STUDY ON ALTERNATIVES TO THE APPROVED BUDGET FOR THE CONTRACT (ABC) AS A PROCUREMENT AND BUDGET CONTROL MECHANISM (AUGUST

2011)

Table of Contents Executive Summary. 5 I. Background . 9 II. Objectives of the Assignment . 9 III. Study Methodology and Limitations 10 IV. Historical Perspective .. 11 V. Literature Review .. 13 VI. International Practices 15 VII. Local Practices . 16 A. B. C. D. E. F. Department of Public Works and Highways (DPWH) 18 Department of Education (DepEd) .. 20 Department of Health (DOH) 20 Procurement Service (PS) 21 Other Government Agencies 22 Private Construction Project Managers and Companies .. 22

VIII. Advantages and Disadvantages of the ABC as Ceiling for Award . 23 IX. Issues and Concerns . 25 X. Recommendations 28 ANNEX A. List of Participants to the Focus Group Discussions .. 34 ANNEX B. List of Persons Interviewed 35

ABBREVIATIONS

AAE ABC ADB AE AGE APP BAC BOC COA CPAR CSO DA DBM DepEd DO DOH DPWH EE EO FGD GAA GOP GPPB GPRA HOPE ICB IRR JICA LCRB LGU LEB NCB NGA ODA PD PD 1594 PPMP PS ROW UNCITRAL US WB WFP WTO

Approved Agency Estimate Approved Budget for the Contract Asian Development Bank Agency Estimate Allowable Government Estimate Annual Procurement Plan Bids and Awards Committee Bureau of Construction, DPWH Commission on Audit Country Procurement Assessment Report Civil Society Organizations Department of Agriculture Department of Budget and Management Department of Education Department Order Department of Health Department of Public Works and Highways Engineers Estimate Executive Order Focus Group Discussions General Appropriations Act Government of the Philippines Government Procurement Policy Board Government Procurement Reform Act Head of Procuring Entity International Competitive Bidding Implementing Rules and Regulations Japan International Cooperation Agency Lowest Calculated and Responsive Bid Local Government Unit Lowest Evaluated Bid National Competitive Bidding National Government Agency Official Development Assistance Presidential Decree Regulations for Government infrastructure Contracts Project Procurement Management Plan Procurement Service Right-of-Way United Nations Commission on International Trade Law United States World Bank Work and Financial Plan World Trade Organization

EXECUTIVE SUMMARY This is a study to identify and analyze all the issues and concerns related to the introduction and use of the Approved Budget for the Contract (ABC) as ceiling for award, as mandated under the Government Procurement Reform Act (GPRA, RA 9184) including those raised by the development partners; to determine whether the original intent for the imposition of the ABC has been met; and to present alternatives that both address the issues raised against the ABC and meet the GOPs need for effective procurement and budget controls. Historically, government procurement policies and regulations provided for the preparation of the agency estimate (AE), the Approved Agency Estimate (AAE) or the Approved Budget for the Contract (ABC). Initially this was kept confidential and was set as the upper limit for contract award with no lower limit. Subsequent revisions in the regulations set limits and floors on the award of government contracts to minimize the incidence of runaway bid prices and failed bids and to address concerns related to collusion among bidders. At the same time, there were no formal training on cost estimating unlike in many developed countries and in the public sector, the concept of quantity surveying was not introduced or institutionalized. Foreign assisted projects required the preparation of the Engineers Estimate (EE) by consulting firms but the net effect was that very limited capability was actually built among government cost estimators as the skill remained with personnel of the consulting firms. As a result, the reliability of the ABC prepared by government personnel remained questionable. The three major international financing institutions do not accept the use of the ABC as ceiling for award for procurements done through international competitive bidding (ICB). They claim that international firms face higher costs than local ones and the ABC does not always take this into consideration. International practice rejects such price control mechanisms as this is inappropriate in a market system, where contract prices should be set through open competition. WB Procurement Guidelines may indicate the estimated total cost of the contract but the ADB Procurement Guidelines do not allow disclosure of the cost estimate in both NCB and ICB procurements. Both Procurement Guidelines stipulate that contract award shall be made to the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents and (ii) to offer the lowest evaluated cost. For National Competitive Bidding (NCB), the WB and JICA allow the use of procedures set forth in RA 9184 with clarifications and modifications. The ADB NCB guidelines allow the publication of the ABC, ceiling price or other similar estimates, but do not permit its use in the evaluation or rejection of bids without its prior concurrence. Model procurement laws of such international organizations as the United Nations Commission on International Trade Law (UNCITRAL), the World Trade Organizations (WTO) and the European Union (EU) Public Procurement Directives are silent on the announcement of the contract cost in the bid documents and recommends the award of contract to the bidder with the lowest evaluated price meeting all the criteria required in the bid documents. The Commonwealth Procurement Guidelines (Australia) estimates the maximum anticipated value of the contract and awards contracts to bidders who submit the best value for money proposal. In many countries reviewed, award is made to the lowest evaluated and responsive bidder. The Dutch government utilizes high quality cost estimates in their procurement process and do not accept bids over the cost estimate. The United States General Services Administration (GSA) is now asking its bidders to lower their bids within the government cost estimate. Many countries do not use the estimated contract cost as basis for award but in

countries that do, the principal reason for its adoption is to address the issue of collusion or bid rigging and cost cutting. The practices of four major government procuring entities in preparing the ABC were reviewed. These are the DepEd, DPWH, DOH and the Procurement Service (PS) of the DBM. Procuring entities have different practices and interpretation as to when the ABC is prepared. Despite the presence of factors to consider in the computation of the ABC in the generic procurement manuals, many agencies do not take all the factors into consideration in the preparation of the ABC. Most agencies implementing infrastructure projects use the DPWH Guidelines for the preparation of the ABC. The DPWH has a cost estimation system and a construction materials price data base that can be shared with other procuring entities implementing infrastructure projects as soon as it is operational. The DOH has a data base for drugs and medicines that may also be used by other agencies. The PS maintains an electronic price catalogue for common use items in the Phil-GEPs website. Although there are no uniform or standard systems followed by private owners or project managers, the construction project manager interviewed state that the contract is generally awarded to the contractor with the most reasonable bid in terms of experience and track record, construction methodology and resources and not to the one submitting the lowest evaluated bid price. A major utility company procuring supplies, materials and services for supply and lay civil works projects uses a bandwidth of +/- 20% the company reference estimate for award of contract. All the stakeholders consulted in this study were unanimous in their agreement that the ABC should be kept as ceiling for award. As a procurement control mechanism: it sets a specific amount for contract award; simplifies the bid evaluation process; allows very limited opportunities to exercise discretion in determining reasonableness of bid items; and minimizes run-away bid prices. As a budgetary control mechanism, it fixes the maximum amount to be released by the DBM based on the ABC thus allowing the reallocation of extra resources for other priority expenditures of the agency. Disadvantages on the use of the ABC as ceiling are as follows: underestimated ABCs result in non-participation of bidders and failure of bidding; overestimated ABCs provide opportunities for collusion and bid manipulation thus encouraging graft and corruption, unnecessary appropriation of funds that could otherwise be used for other purposes. Rigid bid evaluation procedures based on the ABC do not allow bidders to introduce innovations that may bring about value for money and to offer better alternatives. Poorly defined specifications and pricing may also result in substandard or low quality of goods and services delivered. Difficulty in spotting collusion as bidders may have so skillfully orchestrated the preparation of bids very close to the ABC. Setting the contract price or publicly disclosing such undermines the competitive process and has at least two undesirable consequences: (1) the estimated prices may be set so low as to make bids unrealistic, resulting in delay or non completion of the contract; (2) the estimates are set too high, with the result that the successful bidders would make unwarranted profits at the expense of the public. Most countries that follow the model international procurement laws allow market forces to determine the price of goods or services to be purchased. For more complicated procurements, coming up with accurate estimates acceptable to the government has huge cost implications as it necessitates the use of experts in the relevant field and the procurement of specialised consultants. Other costs and variable such as transport, insurance, overheads and those issues related to moral hazard and adverse selection will never be known to the buyer. Since there is no budget set by the government for such activities, then it will always be a problem to arrive at accurate cost estimates and government estimating will remain a hit or miss activity.

Local stakeholders interviewed identified eight issues and concerns related to the use of ABC as ceiling for award: the lack of training and capacity building for cost estimators; the absence of uniform standards and guidelines for its preparation; the absence of a system within the agency for the independent review of the accuracy of the ABC and for monitoring the consistency of its application; the absence of sanctions or penalties for the preparation of over/underestimated ABCs; the absence of data or reliable data bases or references that can be used in the preparation of ABC; non-compliance in the posting of bid opportunities and contract award in the Phil-GEPs; lack of clear guidelines and training in the preparation of specifications; non-procurement related factors such as delayed payments on progress billings, cost of inspection and supervision, cost of doing business with the government, cost of compliance with documentation and procedures, cost of required bid, performance and warranty securities, interest on bank loans, loss of use of funds due to late payment that serve as disincentive to bidders. The private sector and representatives of non-governmental organizations (NGOs) and ordinary taxpayers interviewed would like to see taxpayers money put to good use. Both sectors appear to favor the use of a value for money approach to government procurement than setting price as the principal criteria for the award of government contracts. Two sets of recommendations are presented to address the issues raised against the ABC. The first set of recommendations assumes that the best approach is to allow competitive forces to dictate the market price and to allow the use of the budget as a reference point for choosing the appropriate procurement method and for evaluating bid proposals instead of using it as ceiling for contract award. These include: keeping the budget confidential/announcing the budget; using the budget as reference for bidding; using ranges of contract price (e.g. +/- 20%) as basis for award; using the value for money approach. The second set of recommendations is based on the position to keep the ABC as ceiling for award but is further broken down into two scenarios: one where the shortcomings on its use are ignored so that the recommendations refer only to methods which might make the ABC more accurate and the second where the shortcomings of the ABC are recognised so that the recommendations seek to alleviate some of the worst consequences of the ABC. The proposed courses of action under the first scenario are: the development and implementation of credible standards and guidelines for the preparation of ABC for common and non-common use items; sharing of existing data bases of agencies with other procuring entities; development and implementation of training programs for government cost estimators; development of a system for the independent review of the accuracy and reasonableness of the ABC within the agency; imposition of sanctions and penalties on the wrong preparation of the ABC as well as non-compliance to the posting of bid opportunities and contract award; development of clear guidelines and standards in the preparation and review of technical specifications; addressing non-ABC related issues such as payment, reducing layers of procurement red tape and introduction of quantity surveying as a tertiary course in local universities or colleges. The proposed courses of action under the second scenario are as follows: setting out the ABC against very specific quality parameters (inputs and specifications) or required outputs/performance and allowing bidders to offer their best quality offer for the fixed price and explain the price effects; setting out the ABC against specific quality parameters and allow alternative bids (or variant bids) based on minimum technical specifications; accepting the reality that ABC amounts to fixed budget contracting and simply state the ABC and the required outputs/performance and ask bidders to provide their best quality offers for the fixed price offered.

I.

BACKGROUND

1. Republic Act (RA) 9184, otherwise known as the Government Procurement Reform Act of Philippines (GPRA), currently mandates the application of the Approved Budget for the Contract (ABC) as ceiling for award of contracts for all types of procurements. The rationale for the policy stems from past experiences where unscrupulous government officials and bidders connived to manipulate the procurement activities and to defraud the government of substantial funds that could otherwise be used for the delivery of important services. The policy was intended to address concerns related to abuse of discretion, lack of transparency, collusion among bidders, run-away bid prices, with the goal of minimizing opportunities for corruption and saving valuable government resources. 2. As a budgetary control mechanism, the use of the ABC as the maximum amount for contract award forces procuring entities to properly plan their procurement activities based on the approved budget ceiling and facilitates the allocation of specific amounts to each procurement contract allocating the extra resources for other priority expenditures of the agency. As a procurement control mechanism, the ABC gives all interested bidders equal opportunity to prepare their bids based on the ceiling imposed, allows them to decide on whether or not to participate in the bidding process, provides a basis for comparing the bid price submitted by bidders, disqualifying those who submit above the estimate, reducing the incidence of run-away bid prices, among others. The Government Procurement Policy Board (GPPB) of the GOP is satisfied with the result of the mandatory use of ABC in all locally funded contracts. 3. As an international standard, the use of the government estimate or the ABC as ceiling for contract award is not an acceptable practice as it discourages real market competition, compromises the quality of goods and services to be provided; and allows too much confidence on the validity and correctness of the estimate. The 2006 Country Procurement Assessment Report (CPAR) for the Philippines states that the ABC as ceiling for award is not an acceptable rule for foreign-funded contracts because it limits competition; imposes particular limitations in international bidding as international firms face higher costs than local ones and ABC does not always take this into consideration. The development partners believe that ABC should be abolished once the Government is satisfied that its current purpose in limiting collusive bidding has been served. Thus, they recommend that empirical data be gathered and presented to Government demonstrating that ABC-type price ceilings do not provide long-term benefits. The report recommended the conduct of three empirical studies: (i) a comparison of cost or engineers estimates with ABC to determine how reasonable the ABC limits have been in practice, (ii) an analysis of whether the current low participation of bidders is the result of imposing a bid ceiling, and (iii) a report on the effectiveness of the ABC rule in relation to contract administration and the quality of completed works. 4. In a meeting held on January 19, 2011 among representatives of the GPPB, World Bank (WB) and Asian Development Bank (ADB) at WBs Philippine Country Office, the GPPB mentioned that the GOP has prioritized an initiative to amend the GPRA in 2011, and that this may have the effect of changing the policy on the ABC. The GPPB expressed the need for well researched alternatives to the ABC as a procurement and budget control mechanism that may be proposed in the Philippine Congress and presented during the legislative debates. This study is carried out to address the concerns of the development partners as well as the GOP in the use of the ABC as ceiling for award. II. OBJECTIVES OF THE ASSIGNMENT 5. The overall objectives of the assignment are to analyze all the issues related to the introduction and use of the ABC as ceiling for award (including those raised by the

development partners), in light of the GOPs current procurement and budget systems; study and consider the original intent for the ABC; and present alternatives that both address the issues raised against the ABC and meet the GOPs need for effective procurement and budget controls. III. STUDY METHODOLOGY AND LIMITATIONS 6. In order to achieve the objectives of the study, the following methodologies were employed for data gathering: a. Research and review of current local and international procurement practices on the use of the cost estimate/(ABC) in procurement this covers procurement regulations, issuances and policies used by international institutions like the WB, ADB and JICA as well as the World Trade Organization (WTO), United States (US) and Commonwealth Governments, actual practices of major procuring entities in the government and private sectors and other secondary information useful to the study; b. Conduct of Focus Group Discussions (FGD) with various stakeholders three FGDs were conducted with specific stakeholders on May 31, 2011 and June 24, 2011 that included representatives of Bids and Awards Committees (BAC) of national government agencies and local government units and members of Civil Society Organizations (CSO) actively involved as observers in the procurement process. The list of participants to the FGDs are found in Annex A; c. One-on-one interviews with other stakeholders these entailed meetings with heads of BAC Secretariats, officials involved in the preparation of cost estimates and development and maintenance of price monitors and data bases in four major procuring entities, the Department of Education (DepEd), Department of Health (DOH), the Department of Public Works and Highways (DPWH) and the Procurement Service (PS), officials from the Commission on Audit (COA) and Department of Budget and Management (DBM), procurement management groups of private companies, among others. 7. Due to the limited time given for the conduct of the study, there was no opportunity to gather statistics or hard data or to review completed contracts to show the advantages, disadvantages or practices of various government procuring entities or to review contract administration practices and the effect of the ABC on the quality and timeliness of goods and services delivered. The WB funded a detailed study on the review of the ABC of three major procuring entities that was expected to provide more information on its impact but data gathering has not yet been completed. In view of the need to submit alternatives to the ABC in time for the opening of Congress and the preparation of the legislative agenda for the Legislative and Executive Development Advisory Council (LEDAC), this study was conducted ahead of the results of the WB funded report. A national procurement consultant conducted the interviews and completed the report while an international procurement consultant provided international perspectives and practices. 8. This Final Report incorporates and consolidates all inputs and comments received from participants of four meetings or workshops where the draft report was presented. These are: a. The GPPB Technical Working Group presided by DBM Assistant Secretary Ruby Alvarez on July 15, 2011 b. The GPPB Board presided by DBM Secretary Florencio Abad on July 29, 2011 c. The Philippine Development Forum (PDF) Sub-Working Group on Procurement (preliminary meeting) presided by WB Senior Procurement Specialist Cecilia Vales on July 19, 2011

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d. The PDF Sub-Working on Procurement (regular meeting) presided by WB Portfolio and Operations Manager Chiyo Kanda and DBM Assistant Secretary Ruby Alvarez on August 15, 2011. IV. HISTORICAL PERSPECTIVE 9. In order to better understand the rationale for the imposition of the ABC as ceiling for award for government contracts, a discussion on the evolution and history of the procurement regulations as well as surrounding issues and concerns related to its application are presented in this section of the report. These include the impact of the regulations on collusion among bidders, run away bid prices, the abuse of discretion of government officials, lack of transparency, capacity of government estimators to produce good estimates, among others. 10. The principal precursor of government procurement regulations was Presidential Decree (PD) 1594 prescribing rules and regulations for government infrastructure projects. This was signed by then President Ferdinand Marcos on June 11, 1978 to provide standard guidelines for the procurement of civil works projects funded by the national budget. The standard provisions were included in the discussions on detailed engineering where all government agencies implementing infrastructure projects were required to conduct specific preliminary activities prior to procurement. The first Implementing Rules and Regulations (IRR) included a specific provision on the preparation of the agency estimate (AE) which was kept secret by implementing agencies. It was observed, however, that more often than not, the AE was being leaked to favor certain contractors thereby encouraging collusion and manipulation of bid prices. As a result, government policy makers decided to announce the AE now called the Approved Agency Estimate (AAE) through bid advertisement for purposes of transparency in order to provide all bidders the opportunity to submit bids based on the AE in the mid 80s. The AAE was set as the upper limit for contract award with no lower limit. 11. At around the same time, small cartels of contractors particularly in the regional and district levels were starting to organize in order to corner the market for civil works contracts in connivance with unscrupulous government officials. The most notorious cartels of this era were the Pegasus and Lexus groups named after the sexy nightclubs where the contractors and government officials met to discuss the manner in which specific biddings were to be rigged. The groups were later joined and replaced by the Pajero group where contractors who were members of the cartel all owned the specific brand of luxury vehicle called Pajeros. These cartels were able to control the cost of civil works contracts, the profit margin for contract award as well as the contractors who would participate and win in contracts. While bid opportunities were announced according to the regulations, the government officials working with the cartels controlled the newspapers where the information will be published sometimes in small dailies with very limited circulation. 12. To address the issue of collusion among contractors, the IRR of PD 1594 was amended on April 13, 1988 where the AAE was to be finalized on the day of bidding after all bids were received and the same was kept confidential. The AAE was announced publicly before the various bids were read provided there were at least two complying bidders. However, members of the cartel managed to find ways to go around the requirements as many contracts were being awarded above the AAE. The IRR was further revised to impose a ceiling and a floor for the award of government contracts. The AAE was now the ceiling for award of civil works contracts, meaning no contracts were awarded above it. The floor was calculated as no lower than 70% of the Allowable Government Estimate (AGE). The AGE was computed on the day of bid opening and was calculated as one half of the sum of the AAE and the average of all responsive bids. This was introduced to minimize the incidence of collusion among bidders but implementing agencies found the formula too complicated to

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compute while some quarters questioned its integrity. In addition, the IRR included provisions where the officials of the implementing agency had the right to disregard unbalanced bids (whether frontloaded or with excessively high unit prices), reject bidders who previously failed to satisfactorily perform or complete any construction contract or prequalified on the basis of suppressed or false information in order to limit the number of awards to unscrupulous contractors. Heads of government agencies were also given the discretion to accept proposals involving completion time shorter than that stipulated in the bid documents. During this period, agency officials were also allowed to negotiate with the winning bidder to bring down the bid price further sometimes resulting in abuse of discretion. 13. On March 15, 1991, the IRRs of 1594 were once again amended stating that contract award was to be made to the bidder whose bid price was within the AGE or the AAE, whichever is higher or lower than 70% of the AGE. When all bids received were higher than 120% or lower than 60% of the AAE, the bidding process was declared a failure. In addition, an unbalanced bid was defined as a bid containing one or more major pay items that are 30% higher than the unit AGE (pay items representing at least 20% of the AAE) and allowed the award to unbalanced bid provided that the excess of the item bid price over 130% of the unit AGE was paid upon 80% completion of the entire project and full completion of the major pay item. This was established to further minimize the incidence of runaway bid prices and failed bids. However, the cartels still managed to go around all these regulation and continued to win contracts. 14. As a result of the complicated system of computing the contract award ceiling, the IRRs were again amended on August 12, 2000. The AAE was now known as the Approved Budget for the Contract (ABC) which was prepared by duly designated representatives of the agency and announced through advertisement or Instruction to Bidders. This was the ceiling for contract award and all bids higher than the ABC were automatically disqualified. Award was made to the bidder with the lowest calculated total bid price which passes the agency postqualification procedures and whose bid was now called the Lowest Calculated Responsive Bid (LCRB). 15. On October 8, 2001, Executive Order No. 40 was signed by then President Gloria Macapagal Arroyo to provide procurement regulations and procedures for all national government agencies for civil works, goods, supplies, materials, related services and consulting services funded by the national budget. The previous provisions on the Approved Budget for the Contract (ABC) for civil works were expanded in scope and were now applied to all other types of procurements to ensure uniform interpretation and application and to minimize opportunities for abuse of discretion and to promote transparency. Procurements financed from Official Development Assistance (ODA) and bilateral and other sources continued to utilize the procedures stipulated under the corresponding loan/grant agreement governing such funds. Hence, the ABC was now officially the upper limit or ceiling for the award of all types of procurement contracts. The same provisions were carried over to the GPRA. 16. A major flaw in the Philippine educational system particularly for engineers and architects is the absence of any formal training on cost estimating unlike in many developed countries, particularly in Europe, where the subject is taught in the universities and considered a profession called quantity surveying. A quantity surveyor is a professional working in the construction industry whose principal work is to determine the specific cost of a construction project as it relates to technical specifications and contract provisions. The quantity surveyor undertakes cost planning which forms the basis for the evaluation of bids. The qualifications of a good quantity surveyor are gained through formal education, specific training and experience. In the Philippines, the concept and profession was introduced only in the mid-80s in the private sector at the height of the building boom after the banking sector required more detailed cost estimates for the purpose of processing construction

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related loans. European consulting firms pioneered the work in the country for larger building projects and trained local engineers for work mostly in the Middle East. In the public sector, the concept of quantity surveying was not introduced or institutionalized. However, foreign assisted projects required consulting engineers to prepare detailed engineering studies that included the preparation of what is known as the Engineers Estimate (EE) or the estimation of the project cost. The net effect was that very limited capability was actually built among government cost estimators as the skill remained with personnel of the consulting firms. As a result, the reliability of the ABC prepared by government personnel remained questionable. The absence of clear guidelines on the preparation of estimates aggravated the limited training and exposure of government estimators. 17. Until very recently, there were incidents of differing ABCs, unit and bid prices obtained for civil works projects with similar conditions and scope of work in contiguous areas particularly for projects funded out of the Priority Development Assistance Fund (PDAF) or congressional pork barrel. Cases of bid rigging or collusive tendering prevail in many PDAF funded projects as legislators are given the discretion to identify projects and choose contractors and suppliers that would benefit constituents. Collusion may take the form of assigning contracts to favored contractors or suppliers, agreeing in advance who will submit the winning bid, paying off unsuccessful bidders or offering subcontracts or supply contracts to losing bidders, or bid rotation, where bidders take turns in winning contracts. It is difficult to detect collusion even when the ABC is the ceiling for contract award as unscrupulous contractors and government officials may have already rigged the bidding process so that only selected contractors participate and bid very close to the ABC. The absence of uniform and standard guidelines for the preparation of cost estimates works to the advantage of government estimators and contractors involved in collusion as hidden costs of corruption are imputed in the different items in the ABC. 18. The historical account of the many changes in policy and procedures with regards to the ABC as basis for contract award is a clear indication of the GOPs intention to constantly seek solutions to address issues of collusion, lack of transparency, favoritism, run-away bid prices and abuse of discretion. Prior to the passage of the GPRA, the Philippine procurement system was characterized by multiple laws, rules and regulations which were inefficient and prone to abuse inspite of adhering to the principles of competition and transparency. The GPRA served as an omnibus procurement law that would streamline the process in all types and levels of government procurement. One common feature of the fragmented regulations is the award of contracts to the lowest evaluated bidder regardless of type (goods, services, civil works or consulting services) which is carried over to the GPRA and is adopted as a standard and uniform procedure. This policy assumes that award to the lowest bidder will result in the efficient and prudent use of limited public resources but leaves the issue of quality of goods and services delivered and value for money at the hands of those who prepare the technical specifications and those who approve the delivery of goods and services or implement projects. It also assumes that the government as a specific market will create competition among suppliers, contractors and consultants and will attract certain types of bidders without regard to the fact that these bidders will follow a different level of pricing to cover the cost of doing business with the government. In the long run, government ends up paying for more as it gets what it pays for in value and quality. In addition, there are clear issues related to the imposition of this policy that need to be addressed. V. LITERATURE REVIEW 19. In addition to the historical perspective on the adoption of the ABC as ceiling for contract award, there were two previous studies conducted to understand the effect of the ABC on contract costs. These are: the Analysis of Bid Prices in Relation to Engineers Estimates

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(EE) and Approved Budgets for Sample DPWH Contracts; the Study of Contract Cost Estimates used as Approved Budget Ceiling and the advantages and disadvantages of using the ABC as bid price ceiling for public procurement. Some of the key findings of the studies are: (i) bid prices for the majority of foreign funded contracts for rehabilitation or construction projects are about 1.3 times higher than the would-be ABC, with smaller contracts falling at the range of 0.7 to 0.9 times the ABC, (ii) the result of the bidding for locally funded projects showed that bids are clustered just below ABC and the differences among the bids are generally less than 1%, and (iii) ABC computation does not consider the cost of money due to delays in payment, setting up of right of way, some taxes, costs of temporary works, and others. 20. In November 2004, the first study was conducted under funding from the WB as part of the 2006 CPAR to understand among others, the reasons behind the substantially high variances and discrepancies between the EE and the ABC and the Lowest Evaluated Bid (LEB) and to determine how similar situations can be further avoided in future projects. Based on a review of 164 foreign assisted and 33 locally funded contracts implemented by the DPWH from 2001 to 2004, the study showed that over 76 % of World Bank assisted contracts were above the ABC, majority between 10-20%, 99% of ADB assisted contracts, were above the ABC, majority between 20-30%, and 77% of JBIC assisted contracts, were above the ABC, majority between 20-30%. One of the reasons identified for the high variances between the LEB and the ABC is the absence of a ceiling on the allowable range of contract cost for award in foreign assisted projects. During the study period, the total difference between the EE and the LEB amounted to P 5.61B while that of the ABC and LEB was P 7.33B. In contrast, purely locally funded projects generated savings of P 53.91M as a result of requiring the ABC as ceiling for award. The major causes of the variance are the high direct costs (materials, labor and equipment) quoted by winning contractors of foreign assisted projects (over 50-100% more than the unit prices in the ABC) and higher indirect costs than the computations set by the BAC. Key conclusions to improve the bidding process and to minimize variances between the project cost estimate and the final contract price included: the need to consider a reasonable ceiling on the contract price; to establish clear cut guidelines on bid evaluation; to strengthen the system of checks and balances for ensuring compliance with bid evaluation procedures and to secure the EE to minimize leakage and possible manipulation of bids; to strengthen the capabilities of the implementing offices in the preparation of bid estimates; and the BAC Secretariat in evaluating bids. 21. In 2006, JICA commissioned C. Virata and Associates Inc., to conduct the second study on a review of road design and cost estimates of 16 ODA funded projects and 4 locally funded projects using feasibility, detailed design, bid evaluation, project monitoring and evaluation reports supplemented by key interviews and field visits. In the analysis of cost estimation of road projects, the lowest bids received for 13 of the 16 foreign assisted projects considered were 32% higher than the ABC. For all the 4 JBIC-assisted projects reviewed, the lowest bids received ranged from 28 % to 32 % above the ABC. The following were identified as causes of the variances between the ABC and the lowest accepted bid: a) downward adjustments in the Engineers Estimates on direct costs of various construction pay items made by the Bureau of Construction (BOC); b) the considerable lag time between the preparation of the ABC and the conduct of the actual bidding for some projects; c) underestimation of the real costs of doing business in the country; d) very high and unrealistic equipment operating efficiency adopted by the DPWH in calculating equipment outputs; e) unreliable information used by consultants in the sourcing and pricing of construction materials; f) non-inclusion of the cost of temporary works in governments estimate; g) payment of revolutionary tax as real cost; h) costs imposed by local government units (LGUs) on road access; i) cost of money/financing of bids due to delayed payment of progress billings; j) higher overhead costs due to delayed acquisition of right-of-way (ROW); k) high cost of insurance; among others. Key conclusion reached by the study is that the ABC, as currently formulated, is not a valid tool for assessing the reasonableness of bids

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received. The study recommended that the preparation of project cost estimates used as benchmark for determining the reasonableness of bids should be enhanced to make it a valid tool and to consider project viability as a possible limit to the reasonable cost of project. 22. In 2009, the World Bank competitively recruited a consulting firm to review contracts from 2005 to 2008 in DPWH, Deped and Department of Agriculture (DA), and to present the advantages and disadvantages of using the ABC as bid price ceiling for public procurement in the Philippines (the WB ABC Study). A Steering Committee composed of representatives from GPPB, JICA, ADB, the DPWH, Deped and the DA was created to review the results of the study but the consultants encountered difficulties in the accessing contracts in these agencies and the study is still in the process of completion. 23. The findings and recommendations in the earlier mentioned studies show the need to take an even closer look at the government policy of using the ABC as ceiling for award. The reasonableness of the ABC as well as the assumptions made in its computation is in question due to the significant differences in pricing for foreign assisted and locally funded projects. Cost estimates for foreign assisted civil works projects are prepared by consultants using more rigorous procedures and methodologies based on detailed engineering plans and specifications for the project while it appears that government engineers preparing estimates for locally funded projects use more lenient assumptions and approaches in the computation of the ABC. Contractors, on the other hand, submit higher bids for foreign assisted projects even for projects with similar items of work because they know that they have more opportunities to include undocumented costs and increase profit margin without the need to worry about working under an imposed budget ceiling. The strictness in the preparation of cost estimates for foreign assisted projects and the leniency in locally funded projects present risks that need to be balanced. VI. INTERNATIONAL PRACTICES 24. In order to put the issue of the ABC or cost estimate in the proper perspective, a review of international practices will now be presented to better understand the rational for the objection of international financing institutions (IFIs) for its use as ceiling for contract award and to learn how such practices are implemented in other countries. In the latest WB Procurement Guidelines for goods, works and non-consulting services issued in January 2011, the bid documents for works may indicate the estimated total cost of the contract but not the detailed cost estimates such as bill of quantities for International Competitive Bidding (ICB). ADB Procurement Guidelines do not allow disclosure of the cost estimate in both NCB and ICB procurements. In cases where the bid prices exceed the cost estimates, it may allow negotiation with the lowest evaluated bidder for a reduction of the bid price to meet the budget under certain conditions. Both the WB and ADB Procurement Guidelines stipulate that contract award shall be made to the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents and (ii) to offer the lowest evaluated cost. The same provisions are found in the JICA and JBIC Procurement Guidelines. The three international financing institutions do not accept the use of the ABC for ICB. 25. For National Competitive Bidding (NCB), the WB and JICA allow the use of procedures set forth in RA 9184 with clarifications and modifications. The WB NCB requirements allow the use of the ABC as ceiling for award subject to compliance with the following four conditions: (a) the bidding documents are obtainable free of charge on a freely accessible website; (b) the agency has procedures in place to ensure that the ABC is based on the Engineers Estimate (EE); (c) the agency has trained cost estimators estimating prices and analyzing bid variance; and (d) the agency has established a system to monitor and report bid prices relative to ABC and EE. The ADB NCB guidelines allow the publication of the

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ABC, ceiling price or other similar estimates, but do not permit its use in the evaluation or rejection of bids without its prior concurrence. 26. The donors also claim that the ABC rule imposes particular limitations in ICB because international firms face higher costs than local ones and the ABC does not always take this into consideration. International practice rejects such price control mechanisms because price control is inappropriate in a market system, where contract prices should be set through open competition. The 2008 CPAR states that ABC can actually encourage collusion among a small number of bidders. Thus, the development partners believe that the bid ceiling should be abolished once Government is satisfied that its current purpose in limiting the incidence of collusive bidding environment has been served. 27. International organizations such as the United Nations Commission on International Trade Law (UNCITRAL) and the World Trade Organizations (WTO) have issued templates for national procurement regulations suitable for governments in all stages of economic and other development. Both the UNCITRAL Model Law on Procurement of goods, construction and services with guide to enactment and the WTO Agreement on Government Procurement are silent on the announcement of the contract cost in the bid documents. The UNCITRAL Model Law, however, recommends the award of contract to the bidder with the lowest evaluated price meeting all the criteria required in the bid documents and subject to any margin of preference to be applied. 28. European Union (EU) Public Procurement Directives for the competitive process are also silent on disclosure of budgets or cost estimates including those for alternative contract modes such as dynamic purchasing systems (DPS), framework agreements (FA), competitive dialogue (CD), electronic auctions (EA), among others, although this would not prevent individual Member States from allowing it. Where price is the sole criterion, the contract is awarded to the lowest priced bid complying with the specified requirements and where most economically advantageous tender is the basis, the contract is awarded to the tender which best meets the relevant criteria that may include running costs, servicing costs, level of after sales service, technical assistance, technical merit, environmental characteristics. The same is true for Australian government procurement regulations. Commonwealth Procurement Guidelines (Australia) estimates the maximum anticipated value of the contract including options, extensions, renewals or other mechanisms that may be executed over the life of a contract and awards contracts to the bidder who satisfies the conditions for participation, is fully capable of undertaking the contract and submits the best value for money proposal. One common thread is that award is made to the bidder that satisfies the condition for participation and is capable of delivering the contract at the lowest evaluated bid price. 29. The Japanese domestic procurement regulations require the preparation of a target price to determine the threshold value of contracts and this is used as basis for the award of contract but the same is not publicly announced. Indonesias Kepress 80 signed in 2010 and its Model National Procurement Documents for goods, works and consulting services require procuring agencies to have its own cost estimates which shall be used as basis for evaluating the reasonableness of submitted bid prices. The agency estimate is published in the Invitation to Bid and Instruction to Bidders. Similarly, Thailands Procurement Regulations, 2545, provides for the creation of a Reference Price Determination Committee which shall be responsible for calculating the value of the goods or services to be procured. The reference price is announced in the Invitation to Bid and agencies may be exempted

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from complying with this requirement provided they secure approval from appropriate authorities. The Guidelines for Electronic Procurement, BE 2649, on the other hand, require the announcement of the estimated cost and uses the same as ceiling for award. 30. Centrally managed economies in Eastern Europe such as Albania and Estonia have specific guidelines in calculating the contract price in its government regulations. The regulations are silent on disclosure of the cost estimate and award is made to the bidder who meets the qualifications criteria specified in the tender documents and submits the lowest responsive offer. Countries like Bangladesh, Kenya and Pakistan do not specify if the contract cost is the ceiling for award. Cambodia announces the total contract price in its bid documents but uses it only as reference for evaluating bids. In all these countries, award is made to the lowest evaluated and responsive bidder. 31. Petrus van Duyne and Maarten van Dijck1 describe the operations of building cartels and organized crime in the Netherlands. As a result of a bid rigging scandal involving road contractors in the Netherlands in 2001, the Dutch government has decided to develop high quality cost estimates in their procurement process and do not accept bids over the ceiling or cost estimate. In the late 1970s, the US Justice Department prosecuted numerous cases involving the rigging of bids on state highway construction contracts and like the Dutch government refuses to accept bids over the ceiling. In a study conducted by Klitgaard2 on collusion in South Korea, the US Army attempted several approaches to address the entrenched culture of bid rigging in its contracts that included employing sealed competitive bidding and hiring its own cost estimators. In the end, it embraced the use of cost ceilings as an alternative to awarding contracts to South Korean contractors for its projects. 32. The United States General Services Administration (GSA) established to help manage and support the basic functioning of federal agencies and to develop government-wide cost minimizing policies, is now asking its bidders to lower their bids within the government cost estimate. Federal contracting rules encourage agencies to seek the best value but in truth award contracts based on the lowest cost for government procurements. This is in line with the US Government policy of cutting contract spending both for its regular procurements and for defense spending. The Office of Federal Procurement Policy has been encouraging government contracting officers to communicate better with industry before and after contract awards to better understand what is available and how it should be contracted3.

33. It appears from the information discussed above on international procurement practices involving cost ceilings that many countries do not use the estimated contract cost as basis for award but in countries that do, the principal reason for its adoption is to address the issue of collusion or bid rigging. In the Philippines, the policy of adopting the ABC as ceiling for award was adapted to limit abuse of discretion, collusion, run away bid prices but its reliability and reasonableness remain a major issue. Well-developed cost estimates are essential to ensure realistic budgetary resources are provided. VII. LOCAL PRACTICES 34. In order to better understand the manner in which the ABC as ceiling for award is implemented in government agencies, this section of the report will discuss the general provisions under the generic procurement manuals of RA 9184 as well as specific practices
1

Van Duyne, Petrus C. and Maarten van Dijck, All in the Dutch Construction Family, Cartel Building and Organized Crime 2 Klitgaard, Robert, Controlling Corruption, (Berkeley, University of California Press, 1988) 3 Chacko, Sarah, Feds Driving Harder Bargain at Procurement Table, (July 24, 2011)

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used in the preparation of the ABC in four major procuring entities, the Deped, DPWH and the DOH as well as the Procurement Service (PS). Interviews were also conducted with a private construction project manager and the procurement official of a large utility company to determine the method used for preparing their cost estimates. 35. Volumes 2, 3, and 4 of the Generic Procurement Manuals provide specific guidelines for the preparation of the Project Cost and the ABC in the preparation of the PPMP and the APP. Upon issuance of the Budget Call by the Department of Budget and Management (DBM), each government agency prepares the budget proposal taking into consideration the Work and Financial Plans (WFP) submitted by the end-user or operating units. Project Procurement Management Plans (PPMP) are prepared by these end-user units to support the agency plans and programs based on the WFP. The PPMP serves as a guide in the procurement and implementation process as it requires the end-user units to develop the project requirements, conduct the market survey and gather as much information about the goods, works or services required. The PPMP contains such information as the general description of the project/procurement, the procurement methods to be used, time schedule for each procurement activity, an indicative budget for the procurement at hand or the ABC itself. When the General Appropriation Act (GAA) is approved and the agency budget matrix (ABM) is more or less finalized, the end-user units are requested to revise the submitted PPMP for consolidation into the Annual Procurement Plan (APP) by the BAC. The APP serves as the basis for procurements that are crucial to the efficient discharge of government functions. Procuring entities have different practices and interpretation as to when the ABC is prepared. Some agencies prepare the ABC as inputs to the APP, while others submit an indicative budget in the APP but prepare the ABC prior to actual procurement or based on the program of work approved by the Head of the Procuring Entity (HOPE). Any future amendments to the GPRA may need to clarify the exact period when the ABC is prepared by the procuring entity as this has an effect on the actual budget as well as its reliability and reasonableness. 36. For goods and services, the generic manuals prescribe the inclusion of the following factors in the computation of the ABC: cost or market price of the product or service; incidental expenses like freight, insurance, taxes, installation costs, training costs, if necessary, and cost of inspection; cost of money, to account for government agencies usually buying on credit terms; inflationary factor, since the planning phase is usually done one year ahead of the actual procurement date; quantities, considering that buying in bulk usually means lower unit prices; and supply of spare parts and/or maintenance services, if these are part of the contract package. If the project or contract has a foreign component, a currency valuation adjustment factor is also recommended to address foreign exchange rate fluctuations between the planning phase and the actual procurement date. For civil works and consultancy services, the factors considered are: cost or market price of the product or service itself; incidental expenses like taxes, training costs if necessary, and cost of inspection; cost of money, to account for government agencies usually buying on credit terms; and inflationary factor, since the planning phase is usually done one year ahead of the actual procurement date. Most agencies implementing infrastructure projects use the DPWH Guidelines for the preparation of the ABC. Many participants in the Focus Group Discussions (FGD) conducted with representatives of national government agencies and local government units admitted that not all these factors are taken into consideration in the preparation of the ABC and the BAC may or may not exercise the option to review the ABC. There are no specific agency level guidelines for the preparation of the ABC for goods and services. A. DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS (DPWH)

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37. As the engineering arm of the government, the DPWH is responsible for setting the guidelines for the preparation of cost estimates for civil works contracts. DPWH procurements include: civil works construction, improvement and rehabilitation, office equipment and supplies and consulting services. The end-users or project management offices (PMO) prepare the cost estimates based on the guidelines provided under the appropriate Department Order (DO). For foreign assisted projects, the consultants usually prepare the engineers estimate which is reviewed and evaluated by the Bureau of Construction (BOC) depending on amount and usually adjusted downward. The downward adjustment is done by reviewing the submitted Engineers Estimate (EE) or the ABC against the Program of Work, strictly complying with the guidelines on indirect costs and revising estimates on items of work that appear high and unreasonable. The DPWH Guidelines divide the agency estimates into two parts: Direct Cost consisting of cost of materials (cost at source, transport, handling, and storage costs including allowance for wastes/losses); cost of labor (salaries, wages, living allowance and fringe benefits); cost of equipment (operated equipment rental based on ACEL rates, mobilization and demobililzation) and indirect costs which include overhead expenses (engineering and administrative supervision, transport expenses and per diems, office expenses, cost of premiums of insurances and bonds); contingencies, miscellaneous expenses, contractors profit margin and value added tax). The percentages of each of the indirect cost components vary from a maximum of 29% in the past to a minimum of 14% under the latest DPWH directive (DO 12 and 29). 38. The DPWH has a Construction Estimation and Procurement Management (CEPM) Module funded by the WB under National Roads Improvement and Management Project (NRIMP) 1 and 2. The system has two components: a cost estimation system using standardized estimating procedures, unit costs and inputs for all possible items of works for roads and bridges based on American Association of State Highway and Transport Organization (AASHTO) licensed system and a construction materials system that serves as a data base for prices of all possible construction materials used for roads and bridge construction that is updated on a quarterly basis by the District Engineering Offices (DEO). Both systems are linked to the DPWH Management Information System (MIS) and are intended for use by all Regional and District Offices. The cost estimation system is not operational due to the non-completion of the cost data sheets or detailed unit price analysis (DUPA) sheets that serve as inputs to the system. To date, only 52 work items out of over 500 have been completed but the BOC expects to complete the DUPA sheets by 2012. To facilitate its completion, the consultancy contract needs to be awarded under NRIMP 2. The data base for construction materials prices is now called the Construction Cost Information System that is managed and maintained by the BOC. The construction cost estimation system and the construction materials prices data base are now being used by the BOC for the review of the ABCs submitted by the Regional Offices. The BOC needs additional computer equipment in the monitoring, storage and processing of the data on prices received from the districts. The materials price data base also needs further validation. When fully operational in 2012, both systems can be shared with other procuring entities implementing infrastructure projects to provide a standard and organized system for estimating costs of road and bridge projects. 39. Interviewed officials from the Commission on Audit (COA) Technical Services Office (TSO) recommend the periodic and independent review of the procedures with regards to applied production/efficiency rates for equipment, labor productivity rates and application of indirect costs as these may be subject to manipulation by unscrupulous officials that may result in bloated or higher costs. The prices of construction materials at the district level need further validation as DPWH personnel may unnecessarily inflate such prices to increase the cost of projects. In addition, COA auditors also recommended the development of

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procedures to validate quantities of work reported as these may also be manipulated, padded and claimed during contract implementation. 40. As for goods and services, there are no specific agency level guidelines for preparing cost estimates and end users normally conduct a canvass that is verified by the DPWH Procurement Service. The same situation applies in the preparation of the ABC for consulting services as the DPWH has no standard system used. B. DEPARTMENT OF EDUCATION (DEPED) 41. The Department of Education (DepEd) is mandated to provide basic elementary and high school education for all Filipino citizens. It is organized into two major structural components: the Central Office and Field or District Offices. DepEd major procurements include: textbooks and instructional materials, school buildings and furniture, Information and Communications Technology (ICT) equipment and supplies, science and vocational laboratory equipment and materials. All ABCs are prepared by end-user units and depending on the designated thresholds for procurement are submitted to the Central or District Office BACs. The DepEd Procurement Service, as BAC Secretariat for the Central Office, reviews the ABC based on market survey as well as historical costs or studies. For procurements done at the District Offices, the ABC is reviewed by its own BAC. There are no written guidelines for the preparation of ABC by the end-user units for any of the procurements undertaken by the DepEd. There are, however, standards prepared by the Instructional Materials Council Secretariat (IMCS) for textbooks, the Physical Facilities and School Equipment Division (PFSED) for school building and furniture, National Science Teachers Instrumentation Center (NSTIC) for science and laboratory equipment and the Technical Services Division (TSD) for ICT equipment and services. For all other major procurements, the BAC creates a Technical Working Group (TWG) to conduct market surveys and validate estimates submitted by end user units. For these procurements, there are no specific guidelines and the factors identified in the generic procurement manuals are not generally followed or validated. DepEd cost estimates for school buildings are generally lower than those prepared by the DPWH as these are based on direct costs from the bill of quantities with a small amount included for indirect costs. The different end-user units discussed above have their own internal data bases for unit cost of work items and construction materials that are used for estimating purposes but the DepEd units are not ready to share these data bases with other government procuring entities. It is also notable to cite that the DepEd through its Textbook Count Program has worked with the CSO, Government Watch (G-Watch), to monitor the procurement and supply of more than a million textbooks each year. As a result, the cost of textbooks dropped from P 80-120 each to P 30-45. The average production rime had also dropped from 24 to 12 months and delivery error reduced to 5% on the average. C. DEPARTMENT OF HEALTH (DOH)

42. The Department of Health (DOH) is the principal health agency of the country that is
responsible for ensuring access to basic public health services for all Filipinos. DOH procurements include: drugs and medicines, medical equipment and supplies, construction and improvement of hospitals and centers for health and development, consulting services among others. The end-user units usually prepare the ABC and the BAC does not normally review the ABC. Under DO 2010-0200, nine clearing houses were created for specific types of procurements to review the reasonableness of the quantities, specifications and prices of the items to be procured. These are: a) the Administrative Service for office equipment and supplies, vehicle supplies and repairs, security, janitorial and messengerial services, among others; b) Bureau of Health Devices and Technology for health care equipment and devices; c) Information Management Services for ICT goods and services; d) Health Policy

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Development and Planning Bureau for consulting services; e) National Center for Health Facilities Development (Health Infrastructure Division) for major repairs of hospitals and construction design and supervision; f) National Center for Health Promotions for printing and audio visual supplies and equipment; g) National Center for Pharmaceutical Access and Management for drugs, medicines and pharmaceutical products; h) National Reference Laboratory for Environmental and Occupational Health, Toxicology and Micronutrient Assay for laboratory supplies and equipment; i) Procurement Service for all other procurements. For instance, the clearing house for drugs and medicines, the National Center for Pharmaceutical Access and Management (NCPAM), is also tasked to publish and monitor the prices of all drugs and medicines under the Generics Medicine Act. There are no written guidelines for the preparation of the ABC but the DOH Procurement Service is training the end-user to follow the standards set under the DOH customized procurement manuals. There are also no trained estimators. 43. Each of the DOH clearing houses has its own data base for the specifications and prices of the items they procure but this is available only to DOH personnel. The DOH Procurement Service also prepares a Procurement Price Monitoring Report for goods and services which is used as basis for reviewing further the reasonableness of the ABC. By 2012, the DOH will be ready to share the data base on drugs and medicines with other government agencies and all 70 centers for heath and development and 17 Regional Offices will be submitting the prices of specific goods and services procured to the DOH data base at the Central Office. There is, however, a need to discuss internally if these data bases unique to DOH can be shared with other procuring entities. The DOH Procurement Service reports the unusually low bids received for drugs and medicines due to the presence of more suppliers in the market. Hence, as a result of the competitive bidding process, the prices of major generic medicines have dropped by more than 50%. All locally funded procurements are awarded below the ABC and procurements funded by foreign assistance are usually within the ABC. In 2010, the total ABC of DOH procured items was P 735,936,283.88 with the awarded contract price amounting to P 426,592,974.34. This generated a total price difference of P 309,343,309.54 (42%). It is difficult to conclude that this amount is generated savings on the part of the agency as it may turn out that the ABC for the procurements are higher than the actual market price. D. PROCUREMENT SERVICE (PS) 44. The Procurement Service (PS) is mandated to operate a government-wide procurement system for common use supplies and materials, equipment and construction materials which can be economically purchased through central procurement and to administer the Government Electronic Procurement System (GEPS) in particular the virtual store and the electronic catalogue. The government-wide procurement system is being implemented by the GPPB, the Inter-Agency Bids & Awards Committee (IABAC) and the PS. There are no written guidelines or formula used for the preparation of the ABC or the unit prices of common use items found in the electronic catalogue. The price list and the ABC are derived from the last buying price, a market survey of at least 3 suppliers and the quantity of goods to be procured. As the PS buys in bulk and mostly from manufacturers and wholesalers, they are able to get lower prices for the goods procured than most agencies. The PS does not always use the lowest price as the basis for the ABC or the unit price in the catalogue but also consider their past experience with the bidders and compliance to stringent technical specifications. Such costs as inflationary factors, cost of delivery, transport and inspection and taxes and insurance are assumed to be factored into the bid price of suppliers. It maintains its own laboratories to test the goods and services for compliance to technical requirements and specifications. For non-common use items which they do not regularly procure, PS staff may also refer to prices found in the internet along with the other factors considered. The PS admits that the guidelines for the preparation of the ABC found in the

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generic procurement manuals are not usually followed because of the unique nature of their procurements. 45. The PS Purchasing Division has a Price Monitor that is updated on a quarterly basis. Their basis for determining the accuracy of the ABC is the result of the bidding itself. If they are able to get good prices (usually 90%) of all items bidded in a single meeting, they know the ABC is close to accurate. On the average, however, around 70% of procurements are awarded while 30% need to be rebidded. For items that need to be rebidded, the ABC and technical specifications are reviewed to find out the causes for failure of bidding. The appropriate adjustments are made on the ABC or the technical specifications based on the analysis. The PS has been experiencing fewer bidders participating in their procurement activities as well as the lack of cooperation from sellers on more accurate market prices. They observed that many suppliers downgrade the quality and specifications of products in order to keep the price stable particularly for products manufactured in China. This result in erratic movements of prices that make it difficult to set standards for estimating the ABC of goods procured. E. OTHER GOVERNMENT AGENCIES 46. Other government agencies and local government units who participated in the FGDs report that the ABC is usually prepared by the end-user unit and the BAC may or may not review the ABC. There are no standards followed in the preparation of the ABC by these agencies and the factors identified in the generic procurement manuals are not generally considered. For many NGAs and LGUs implementing civil works projects, the DPWH guidelines are applied. F. PRIVATE CONSTRUCTION PROJECT MANAGERS AND COMPANIES 47. Interviews were conducted with a construction project manager supervising work for private building owners here and abroad in order to comprehend the system followed in the preparation of cost estimates for private civil works contracts. Although there are no uniform or standard systems followed by private owners or project managers, the information on private practice can nevertheless provide insights on alternative means used for the preparation of the cost estimates. There are generally three types of budgets prepared for a construction project in the private sector. These are: a) the budgetary estimate which is used by the owner as basis for securing and mobilizing the necessary financing for the project; b) a design development estimate which specifies the computed cost items based on the designs and technical specifications for the project; c) the project managers estimate which is prepared from actual work breakdown structure, bill of quantities and specifications and used as reference for the evaluation of bids. The design development estimates and project managers estimates are prepared by trained and experienced quantity surveyors following very comprehensive procedures. The original owners budgetary estimate is disregarded in the preparation of the cost estimates that are meticulously prepared taking into consideration the actual requirements of the project and all possible factors that may arise in the course of actual construction. Direct costs usually comprise 65% of total construction cost while indirect cost is usually 35%. The contract is generally awarded to the contractor with the most reasonable bid in terms of experience and track record, construction methodology and resources and not to the contractor submitting the lowest evaluated bid price. Each item of work is reviewed against the reference price and the contractor is asked to clarify the bid. Only after the most reasonable bid has been selected does negotiation take place.

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48. For a major utility company procuring supplies, materials and services for supply and lay civil works projects, only accredited/pre-qualified vendors with sufficient technical, financial and construction experience are allowed to participate in the bidding process in order to maintain the quality and standards of completed projects at the most reasonable cost. The Technical Services Department prepares the detailed cost estimates for the procurement at hand based on experience with similar works and the technical specifications for the project and also conducts the detailed technical evaluation of the bids. The bandwidth for award of contract is +/- 20% of the company reference estimate. Bids are ranked based on the technical evaluation and award is made to the lowest complying bidder who has the right of first refusal until an acceptable bidder is found. 49. The survey of local practices show the differences in the manner by which the ABC is prepared by different government agencies, the presence or absence of procedures for its preparation as well as the disparity between government and private practice. The differing interpretations and practice in the preparation of the ABC may be due to the diverse types of procurements undertaken. However, for construction projects, government procuring entities generally follow the DPWH procedures awarding the contract to the lowest calculated and responsive while the private sector institutional owners such as condominium owners or developers do not always select the winning bidders based on price but on value for money and the application of value engineering practices. While there are clear procedures for contract award in the public sector, in the private sector, there are no fixed rules that are being followed. VIII. ADVANTAGES AND DISADVANTAGES OF THE ABC AS CEILING FOR AWARD 50. A good government estimate is a description and computation of the amount an agency is reasonably expected to pay for needed goods, services and works. It should be supported by factual or reasoned data and documentation and serves as basis for reserving or allocating funds for the actual procurement, as a benchmark for comparing costs or bids submitted by bidders, as basis for determining reasonableness of the price and completeness of the bid, detecting bidder buy-ins and identifying unbalanced bids. Cost estimation is a field of practice that can be simple to complex, depending on the requirements to be procured. Cost estimation methods for major civil works, consultancy services and equipment acquisitions are complex and require defined requirements, extensive market research and expert assistance. There are different approaches used in the preparation of the cost estimates and the estimator decides on the approach depending on the requirements, amount of data that the estimator has and the time frame for completion and delivery of the procurement. The estimator should be familiar with the market for the item, including prior prices, inflation, market conditions, quantity, existing and emerging technologies, and substitutions. The estimator should also be able to explain clearly the rationale used to develop the estimate and list any assumptions, methodology, and reference material used in developing the estimate. Standard elements of a detailed cost estimate should include direct costs of materials, labor and equipment that go into the manufacture/construction/completion of the final product as well as indirect costs such as overhead expenses, general and administrative expenses, materials handling rate, cost of money, insurance, profit margin including the cost of doing business with the government. All these factors that make a good government cost estimate are discussed in order to determine whether these are considered by the agency in the preparation of the ABC. By all standards and based on the data gathered, it appears that many of these factors are not taken into account when government estimators prepare the ABC or evaluate bid prices. 51. All the stakeholders consulted in this study were unanimous in their agreement that the ABC should be kept as ceiling for award. This is understood to mean that in their opinion, the

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objectives for its imposition as a procurement and budget control mechanism have been substantially met. Advantages identified are as follows: as a procurement control mechanism: it sets a specific amount for contract award; simplifies the bid evaluation process; allows very limited opportunities to exercise discretion in determining reasonableness of bid items; and minimizes run-away bid prices. Announcing the ABC in the Invitation to Bid also gives all interested bidders equal opportunity to prepare their bids based on the ceiling imposed; allows them to make an outright decision on whether or not to participate in the bidding process; and limits opportunities for collusion as competition is open to as many interested bidders as possible thus encouraging transparency in the procurement process. As a budgetary control mechanism, it fixes the maximum amount to be released by the DBM based on the ABC thus allowing the reallocation of extra resources for other priority expenditures of the agency. Stakeholders claim that awarding contracts above the ABC will cause problems to the agency as they will not know where to source the payment for the price differential or may jeopardize funding for other procurements. 52. The same advantages may turn into disadvantages as identified by the stakeholders under the following conditions: underestimated ABCs result in non-participation of bidders and failure of bidding thus increasing the cost or procurement and delaying the delivery of the necessary goods and services; conversely, overestimated ABCs provide opportunities for collusion and bid manipulation among a selected number of bidders and officials of the procuring entity thus encouraging graft and corruption and in cases where no such events occur, unnecessary appropriation of funds that could otherwise be used for other purposes. Rigid procedures in the evaluation of bids based on the ABC do not allow bidders to introduce innovations that may bring about value for money and to offer better alternatives to those found in the specifications. Poorly defined specifications and pricing may also result in substandard or low quality of goods and services delivered. In cases where there is intent to manipulate the bidding process, it may be difficult to spot collusion as bidders may have so skillfully orchestrated the preparation of bids very close to the ABC (which is in any event the result of imposing the ABC as ceiling for award). There is also the tendency to control bid prices for non-common use items with limited suppliers, and the reliability and accuracy of the cost estimates may remain questionable due to the lack of training of cost estimators and the availability of standards, guidelines and data bases for the preparation of more realistic estimates. 53. For standard off-the-shelf types of procurements such as common use items or routine security and janitorial services, the ABC may be easier to estimate as there are available data bases such as the electronic catalogue and the Phil-GEPs website that provide such information. However, this is not the case for other products and services that require more detailed, diverse or ambiguous technical specifications or where quality is a concern as such require further research or technical advice in its preparation. Examples of these include ICT or defense related goods and services. For civil works projects, the cost of major inputs such as materials, labor and equipment may be readily identifiable and calculable but the indirect costs as they relate to the specific conditions on site may vary. A one size fits all solution in terms of the guidelines for the preparation of the ABC may offer more disadvantages than advantages specifically for highly specialized products and services. 54. In an assessment of the procurement performance of 19 government agencies with WB portfolio in 2010 under the Agency Procurement Compliance and Performance Indicator (APCPI) system developed for the GPPB, three indicators were identified to measure the level of competitiveness of the government bidding process under the GPRA. These are: the average number of bidders submitting bids, the ratio of failed biddings against the number of total biddings processed and the ratio of contracts with only one bidder participating. These indicators were selected to determine the level of interest and participation of bidders despite the imposition of the ABC as ceiling for award and private sector confidence in its accuracy.

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Table 1 presents the results for the national average as well as the agencies earlier selected in the discussions on local practice, DPWH, DepEd, DOH and PS. Table 1. APCPI Competitiveness Indicators Average Ratio of Failed Bidding Ratio of Contracts No. of and Total Number of with Only One Bidder Bidders Biddings Processed Participating 5 5 1.0% 1.0% 2 4.2% 4.7% 10 1.0% 2.3% 2 5% 37%

Agency

National Average DPWH DepEd DOH PS

55. Clearly there was a rise in the average number of bidders from 2 in 2006 to 5 in 2009 based on the national average indicating an increased level of confidence in the government procurement processes. DPWH and DOH had sufficient number of bidders (5 and 10 respectively) as well as low levels of bid failure and single bidder participation. On the other hand, the PS and the DepEd had limited number of bidders and higher levels of failed bids and single bidder participation. This, however, does not necessarily correlate to the use of the of ABC as ceiling for award but could just be the result of the structure of the market for goods and services procured as DepEd and PS deal directly with manufacturers and wholesalers and procure in bulk. For local government units interviewed, the number of failed bids is an average 2% of the total number of procurements. IX. ISSUES AND CONCERNS 56. This section will attempt to identify the issues and concerns related to the use of the ABC as ceiling for award in order to better understand the differing point of views of various stakeholders and to arrive at reasonable courses of action to address such concerns. The discussions will cover the apprehensions laid out by IFIs, international and local practice. 57. From an economic point of view, procurement involves the purchase of supplies and goods from the market and, therefore, needs to be analyzed as a specific function within a market economy where the forces of supply and demand will produce the best or lowest price. Price is not the sole determinant in the choice of product or service but only one among many in the decision of what best meets the requirements of the purchaser. The result of relying on price would simply lead to the purchase of the cheapest and worst/lowest quality product. On the other hand, seeking to standardize goods or services into common specifications will lose any quality of performance variations and will inevitably result in specifying the lowest quality product or automatically discriminate among products. Where the price is fixed by the procuring entity (or even where the estimated price is disclosed publicly), the competitive process is fundamentally undermined. In these circumstances, competition generally means manipulating the schedules of prices (or price components in the case of a fixed price such as the ABC) in order to arrive at a cosmetic price (shaving off a percentage from one estimated price and adding to another4) which is hopefully lower than that of the competitors. This appears to be borne out by local practice as many bids received by procuring entities are clustered close to the ABC. At least two undesirable consequences may follow: (1) the estimated prices may be set so low as to make bids unrealistic, with the result that the contract will not be completed on time, at cost or at all; (2) the estimates are set too high, with the result that the successful bidders would make unwarranted profits at the expense of the public purse. It is for this reason that most
4

In countries which disclose estimated prices, this is often compounded by an additional habit of the government of allowing bid prices to vary from the estimated price only by a fixed percentage.

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countries that follow the model international procurement laws allow market forces to determine the price of goods or services to be purchased. While many countries prepare estimates of contract cost, these are not used as basis for award as market competition remain a better determinant on the accuracy of costs. Imposing a ceiling on contract cost as in the case of the ABC limits such market competition as it puts a huge burden on the accuracy of the cost estimates and allows price to dictate the quality of goods and services to be procured. This is why the major IFIs do not accept the practice of price control mechanisms such as imposing the ABC as ceiling for award as it limits market competition. 58. As discussed in Section 51 of this report, it may be easy enough to come up with reasonable cost estimates for standard off-the shelf procurements but this is not the case in more complicated types of procurements. For such types, coming up with accurate estimates acceptable to the government (ABC) has huge cost implications. Technologically, it necessitates the use of experts in the relevant field and the procurement of specialised consultants. Such services are generally available for foreign assisted projects but procuring entities do not have normally have the funds for this for procurement funded out of the national budget. For products where technology advances quickly (e.g. Information Technology) and where procuring entities are not generally exposed to specifications and usage, this will be very costly. In construction, prices of raw materials are more widely known but changes in supply, sudden shortages and the availability for products to certain bidders will be unknown and unpredictable. Other costs such as transport and insurance may be identified in general terms but not in relation to specific bidders. Other variable costs such as overheads and those issues related to moral hazard and adverse selection will never be known to the buyer. Since there is no budget set by the government for such activities, then it will always be a problem to arrive at accurate cost estimates and government estimating will remain a hit or miss activity. The development partners also contend that the ABC rule imposes particular limitations in international competitive bidding because international firms face higher costs of doing business than local ones and ABC does not always take this into consideration. On the other hand, if their naturally higher costs imply higher prices, then they would not be in a position to win the contracts anyway. There is no reason to provide international competitors with a preference based on higher transaction costs: the only issue is really whether the ABC is set so low as to prevent realistic and effective competition whether that comes from either domestic or international competitors. 59. In cases where bidders will sometimes try to accommodate the governments fixed prices even if they are unrealistic there will have to be compromise done in the contract and specifications in order to survive. This may be in terms of lower quality, longer lead times, poor after sales service etc. To cover these deficiencies, there may also be corrupt practices, i.e. collusion with government officers to ignore or conceal deficiencies, to grant time extensions or price escalations. The effect of unrealistically low fixed pricing will be to shift the focus of high quality bidders from the public to the private market, where they are also able to sell, leaving the public sector at the mercy of low quality bidders. To use the old adage: you get what you pay for. If the prices are unrealistically high, bidders will stay in the public sector and reap excessive profits. Clearly this is one area where the ABC as a ceiling may be abused. 60. The practice of fixing prices will not only have a significant effect on the competitive process but on the incidence of bribery. It may be assumed that, in a competitive bidding system, the winner will be the most efficient firm in the sense that he will be able to offer the lowest price. He has the ability to achieve the highest profit margin and, to the extent that he knows the level of competing bids in terms of efficiency, can value his bid so as to maximise his profit while keeping his price sufficiently low to secure the contract. Where the prices are more or less fixed by the government, his margin for manoeuvre is increased. He will have the highest profit margin and, assuming his better or at least equivalent quality; will be in the best position to win the bid. He will be able to shave the most off his price by offering the

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largest discount from the governments fixed price. He will also be in a position to offer the largest bribe. Since the government procuring official has the ability to set the price, he also has a greater possibility of extracting a personal benefit. He may negotiate with the bidder and extract a bribe equivalent to the discount to the government. It is quite possible that the same bidder would have won the contract under either a competitive bidding system or under a system in which bribery is the key to winning contracts. Development partners are also concerned about indications that some bidders are cornering markets or colluding to win bids. They believe that the bid ceiling should be abolished once Government is satisfied that its current purpose in limiting the incidence of collusive bidding environment has been served. 61. Other issues related to the use of the ABC as ceiling for award are: the inability to use output or performance specifications because the specifications need to be linked directly to the estimated input costs and prices and this could likely result in outdated or low quality products; the inability to estimate all costs of all bidders means ABC will always be either too high or too low (other than by accident): too high and winner makes windfall profit; too low and quality will suffer (or timeliness) in the short run; consistently too low and efficient bidders will leave the public market in favour of alternative private markets. 62. Local stakeholders interviewed identified eight issues and concerns related to the use of ABC as ceiling for award. The first and most important issue related to the accuracy and reasonableness of the ABC involves the lack of training and capacity building for cost estimators. Officials of end user units of procuring entities tasked to prepare cost estimates do not have any form of training on the matter as they perform such functions on an ad hoc basis with the probable exception of DPWH BOC personnel. As discussed earlier, the practice of quantity surveying has not been introduced in the public sector and the attendant training and other systems and procedures that are used in the profession are not available in government agencies. The second issue involves the absence of uniform standards and guidelines for its preparation particularly for common and non-common use items procured. Representatives of procuring entities claim that one of the primary reasons for the lack of confidence in the preparation of the ABC is the absence of such standards and they agreed on the need for common guidelines to be followed on setting such cost factors as acceptable profit margin, formula for computing inflation and cost of money, among others that will be used by all procuring entities. The third issue entails the absence of a system within the agency for the independent review of the accuracy of the ABC and for monitoring the consistency of its application among the different units as this is not provided for under the IRR of the GPRA or the generic procurement manuals. There appears to be no system of checks and balances in the preparation of the ABC as in many cases the BAC simply accepts the ABC submitted by the end user units. Similarly, the absence of sanctions or penalties for the preparation of over/underestimated ABCs is a fourth issue that needs to be addressed as the lack of accountability on the part of cost estimators encourages the practice of leniency. The fifth issue is related to the first four and is concerned with the absence of data or reliable data bases or references that can be used in the preparation of ABC. Procuring entities stress the need for such data bases in order to come up with more accurate cost estimates. The sixth issue may not be directly concerned with the preparation of the ABC but contributes to its problems as there are still many procuring entities who do not comply with the posting of bid opportunities and contract award in the Phil-GEPs and other processes that encourage transparency. The non-posting may continue to encourage collusion in agencies that would like to limit participation in procurement activities to selected bidders. The seventh issue concerns bloated quantities and costs of items of work or specifications that tend to increase the cost of projects due to lack of clear guidelines and training in its preparation and the attendant review that should follow its preparation. The eight issue identifies non-procurement related factors such as delayed payments on progress billings, cost of inspection and supervision, cost of doing business with the government, cost of compliance with documentation and procedures, cost of required bid,

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performance and warranty securities, interest on bank loans, loss of use of funds due to late payment that serve as disincentive to bidders. These may have an indirect impact on the preparation of the ABC but most certainly affect the bids submitted by contractors and suppliers. 63. While all stakeholders interviewed agree to maintain the ABC as ceiling for award, representatives of the private sector claim that their primary issue is the fairness and reasonableness of the ABC. The Philippine Constructors Association (PCA), the national group of construction contractors, would like to see provisions and procedures in the GPRA allowing bidders to clarify and challenge the ABCs prepared by procuring entities when they see the need for it. In addition, the private sector would like to find out if procuring entities are willing to accept alternative bids that offer better quality and faster service delivery. They cite the private sector practice of awarding contracts not to the lowest bidder but to the one that can provide the best value for money in terms of quality and delivery. Many good local contractors do not want to bid in government projects because of the questionable estimates as well as the tedious bidding processes that do not consider the cost of doing business with the government in terms of compliance to bureaucratic processes and delays in payments, among others. Representatives of non-governmental organizations (NGOs) and ordinary taxpayers interviewed, on the other hand, would like to see taxpayers money put to good use through better roads, schools, health facilities, among others. They would like to see corruption in government minimized in order that meager public resources can be used to provide for more facilities for the citizenry. Both sectors appear to favor the use of a value for money approach to government procurement than setting price as the principal criteria for the award of government contracts. 64. During the last GPPB Meeting held on July 29, 2011, no less than the Chairman, Florencio Abad, Secretary of Budget and Management, raised the importance of looking for alternative modes of procurement to meet the gaps in service delivery for school buildings and health centers and to facilitate award of procurement contracts to the private sector. He stressed the need to review government procurement procedures that will allow easy review of contracts. 65. In summary, from the issues and concerns identified by the development partners, procuring entities, the private sector and ordinary taxpayers on the use of the ABC as ceiling for contract award, there appears to be a common consensus on improving the current practices but there are also variances in the approaches and positions taken by these sectors. The IFIs maintain that market competition should dictate the price at which government contracts should be awarded. Government procuring entities and civil society organizations (CSOs) believe that the current status quo should be retained. The private sector and taxpayers, on the other hand, want to move to a value for money approach in the award of contracts. All sectors, however, are in agreement that procuring entities should come up with more accurate government estimates and address issues related and attendant to its preparation.

X. RECOMMENDATIONS 66. In view of the findings and conclusions arrived at in this study and the position of the government to maintain the ABC as ceiling for award, there is a need to present alternatives that both address the issues raised against the ABC and meet the GOPs need for effective procurement and budget controls as provided for in the terms of reference. For this purpose, two sets of recommendations are presented for the consideration of government policy makers and development partners. The first set of recommendations involves addressing the position of the development partners and the private sector to allow the market to dictate the

28

contract price and to transition into a value for money approach as practiced in other more progressive countries. It assumes that the best approach is to allow competitive forces to dictate the market price. The second set of recommendations entails responding to the position of procuring entities and CSOs to maintain the ABC as ceiling for award and to address issues relating to improvements in its preparation and accuracy. 67. It is important to point out that under both alternatives, it is necessary to have a cost estimate as a means of (i) achieving a budget and (ii) estimating the threshold value. The main issue is not with preparing an estimate but in believing that it should be the ceiling and in disclosing the budget in a way which encourages bidders to compete against the budget and not on the basis of the realistically meeting the requirements. Government decision makers from the GPPB and the procuring entities as well as development partners may consider some of the recommendations in its programs on procurement reforms. 68. The first set of recommendations, therefore, involves a scenario where the budget is kept solely as a reference point for choosing the appropriate procurement method and for evaluating bid proposals instead of using it as ceiling for contract award. It implies removal of the ABC as ceiling for award. These courses of action and its impact on the Philippine public procurement need more detailed studies as some have already been practiced in the past but have not succeeded in its implementation. Special emphasis should be given to identifying the reasons why these approaches failed in particular as it relates to collusion among bidders and in addressing such concerns. All the recommendations require further study and may be classified as activities that can be implemented in the medium (within 2-3 years) and long term (within 3-5 years). a. Keeping the budget confidential/announcing the budget although these have been practiced in the past, a budget rather than a cost estimate would allow more flexibility on the part of the procuring entity to receive different bids that are close to market prices for as long as the procedures are in place to safeguard its confidentiality; b. Using the budget as reference for bidding - this is will indicate roughly where the prices should be and provide a flexible budget ceiling. If all prices exceed the actual budget, then the procedure should be cancelled and the requirements reviewed in terms of specification, scope and timing in order to prepare more realistic requirements that are within the allocated budget. Alternatively, the procuring entity could proceed with the lowest priced bid but reduce the quantities/ units purchased or otherwise reduce the scope (e.g. time) to come within the budget. However, as pointed out by procuring entities, there will be difficulty in sourcing funds in case the contracts are awarded above the budget. c. Using ranges of contract price (e.g. +/- 20%) as basis for award - setting a range for contract will allow procuring entities to prepare budgets within the upper range and use whatever savings may be generated for other purposes but this will only encourage bidders to submit prices at the top of the range. What is really needed is an estimated price resulting from the range of estimated unit prices together with a confidential maximum budget. d. Using the value for money approach this will involve arriving at the right mix of quality and price and the application of value engineering and evaluation practices. Contracts may still be awarded based on the budget and will require more training and capacity building on the part of procuring entities to evaluate bids based on a value for money approach. Procedures need to be in place to ensure that abuse of discretion is limited.

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69. The Government recognised the lack of confidentially and the collusion between public officers and bidders as a serious problem and used the ABC as ceiling for award as one of the solutions offered. Given the potentially negative effects of the ABC, however, these first set of recommendations imply that the Government needs to deal with the issues of confidentiality, integrity and collusion head on. The ABC with its inevitable effect of clustering prices around or just below the ABC helps conceal any bid-rigging and would allow any cartel to be more easily policed by its members. 70. The second set of recommendations is based on the position taken by the government and the majority of stakeholders to keep the ABC as ceiling for award but is further broken down into two scenarios: one where the shortcomings on its use are ignored so that the recommendations refer only to methods which might make the ABC more accurate and the second where the shortcomings of the ABC are recognised so that the recommendations seek to alleviate some of the worst consequences of the ABC. 71. The first scenario where the shortcomings of the ABC are ignored address the issues identified in Section 60 of the report through the following proposed courses of action: Short Term (within one year) a. Development and implementation of credible standards and guidelines for the preparation of ABC for common and non-common use items. This is in response to the common finding on the absence of uniform standards and guidelines for estimating costs that will be used by procuring entities. The standards should provide more detailed formulae for the computation of profit margin, inflation, cost of money, cost of doing business with the government and other factors which are not normally taken into consideration by government estimators. b. Sharing of existing data bases of agencies such as the DPWH, DepEd, DOH and PS on prices to be used by other procuring entities. As discussed in the section on local practices, both the DPWH and the DOH are ready to share their data bases by 2012 but efforts must also be taken to assist these agencies in facilitating the availability and accessibility of information and in tapping other agencies with similar data bases. Efforts should also be considered in using the Phil-GEPs as possible repository or manager for all these data bases. In addition, the DPWH can be requested to share their cost estimation system and to prepare a template for the preparation of the Program of Work for civil works projects that can be used by all agencies and that can be posted in the Phil-GEPs website for purposes of comparing and referencing unit prices and items of work. c. Development and implementation of training programs for government cost estimators for all types of procurements. This is to address the issue of lack of training and capacity building. Training programs must be replicable in order to be able to allow more cost estimators particularly of major procuring entities to improve their skills and to arrive at more accurate estimates. Medium Term (within 2-3 years) d. Development of a system for the independent review of the accuracy and reasonableness of the ABC within the agency. This is based on the issue on the absence of an independent review mechanism to validate the accuracy of the ABC and for monitoring the consistency of its application. The services of experts such as quantity surveyors operating in the private sector can be tapped to provide this independent review and their services can also be used to provide the appropriate

30

training, data and support for government cost estimators particularly for large infrastructure projects. e. Imposition of sanctions and penalties on the wrong preparation of the ABC as well as non-compliance to the posting of bid opportunities and contract award. This is to address the issue of greater diligence, accountability and responsibility in the preparation of the ABC as well as in complying with existing regulations to post bid opportunities and contract award information. f. Development of clear guidelines and standards in the preparation and review of technical specifications for common and non-common use items as well as training of procuring entity staff in its use. While this may not be directly involved in improving the preparation of the ABC, unscrupulous officials of procuring entities may tend to bloat quantities or specifications unnecessarily increasing contract costs. The guidelines will also assist procuring entities to improve the preparation of technical specifications to obtain better value for its contracts.

g. Addressing non-ABC related issues such as payment, reducing layers of procurement red tape. This involves a host of non-ABC related concerns that impact on increased contract cost. Long Term (3-5 years) h. Introduction of quantity surveying as a tertiary course in local universities or colleges to enable the country to produce more quantity surveyors particularly in the public sector. This will help in improving the quality and cost of infrastructure projects.

72. The second scenario and set of recommendations refer to maintaining the ABC as ceiling for award and to taking into account its shortcomings. These proposals need further study and consideration in order to determine the types of procurement (complex) for which it can be applied. These recommendations will require the development of specific sets of implementation guidelines and capacity building for procuring entity personnel as well as bidders in order to be put in place. Medium Term (within 2-3 years) a. Set out the ABC against very specific quality parameters (inputs and specifications) or required outputs/performance and allow bidders to offer their best quality offer for the fixed price and explain the price effects. Competition would then be purely on quality/quantity up to the limit of the ABC. While this would work well with standardised equipment and routine maintenance or services contracts, it could also be used for more complex procurement since bidders have the opportunity of deciding how best they can meet the requirement. The output would also need to be realistic when compared to the budget and bidders would need to explain their bids or offer alternatives. b. Set out the ABC against specific quality parameters and allow alternative bids (or variant bids) based on minimum technical specifications. This would at least enable bidders to make offers based on output or performance criteria and still remain within the ABC, thus enabling much wider competition on quality. As discussed earlier, this will entail very specific guidelines on the evaluation of alternative bids in order to ensure that abuse of discretion or manipulation is avoided.

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c. Accept the reality that ABC amounts to fixed budget contracting and simply state the ABC and the required outputs/performance and ask bidders to provide their best quality offers for the fixed price offered. Competition would then be purely on quality/quantity up to the limit of the ABC. 73. One way to determine if these second set of recommendations will in fact improve procurement is to conduct a pilot test in the procurement of some foreign-assisted projects funded either by the ADB or the WB where there are fewer opportunities for vested, political or other interests to thrive and where the controls are more stringent. Preliminary guidelines on the evaluation of quality parameters and alternative bids can be developed and later improved based on the lessons learned from the pilot that can be implemented on wider level among procuring entities. Procurement personnel will need to be trained on the preparation of quality based inputs and technical specifications, cost estimating, bid evaluation and contract supervision and implementation in order to ensure capacity building. On this basis, training modules can be further developed for use on a wider scale, once it is found that it is a reasonable and better alternative to the current practice. 74. In any case, whether the first or second set of recommendations are selected, the GPPB will still need to address the short term recommendations discussed in Section 69 of this report in order to strengthen capacity of procuring entity cost estimators in preparing more reliable ABCs. As an interim measure, these proposals can be included as part of the Action Plan for the next CPAR. In addition to this and in order to provide more informed decision on the alternatives provided under the second set of recommendations, more detailed studies need to be undertaken on the viability and acceptability of the alternatives and how these can be implemented in the context of the Philippine public procurement system. Earlier CPAR recommendation to conduct a study on the effectiveness of the ABC rule in relation to contract administration and the quality of completed works as it relates to such policies as no price escalation and limited variation orders is encouraged.

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REFERENCES

Asian Development Bank, Preparation and Presentation of Cost Estimates for Projects Financed by the Asian Development Bank, April 20, 2008 Asian Development Bank, Procurement Guideline, April 2010 C. Virata and Associates, Study on the Design and Analysis of JBIC ODA-Loan Assisted Projects in the Philippines, 2006 Department of Health, Department Order No. 2010-0200 Department of Public Works and Highways, Department Order No. 12 series of 2011 Department of Public Works and Highways, Department Order No. 29 series of 2011 Department of Public Works and Highways, Department Order No. 55 series of 2010 European Union, Introduction to the EU Procurement Rules European Union, Public Procurement Guidelines Competitive Process, European Union Asia Interuniversity Network for Teaching and Research in Public Procurement Regulation, Comprehensive Bibliography on Public Procurement Law and Regulation Government of Albania, Public Procurement Law of 2006 Government of Australia, Commonwealth Procurement Guidelines, December 2008 Government of Bangladesh, Public Procurement Act of 2006 Government of Indonesia: Kepress 80: Government Guidelines for the Procurement of Goods and Services, August 2010 Government of Kenya, Public Procurement and Disposal Act of 2005 Government of Thailand, BE 2535, Regulations of the Office of the Prime Minister on Procurement Japan International Cooperation Agency, Procurement Guidelines Klitgaard, Robert, Controlling Corruption, (Berkeley, University of California Press, 1988) Office of Government Commerce, Disclosure of Budgets in the Course of Procurement Office of Government Commerce, Early Market Engagement: Principles and Examples of Good Practice Office of Government Commerce, Government Procurement Code of Good Practice for Customers and Suppliers Office of Government Commerce, Value for Money Policy Principles Organization for Economic Cooperation and Development, Guidelines for Fighting Bid Rigging in Public Procurement Organization for Economic Cooperation and Development Policy Roundtables, Collusion and Corruption in Public Procurement, October, 2010 Organization for Economic Cooperation and Development, European Union and Support for Improvement in Governance and Management, Albania Public Procurement System, May 2009 United Nations Commission on International Trade Law, Model Law on Procurement of Goods, Construction and Services with Guide to Enactment Van Duyne, Petrus C. and Maarten van Dijck, All in the Dutch Construction Family, Cartel Building and Organized Crime World Bank, Guidelines: Procurement of Goods, Works and Non-Consulting Service by World Bank Borrowers, March, 2010 World Bank, Philippines Country Procurement Assessment Report, Manila, 2008 World Bank, Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004, revised October 1, 2006 and May 1, 2010

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ANNEX A LIST OF PARTICIPANTS TO THE FOCUS GROUP DISCUSSIONS

A. National Government Agencies May 31, 2011 1. Director Estanislao C. Granados Jr. Procurement Service, DBM 2. Director Aida N. Carpintero Department of Education 3. Director Ardeliza R. Medenilla Department of Public Works and Highways 4. Ms. Ma. Victoria S. Gregorio - Department of Public Works and Highways 5. Ms. Minda Marie Gugol Department of Health 6. Mr. Joel M. Baccay - Department of Health 7. Ms. Nelly S. Ibo Bureau of Internal Revenue 8. Mr. Inocencio Castillo Department of Environment and Natural Resources 9. Ms. Maritee A. Espanol Local Water Utilities Administration 10. Ms. Marilou A. Reyes Commission on Audit 11. Atty. Jose Luis C. Syquia Asian Development Bank 12. Mr. Samuel Haile Selassie World Bank 13. Mr. Dennis Lorne S. Nacario Government Procurement Policy Board 14. Mr. Andy G. Matula - Government Procurement Policy Board 15. Ms. Liza Vega - Government Procurement Policy Board 16. Alicia A. Tiongson Consultant B. Local Government Units May 31, 2011 1. Engr. Angelito De Guzman Valenzuela City 2. Mr. Renato A. Abutan Province of Cavite 3. Engr. Victorina M. Capuloy Province of Batangas 4. Mr. Andresito Gonzal Province of Rizal 5. Engr. Rowell Radovan Province of Quezon 6. Ms. Rosandre T. Abrantes Province of Laguna 7. Mr. Jose Mar Pilar Quezon City 8. Atty. Rolando Rivera Province of Rizal 9. Ms. Galia Ismakova Asian Development Bank 10. Atty. Jose Luis C. Syquia Asian Development Bank 11. Mr. Samuel Haile Selassie World Bank 12. Mr. Dennis Lorne S. Nacario Government Procurement Policy Board 13. Mr. Andy G. Matula - Government Procurement Policy Board 14. Ms. Liza Vega - Government Procurement Policy Board 15. Alicia A. Tiongson Consultant C. Civil Society Organizations June 24, 2011 1. Mr. Ricardo Rivera Sangguniang Laiko ng Pilipinas 2. Ms. Mary Mariano Concerned Citizens of Abra 3. Mr. Anthony Septino Procurement Watch 4. Ms. Riza Halili Procurement Watch 5. Mr. Telebert Laoc National Citizens Movement for Free Elections 6. Atty. Jose Luis C. Syquia Asian Development Bank 7. Mr. Samuel Haile Selassie World Bank 8. Mr. Dennis Lorne S. Nacario Government Procurement Policy Board 9. Ms. Liza Vega - Government Procurement Policy Board 10. Alicia A. Tiongson Consultant

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ANNEX B List of Persons Interviewed

Name of Agency Name of Respondent A. Department of Public Works and Highways 1. Procurement Service Ardeliza Medenilla 2. Management Information Elizabeth Yap Service 3. Bureau of Construction Aris Doroy B. Department of Education 1. Procurement Service Aida Carpintero Adonis Barroquias 2. Physical Facilities and School Luis Purisima Equipment Division 3. Technical Services Office Paul Soriano C. Department of Health 1. Procurement Service Teresita Vera D. Procurement Service Estanislao Granados Jr. E. Commission on Audit 1. Technical Services Office Joseph Anakay F. Private Sector 1. Asian Technicon Construction Felicitas Pio Roda Managers 2. Maynilad Water Services Esperanza Raymundo Teodoro T. Encarnacion Position Director Director Division Chief Director Division chief Division Chief Division Chief Director Director Director President Procurement Official Consultant

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