SADCOPAC Training Event
Nairobi November 2013
Auditing
public procurement process
to improve
transparency and accountability
Werner Pelzer
Bundesrechnungshof
Werner Pelzer
Auditing Public Procurement
1
Introduction
Why auditing public procurement ?
EU- Member States have annual expenses in procurement worth
some 1.5 trillion euro respectivly 16 % GNP.
In Germany this amount equals some 250 billion euro.
 properly and timely executed the audit of public procurement
may generate significant savings for the budget.
Werner Pelzer
Auditing Public Procurement
2
Audit in public procurement
Preconditions
for
successful audits
Werner Pelzer
Auditing Public Procurement
3
Audit in public procurement
Carrying out successfull audits in public procurement requires that a set
of preconditions are met:
1. a sufficiently comprehensive and robust mandate
2. professional and well trained staff
3. adequate audit rules
4. audit projects that are designed consistently and
conducted on the right subject and at the right time
Werner Pelzer
Auditing Public Procurement
4
Audit in public procurement
In case these basic conditions are fulfilled audits in public procurement
very often contribute to saving public money or at least to spending
public money more economically.
Some key factors for success are:
a. legal committment for administration to adhere to
principle of economy when executing the budget
follow adequate standars for the award procedure
b. timing
c. structural analysis of procurement activities
Werner Pelzer
Auditing Public Procurement
5
Audit in public procurement
Aims of procurement audits
should be determined
such as
• Check whether there is a justified motivation for spending public
money for a particular good or service
• Confirm that relevant laws have been applied
• Make sure that the procedure has achieved value for money
• Prevent fraud and corruption
Werner Pelzer
Auditing Public Procurement
6
Stages of Procurement Processes
Definition of
needs
Procurement
procedure
Werner Pelzer
Contract
Implementation
Auditing Public Procurement
7
Audit in public procurement
 Has the public authority justified the procurement under aspects of
economy/effectiveness?
 Is the number/scope necessary or would less also be sufficient?
 Are the concrete technical specifications indispensable or would a lower
level also do?
 Did the department consider all reasonable alternatives?
 Did the department compare these alternatives against each other, applying
accurate figures, include all relevant aspects as well as agreed standards
and come to reasonable results?
Werner Pelzer
Auditing Public Procurement
8
Stages of Procurement Processes
Award of contract
Definition of
needs
Performance
description
Choice of
procedure
Notification
Contract
Implementation
Evaluation
of tenders
Scope of procurement law
Werner Pelzer
Auditing Public Procurement
9
Audit in public procurement
 Was the performance described clearly, unambiguously and
comprehensively, giving precise definition of the characteristics of what to be
supplied, making it possible that all concerned understand it in the same
way?
 Were technical requirements set strict enough to guarantee the desired
performance without being unnecessarily tight and thus bearing the risk of
excluding favourable bids that don’t comply with all these requirements?
 Did technical specifications include no unjustified reference to a specific
make or source, to a particular process, to trade marks, patents, types or to a
specific origin or production, thus preventing favouring or eliminating certain
undertakings or products?
Werner Pelzer
Auditing Public Procurement
10
Stages of Procurement Processes
Award of contract
Definition of
needs
Performance
description
Choice of
procedure
Notification
Contract
Implementation
Evaluation
of tenders
Scope of procurement law
Werner Pelzer
Auditing Public Procurement
11
Audit in public procurement
 Did the public authority opt for the one procedure that offers most perfect and
open competition under the given circumstances?
 When exceptional negotiated procedures were used, did the contracting
authority give sufficient and reasonable reasons and evidence for its option,
motivating why an open or restricted procedure was not possible?
 Did those conditions actually occur?
The auditor should bear in mind that each restriction of bidders may imply
• exclusion of potentially favorable offers
• enhanced risk of undue influence in assessment
• that undue cooperation between bidders is facilitated
Werner Pelzer
Auditing Public Procurement
12
Stages of Procurement Processes
Award of contract
Definition of
needs
Performance
description
Choice of
procedure
Notification
Contract
Implementation
Evaluation
of tenders
Scope of procurement law
Werner Pelzer
Auditing Public Procurement
13
SADCOPAC Conference
 Has the public authority defined clearly the award criteria?
 Are the award criteria linked to the subject matter of the contract and suitable
to determine the most advantageous offer
 Have the criteria been weighed?
 Is the evaluation process documented?
 Did the contracting authority evaluate and rank bids against all and only
those criteria, and relative weighting, which it had published in the
procurement documents?
Werner Pelzer
Auditing Public Procurement
14
SADCOPAC Conference
Besides the legal issues the auditor should verify whether the public authority has
considered the following performance aspect that might have been suitable to
enhance the chances to receive economically favorable offers:
Aggregating demand, to make tendering attractive, thus improving competition
Contract duration, should be as short as possible to preserve the
competitiveness of unsuccessful tenderers and to launch new invitations to
tender in time
Contract award by lots which enables small and specialized companies to
tender, thus improving competition
However, the auditor must bear in mind that these measures may be at odds and not
necessarily beneficial in all cases. The motivation given by the auditee is important
for an assessment.
Werner Pelzer
Auditing Public Procurement
15
Audit Approach BRH
Audit Approach
BRH
Werner Pelzer
Auditing Public Procurement
16
Audit Approach BRH
Audits in public procurement in Germany are carried out as a
routine exercise.
Audit work is designed to verify whether
 there is an actual need for the particular procurement
 the result of the procedure achieves value for money
 the public procurement regulations have been adhered to
If the auditor comes to the conclusion that one of these
questions has to be negated the administration did not perform
Werner Pelzer
Auditing Public Procurement
well.
17
Audit Approach BRH
Characteristics of good procurement
 get what you need
•
in number and specification
•
neither less nor more
 to adequate conditions concerning
•
price and
•
quality
Werner Pelzer
Auditing Public Procurement
18
Audit Findings
Competition
 open
 nondiscriminating
 transparent
Werner Pelzer
Auditing Public Procurement
19
Audit Approach BRH
How can subject matter and scope of
audits in public procurement be identified ?
Sources of information about procurement activities
 budget plan, esp. titles concerning equipment and maintenance
 statistics
 register containing contracts concluded
 auditors projection of possible procurements derived from his
experience
 complaints, evidence and petitions rendered by third persons
Werner Pelzer
Auditing Public Procurement
20
Audit Approach BRH
What is subject-matter of the audit?
Every decision, measure or programme
 Individual purchase, leasing or service contracts; framework
agreements
 Decisions taken to define public needs and prepare procurement
activities
 The course of the procurement procedure which aims to satisfy the
demands
 Programmes in context of public procurement such as
 planning and rollout of an e-procurement plattform,
 implementation of standards and procedures for bundled
procurement activities within the federal government
Werner Pelzer
Auditing Public Procurement
21
Audit Approach BRH
Which are the documents BRH scutinises?
Evidence may be found in the tender documents
 specification
 contract (draft or concluded)
 notification
 written motivation for all steps of the procurement procedure
Werner Pelzer
Auditing Public Procurement
22
Audit Approach BRH
Which are the criteria BRH applies to assess findings?
Audits in public procurement in Germany are seeking to ensure regularity
as well as good performance.
Audit work therefore is designed to verify whether
from an economic perspective
 there is an actual need for the particular procurement
 the result of the procedure achieves value for money.
from a legal point of view
 the procedure has been conducted in accordance with legislation
Werner Pelzer
Auditing Public Procurement
23
Audit Findings
Audit Findings
Werner Pelzer
Auditing Public Procurement
24
Audit Findings
Unjustified procurements
 no need for goods or services
 exaggerated specifications
 number of devices /scope of service
inadequate
Werner Pelzer
Auditing Public Procurement
25
Audit Findings
Example
The department procured 250 PC to replace existent equipment which
was not yet amortised.
This purchase was said to be necessary because a new software was
being implemented which reputedly needed a higher hardware capacity
than the former software.
 BRH scrutinized this motivation and found out that the new software
could have been operated without restriction on the available PC.
In consequence the procurement had to be considered as being not
economic.
Werner Pelzer
Auditing Public Procurement
26
Audit Findings
Key data
 military procurement
wave of items plus
reduction of operating
cost
 direct savings
 accurate quantification
+ estimate
 1.34 billion €
+ some 2 billion €
Werner Pelzer
Auditing Public Procurement
27
Audit Findings
 Restricted Competition
open and concealed
 Discrimination
against or in favour of bidders and products;
 Intransparent Procedure
Werner Pelzer
Auditing Public Procurement
28
Audit Findings
Restricted Competition
 frequent and unjustified use of restricted award
procedures
 inadmissible direct award without any competition
 inadmissible extension of contract duration
 additional contracts without award procedure
Werner Pelzer
Auditing Public Procurement
29
Audit Findings
Discrimination
 specifications not comprehensive and
equally comprehendible
 privileged brands
 tenders accepted that do not meet requirements
 negotiations with bidders in open procedure
 inadmissible criteria for suitability of bidders and
evaluation of tenders
Werner Pelzer
Auditing Public Procurement
30
Audit Findings
Intransparent procedure
 no documentation about decisions and
measures taken,
such as selection or rejection of bidders
 motivations given are not plausible and
convincing –
esp. for the selection of the most advantageous offer;
 criteria for evaluation of tenders have not
been notified
Werner Pelzer
Auditing Public Procurement
31
Recommendations
What did BRH essentially recommend so far?
 Self-evidently: follow the binding procedure which shall
contribute to attain value for money
 Adequate preparation of procurement activities, in particular
proper definition of needs, bearing in mind alternatives.
The definition of needs is the basis for a clear and
comprehensible specification
 Provide for as much competition as reasonably possible
 Comprehensive documentation
Werner Pelzer
Auditing Public Procurement
32
Recommendations
What else can be done to enhance economy?
 Establishment of professional procurement units
 Training of staff
 Bundling of needs to make the contract more attractive for
the companies; framework agreements should be taken into
account
 Contract duration as short as possible to keep competition up
 Formation of lots to encourage participation of SME
Werner Pelzer
Auditing Public Procurement
33
Guidance
 Guidelines and checklists
issued by a working group of the Contact Committee of the Supreme Audit
Institutions of the European Union
 Websites of the European Union
http://ec.europa.eu/internal_market/publicprocurement/index.htm
http://simap.europa.eu/index_en.htm
 SIGMA Briefs
http://www.oecd.org/site/sigma/publicationsdocuments/
Werner Pelzer
Auditing Public Procurement
34
Guidance
Questions ?
Werner Pelzer
Auditing Public Procurement
35
Procurement Stages
The award of the contract is governed by a set of provisions
on different levels,
the most important of which are
 the GPA
 the EU- Directives and Regulations
 the national rules
based on these international statutory provisions
Werner Pelzer
Auditing Public Procurement
36
Procurement Regulations
Government Procurement Agreement
 Regulations about government procurement initially had been explicitly
excluded from the General Agreement on Trade and Tariffs (GATT)
 As result of the Tokio Round a first Agreement on public procurement
took effect in 1981.
 In parallel with the Uruguay Round the Parties of the Agreement
extended its scope and coverage to todays Government Procurement
Agreement which entered into force on 1 January 1996.
Werner Pelzer
Auditing Public Procurement
37
Procurement Regulations
Government Procurement Agreement
The GPA does not establish comprehensive committment on public
procurement as it does not apply to all government procurement of the
Parties:
 The procuring entities which have to apply the GPA in each country are
listed in Annex 1
 GPA covers contracts
- on goods
- on services and construction as specified in positiv lists
- above certain thresholds, which each Party indicates in the Annex
 GPA is restricted by a number of exceptions set forth in General
Notes at the end of most Parties schedules
Werner Pelzer
Auditing Public Procurement
38
Procurement Regulations
Government Procurement Agreement
GPA contains a number of detailed obligations which procuring
entities have to fulfill concerning
 procedure which has to be followed, ranging from basicly
unrestricted participation up to restricted negotiations under
exceptional circumstances
 admissible technical specifications to describe the performance
 notification
 deadlines
 documentation
 award and selection criteria
Werner Pelzer
Auditing Public Procurement
39
Auditee
Who is subject to our audits?
 Basically only federal institutions such as the departments and their
subordinate administration.
 Any institution which receives public subsidies provided these equal
a certain value
 Body of private law, in particular economic operators, which are
property of the federal government.
In recent years many such companies have been established in order to take over the
implementation of tasks traditionally performed by public administration. They are
not bound to budgetary law and for this reason may act much more flexible on the
markets.
The Role of the Bundesrechnungshof
40
Collegiate decision-making bodies
College of Two
Senior Audit Director
Audit group
Audit Director
College of Three
President/
Vice-President
Senior Audit
Director
Audit Director
Senate
President
and
Vice-President
9
Senior Audit
Directors
3
Audit
Directors
Rapporteur and
co-rapporteur
Divisional
senates
Standing
Committee of
the Senate
The Role of the Bundesrechnungshof
41
Planning and conducting audit work
planning
analyse tasks of audit units
select audit matters for medium-term
audit planning (3-5 years)
sort audit themes according to
priorities and resources
prepare annual plan
audit process
audit schedule
audit notification
conduct of audit work
draft of audit record
The Role of the Bundesrechnungshof
42
Contradictory procedure
Management letter to audited body
Comments of audited body
Evaluation of
audit findings
Analysis of audited body‘s comments
by SAI/regional audit office
Finalisation
of audit work
Evaluation,
remedial
action
Annual report item Advice
Special report
Parliament
The Role of the Bundesrechnungshof
43
Reports of the German SAI
Annual report
Two Houses of Parliament and Federal
Government
Advisory reports
Appropriations Committee, Federal
Government, Departments, and Council
Special reports
Two Houses of Parliament and Federal
Government, German Central Bank,
Individual
reports
Federal Posts and
Telecommunications Agency
Opinion of Federal
Performance
Commissioner
Two Houses of Parliament and Federal
Government
Other studies
Federal Government and Departments
The Role of the Bundesrechnungshof
44
Processing of Annual report
Annual report
Bundestag
Bundesrat
Fed. Government
Appropriations
Committee
Public Accounts
Committee
•Deliberation of
departmental budgets
(federal government
departments, SAI)
Appropriations
Committee
• Resolution proposal
Bundestag
• Discharge
Finance Committee
• Resolution proposal
Bundesrat
(plenary session)
•Discharge
The Role of the Bundesrechnungshof
45
Special reports (Art. 99 Federal Budget Code)
 on matters of particular importance to
 Bundestag
 Bundesrat
 Federal Government
 especially suitable for informing general public
 procedure is the same as for the annual report
The Role of the Bundesrechnungshof
46
Advice (Art. 88 Federal Budget Code)
based on audit experience

Bundestag
- Appropriations Committee
- Public Accounts Committee
- specialised committees
- rapporteurs

Bundesrat

Federal Government

individual federal ministries;
47
Audit Findings
Example
The Department of Construction and Traffic is responsible for the maintenance of
public roads. This task is fulfilled by in-house staff and equipment at several local
branch offices. The Departement purchased new machinery for one of those offices,
among other things a steam roller, price 50.000 €.
To assess whether the purchase was justified in terms of economy the auditor
surveyed how many similar items were already operated by the Departement and to
which extent. He found that several steam rollers in other locations showed only few
operation hours and infered from the available data that some were used less than
30% of their capacity. He came to the final conclusion that the Departement could
have abstained from buying a steam roller if only it had considered the alternatives
properly and reorganised the distribution of steam rollers in accordance with actual
local needs.
Werner Pelzer
Auditing Public Procurement
48
Audit Findings
Key data
 military procurement
wave of item
 direct savings
 accurate quantification
+ estimation
 54 mill. Euro
+ 1.2 mill. Euro
Werner Pelzer
Auditing Public Procurement
49
Audit Findings
Specifications
Example
Purchase of personal computers.
Specification requires
„metal housing, white“
Unless justified reasons are given this specification unnecessarily
excludes all products with plastic boxes and different colours.
Werner Pelzer
Auditing Public Procurement
50
SADCOPAC Conference
?
Werner Pelzer
Auditing Public Procurement
51