PROCUREMENT UNDER WORLD BANK-FINANCED PROJECTS: FY06 ANNUAL REPORT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROCUREMENT UNDER WORLD BANK-FINANCED PROJECTS: FY06 ANNUAL REPORT August 2007 Operations Policy and Country Services 40515

2 ii ABBREVIATIONS AND ACRONYMS ACS ADB AfDB AFR AML/CFT AMS BEEPS BIS BP CAS CDB CDD CFAA CO CPAR CPS CSA CSRVP DFID DPL EAP ECA EC e-gp ESRP ESW EU FIDIC FM FY GAC GPM HD HOP IADB IBRD ICB ICT IDA IDF Administrative and Client Support (staff) Asian Development Bank African Development Bank Africa Region Anti-money laundering/combating the financing of terrorism Administrative Manual Statement Business Environment and Enterprise Performance Survey Baseline indicator system Bank Procedure Country Assistance Strategy Caribbean Development Bank Community-driven development Country Financial Accountability Assessment Country office Country Procurement Assessment Report Country Partnership Strategy Country Consulting Services Assessment Controllers Strategy Resource Management Vice Presidency Department for International Development (U.K.) Development policy lending/loan East Asia and Pacific Region Europe and Central Asia Region European Commission Electronic government procurement Environmentally and socially responsible procurement Economic and sector work European Union International Federation of Consulting Engineers Financial management Fiscal year Governance and anticorruption Generic Procurement Manual Human Development Heads of Procurement Inter-American Development Bank International Bank for Reconstruction and Development International competitive bidding Information and communication technology International Development Association Institutional Development Fund

3 iii IFA IFI INT IMF IPR IRS IsDB ISG JBIC K&L LCR LICUS LOA LEGPR MBD MDB MNA NCB OECD-DAC OPCPR OPCS OPRC PAD PEFA PPR PREM PRSC PSB PSLO QAG RFP RPM QEA QSA SAP SAR SBD SWAp UN WB Integrative Fiduciary Assessment International financial institution Department of Institutional Integrity International Monetary Fund Independent Procurement Review Internationally recruited staff Islamic Development Bank Information Solutions Group Japan Bank for International Cooperation Knowledge and leaning Latin America and Caribbean Region Low-income country under stress Loan Department Central Procurement Legal Team Master bidding document Multilateral development bank Middle East and North Africa Region National competitive bidding Organisation for Economic Co-Operation and Development-Development Assistance Committee Procurement Policy and Services Group Operations Policy and Country Services (Network) Operations Procurement Review Committee Project Appraisal Document Public Expenditure and Financial Accountability (initiative) Procurement Post Review Poverty Reduction and Economic Management (Network) Poverty reduction support credit Procurement Sector Board Private Sector Liaison Officers Quality Assurance Group Request for Proposals Regional Procurement Manager Quality-at-Entry Assessment Quality of Supervision Assessment Systems, Applications & Products system South Asia Region Standard bidding document Sectorwide approach United Nations World Bank

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5 PROCUREMENT UNDER WORLD BANK-FINANCED PROJECTS: FY06 ANNUAL REPORT Contents Executive Summary... vii I. Introduction...1 II. Fiduciary Oversight and Compliance...1 III. Country Services...11 IV. Procurement Policy, Tools, and Institutional Initiatives...20 V. Staffing...22 VI. New Initiatives...23 Annex A. FY06 Fiduciary Compliance...27 Annex B. FY06 Misprocurement Cases...31 Annex C. Complaints...33 Annex D. FY06 ESW Reports...35 Annex E. Procurement Staff Trends...37 Tables Table 1. Procurement Decentralization Trends... 2 Table 2. FY06 Prior Review Contracts by Region and Category... 4 Table 3. FY06 Procurement Post Review by Region... 5 Table 4. FY04-06 Misprocurement Trends... 6 Table 5. FY06 Procurement Staffing by Grade and Region/Unit Table A1. FY06 Ten Largest IBRD/IDA Borrowers Table A2. Top Ten Supplier Countries by Major Bank-Financed Contracts, 2002 to Table A3. Independent Procurement Review Trends, FY Table A4. Procurement Post-Review Trends by Region, FY Table B1. Misprocurement Declared (July 1, June 30, 2006) Table C1. FY06 Complaints by Nature and Rank Table C2. FY06 Complaints Resolution Table C3. FY06 Complaints Forwarded to INT Table E1. Procurement Resources by Region and Location, FY

6 Figures Figure 1. Regional Prior Review Contracts vs. Disbursements... 3 Figure 2. FY02-06 Regional OPRC Review Trend... 4 Figure 3. FY02-06 Procurement Complaints Trend... 7 Figure 4. QSA/QEA Ratings FY Figure A1. FY06 Lending Volume by Region Figure A2. FY02-FY06 Bankwide Prior Review Contracts Figure A3. FY02-FY06 Prior Review Contract Awards by Region Figure A4. OPRC Cases by Contract Type, FY Figure E1. Procurement Staff Trends by Location... 37

7 PROCUREMENT UNDER WORLD BANK-FINANCED PROJECTS: FY06 ANNUAL REPORT EXECUTIVE SUMMARY 1. The Audit Committee s response to the FY05 Procurement Sector Annual Report provided a very clear message that has set the framework for FY06 Annual Report. The Audit Committee challenged the Sector to focus less on presenting data and to provide greater analysis of what the data indicates, including the response of the Sector to issues signaled by the information being collected on a regular basis. This report covers the activities in FY06 only and is focused on the Sector s responsibilities and contributions to the work of the World Bank and includes the information tracked by the Sector to underpin the key messages. A final section summarizes key issues that are contributing to an emerging strategy for the future and discusses some of the initiatives the sector has been working on since FY Fiduciary Oversight and Compliance. The core of procurement work in the Bank continues to be fiduciary oversight and compliance activities to ensure that Bank funds are used for the purposes intended. In FY06, procurement staff worked on 286 new operations in 89 countries, with a total commitment of $23.6 billion. This represented the highest IBRD/IDA lending levels for the past five years (FY01-06) and resulted in increased fiduciary oversight and compliance monitoring for Regional procurement staff. In addition, procurement staff provided continued technical support for 1,345 existing projects with total commitments of $94.9 billion and disbursements of $12.3 billion. The year also saw an increase in the delegation of procurement decision authority to staff in country offices, from 64 percent in FY04 to 77 percent in FY Review of Contracts. The Procurement Sector s fiduciary oversight work at the project level is a blend of prior review, which involves a step-by-step review of pre-award actions focused on high value procurement; and post review, a risk based sampling of contracts reviewed after award. An estimated 6,760 contracts at a total value of $7.5 billion were subject to procurement prior review in FY06. Although the number of prior review contracts declined from FY05, the number of contracts presented to the Operations Procurement Review Committee, 1 which reviews the highest value contracts, rose by 53 percent compared to FY Post-Review Trends. Post review of projects in FY06 increased 18 percent over FY05, with 78 percent of active projects subject to post review. Post review is a key supervision activity and contributes to capacity development at the country level. Post-review reports identify weaknesses noted in the project s implementation procedures and provide an action plan to correct deficiencies. Another key result of post review is the identification of misprocurement, which is declared when it has been determined that the borrower has failed 1 The OPRC is chaired by the Chief Procurement Technical Advisor and includes the relevant Regional Procurement Manager, a legal representative, and the task team leader for the process under review. Transactions projected to result in contracts above $25 million for goods and works and $10 million for consulting services are required to be reviewed by the OPRC.

8 viii to follow the Bank s procurement guidelines and procedures as specified in the Loan/Credit Agreement. In FY06, 153 cases of misprocurement relating to projects in nine countries were identified for a total value of $71 million. Post review is supplemented in most Regions by independent procurement reviews (IPRs), which are contracted out to firms or individuals. IPRs are generally undertaken in high-risk countries and involve a more intensive review of procurement under a selected number of active projects in the country. Twenty-four countries were covered by IPRs in FY06, an increase of 70 percent. 5. Complaints. An important area monitored by the Bank is complaints issued against borrowers during the implementation of procurement under Bank-financed projects. In FY06, the Procurement Sector continued to upgrade its Complaints monitoring database. The upgrade in the complaints monitoring system resulted in the capture of more data (an increase of 37 percent over FY05) and enabled the Bank to determine patterns in the type of actions resulting in complaints. As a result, the Bank is able to develop focused training for borrowers or take other actions to improve the implementation of procurement under projects. Monitoring of the handling of complaints also ensures that the complaints are addressed in a timely manner and result in a fair resolution process consistent with the Bank s guidelines. Key data drawn from the Complaints database are covered in this report in response to the Audit Committee s specific requests for greater disaggregation of data in this area. 6. Anticorruption Efforts. The Procurement Sector s fiduciary and compliance work contributes to the identification of noncompliance, which is referred to the Bank s Department of Institutional Integrity (INT) when fraud or corruption is suspected. Most of these referrals result from the post review of contracts or from complaints. However, INT also has continued to conduct intensive reviews of projects in high-risk countries in cooperation with the country teams and with the support of procurement staff. The results of these reviews are shared with the country teams and the borrower, leading to corrective actions and to an improvement in the design of projects to include more effective anticorruption measures. In FY05, the Procurement Sector worked closely with INT, Legal, and other representatives in the Bank to begin the process of reforming the Bank s sanctions procedures and expanding the definitions of fraud and corruption. This work was largely completed in FY06 and produced a sanctions reform package that the Board approved in August All projects scheduled for negotiation after October 2006 are subject to the new sanctions reform process. The major changes resulting from the reform initiative included adding obstructive practices to the fraud and corruption provisions of the Bank, a harmonization of definitions with other multilateral development banks (MDBs), and a broadening of the scope of the fraud and corruption provision beyond the procurement process. 7. Country Services. Several changes introduced in FY06 had an impact on the Bank s procurement and other financial management work at the country level. On July 25, 2005, the Vice Presidents of Operations Policy and Country Services (OPCS) and Poverty Reduction and Economic Management (PREM) Networks jointly issued a note 2 to staff 2 Strengthening the Bank s Public Financial Management Work, issued July 25, 2005, by James W. Adams, OPCS, and Danny Leipziger, PREM.

9 ix supporting the introduction of the Public Expenditure and Financial Accountability (PEFA) indicators and a strengthened approach to how the Bank should engage at the country level to improve the overall effectiveness of work on public financial management systems. This note was the culmination of several years of joint work involving the Procurement Sector, the Financial Management Sector, and the Public Management/Governance Sector in the Bank, together with the PEFA partnership that includes the International Monetary Fund (IMF), the European Commission (EC), and a group of bilateral donors. This note led to significant increase in integrated economic and sector work conducted at the country level that included the integration of procurement into broader public financial management assessments. Procurement aspects of public financial management assessment are still guided by the Country Procurement Assessment Report process, but much more flexibility has been employed in the type of procurement assessments conducted at the country level. Key accomplishments that demonstrate the coordination of work with other donors active in the country and the introduction of a more demand-driven and flexible approach to this work include the following. In the Latin America and Caribbean Region (LCR), an agreement was signed with the Inter-American Development Bank to conduct economic and sector work on a coordinated and integrated basis. The South Asia Region (SAR) used the increased flexibility to expand the review of states in India to support expanded lending directly to programs managed by the states. In the Europe and Central Asia Region (ECA), the new flexibility led to closer cooperation with the EC on assessing and addressing procurement reform activities, and to the use of a specialized form of integrated fiduciary assessment to support the expanding use of sectorwide approaches. The Africa Region (AFR) focused on follow-up work to assess the progress of countries in implementing agreed procurement reforms, and it continued to work in close partnership with the African Development Bank. The Middle East and North Africa Region (MNA) and East Asia Region (EAP) expanded the use of new tools and increased their coordination with donors, with a heightened focus on integrated products with demonstrated results in Morocco, Philippines, and Vietnam. In Morocco, Phase I of the analysis of the quality of the public procurement systems was completed and work on Phase II was initiated. 8. Joint Venture for Procurement. The joint work with the Development Assistance Committee of the Organization for Economic Co-Operation and Development (OECD-DAC) that began as part of the Procurement Roundtable Initiative was continued in FY06 under the guidance of the Joint Venture for Procurement, a subcommittee of the OECD-DAC Working Party on Aid Effectiveness which is co-chaired by the World Bank. A key element of the Joint Venture s work program was the development of a more robust set of procurement benchmarks and performance indicators, with scoring criteria and implementation guidance. The Bank has used various versions of benchmarking indicators of procurement institutional and legal frameworks as part of its dialogue with partner countries when conducting CPARs. The experience gained from more than 20 such exercises conducted was a key contribution to refining these indicators. In June 2006, after consultations with the broad membership of the

10 x OECD-DAC Joint Venture for Procurement, a country-based assessment methodology ( Methodology for the Assessment of National Procurement Systems (version 4.0) was adopted for testing purposes with partner countries under the Paris Aid Effectiveness declaration that have volunteered to test the methodology. Regional events have been planned for three Regions (Africa, East Asia and Pacific, and Latin America and the Caribbean) to discuss the methodology and provide guidance on how it should be used. The rollout exercise to test the methodology has also started, and it is expected that the results will be reviewed at the next annual meeting of the JV to be held in Copenhagen in September Electronic Government Procurement (e-gp). As part of the Bank s strategy for improving the effectiveness of our country-based work, the Procurement Sector further emphasized helping client countries develop and use e-gp as a vehicle of improving the transparency and efficiency of all public procurement. The Bank was instrumental in fostering the use of e-gp in various client countries, including through e-gp readiness assessments, assessments of existing e-gp systems, and implementation of e-gp programs in 11 client countries. An implementation guide, including a readiness assessment tool, is part of the harmonized toolkit provided for country use by the Working Group on e-gp. 3 This group also produced guidance notes on e-bidding and e-reverse auctions. Much of this work is guided by the experience of several client countries that have successfully introduced these capacities into their national procurement systems, notably Brazil, Chile, and Mexico. 10. Heads of Procurement (HoP). In FY06, the MDB Heads of Procurement made further advancements, and many aspects of procurement are now substantially harmonized between the major MDBs. Considerable progress was made in the harmonization of procurement policy; following the revision of the World Bank (WB) Guidelines in 2004, Inter-American Development Bank (IADB), Islamic Development Bank (IsDB), Caribbean Development Bank (CDB), and Asian Development Bank (ADB) issued their new Guidelines, which are substantially harmonized with those of the Bank. As this significant progress was made in the harmonization of procurement policy, the HoP s emphasis shifted to the harmonized implementation of these shared policies. Environmentally and socially responsible procurement remained an important issue, and significant gains were made regarding core labor standards and incorporation of new provisions in the bidding documents that build health care and aids prevention and awareness measures into large civil works contracts. Work on expanding the range of available harmonized bidding documents continues. 11. Procurement Policy, Tools, and Institutional Initiatives. A key aspect of the work program for the Procurement Anchor is the maintenance of policy, policy-related documents, and tools. During FY06, a number of policy-related documents were updated or issued to reflect the May 2004 changes to the Procurement Guidelines and the Selection of Consultants Guidelines. This work included reissuing the Bank Consulting Services Manual and updating the standard request for proposal document. Work begun in FY05 on updating the full range of standard bidding documents to reflect the May 2004 changes was completed in FY06. 3 The Working Group on e-gp is one of the working groups created under the Heads of Procurement of the multilateral development banks.

11 xi 12. Systems Enhancements. The Procurement Anchor is responsible for the design, development, and upgrading of a range of systems to facilitate capture and publication of data and the monitoring of procurement actions. This work involves coordination with the Information Solutions Group (ISG), which supports the technical aspects of systems development and works with a network of staff in the Regions to introduce and train staff on use of the systems. In FY06, the team in the Procurement Anchor developed the Module for Publication of Procurement Notices, Contract Awards Module, and Private Sector Liaison Officers website. In FY06, the Procurement Anchor was asked by the Controllers, Strategy, and Resource Management Vice Presidency (CSRVP) to develop an anti-money laundering/combating the financing of terrorism (AML/CFT) screening system that would allow task teams to run a cross-reference check of the supplier list in the SAP 384 module against available sanctions lists before issuing their no-objections to contract awards. 13. Procurement Staffing. In FY06, the Procurement Sector lost a significant number of senior and experienced procurement staff due to retirement and this trend is expected to somehow continue in the coming years. The Procurement Anchor was particularly affected in this regard in FY06. This placed additional strain on the Procurement Sector in meeting increasing client demands but also brought opportunities. The Sector focused in particular on enhancing its presence in the field and hiring local staff and/or decentralizing the HQ staff. This effort in FY06 resulted in 53 percent of professional level (GE+) procurement staff stationed in Country Offices (COs) 4 including 22 percent of the senior Internationally Recruited Staff (IRS). The continued high level of demand for procurement support in COs was further met by an increase in CO delegation of procurement clearance authority. 14. Procurement staff continued to perform well in supporting projects, as indicated by the high ratings in the Quality at Entry (100 percent satisfactory or better) and Quality of Supervision (97 percent satisfactory or better) reviews undertaken by the Quality Assurance Group (QAG). However, staff skills and a certain dearth of qualified staff able to work both on operational procurement and policy reforms remain a concern. The Procurement Sector Board is working with Human Resources to agree on a sectorwide strategy for management of staff and for a longer-term strategy for identification of a pipeline of staff with potential and adequate skills to cover the broad range of activities. In this regard, one consideration is the use of the Bank s Young Professionals program. Work has also begun on defining an intensive capacity development program for procurement staff. This program will focus not only on basic skills improvement, but will also address skills needed to implement the Sector s emerging strategy and deliver on new initiatives. 15. Emerging Strategy. Many of the issues seen in FY05 and FY06 led to new initiatives that will form the core of the Procurement Sector strategy for the coming years. The Procurement Anchor discussed defining a new strategy in a retreat held at the end of FY06 and agreed that this should be the subject of a Procurement Sector Board retreat in FY07. Although this new strategy is just emerging, the following paragraphs summarize some elements that are currently recognized as being of importance GE+ staff stationed in Washington and 90 in country offices (COs).

12 xii 16. Identifying Risk. With regard to fiduciary and compliance work in the Bank, much more attention needs to be given to the identification of risk, especially with regard to including improved anticorruption measures in project design. Under the guidance of SAR, the Procurement Sector also worked on development of a dynamic risk model system and started to pilot the model prepared by the working group initially set up by the Anchor. The system would measure projects risk levels based on a combination of factors, including previous Bank work in the sector and country. It will draw on methods that are being employed in several of the Regions, including ECA and LCR. 17. Rapid Response. During FY06, work began on development of a new rapid response policy. The Procurement Sector contributed to the development of this new policy, which has many implications for the Sector in supporting rapid response to critical situations in our client countries. The Procurement Sector will work to prepare implementation guidance for staff, develop new procurement tools to support the policy, and work with other contributing units in the Bank to ensure that this new policy will provide the flexible and timely procurement services required. 18. Governance. The Bank has embarked on an aggressive program to further strengthen its governance and anticorruption work. 5 Procurement is a key element in the Bank s ability to impact governance and anticorruption at the project level. Procurement staff are actively involved at the project, country, and Regional levels to design and implement measures that will help improve governance and reduce the potential for corruption, as a contribution to implementation of the recently approved Bankwide governance and anticorruption strategy. 19. Payments. The Procurement Sector is working closely with the Financial Management Sector to identify issues related to poor payment practices under Bank-financed projects. This initiative will involve an increased assessment of country financial management systems and analysis of the country s record with regard to payment. This new emphasis on payments is a result of a growing awareness that payment issues increase the cost of doing business in a country and can have a negative impact on competition and business relations. 20. Country Services. With regard to country services, the Procurement Sector will continue to foster more flexible responses to a demand-driven approach to economic and sector work and to support client country systems in meeting the core principles of transparency, accountability, and fairness. This will involve revising the current Country Procurement Assessment Report (CPAR) guidance and providing additional focus on capturing and sharing of knowledge with staff on new tools and methods being employed at the country level to improve effectiveness. Of particular importance is the growing use of the OECD-DAC benchmarking indicators. These internationally agreed benchmarks provide a tool to help client countries determine their public procurement systems relative strengths and weaknesses, and they provide the means for measuring progress on reforms. In the coming years, the Sector will expand its use of the OECD-DAC indicators for assessment and measurement of progress on reforms in client countries. Another key element of the 5 Strengthening World Bank Group Engagement on Governance and Anticorruption (R ), March 20, 2007

13 xiii strategy at the country level is to continue to encourage the expanded use of technology to support procurement. This will involve continued support to developing e-gp systems and the sharing of cross-country experiences. 21. Country Systems. As the Bank moves toward reaching a decision on an increased reliance on country systems, including in procurement, the above-captioned areas are critical to implementing the Bank s initiative and these efforts will take center stage. The assessment of country procurement systems on the basis of an analysis of institutional and legal framework and procedures, the monitoring of performance indicators, and equivalence with Bank standards were key elements of the Bank's initial proposal to the Board in March 2005 for increasing reliance on country procurement systems 6. At the request of the Board, this paper was posted on an external website for a period of six weeks to encourage submission of comments by interested stakeholders. The Bank held subsequent consultations throughout FY06 with stakeholders that expressed concern about the methodology defined in the paper, including a tour of European countries and several meetings with the US industry. As a result of those extensive consultations and remaining concerns by some stakeholders, the paper was withdrawn in May Electronic Government Procurement. Another key element of the strategy at the country level is to continue to encourage the expanded use of technology to support procurement. This will involve continued support to developing e-gp systems and the sharing of cross-country experiences. These areas are critical to implementing the Bank s initiative to increase its reliance on country systems, including procurement systems. 23. Trust Fund Partnerships. The Bank is responding to the growing demand for harmonization at the country level and for providing good service in countries with difficult working environments by participating in a growing number of trust funds with other donors. These funds vary in nature, but all require a solid fiduciary framework. The Procurement Sector will work closely with development partners, including the United Nations, to provide a procurement umbrella framework agreement that will be coupled with the existing financial management umbrella agreement to simplify working with a broad number of partners and ensure a continuation of strong fiduciary coverage for these trust funds. 24. System Development: Post Reviews. The Procurement Anchor has established a working group that is developing the template for a system to capture data from post-review reports. This information will enable the Sector to learn from good practices and to design capacity development activities that will help staff and client countries implement better procurement practices. 6 Increasing the Use of Country Systems in Procurement (R ), March 8, Subsequent to this report, taking into account the input received from the various stakeholders, a new initiative on use of country systems was developed by the management in FY07 (outside the reporting period for this Report). The revised paper was discussed by CODE on May 14, 2007, and by the Board on June 7, 2007.

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15 PROCUREMENT UNDER WORLD BANK-FINANCED PROJECTS: FY06 ANNUAL REPORT I. INTRODUCTION 1. World Bank operational procurement work in FY06 comprised fiduciary oversight and compliance, country services, and client capacity building, as discussed in this report. In the context of the increase in the Bank s investment portfolio to the highest level for the past five years (resulting in increased fiduciary oversight and compliance monitoring for Regional procurement teams), the Procurement Sector with reduced resources worked to advance its impact and effectiveness in client countries and improve fiduciary compliance through greater focus on governance and anticorruption-related activities Organization of the FY06 Annual Report. Following this introduction, Section II discusses FY06 fiduciary oversight and compliance across the Bank s six Regions Africa (AFR), East Asia and Pacific (EAP), Europe and Central Asia (ECA), Latin America and the Caribbean (LCR), Middle East and North Africa (MNA), and South Asia (SAR) and governance and anticorruption-related activities. Section III examines country services activities, underscoring the changing role of procurement teams and their support for reforms of country systems, harmonization, government e-procurement, and client capacity building. Section IV discusses procurement policies, tools, and institutional initiatives. Section V provides an overview of procurement staff in FY06 and staffing trends during the past three years. Section VI outlines initiatives for the coming years. II. FIDUCIARY OVERSIGHT AND COMPLIANCE 3. In FY06, Regional procurement teams continued their focus on procurement oversight and compliance through support to operations teams and client countries. This work included procurement document reviews, post reviews, and provision of technical advice to the operations teams on project design and supervision and to client countries on their project procurement activities. 4. Lending Portfolio. In FY06, 286 new operations (113 IBRD and 173 IDA) in 89 borrower countries were approved, with a total commitment of $23.6 billion. Of this total, 235, or 82 percent, were investment projects, with commitments of $16.3 billion. This represented the highest annual IBRD/IDA lending level in the FY01-06 period, with the trend showing continuing growth of about 8 percent over the past three years. Mexico and Brazil were the leading FY06 borrowers; together they accounted for 15 percent of the total new commitments. The supervision portfolio included 1,345 operations with a total commitment value of $94.9 billion. The distribution of the FY06 lending activities by Region and of lending portfolio by top leading borrowers are depicted in Figure A1 and Table A1 in Annex A. 1 The delay in submission of the FY06 report is due to the limited staffing resources in OPCPR during FY06 and FY07. The request for delayed submission of the FY06 report was agreed to by the audit Committee.

16 2 5. Work Program Impact. The growth in the Bank s portfolio had a significant impact on the Procurement work program, and required a balancing between the demands of additional procurement input to operations teams and clients on the one hand and the increasing work on country systems and reforms on the other. It also required Regional adjustments in decentralization of Procurement staff, and delegation of procurement authority. 6. Procurement Decentralization. The focus of Regional procurement decentralization strategies has been on better service, increased client access, and maintenance of current knowledge of the country s governance system. Under the guidance of the Operations Procurement Review Committee (OPRC), the Regions have been increasing the recruitment of country-based staff and the delegation of the procurement authority below the Regional Procurement Manager (RPM) threshold to country offices (COs). This trend continued in FY06: the decentralization of procurement authority reached 77 percent compared to 64 percent in FY04. The positive impact of the Regional decentralization strategies was noted in FY06 by the Quality Assurance Group (QAG) in its seventh Quality of Supervision Assessment (QSA7), which identified the involvement of the country-based procurement staff as one of the main elements responsible for improved Satisfactory ratings for Procurement supervision. Table 1 below shows the FY06 levels of Regional procurement decentralization and the trend since FY04. Table 1. Procurement Decentralization Trends Procurement Decentralization Indicators, FY04-06 Decentralization Data AFR EAP ECA LCR MNA SAR Bankwide FY04 Decentralization Percentage Active Projects ,352 Delegated to COs FY05 Decentralization Percentage Active Projects ,517 Delegated to COs ,087 FY06 Decentralization Percentage Active Projects ,601 Delegated to COs , Project Preparation and Supervision. Regional procurement teams took part as members of operations teams for the 286 new lending operations, providing advice on project designs, conducting procurement capacity assessments, preparing the required procurement procedures and schedules in the Project Appraisal Documents (PAD) and Loan/Credit Agreements, and participating in final Loan/Credit negotiations. At project launch, the teams also conducted procurement capacity-building workshops for client staff. 8. Follow-Up to Risk Assessments. In FY06, Regional procurement teams increased their focus on follow-up measures of procurement risk assessments for new projects, incorporating mitigation measures in project design. Under the guidance of the SAR team,

17 3 work also started on development and piloting of a dynamic risk model system to measure project risk levels on the basis of a combination of factors, including previous Bank work in the sector and country. Plans for the risk model system include its connection to the Project Portal, Complaints database, Misprocurement database, Department of Institutional Integrity (INT) cases, latest assessment reports, Country Procurement Assessment Reports (CPARs), and results of procurement post reviews. 9. Prior Reviews. With 1,345 active projects, fiduciary oversight and compliance once again occupied the greater part of the work programs of Regional procurement teams. An estimated 6,760 contracts, with a total value of $7.5 billion, were subject to procurement prior review 2 in FY06, compared to 8,145 contracts in FY05, with a value of $8,964 billion (a 17 percent decline in volume). This represented 61 percent of total FY06 disbursements, and followed the declining trend line of the past four years in the number of the prior review contracts relative to the increased lending portfolio. The decrease in prior review contracts is compensated by the increase in Procurement Post Reviews (PPRs) of projects; the number of FY06 PPRs rose by 18 percent compared to FY05. Figure 1 below shows the FY06 Regional prior review contracts in relation to total disbursements. Figure 1. Regional Prior Review Contracts vs. Disbursements FY06 Prior Review Contract Value and Project Disbursement Amount (US$ M) 4,000 US$ Million 3,000 2,000 1,000 0 AFR EAP ECA LCR MNA SAR Disb in FY06 2,571 1,845 1,685 2, ,884 Prior review contract value 1,833 1,368 1, ,328 % reviewed contract value / 71% 74% 77% 41% 74% 46% disbursement Region Disb in FY06 Prior review contract value % reviewed contract value / disbursement 10. Regional Trends. Analysis of FY02-06 contract awards by the 10 leading borrowers shows that India and China have the largest value contracts, followed by Brazil; a similar distribution applies to countries that supply Bank-financed contracts. Table 2 below presents the FY06 prior review contracts by Region and Procurement category and Annex A presents the FY02-06 Bankwide trend in prior review contracts (Figure A2), FY02-06 trend of Regional prior review contract awards (Figure A3), and the FY06 list of leading suppliers (Table A2). 2 Per the Loan/Credit Agreements, certain procurement actions taken by the borrower for example, issuing bidding documents, evaluating bids, and recommending contract awards must be reviewed by the Bank and a written no-objection provided before the borrower may proceed to each next stage of the procurement process. This prior-review process usually applies to procurement actions for contracts involving international competitive bidding and those above a certain dollar threshold. Prior review thresholds are set as a function of the procurement risk for a given project or country, based on the assessment of the capacity of the executing agency to implement procurement activities.

18 4 Table 2. FY06 Prior Review Contracts by Region and Category FY06 Prior Review Contracts by Region and Procurement Category Proc Categ \ Region AFR EAP ECA LCR MNA SAR Bank-wide % Amount (US$ Million) Civil Works 1, ,187 56% Goods ,071 28% Services % Consultant Services ,137 15% Total 1,833 1,368 1, ,328 7, % Number of Contract Civil Works ,316 19% Goods ,136 32% Services % Consultant Services ,178 47% Total 1,702 1,127 1,639 1, , % 11. Operations Procurement Review Committee. The Operations Procurement Review Committee (OPRC) provides an important contribution to the fiduciary oversight role of the procurement function through review and clearance of the highest value and most complex contracts financed through Bank loans. 3 During FY06, OPRC reviewed 89 cases, valued at $4.9 billion. This was the highest number of cases reviewed during the past five years and a 53 percent increase over FY05, reflecting the Bank s general shift to larger infrastructuretype lending projects. An analysis of FY06 cases shows that India, Ethiopia, and China had the highest number of cases reviewed while India and China had the highest value contracts reviewed. In Annex A, Figure A4 depicts the overall weight of cases by contract type from FY03 to FY06. Figure 2 below shows the FY02-06 Regional trend of OPRC reviews. Figure 2. FY02-06 Regional OPRC Review Trend US$ Million 2,500 2,000 1,500 1,000 Trends of OPRC Review -- Contract Value by Region FY02 - FY FY02 FY03 FY04 FY05 FY06 AFR EAP ECA LAC MNA SAR 12. Independent Procurement Reviews (IPRs). As a part of monitoring project fiduciary compliance, IPRs complement the prior review and regular post review procedures, and inform Regional management of the quality of the Region s fiduciary work on procurement. 3 This includes clearances for (a) contracts for procurement of goods, works, and services (other than consulting services) costing $25 million or more, (b) consulting contracts costing $10 million or more equivalent, (c) single-source selection of consulting services contracts costing $5 million or more equivalent, and (d) other cases at the request of the RPMs.

19 5 During FY06, IPRs were conducted in 24 countries, 4 covering 70 lending projects and 1,385 contracts. In comparison to FY05, the country coverage of IPR in FY06 increased from 14 to 24, an increase of 71 percent, and the number of reviewed projects increased from 50 to 70, a 40 percent increase. Table A3 in Annex A presents the IPR coverage for the period FY Procurement Post Reviews (PPRs). During the fiscal year, PPRs were carried out for 693 projects, or 78 percent of the total projects subject to post review. PPRs are an integral part of Regional teams work programs and they are having a significant impact on the procurement approach to projects in terms of follow-up work, client capacity building, and identification of cases requiring the Bank s attention. Accordingly, the Regions strengthened their efforts to follow-up on the findings of the PPR/IPR reports and, where applicable, used the PPR/IPR results to expand and further improve borrower capacity building. Another important outcome of these reports is the identification of misprocurement cases. Table 3 below show the FY06 post-review monitoring and status by Region and Table A4 in Annex A depict the trends of post-review coverage by Regions over the past five fiscal years. Table 3. FY06 Procurement Post Review by Region Procurement Post Review (Jul. 1, Jun. 30, 2006) Item\Region AFR EAP ECA LCR MNA SAR 1 Bankwide Projects in Portfolio* Projects not subject to post review** Projects Subject to post review Projects post reviewed *** (accumulated) Projects post reviewed (accumulated %) 79% 54% 74% 98% 53% 96% 78% Notes * Total number of active projects in portfolio, including PE (IBRD&IDA), GEF, MT, SF, and TF if being post reviewed. ** Projects 100% subject prior review, and projects with insufficient contracts for post review. *** Data including projects under independent procurement review. 1. Data excludes Nepal and Sri Lanka due to the country conditions in which reviews could not be carried out. 14. Misprocurement. Bank policy is to cancel any portion of the loan allocated to the goods, works, and services that has not been procured in accordance with the procedures set out in the Loan Agreement (misprocurement). In FY06, 153 cases of misprocurement relating to nine countries were identified, for a total value of $71 million. Compared to the last three years, this was a significant increase in misprocurement cases, reflecting a heightened focus on governance and anticorruption efforts. An analysis of the FY06 misprocurement cases showed that 55 percent were identified as a result of the post reviews (PPRs or IPRs), while 40 percent were based on complaints submitted by bidders and consultants and subsequent INT investigations. The remaining 5 percent were based on prior review process and government reviews. This distribution underscores the degree to which follow-up to PPRs and complaints are taken seriously. Annex B presents the details of the FY06 misprocurement cases, including how they were identified and Table 4 below presents the misprocurement trends during the past three years. 4 These included Argentina, Azerbaijan, Bolivia, Brazil, Chad, Chili, Columbia, Democratic Republic of Congo, Dominican Republic, Egypt, Ethiopia, Honduras, Jordan, Madagascar, Mexico, Moldova, Nicaragua, Paraguay, Peru, Rwanda, Senegal, St. Lucia, and West Bank and Gaza.

20 6 FY No. of Countries Table 4. FY04-06 Misprocurement Trends No. of Projects No. of Contract Contract Value ($M) How Identified FY04 5 N/A M Complaints, Post Review FY05 6 N/A M Post Review FY M Supervision, Prior Review, IPR, Complaints, Review, INT 15. Complaints. An important part of ensuring compliance with the procurement process is the ability of bidders and consultants to submit formal complaints. In FY06, the Procurement Anchor worked with the Regions to improve the complaints data-capturing process and developed a new Bankwide Complaints database. This system has improved the quality of the information and has provided a means for better analysis of the data. During FY06, 388 complaints were registered, involving 220 projects in 73 borrower countries (17 projects received more than one complaint). This was an increase of 105 projects, or 37 percent, compared to FY05. The number of complaints rose in AFR, EAP, ECA, and LCR while declining in MNA and SAR. 16. Complaint Trends. In FY06, the seven countries with the highest number of registered complaints (India, China, the United States, Nigeria, Bangladesh, Vietnam, and Germany, respectively) represented 43 percent of the total complaints. India and China both registered and received the highest number of complaints. Excepting the United States and Germany, most of the complaints were from local companies: 100 percent of the complaint cases originated locally in Nigeria, Bangladesh, and Vietnam; 93 and 76 percent of cases in India and China, respectively, related to projects in their own countries. The three leading reasons for FY06 complaints were the qualification of other firms, disqualification of bid, and application of evaluation criteria. This was followed by allegations of fraud and corruption. The Bank s review of the FY06 complaints resulted in upholding the borrowers decision in 30 percent of the cases, validating the complaints in 8 percent of cases, and invaliding the complaints in 14 percent of cases. A total of 19 cases (5 percent) were forwarded to INT. (The resolution of the remaining cases is presented in Table C2). Figure 3 below shows the FY02-06 procurement complaints trend and Annex C shows the FY06 complaints by their nature and rank (Table C1), FY06 complaints by their resolution (Table C2), and the number of cases forwarded to INT by country (Table C3).

21 7 Figure 3. FY02-06 Procurement Complaints Trend Number of Complaints Trend of Procurement Complaints in the Past Five Fiscal Years (FY02 - FY06) Fiscal Year AFR EAP ECA LCR MNA SAR 17. Responsiveness to Clients. The Bank standard response time to clients on procurement-related documents is seven business days. Recognizing the importance of this performance indicator and its use in EAP, ECA, and MNA, during FY06, the rest of the Regions worked toward developing fully functional Regional monitoring systems. Since these systems were not operational by the end of the fiscal year, the Bankwide data on procurement response time was not available for reporting in FY06. However, the FY06 data collected from the three Regions with operating systems showed that the average response time in MNA was 1.53 days and that the Region met the seven-day standard 97.2 percent of the time; the corresponding figures for ECA and EAP were 1.54 days and 95.7 percent and 3.8 days and 89.7 percent, respectively. The differences among the Regions can be attributed to Regional factors including resources, complexity, and volume. 18. Quality Assessment. The positive impact of the Regional procurement teams work was demonstrated in the Quality Assurance Group s (QAG s) Seventh Quality of Supervision Assessment (QSA7), which evaluated the quality of procurement supervision in a random sample of 127 FY05-06 projects and found that 97 percent of the projects had a Satisfactory or better rating on procurement supervision aspects. This result shows the steady improvement against the QSA4 (85 percent), QSA5 (91 percent), and QSA6 (95 percent) assessments. Significantly, while in the recent past, procurement specialized reviews were only conducted on a case-by-case basis rather than on the full sample of projects under review, the heightened concern about corruption under Bank-financed projects, resulted in the specialized review being applied to all QSA7 projects. 5 The positive procurement performance trend in the QAG results for Quality at Entry (QEA) and Quality at Supervision since FY01 can be seen in Figure 4. 5 Excepting Development Policy Loans (DPLs), which do not apply the same requirements for procurement supervision as investment loans.

22 8 Figure 4. QSA/QEA Ratings FY01-06 QEA vs. QSA Procurement Results Over Time % Marginally Satisfactory or Better 105% 100% 95% 90% QSA QEA 85% 80% 75% QEA/QSA4 QEA5/QSA5 QEA6/QSA6 QEA7/QSA7 19. Factors of Quality. The factors QAG noted as contributing to Satisfactory or better procurement supervision included coverage procurement staff participation as part of supervision teams and follow-up to address procurement problems noted during supervision. Other factors included decentralization, solid documentation, proper procurement planning, and the integration of procurement staff into project teams. Projects rated more highly for procurement supervision further demonstrated good coordination and communication among the procurement specialist, the task team leader, and other members of the team, including the Financial Management Specialist. The absence of the same attributes was cited for the projects with lower ratings. The main recommendation of QSA7 for the Procurement Sector was to apply the lessons learned from the key characteristics of highly rated versus poorly rated procurement supervision to strengthen performance. 20. Governance and Anticorruption (GAC). As the Bank continues to enhance its fight against fraud and corruption under Bank-financed projects, the Regions introduced governance and anticorruption measures in new projects and worked with the clients to enhance their governance and anticorruption agendas. A key pillar of the GAC strategy is that the Bank must remain committed to improving country systems and increasing its reliance on such systems. 21. AFR GAC. During FY06, AFR issued a policy note on Managing High-Risk Operations to enhance risk management screening at both the country and project levels. This was part of the overall Regional effort to heighten staff attention on fighting corruption. Operations located in countries with High Systemic Corruption Risk and/or political governance issues, or projects with High Specific Fiduciary Risks were classified as highrisk operations. To ensure upstream review of high-risk operations, AFR staff were instructed to introduce a new review process at the Project Concept Note and Decision Meeting stages, requiring mandatory reviews by the RPM Office, with a copy to OPCS. In addition, review by the Regional Operations Committee meeting was made mandatory for decision meetings involving high-risk operations. Sign-off provided by the AFTQK Director in consultation with the RPM remained unchanged. AFR procurement staff were requested to ensure that the project documentation address all governance and corruption issues. For projects in countries with High Systemic Corruption Risk, they were requested to prepare a frank write-up describing the state of governance in the country, recent developments, and issues that could impact the successful implementation of the project. Clearance of the Board package for high-risk projects by the AFRVP was made mandatory, because of the sensitivities of governance issues. In addition to the normal review and guidance function from procurement staff, the documentation for projects with High Specific Fiduciary Risks became subject to