f bidding documents for a l l types o f products. The use o f these bidding documents i s not mandatory. As in the case o f the long l i s t o f standard bidding documents o f the World Bank, Zambia also needs a wide range o f bidding documents to support the various types o f products and services to be procured.

3.02 Award Criteria The Tender Regulations do not detail the range and nature o f 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 i s in the descriptions o f the tender committee's functions, where they specify "that the committee must ensure that the criteria used in evaluating tenders i s 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 c iv i l works, however, mention both a technical evaluation and a commercial evaluation, l is t - ing a number o f standard criteria for each section.

3.03 Registration System for Small Value Procurement. Zambian public procurement relies on a registration l i s t system for identifying and assessing the potential suppliers' qualifications. The Tender Regulations require the Central Tender Committee to register suppliers o f goods, works, and services at the central level and the PSUs to register suppliers at the decentralized level. According to the Guidelines, this registration l i s t assists the PSUs with market information and enables them to carry out "informal" procurement (below the monetary limit o f ZMK 30 mi l l ion or about USD 7500) with diligence. The Guidelines provide for central registration o f suppliers that se l l items o f general use for a l l public sectors at the CTUZNTB. In addition, al l foreign f i rms are to be registered at the ZNTB. Each ministry also requires a separate registration for items o f 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 ZNTBICTC l i s t i s circulated to the purchasing ministries or agencies. Application forms are available at the National Tender Board and the PSUs. There i s a registration fee o f between ZMK 50,000 and ZMK 200,000 (equivalent to USD 12.50 to U S D 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 i s not defined in detail. There i s no appeal, except to the ZNTB itself.

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3.05 Tender Methods. The Tender Regulations and Procurement Guidelines define a number o f different procurement methods. These methods differ in terms o f their openness to potential suppliers.

3.06 A Formal Tender i s required to be advertised in the Government Gazette and i s for contracts exceeding ZMK 30 mill ion. It i s equivalent to an "Open Tender," which i s open to all who respond to a national or international 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 Formal Tender i s an exception to the Formal Ten- der that i s used where quotations are requested from a number o f potential suppliers. The minimum number o f quotations i s not specified. An Informal Tender i s not advertised. The contract value should not exceed ZMK 30 mi l l ion for government bodies or ZMK 30 mi l l ion for parastatals. The approving authority (CTC, Head o f Department in Ministry, etc.) depends on the value o f the contract concerned. For Informal Tenders, bids are required to be invited from at least three contractors or suppliers. Another recognized method o f procurement i s negotiation. 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 c iv i l works o f a "specialized and com- plex nature" are involved or "highly specialized" equipment i s to be obtained, or when the goods and services to be obtained are o f a "personal or professional nature" or "no acceptable tender from al l formal tenders previously invited" has been made.

3.07 Single sourcing of consultancy services i s 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 i s not widely available, or have undertaken similar assignments before. Single sourcing i s not allowed for the procurement o f c iv i l works and goods.

3.08 No comprehensive list of procurement methods is de$ned. The various tender methods are not comprehensive enough. Also, the definitions o f the methods are scattered over different legislative documents. The UNCITRAL Model Law includes a comprehensive description o f procurement methods, which can serve as a benchmark for improving the current provisions.

3.09 Bid and Opening of Bid. To avoid malpractice, bids should be opened immediately after the announced bid submission time. T h i s important principle i s not clearly specified in the procurement regulations. In practice, most bids are opened immediately after the expiry o f the deadline. However, delays o f as much as a few days in the opening o f bids do occur.

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B. ASSESSMENT OF PROCUREMENT PRACTICES

3.10 In assessing procurement practices, an important issue i s whether practices support a transparent, fair, and accountable procurement system, which promotes competition among suppliers.

(a) Regulatory Framework

3.1 1 Practices Differ from Formal Objectives. The Zambian public procurement system i s characterized by a divergence between overall, formal legislation and objectives on the one hand and daily practices on the other hand. This divergence i s manifest in the general appreciation o f procurement rules and; in particular, the application o f tender methods, registration system, and the enforcement o f rules by the ZNTB, which waives i t s rules liberally. Th is divergence i s possible in large part because o f the vagueness and imprecision o f important legislative and regulatory documents. The imprecision enables a number o f interpretations and the arbitrary application o f procurement rules. Political interference and the weak will o f the CTC and ZNTB to enforce their regulations also support this divergence. The result i s a procurement system that i s perceived among potential suppliers as unfair, ambiguous, nontransparent, 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 i s 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 i s a frequent practice for PSUs to seek CTC’s waiver for Informal Tenders for larger value contracts. These are then awarded to registered suppliers using the Special Tender method. This circumvents the Formal Tender method requirement. In practice, CTC i s frequently unable to strictly enforce the rules and tends to bow to the pressure from the PSUs to allow the use o f Informal Tenders. Th is phenomenon was noticed even in the 14 cases o f large-value procurement at the CTC reviewed for this CPAR.

3.14 Another frequent practice i s to “annul” a Formal Tender procedure mid-way during processing. Immediately thereafter, “negotiations ” are initiated with bidders from the very tender that was annulled. Th is undesirable practice o f annulment followed by negotiations was observed also in the 14 large-value cases. T h i s practice entails nontransparent procurement and works against fairness and competition.

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@) Inadequacies and Misuse of the Registration System

3.1 5 Registration List System Considered Unfair and Nontransparent. In al l procurement, i t i s important for the procuring entity to evaluate bidders’ qualifications and capacity to ensure their ability to deliver the promised products. To prevent arbitrary decisions, it i s important that the procedures and criteria used to assess the qualifications o f the bidders are open and transparent. Tendering with init ial pre-qualification and a subsequent short-listing o f bidders i s one way to achieve this. However, the Tender Regulations do not define these qualification methods, nor i s any guidance on these methods available. Instead, the registration l i s t system described earlier i s used. While short-lists are drafted on the basis o f the registration list, each short-list i s subject to misuse to favor particular f i rms . Further, the registration l ists are not systematically updated nor are the means available to check the data applicants submit in registration forms. Moreover, the registration system i s used for much higher value contracts than the regulations intend.

3.16 This non-transparent system, which does not truly assess bidder qualifications, i s perceived as being misused or not used as intended in establishing short-lists. The fee for regis- tering as a potential supplier i s perceived as a tax, and the ministries see it as an important revenue generation activity. The system, as currently designed, i s a potential source for corrupt practices.

3.17 The use o f the registration system i s 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 Guidelines for Procurement of Consultancy Services The guidelines for consultancy services are, in a number o f respects, broad and imprecise. A proper definition o f “consultancy services” i s 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 i s used for short- listing consultants, in addition to “registers maintained by professional bodies o f members o f firms.’’ The award process permits opening the best three technical proposals without regard to a minimum threshold o f quality. Financial proposals are opened privately by a committee, a process which i s not “open” to the bidders. The criteria for the single source selection method are imprecise and allow for liberal use o f this method. In al l consultancy contracts, negotiations are allowed without restrictions, both in regard to substantial elements o f the specifica- tions and for unit rates already offered. Such liberal access to negotiation presents a high r i sk o f collusion and non-equal treatment o f bidders.

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3.19 For donor-funded consultancy contracts, donor procurement requirements are followed. In practice, much o f the consultancy services procured with government funds are for routine assignments such as architects, engineers, and quantity surveyors, where the registration system (with i t s attendant weaknesses) i s the primary basis for short-listing. An earlier practice o f hiring civil sewants as preferred providers for consultancy services has been largely, though not completely, abandoned. Today, this practice i s known to continue mainly for some government-funded contracts.

3.20 Insufficient Procedures for Use of Domestic Preference System. The domestic preference 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 o f 25 percent for manufactured goods supplied by them. No preference i s permit- ted for domestic c iv i l works contractors. In practice, CTC and the ministries have diff iculty applying these preferences as the means o f 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. N o data i s maintained on the impact of, or incidence of, the use o f the domestic preference system for goods manufactured, or goods imported and stocked for sale locally.

3.2 1 Insufficient Filing Systems. A number o f shortcomings characterize the present filing system o f 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 i s no clear guidance on what data should be maintained in the filing system and i ts structure (as government has directed for other filing systems) and no special filing system has been developed for documentation l inked to the procurement process. There i s a lack o f appreciation o f the importance o f and methods for maintaining files. The result i s f i les that are generally incomplete. A review o f Wor ld Bank-funded projects documented serious problems in managing procurement records. T h i s situation also leads to ineffective contract management when vital documents, such as performance guarantees or the contract itself, cannot be found when required.

3.22 Insufficient Procurement Planning. Except in isolated ministries, which practice a system limited to procurement “scheduling, the use o f procurement planning as a tool for conducting efficient and economic procurement i s largely non-existent. The CPAR team was advised that procurement planning i s not done as there i s 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 o f procurement planning (such as packaging, choosing the appropriate procurement method and type o f contract, etc.) are not taking place early in the procurement process. Consequently, there were many cases where prior agreement on these aspects was lacking, which caused delays; when the actual bid documents were forwarded to the

- 1 8 -

CTC, these choices were questioned. The guidelines are silent on the need for and importance o f procurement planning, and on when and how it should be done.

3.23 This state o f affairs results in a large incidence o f “urgent” cases o f procurement. In urgent cases, suboptimal methods o f procurement must be used, undermining efficient and economic procurement. The review o f 14 large-value procurement contracts in the ZNTB revealed 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 allocated 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 i s generally agreed that this occurs too often and seriously affects project implementation, efficient procurement, and contract management. Th is unreliable state o f affairs has several consequences, including: (a) contractors’ bills are often held up for several months, which delays projects, makes contractors wary o f 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 o f local currency to be required than was originally provided.

3.25 Further, in the budget process, the funds actually allocated are often lower than the amounts required for good project progress. Also prevalent in the budget system i s a practice of allocating a “nominal” 1 ZMK for “tentative” projects that “may” be approved during the budget year. W h i l e this allows such tentative projects to be listed in the budget papers for eligibility to use the budget funds during the year, it further strains the budget for other projects when more than the allocated 1 ZMK i s finally released to such tentative projects. Subse- quently, it exacerbates the problem o f adequate and timely release o f funds.

3.26 External Payments Procedures. The use o f Letters o f Credit as a means o f payment has declined both in the public and private sector since 1992, when restrictions on the use o f foreign currency were abolished. Before then, it was mandatory to go through a central bank and open Letters o f Credit on al l amounts above USD 5,000. N o w it i s up to the buyer and seller to agree on the means o f payment. Opening an LC takes between 1 and 2 weeks. The procedure, as presented by the banks, i s normal compared to practices in other countries.

3.27 An analysis conducted by the Office o f the Auditor General provided several reasons for the decline in the use of Letters of Credit, mainly related to goods imported by local agents

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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 i s then used for buying 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 enables easy and safe money laundering. For government-financed public procurement, the release o f funds in this way, instead o f with LCs directly to the foreign supplier, does occur, but a security i s obtained before such advances are paid. For payments financed by Wor ld Bank, the opening o f an L C i s facilitated by the Wor ld Bank by a system o f “direct commitment.” For Wor ld Bank-funded projects, the incidence o f opening LCs without recourse to a direct commitment method i s low (statistics could not be obtained). Contrary to reports received by the CPAR team, delays by the World Bank in facilitating the opening o f LCs through providing direct commitment were not found. Another reason attributed by some projects for lesss use o f LCs, i s the high cost in terms o f bank charges. The commercial banks do not find i t 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 o f smaller companies from par- ticipating in public tenders because, for guarantees, banks require collateral, often in cash, which i s diff icult for such companies to provide. On the other hand, bonds are r iskier as their encashment i s not unconditional. Government regulations require that performance guarantees and guarantees for advances released should be obtained. However, govemment does permit the use o f bonds in place o f 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 infi-e- 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 o f USD 463 mill ion. O f this, USD 199.5 mi l l ion has been disbursed by end o f FY02. The Country Portfolio Performance Review for Zambia notes that project performance improved slightly since end o f FY 2001 as there are now only two problem projects compared to five then.’’

3.30 Recently a number o f procurement-related reviews have been conducted for various reasons. An Independent Procurement Review (IPR) was conducted in 1999 by a consulting firm (Ws Crown Agents). Ex-post Procurement and Statement o f Expenditure (SOE) Re- views were conducted (a) in June 2001 for the HSSP and (b) in August 2001 for four other

” At the end o f FY 2001 (June 2001), there were five problem projects: Urban Restructuring 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 o f 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

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projects12. In February 2002, the Bank conducted a procurement review o f 10 selected contracts that were subject to IDA 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 o f one project (HSSP), cases o f misprocurement were identified and reported to government. In the same project, it was discovered that the Special Account was used repeatedly to finance ineligible expenditures. Due to i t s improper uses o f 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 a l l projects, the common problems included: (a) lack o f f i les and documentation; (b) bid opening procedures, etc., not rigorously followed; (c) prior review clearances not obtained in time; (d) deficiencies in important features o f bid documents; (e) poor contract management, including release o f advances without guarantees; ( f ) deficiencies o f capacity and capability in contractor f i r m s awarded c iv i l works contracts; and (g) cost overruns coupled with time overruns.

3.33 All these reports drew attention to inadequacies in the capacities o f the PSUs. The inadequacies included (a) understaffing, (b) inadequate exposure to and training in procurement, (c) inadequate knowledge o f filing needs and contract management issues, (d) lack o f procurement planning and i t s use for efficient procurement, and (e) insufficient clarity in institutional and organizational arrangements affecting the capacity o f PSUs to perform effectively.

3.34 The slow pace o f delegation o f authority to procure to the ministries and agencies i s partly due to ZNTB's lack o f confidence in their capacity. But the there are also other reasons for persistent lack o f adequate interest in reform o f public procurement. The lack o f interest in ministries and agencies to actively pursue even the limited program o f delegation o f procurement authority i s symptomatic o f underlying causes such as preference for a system o f dif- fused responsibility and accountability offered by the current lax systems and procedures and institutional arrangements. Any tightening o f the arrangements would affect the distribution of rents be it ZNTB, senior officials or politicians. Though diff icult to pin down in any country, political interference in public procurement in Zambia i s generally acknowledged.

'* Agricultural Sector Investment Program (ASIP), Economic Recovery and Investment Promotion Credit

- 2 1 - (ERIPTA), ROADSIP, and Social Recovery I1 Project (SRP 11).

D. RECOMMENDATIONS

(a) Improve the Regulatory Framework

3.35 The following i s 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 l i s t o f 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 o f 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 regulations and guidelines governing public procurement. Regulations should elaborate the details on the process and the technical details separately for c iv i l works, goods, and consultancy services. Regulations should clearly specify that bid opening must take place immediately after the deadline for bid submission. Domestic price preference for c iv i l works contracts should be introduced with eligibility requirements similar to the provisions in Bank guidelines. For manufactured goods, a criteria o f minimum value added should be introduced. The price preference for (a) imported 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 documentation andfiling should be addressed in the revised procurement act, and the Procurement Authority should develop detailed instructions for filing, 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 i s recommended: 0 The registration system for identifying potential bidders should be redesigned with the

objective o f (a) restricting the use o f the system to only very small value items (below the equivalent o f USD 7500) and (b) providing effective means for administration, enforcement, and monitoring o f the system. Private sector representatives should be involved in reviewing the registration l i s t system. The registration fee should be less expensive and reflect more directly the actual cost o f registration.

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(c) Enhance the Administration o f Procurement Procedures

3.37 The administration o f procurement procedures should be reformed in a number o f ways: 0 CTC should enforce the use o f procurement method and related thresholds much more

rigorously and only allow waivers in a few well-justified cases. A full set o f standard bidding documents should be developed. The use o f standard bidding 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 o f documentation for procurement activities in one place. The proposed new procurement authority should develop detailed instructions for filing, including a checklist to be used by the PSUs. A manual on procurement planning should be developed. The system o f procurement planning should be enforced. Methods o f procurement, packaging, etc., should be defined and agreed to well before the procurement process begins and should then be followed. Release o f budget funds from the budgetary system should be suitably linked to realistic procurement plans

0

0

0

(d) Facilitate Payments and Guarantees

3.38 The present practices for payments and guarantees call for certain reforms: 0 The system o f allocation and release offunds to ministries under the government’s

budget should be modified to improve reliability and adequate availability o f timely resources. The use ofLetters 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 o f the procuring entity, bank guarantees should be mandatory for larger contracts.

0

0

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4. TRADE PRACTICES AND CUSTOMS A. THE ZAMBIAN TRADE REGIME

4.01 Procurement Issues. A central procurement issue in relation to trade i s the application o f transparent and internationally recognized customs and trade procedures, which allow the effective import and export o f goods. A modern customs administration must be able to facilitate trade flows through smooth import and export procedures and, at the same time, fulfill i t s role as a key revenue generator to the state budget.

4.02 Trade Policy. Zambia has adopted most o f the international standards in terms o f trade policies and customs regulations. As a member o f COMESA (Common Market o f Eastern and Southern Africa), Zambia has moved ahead o f other member states in adopting tari f f reductions o f up to 80 percent on most tradable commodities. Zambia i s also a member o f SADC (Southem 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 o f America.

4.03 TarijJi and Taxes. Zambia has consistently followed a policy o f reducing tari f f levels, with significant rate reductions taking place in 1996. The current rates o f customs duty range between zero and 25 percent, with 15 percent as the most common rate. In general, a 5 percent 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 i s a limited l i s t o f duty-free goods including, among other items, books, fertilizers, and primary forms o f rubber and steel. The VAT rate i s 17.5 percent.

4.04 Registration of Traders. All traders, including foreign f i r m s using a national agent, must be registered. A prospective company must register with the Registrar o f Companies at the Ministry o f Commerce, Trade, and Industry. After that, a Certificate o f Incorporation i s issued. Within Customs, an identification number i s allocated to traders who import, export, or transport goods. The import licensing system has been abolished. However, a certification procedure i s 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 i s part o f 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 staf f in lower grades i s provided with only 3 weeks o f training upon recruitment, whereas higher-grade officers with university degrees receive 4 weeks. There are incidents where newly recruited s t a f f must handle work al l alone.

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4.06 Computerized Customs System. In 1998, the computerized customs system, ASY- CUDA, was introduced. It includes a l l functions needed in a modern customs operation. Ver- sion 2 o f ASYCUDA i s currently in place, and the latest version, ASYCUDA++, wil l be introduced later in 2002. This version will reduce direct interaction between the customs bro- ker/trader and the customs officer, thereby significantly reducing the risk o f corruption. ASYCUDA includes an automatic risk analysis module that supports the identification and selection o f consignments, which represent a higher risk and, therefore, should be controlled further. Due to inadequate training, the risk analysis module i s not being properly used, leading to a high percentage o f consignments (30-50 percent) being inspected. T h i s causes delays and increases procurement lead time.

4.07 Under-invoicing and Forged Invoices. The incidence o f under-invoicing and forged invoices i s 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 introduced post-entry control as a supplement to the traditional transaction control at the border. However, to ensure effectiveness, the department i s contemplating a more advanced system o f 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 o f 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 al l levels. This would support effectiveness o f both private and public sector procurement when goods are imported. Newly recruited officers need more comprehensive introduction and training. Implementation o f A S Y C U D A H should be continued and supported by training. The use o f the system's r isk 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 capacity to reduce under- invoicing and forged invoices. Control efforts directed towards under-invoicing should be integrated with VAT control and audit o f profit tax. Training capacity should be strengthened, and training should be provided for customs officers for carrying out efficient investigations o f under-invoicing.

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5. PRIVATE SECTOR COMMERCIAL PRACTICES

A. THE PRIVATE SECTOR IN ZAMBIA

5.01 Competitiveness in a Liberalizing Economy. The competitiveness o f major parts o f 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 o f inefficient, state-owned enterprises. Privatization has culminated in recent years with privatization o f the mining sector. However, the recent decision o f Anglo American to withdraw from Zambia i s a seZTBAck in the private sector.

5.02 Private Sector Organizations. There are two major private sector organizations in Zambia: The Zambia Association o f Chambers o f Commerce (ZACCI) and the Zambian As- sociation o f Manufacturers (ZAM). Together, they represent most o f 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 i s ex- panding. Private sector output, in general, seems to r i se faster than employment, pointing to increased competitiveness and a more sustainable private sector.

5.04 Regulation of Commercial Practices. The Competition and Fair Trading Ac t o f 1994 i s 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 o f economic power, and consumer welfare protection. The Ac t 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 Ac t i s the Zambian Competition Commission (ZCC), an autonomous corporate body under the Ministry o f Commerce, Trade, and Industry. According to the ZCC, i t s limited resources make it diff icult to exercise i t s powers. Many cases are not pursued due to the lack o f staff.

5.06 Private Sector Procurement and Procurement Procedures. The volume o f private sector procurement cannot be estimated on the basis o f the available data. Also diff icult to esti- mate i s the quantitative contribution o f the domestic private sector to public procurement. In- dustry estimates the volume o f private sector procurement at well below that o f public procurement. For the majority o f companies, there are no formal procedures for procurement, particularly among SMEs. Some large companies, especially the "privatized parastatals," have comprehensive and efficient procurement procedures.

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5.07 Professionalism and Capacity Building. There i s room, and the need, for Zambian suppliers to be professionalized to meet the demands o f procuring enterprises. The professionalism and sustainability o f suppliers i s a major issue for Zambian private sector procurement. Some suppliers are professional in terms o f good business practices, but many are not.

5.08 Private sector procurement systems and procedures There also are considerable deficiencies in general understanding and recognition o f the procurement process. Zambian private sector procurement procedures can be grouped as (a) those with no formal procedures for procurement, that is, the majority o f companies, especially SMEs, and (b) “frontrunners” in private sector procurement, which applies to some large companies with comprehensive, efficient 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 intemational bidding processes. Open tender i s more common for goods than for works. The larger the purchase, the more likely i t i s that an open or international tender procedure i s 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 corporate-approved suppliers.

5.10 Purchasing and procurement i s not generally recognized as a profession, and there i s room for greater professionalization o f 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 o f under-deliverance and over-deliverance with claims for extra payment; and non- compliance with time schedules for delivery. There i s also little understanding o f the payment procedures agreed upon. Many suppliers ins is t on different procedures o f payment than those originally agreed in the contract once they deliver the goods.

B. MAIN RECOMMENDATIONS

5.1 1 The following are recommended: 0 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 institutions such as ZACCI, ZAM and Zambian Enterprise Network Association through donor support. Development o f good business practices in the Zambian business community could be furthered by facilitating the development of a code o f ethics for good business practices. ZACCI, ZAM and Zambian Enterprise Network Association should be involved in this work.

0

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6. GENERAL RISKASSESSMENT

6.0 1 focus on managing the following risks:

In achieving a wel l - funct ioning pub l ic procurement system, the government should

No. 1 -

2

3

Risk to be managed Institutional framework lacks separation between implementing agencies and oversight function

Enforcement by OAG, ACC, and procurement authority remains weak partly due to lack o f funding

Legal instruments - act, regulations, and guidelines inadequate and used insuf- ficiently

What can happen 0 Faith in govem-

ment’s procurement system cannot be built or maintained

0 Decentralization slowed down

0 Implementing agencies don’t receive direction needed for implementation

0 General bel ief in the system not built or maintained because a breach o f rules has n o consequence

0 Corruption continues

0 Even though re- fo rm plans exist, they will not be effectively implemented because implementing institutions (OAG, ACC, ZNTB) do no t have sufficient and constant f l ow o f funds to operate

weakened with different practices developing due to lack o f clarity and authority in rules

Enforcement

How can it happen Oversight role o f ZNTB unclear in terms o f tasks and day-today performance

0 Role o f CTC vis- a-vis the ZNTB unclear

0 Confl ict o f interest due to overlap o f members

0 Even though reports document lack o f apprecia- t ion o f procurement rules, i t i s no t remedied

0 Practitioners tend to choose own interpretation o f rules

0 Those tempted to misuse the system to their own benefit not pun- ished

0 Reform plan not coordinated, leading to funding provided o n a project-by- pro- ject basis instead o f a total program basis

0 Various guidelines developed by different PSUS

Risk mitigation 0 Definit ion o f a new

institutional framework that clearly separates those who carry out and approve procurement f rom those with pol- i cy and oversight responsibility

Provide funding for institutions Revise the Audit Ac t to strengthen mandate o f OAG office Strengthen institutional llnkages between OAG/ACC and procurement authority with regular meetings o f agencies’ CEOs

Review o f legal framework

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YO.

4 -

5

Risk to be managed Lack o f faith in the government’s procurement system by the private sector

Lack o f abi l i ty to retain staff even though many have been trained

What can happen B Companies choose

not to work for government because o f late payments and non- transparency in the bidding process, which provides less competition

B Companies that work with the government calculate higher prices to compensate for late payments, etc.

B Companies col- lude, preventing real competition and increasing prices Pay structure un- changed and cadre not fully developed as planned. High staff turnover continues and trained staff go to private sector, where pay is 5-10 times better

0 Dif f icul t to attract the right people for training because ski l l improvements not l inked to pro- mot ion and better Pay

0 Decentralization slowed down due to lack o f capacity in the PSUs

How can it happen B Late payments

continue D Registration sys-

tem not transparent

D Bids rejected on arbitrary basis Useofshort- listing instead o f open tendering o n large contracts

Procurement staff continue to be hired as c iv i l servants The pay structure o f procurement staff l inked to the c iv i l serve reform program, making a short-term solu- t ion unl ikely

Risk mitigation Government to improve budgeting process t o ensure availability o f funds for payments Review o f registra- t ion system

Establishment of cadre, including career path and competitive and adequate pay structure based o n a gant- aided system such as the ZR4. ZNTB seconds professional procurement staff to improve the quality o f procurement procedures and processes

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No. 6 -

- 7

Risk to be managed

Risk to be managed Lack o f faith and confusion regarding the procedures and possibilities for parties involved in bidding to file complaints

Indicative assessment of risk not being managed

Slow pace o f decentralization -PSUs not given higher authority to handle procurement without continuous approval o f CTC

Institutional framework lacks separation between implementing

Enforcement o f procurement rules remains weak, partly due to

Legal instruments (acts, regulations, and guidelines) are unclear

agencies and oversight function

lack o f hnding

and inadeauatelv used

What can happen Complaints sent to the wrong office and not addressed in time Bidders stop com- plaining due to fear o f not being short-listed in the future

0 Bidders seek solutions through alternative means

3

4

3

0 Management o f the ministr ies and agencies cannot be held 100 percent responsible for their procurement operation because o f constant CTC involvement in approvals

avoid referral to the CTC

0 Procurement more costly to handle for the government

0 Procurement slowed down

0 Contracts split to

Lack o f faith in the government's procurement system in the pri-

Lack o f ability to retain procurement staff even though many have vate sector

been trained

How can it happen Need to improve the complaints system generally agreed on, but new independent institution handling complaints not identified

3

4

0 Lackofpro- curement capacity continues as a problem in the PSUs Norealcom- mitment to decentralization policy at political level because o f desire to be able to influence and control contract awards through the present system.

Risk mitigation 0 Review o f legal

framework and development o f new complaints system enshrined in an act

Establishment o f the cadre and all positions in PSUs filled

0 Abolishment o f the PSU categorization system with a de- clared target o f 3 years. Full authority given to six PSUs by end o f 2002

0 Full authority given to remaining PSUs from 2003-2004.

0 Monitoring system built within new procurement authority to ensure enforcement o f procurement legislation

6.02 The table be low rates the l ikel ihood o f the government's abil ity to manage risks, with 4 representing high risk; 3, medium risk; 2, l o w risk; and 1, n o risk.

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Risk to be managed Indicative assessment o f risk not being managed

6.03 The risk profile can be categorized as medium to high because o f the need to adjust basic procurement system elements such as the institutional and legal frameworks. In combi- nation with the lack o f funding, this i s a high r isk factor.

Lack o f faith in effects and confusion regarding possibilities o f

Slow pace o f procurement decentralization filing complaints

- 3 1 -

3

4

7. RECOMMENDED ACTION PLAN

7.01 Central to any recommendations that emerge i s 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 status quo can only be tackled by polit ical will.

7.02 The actions described below are o f major importance for the improvement o f the Zambian public procurement system. (See also the fully developed action plan in the AC- T I O N PLAN MATRIX at Annex A1 and A 2).

Actions in the Short Term

1.

2.

3.

4.

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 o f the activities in the action plan. The committee must have high-level members Erom, 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 Erame in which to conclude i t s reform agenda. To support this work, a Procurement Reform Implementation Unit (PRIU) should be established. I t should be responsible to the Permanent Secretary. Ministry o f Finance and National Planning.

Finalize the Plan for complete delegation of procurement authority. Develop a 3-year plan for the full delegation o f 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 pi lot provinces for full delegation o f procurement authority.

Re-establish the ZNTB’s Policy and Supervisory Role Immediately. Without waiting for new procurement legislation, prepare the structure o f the ZNTB for this role, which i s already required under existing legislation. As the DG o f ZNTB will manage the CTC until i t s dissolution in 3 years (see below), strengthen the secretariat o f ZNTB to support i t in this role by enhanced staffing (and possibly splitting it o f f from the current secretariat). Provide an adequate budget to support this objective.

Define TOR for Revision of Legal Framework. The Terms o f Reference for the review o f the legal and institutional framework, which i s 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 intemational best practices.

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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 o f the new act.

6. Prepare Establishment of Professional Procurement Cadre. Define the composition o f the cadre to be established and measures for i t s adoption. Start implementing the measures with the cadre’s management function given to the ZNTB until the new procurement authority (possibly called Zambian National Procurement Authority - ZNPA) i s established.

7. Re-design of Registration List System. A revised Registration System should be defined. New guidelines should be developed which restrict i t s use to small-value contracts only.

8. Implementation o f Corruption Survey. The planned corruption survey should be implemented. 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 procurement 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 s t a f f for the new Authority should be appointed. The specialized functions o f the Authority should be defined and developed in detail. Simultaneously with establishment o f ZNPA, ZNTB should be abolished. Also establish a part time and independent Appeals body.

2. Continue Implementation o f Plan for complete delegation of procurement authority. The 3-year plan should be monitored for effective implementation. Delays, as in the past, should not be allowed.

3. Develop the Capacity o f the Procurement Cadre. A secondment system for the procurement cadre s t a f f should be developed. A human resource database with the CVs o f cadre members and those applying for membership should be established. A training ac- t ion plan should be developed and upgraded.

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4. Develop Manual on Procurement Planning. A manual on procurement planning should be developed, containing clear instructions for the introduction o f best practices. Release of budget funds from the budgetary system should be suitably l inked to realistic procurement plans

5. Strengthen Training Programs and Training Institutions. A capacity assessment o f training institutions should be carried out. The need for supplementary procurement training programs should be defined. Required training programs should be developed and de- livered.

6. Introduce Anti-Corruption Clauses. New anti-comption clauses should be introduced in the standard bidding documents.

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ACTION PLAN MATRIX Annex A 1. Short Term

SEQUENCED ACTIONS SUMMARIZED BY MAJOR CATEGORIES - SHORT TERM

Issue

1. Establish Pro- curement Re- form Task Force and an Imple- mentation Unit

2. Finalize new decentralization plan

3. Re-establish policy and supervisory role of the ZNTB as responsible for public procurement policy and regulation

Recommended Action

Appoint a High Level Committee, which will be responsible for initiating and overseeing the implementation of the activities in the Action Plan. The Committee must have high-level 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 responsible to PS Ministry of Finance and National Planning.

1 Develop plan for full decentralization of procurement in phases.

8 Appoint one or two provinces in first year as pilot provinces for full decentralization.

8 Communicate plan to ministries and agencies and explain the plan's implementation and their responsibility. . Without waiting for new procurement legislation, prepare the structure o f the ZNTB for this role and define the tasks.

out relevant role and ensure availability of funds. . ZNTB to focus primarily on i ts policy and regulatory role immediately. Strengthen the department responsible for support to ZNTB for its regulatory functions, pending complete decentralization of ZNTBKTC approval functions on procurement.

1 Define and develop specialized functions matching tasks, such as monitoring of procurement, data collection on procurement activities, performance indicators and benchmarks, law drafting, drafting regulations and guidelines, and management and development of the cadre, and conduct outreach to private sector for closer involvement.

1 Prepare the budget for the ZNTB to carry

Timing From

May 2003

Nov. 2003

Feb. 2004

Feb. 2004

Dec. 2003

Dec. 2003

Dec. 2003

July 2004

To May 2003

Feb. 2004

April 2004

April 2004

Feb. 2004

Dec. 2003

Jan. 2004

Oct. 2004

Responsible

MOFNP

MOFNP ZNTB

ZNTB

MOFNPiZNTB

MOFNPENTB

ZNTB/MOFNP

MOFNPENTB

MOFNPENTB

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Issue

4. Revise legal framework

_ _ _ _ _ ~

5. Establish the professional procurement cadre

Recommended Action

1 Revise terms of reference, already drafted in cooperation with AfDB, and clearly state that the revision of the procurement legislation should build on the UNCITRAL Model Law in terms o f content and terminology.

Develop new procurement law based on UNCITRAL Model Law that provides for the new procurement authority, complaints function, and a revised price preference system with more robust criteria.

1 Develop Cabinet Paper for new legislation.

1 Obtain Parliament approval o f new legislation, set up ZNPA, and disband ZNTB.

1 Develop new regulations based on the new procurement law.

1 Develop new guidelines based on new law and regulations.

1 Prepare new versions of standard bidding documents and incorporate anti- corruption clauses.

1 Describe and define the cadre: level of ski l ls for entry, code o f conduct, salary structure, career path, and role of the cadre adminis- trator (the procurement authority).

Develop secondment system for the procurement cadre based on attractive salary system, administered by the procurement authority to replace the current system o f mixed civil servants and personnel seconded by ZNTB.

cadre members and those applying for entry. I Develop HR database with the curricula of

I Identify and register cadre members who can enter the cadre without further training.

I Develop upgrading and training action plan for both cadre members and potential members to ensure development and maintenance.

Timing From

Nov. 2003

March 2004

Oct. 2004

Jan. 2005

March 2005

March 2005

June 2005

Dec. 2003

March 2004

July 2004

July 2004

May 2004

To Dec. 2003

Sept. 2004

Nov. 2004

Feb. 2005

May 2005

May 2005

Oct. 2005

March 2004

June 2004

Sept. 2004

Sept. 2004

July 2004

Responsible

ZNTB/MOFNP

DG ZNTB

ZNTB/ MOFNP

MOFNP/ZNTB

DG of New Procurement Authority DG o f New Prc- curement Au- thority DG o f New Procurement Authority

ZNTB

ZNTB

ZNTB

ZNTB

ZNTB

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Recommended Action Timing Responsible Issue From To

6. Streamline the guidelines and operation of the registration system

1 Streamline the existing registration system. Dec. 2003

Aug. 2004

Feb. 2004

Aug. 200~

Oct. 2003

Sept. 200'

ZNTB

ZNTB

ZNTB

1 Develop revised guidelines for the operation of the registration system.

1 Implement the improved system and ensure

1 Develop:

information to stakeholders.

- Concept for separate procurement register - Instructions and guidelines to PSUs con- ceming establishment and maintenance of procurement filing system.

- Manuals with clear instructions and tools 1 Develop:

for introducing best practices for (a) procurement planning and (b) contract management

- Mandatory training sessions in the subjects for procurement cadre members and contract managers from ministries and agencies.

March 2004

Jan. 2005

Sept. 200~

July 2005

ZNTB 7. Establish separate procurement filing systems in PSUs

E. Develop manuals on (a) procurement planning and (b) contract management

ZNTB

9. Enhance effectiveness and reporting from OAG

10. Reduce delays in govemment payments

1 Strengthen the mandate and the funding of the OAG office as suggested earlier by the PAC, and Improve timeliness of OAG's yearly report.

Ongoing AGICabinet office

1 "The following should be coordinated with the recommendations coming out o f the Fi- nancial Accountability Assessment Review: - Change actual release of funds to match the appropriation of funds in the budget and reduce the delays in govemment payments."

1 "The following should be coordinated with the PSCAP project: - Ensure implementation of planned anti- corruption survey."

1 Inform the private sector of the action plan. 1 Involve private sector in work groups

where suitable.

Oct. 2003 Jan. 2004 MOFNP

Oct. 2003

Oct. 2003

MOFNP 11. Conduct anti- corruption survey

12. Involve private sector in procurement reform

Ongoing MOFNPI ZNTB I Ministry of Commerce, Trade and Indus- try

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MEDIUM TO LONG TERM

Annex A 2. Medium to Long Term

Issue

1. Set up ZNPA and Develop and establish new independent Ap- peals body authority

2. Implement anti- corruption clauses

3. Create training programs and conduct capacity assessment of training institutions

4. Strengthen capacity of clearing agents

Recommended Action

1 Set up ZNPA . Set up the Appeals Body upon enactment of legislation based on UN- CITRAL Model Law provisions that mandate a new, independent, part-time appeals body to complement the role of complaints handling given to the new Procurement Authority.

1 Introduce new anti-corruption clauses in the standard bidding documents.

. Perform a capacity assessment o f training institutions. Agree on a capacity building action plan far each institution with clear targets. Provide funding for upgraded activities and investment in equipmentlfacilities if needed. . Define the training programs needed to supplement the existing CIPS program, for example, mid-career training programs. Visit international training institutions to collect information on other types of training programs.

1 Develop and deliver training programs.

1 Develop a new licensing system for clearing agents. . Develop a 2-3 day training program for clearing agents. Participation should be mandatory for agents to keep their li- cense.

1 Deliver the training. 1 Develop guidelines and instructions to

clearing agents.

Timing From

Feb. 2005 Feb 2005

Jan. 2005

July 2004

July 2004

Nov. 2004 Nov. 2003

Jan. 2004

Apr. 2004 Sept. 2004

T o March 2005 July 2005

July 2005

Nov. 2004

Nov. 2004

Ongoing March 2004

March 2004

June 2004 Dec. 2004

Responsible

MOFNP MOFNP

Procurement Authority I MOFNP ZNTB

ZNTB

ZNTB ZRA

ZRA

ZRA ZRA

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Issue Recommended Action Timing From

Responsible

~~~~ ~~ . Revise current training programs and develop more training on: - Basic customs procedures and use o f

- ASYCUDA’s risk analysis module - Physical inspection requirements,

corruption prevention, and disap- pearance o f goods

ASYCUDA system

- Reduction o f under-invoicing - Improvement o f duty-drawback

system. . Deliver the training program.

Implement ASYCUDA++ and increase the processing fee to USD 5 per decla- ration. . Develop training in use o f new system.

m Deliver training.

5. Strengthen capacity o f customs officers

Sept. 2003

Jan. 2004 Jan. 2004

June 2004 Dec. 2004

6. Implement ASYCUDA++

7. Develop training in good business practices for the private sector

8. Improve commercial regulations

Develop a training program in cooperation with ZACCI and Z A M on: - Good business practices and ethics - Purchasing, supply, and procurement - Financial management - Effective communication with cus- tomers and public authorities. . Examine barriers in commercial regulations and identify measures to improve regulatory practices.

Sept. 2003

Sept. 2003

To Dec. 2003

Dec. 2004 Dec. 2004

Nov. 2004 Ongoing June 2004

Sept. 2004

ZRA

ZRA ZRA

ZRA ZRA Ministry o f Commerce, Trade, and In- dustry

Ministry o f Commerce, Trade, and In- dustry

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