Remaking Malaysia: No more getting around procurement rules?

This article first appeared in The Edge Malaysia Weekly, on October 1, 2018 - October 07, 2018.

Pua says much of the wastage in public procurement is due to the use of alternative financing methods. Photo by Sam Fong

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A major problem with public procurement under the previous government was that its own rules of accountability were bypassed by the use of instruments like government guarantees.

This was highlighted by whistleblowing politician Tony Pua at a conference on good governance recently. The special officer to the finance minister said much of the wastage in public procurement was due to the use of alternative financing methods.

For example, Pua said Pembinaan BLT Sdn Bhd, a special purpose vehicle owned by the Ministry of Finance Inc, was given a government guarantee to build 74 police stations for RM8.5 billion. The firm then used this guarantee to issue RM10 billion of bonds.

These bonds were secured by guaranteed rental payments from the government for the use of the police quarters.

This measure allowed the government to avoid scrutiny of such projects in the Auditor-General’s Report, which covers expenditure under the federal budget.

“If you are looking at a typical MoF procurement process, you would only cover a fraction of the actual government procurement as the bulk of it avoids the usual ministry rules,” said Pua.

“This contributed to the RM1 trillion debt,” he said at a conference organised by the Centre To Combat Corruption and Cronyism (C4).

Commenting on the issue, Sunway University Business School economics professor Dr Yeah Kim Leng noted that the government spends a large portion of its budget — about RM150 billion per year — on procurement but 30% can be saved if leakages and wastage are cut.

“Given that public expenditure on supplies and services is the second biggest budget item after emoluments, the government should embark on open bidding,” Yeah said in a phone interview.

On abuses in public procurement, former auditor-general Tan Sri Ambrin Buang has spelt out the issues over many annual reports to parliament.

In one such report quoted by the conference organiser, Ambrin said Malaysia continued to suffer from problems of wastage, overpricing, cost overruns, delays and sub-standard quality in the final delivery of projects.

“While some of these problems may be attributed to administrative inefficiency, inexperience or human error in the procurement process, in many cases, they also stem from intentional manipulation and fraud in addition to nepotism, cronyism and corruption at the expense of taxpayers,” he was quoted as saying.

C4 research consultant Yap Swee Seng, who presented a report at the conference, said rightfully, procurement processes should use principles such as transparency, value for money, open and fair competition, and fair dealing to guide decisions.

“But we know it was not followed. The Treasury unit in MoF that was supposed to oversee the procurement exercise clearly failed. There were no internal and external audits,” he told The Edge.

In the past, the lack of supervision and audits had marred public procurement in the country, leading to cost overruns, extravagant spending, wastage, overpriced purchases, delays in project completion and low quality deliverables.

Yap identified kickbacks, bid-rigging, the use of front or shell companies, excess payments and misrepresentation of facts as typical abuses that take place.

These weaknesses now need to be corrected, he said.

Transparency International Malaysia president Datuk Akhbar Satar pointed out that politically-connected companies won contracts through collusion even though they are not up to the mark.

“They are not qualified to carry out such projects. Look at what happened to the Sultan Mizan Zainal Abidin Stadium in Terengganu ... the roof collapsed a year after it was opened,” he added.

It is said that the construction of the stadium, built at a cost of RM270 million, failed to meet various specifications. Among others, the roof design was faulty, the wrong components were used, and supervision was weak.

It is not as if the rules are not in place. The MoF is responsible for all procurements, which are governed by the Financial Procedure Act, Government Contract Act, Treasury Instructions, Treasury circulars and Federal Central Contract circulars.

However, the questionable use of public procurement for private gain has a long history.

In the 1980s, DAP leader Lim Kit Siang had taken the government to task over the privatisation of the North-South Expressway to Hatibudi Sdn Bhd, a company controlled by Umno.

Hatibudi had taken over the then debt-laden United Engineers (M) Bhd, which won the award to build the RM3.4 billion highway. The toll collected from the highway was used to fund the construction of the Umno headquarters — an arrangement that set the tone for the parcelling out of government projects to private interests.

Other politically-linked projects included the RM3.52 billion Port Klang Free Zone, RM628 million Matrade Centre, and RM7.4 billion Bakun Dam.

After the historic change of government, some projects were stopped before they took off, including the cost-inflated RM81 billion East Coast Rail Link (ECRL), and RM9.41 billion gas pipeline projects. Both were awarded without open tenders to China Communication Construction Co Ltd, and China Petroleum Pipeline Bureau, respectively.

Yap cited the example of the procurement of Scorpene submarines by the Defence Ministry for €1 billion with alleged kickbacks of RM540 million in the form of commission paid to Perimekar Sdn Bhd, said to be linked to ex-prime minister Datuk Seri Najib Razak’s aide Razak Baginda.

He also identified 1Malaysia Development Bhd (1MDB) as another such beneficiary — rasing eyebrows as it lacked experience in the energy sector, but acquired the Jimmah and Batu Gajah power plants at inflated prices.  As it turned out, the state investment fund failed to meet its contractual obligations.

“While the Malaysian Anti-Corruption Commission was supposed to act as an external oversight mechanism to curb these ills, it was guilty of only acting against minor cases. It caught the small fry but was not able to hold the big sharks accountable. This was epitomised by the lack of action against Najib in the Scorpene case, 1MDB and the ECRL,” Yap added.

While the huge cost of corruption in public procurement is becoming clearer, the challenge lies in changing the ethical culture among the stakeholders, said Akhbar.

He said it is difficult to fight corruption and abuse in the system because there is lack of integrity in society.

“We are facing an integrity crisis here. [For political leaders], projects mean money [rather than] a benefit for the people. They don’t care as it is all about the commission. It is very sad.”

To overcome these problems, Yap recommends strengthening internal control mechanisms and external oversight systems, including making the MyProcurement website a one-stop portal for all public procurements.

In addition, the government should establish a contractors’ database and review their performance annually, he said. It should also publish decisions on the award of contracts and the justification for selection and rejection. Another positive measure would be to set up ombudsman offices as a channel for public complaints. Mandatory asset declarations by public procurement officials are also necessary.

For Yeah, there is no magic bullet to resolve the problem.

“Institutional processes must be closely monitored. Officials at the higher levels should ensure accountability. Whistleblowing must be properly instituted and the media must be strong. I think institutional reform would also go a long way to reduce corruption,” he noted.

All these measures would require strong political will, which are among the pledges of the new government. Members of the public and anti-corruption advocates will be watching for these promises to be made good.

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