Competitive bidding - the best way
M Bakri MusaPublished: Oct 28, 2004 4:37 PM | Updated: Jan 29, 2008 6:21 PM
The government is finally acknowledging the obvious - it is being milked in its many privatisation projects. Recognising the problem is a necessary first step toward solving it, but it is not enough. There must be a willingness to learn from past mistakes as well as from those who have done it right.
The central lesson is that only though open competitive bidding can the government get the best prices and the most efficient vendors. This is the most difficult lesson for our government officials to grasp.
A more fundamental question is the proper role of government. Should it, for example, be concerned with supplying cars and building homes for civil servants? I see no compelling reasons for sparing or insulating our civil servants from such daily concerns. Nor does the government need to provide these perks, there is no shortage of applicants for the civil service.
Saying that savvy investment bankers and private contractors outwitted government negotiators, as Deputy Prime Minister Najib Abdul Razak admitted recently, is a lame excuse. It also does not reflect well on our civil servants.
Although we cannot expect them to be knowledgeable in all fields, as professionals they should know their limitations and thus be smart enough to seek outside help. You may not know anything about building a house, but you can consult various architects and contractors and ask for multiple bids. That is, you do the equivalent of shopping around. This is elementary; housewives do it all the time.
When seeking private contracts, the government must be open to competitive bidding if it is to pay fair prices for a decent job.
The government is finally acknowledging the obvious - it is being milked in its many privatisation projects. Recognising the problem is a necessary first step toward solving it, but it is not enough. There must be a willingness to learn from past mistakes as well as from those who have done it right.
The central lesson is that only though open competitive bidding can the government get the best prices and the most efficient vendors. This is the most difficult lesson for our government officials to grasp.
A more fundamental question is the proper role of government. Should it, for example, be concerned with supplying cars and building homes for civil servants? I see no compelling reasons for sparing or insulating our civil servants from such daily concerns. Nor does the government need to provide these perks, there is no shortage of applicants for the civil service.
Saying that savvy investment bankers and private contractors outwitted government negotiators, as Deputy Prime Minister Najib Abdul Razak admitted recently, is a lame excuse. It also does not reflect well on our civil servants.
Although we cannot expect them to be knowledgeable in all fields, as professionals they should know their limitations and thus be smart enough to seek outside help. You may not know anything about building a house, but you can consult various architects and contractors and ask for multiple bids. That is, you do the equivalent of shopping around. This is elementary; housewives do it all the time.
Spanco affair
Take the example of Spanco, the company that maintained the 4,800 cars supplied to senior civil servants. The contract is so outrageously expensive that the company apparently willingly renegotiated it and easily lopped off RM20 million from its original RM100 million annual price tag.
At the original price, the company was charging about RM20,800 per car per year. That paid for a lot of oil changes.
No one knows what is the right or fair cost of a contract because companies differ in their efficiency, cost structure, and acceptable profit margins. To a company already servicing many cars (for example, a car rental company or major dealership) the added cost of maintaining the extra cars would not be that much. It already has the basic service stations and mechanics in place, thus its marginal costs would be lower as compared to an entirely new company that would have to build everything from scratch.
Alternatively, the government could contract directly with the manufacturer and get a huge fleet discount. Indeed, manufactures of luxury cars (the class given to civil servants) often include in the purchase price the cost of maintenance for the first few years.
The only way to get the best price is to seek open competitive bidding from as many vendors as possible. Cost plus and negotiated contracts have their place, but not in such routine matters. America's space programme, where no one can anticipate all the variables and unknowns, is a good example of a successful cost-plus or negotiated contract.
Welcome multiple bidders
To prevent collusion, the government should welcome as many bidders as possible, including foreign ones if need be. The present practice of limiting contracts to local or Bumiputera vendors only may be good for them but it is bad for the nation. Not only will that result in unnecessary bloated costs, it is no way to make these vendors competitive.
Estimating the cost of a contract is as much art as science. Even if the government was to have competent personnel, they could still be very wrong. Those civil servants are after all not active in and are often insulated from the marketplace, they cannot possibly keep track of changes in the market.
Many years ago, the United States government auctioned off its vast tracks of forests in the Northwest. It invited bidders from as far away as Japan.
Despite having well-trained and seasoned professionals in its service, The government's best estimate of the value of the lumber was still vastly below the final selling price. In the end the taxpayers, meaning the public, benefited. Only an open bidding system could determine the actual market price.
Malaysian officials do not have to go far to learn how to undertake effective privatisation. Simply cross the causeway. If that is not an exotic enough destination, visit Britain. Study its privatisation projects, especially those carried out during the Thatcher administration.
To date the government's answer to bloated privatisation projects is to cancel them, as with the double railroad scheme from Johor Baru. That is an important infrastructure for expanding the Port of Johor.
After its initial bloated cost of RM41 billion drew the wrath of then prime minister Dr Mahathir Mohamad, the price suddenly and miraculously dropped to RM14 billion. Instead of cancelling it, I would have opened up the bidding. No telling what the actual price would have been.
Even with transparent competitive bidding, the government still has to be wary. A few years ago California deregulated its electricity market, believing that open competition would drop the price.
The reality was that the few suppliers conspired to create shortages and thereby drove the price up, gouging the consumers. They had all conveniently shut their generators for 'maintenance' at the same time during peak hours! Fortunately the government was vigilant, and those culprits are now being prosecuted.
Dodgy contracts
The bloated Spanco contract is part of a much larger problem. Hundreds of contracts are given out annually, from school computer labs to highway constructions. In their totality, they cost the nation a tidy bundle, funds the nation can ill afford to waste. This is also not the way to prepare our contractors and vendors for the competitive global marketplace.
The more fundamental issue is whether the government should be in the business of maintaining civil servants' cars? Would it not be more efficient to simply raise their salaries and let them decide how to spend that extra money? Instead of spending its RM100 million to maintain cars, the funds could have been more usefully spent on schools. The surprise was that such large outlays were never subjected to parliamentary scrutiny.
Unfortunately that kind of rationalisation cannot be had through competitive bidding. The leaders themselves must have some sense of the nation's pressing priorities. Leaders must have a sense of accountability when spending public funds and resources.
The central lesson is that only though open competitive bidding can the government get the best prices and the most efficient vendors. This is the most difficult lesson for our government officials to grasp.
A more fundamental question is the proper role of government. Should it, for example, be concerned with supplying cars and building homes for civil servants? I see no compelling reasons for sparing or insulating our civil servants from such daily concerns. Nor does the government need to provide these perks, there is no shortage of applicants for the civil service.
Saying that savvy investment bankers and private contractors outwitted government negotiators, as Deputy Prime Minister Najib Abdul Razak admitted recently, is a lame excuse. It also does not reflect well on our civil servants.
Although we cannot expect them to be knowledgeable in all fields, as professionals they should know their limitations and thus be smart enough to seek outside help. You may not know anything about building a house, but you can consult various architects and contractors and ask for multiple bids. That is, you do the equivalent of shopping around. This is elementary; housewives do it all the time.
Spanco affair
Take the example of Spanco, the company that maintained the 4,800 cars supplied to senior civil servants. The contract is so outrageously expensive that the company apparently willingly renegotiated it and easily lopped off RM20 million from its original RM100 million annual price tag.
At the original price, the company was charging about RM20,800 per car per year. That paid for a lot of oil changes.
No one knows what is the right or fair cost of a contract because companies differ in their efficiency, cost structure, and acceptable profit margins. To a company already servicing many cars (for example, a car rental company or major dealership) the added cost of maintaining the extra cars would not be that much. It already has the basic service stations and mechanics in place, thus its marginal costs would be lower as compared to an entirely new company that would have to build everything from scratch.
Alternatively, the government could contract directly with the manufacturer and get a huge fleet discount. Indeed, manufactures of luxury cars (the class given to civil servants) often include in the purchase price the cost of maintenance for the first few years.
The only way to get the best price is to seek open competitive bidding from as many vendors as possible. Cost plus and negotiated contracts have their place, but not in such routine matters. America's space programme, where no one can anticipate all the variables and unknowns, is a good example of a successful cost-plus or negotiated contract.
Welcome multiple bidders
To prevent collusion, the government should welcome as many bidders as possible, including foreign ones if need be. The present practice of limiting contracts to local or Bumiputera vendors only may be good for them but it is bad for the nation. Not only will that result in unnecessary bloated costs, it is no way to make these vendors competitive.
Estimating the cost of a contract is as much art as science. Even if the government was to have competent personnel, they could still be very wrong. Those civil servants are after all not active in and are often insulated from the marketplace, they cannot possibly keep track of changes in the market.
Many years ago, the United States government auctioned off its vast tracks of forests in the Northwest. It invited bidders from as far away as Japan.
Despite having well-trained and seasoned professionals in its service, The government's best estimate of the value of the lumber was still vastly below the final selling price. In the end the taxpayers, meaning the public, benefited. Only an open bidding system could determine the actual market price.
Malaysian officials do not have to go far to learn how to undertake effective privatisation. Simply cross the causeway. If that is not an exotic enough destination, visit Britain. Study its privatisation projects, especially those carried out during the Thatcher administration.
To date the government's answer to bloated privatisation projects is to cancel them, as with the double railroad scheme from Johor Baru. That is an important infrastructure for expanding the Port of Johor.
After its initial bloated cost of RM41 billion drew the wrath of then prime minister Dr Mahathir Mohamad, the price suddenly and miraculously dropped to RM14 billion. Instead of cancelling it, I would have opened up the bidding. No telling what the actual price would have been.
Even with transparent competitive bidding, the government still has to be wary. A few years ago California deregulated its electricity market, believing that open competition would drop the price.
The reality was that the few suppliers conspired to create shortages and thereby drove the price up, gouging the consumers. They had all conveniently shut their generators for 'maintenance' at the same time during peak hours! Fortunately the government was vigilant, and those culprits are now being prosecuted.
Dodgy contracts
The bloated Spanco contract is part of a much larger problem. Hundreds of contracts are given out annually, from school computer labs to highway constructions. In their totality, they cost the nation a tidy bundle, funds the nation can ill afford to waste. This is also not the way to prepare our contractors and vendors for the competitive global marketplace.
The more fundamental issue is whether the government should be in the business of maintaining civil servants' cars? Would it not be more efficient to simply raise their salaries and let them decide how to spend that extra money? Instead of spending its RM100 million to maintain cars, the funds could have been more usefully spent on schools. The surprise was that such large outlays were never subjected to parliamentary scrutiny.
Unfortunately that kind of rationalisation cannot be had through competitive bidding. The leaders themselves must have some sense of the nation's pressing priorities. Leaders must have a sense of accountability when spending public funds and resources.
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