Open Contracting and Beneficial Ownership Transparency (MW0006)

Brief Description of the Commitment

Enhanced Open Contracting to improve transparency and reduce opportunities for procurement malfeasance through open tendering; Institutionalizing (legislation/regulation) and operationalizing (collecting, publishing, verifying and using) beneficial ownership transparency for all legal entities in Malawi engaged in public procurement.

Problem Definition

1. What problem does the commitment aim to address?

The commitment will address the following governance problems:
1. Grand corruption by public servants including malfeasance such as awarding contracts to business entities whose beneficial owners are themselves, family or associates;
2. Collusion and fraud in public procurement involving state (Public servants and governing politicians) and business actors to rig the public procurement system to their mutual benefits;
3. Rigging of the public procurement system by removing any meaningful competition among bidders especially when procurement methods other than single sourcing are used which enable different business entities belonging to the same shareholders to compete against each other;
4. Procurement monopolies and cronyism whereby certain families dominate public procurement through their business outfits and effectively disproportionately feed off the state and effectively ‘capture the state’
5. Collusion involving price fixing which distorts the operation of the market to determine the correct value of goods and services being procured and defeats the principle of value for money.
6. Verification of compliance with the MSME Public Procurement Order especially to check big companies participating in public procurement under the MSME order through fronting MSMEs.

2. What are the causes of the problem?

1. Non-disclosure of beneficial ownership of business entities: The law in its current format requires businesses to declare and register directors of business entities as legal owners of the entities. Beneficial owners are left out and recent experiences show clearly that addressing or avoiding the problems of procurement monopolies and the specter of state capture, the registration of business entities with the Registrar General as well as the registration with the Public procurement ad Disposal of assets Authority and bid documents must require disclosure of beneficial owners of the business entities participating in the public procurement system.
2. Frequent or normalized use of exclusionary procurement methods especially restricted tender and single source which provide opportunities for various procurement malfeasance and in recent times have proved to be the most effective ways through which procurement monopolies have been created and have also catalyzed the phenomenon of state capture by business elements.

Commitment Description

1. What has been done so far to solve the problem?

1. Introduced vetting of public procurements of high value by the Anti- Corruption Bureau (ACB) but the vetting process has institutional and operational weaknesses so much that it does not detect all or some procurement malfeasances;
2. In 2012, Government introduced downstream vetting of contracts by the Government Contracts Units (GCU) in OPC but it is sometimes by-passed by MDAs and is accused of delaying procurements;
3. PPDA Regulations to address opacity in the public procurement chain including providing guidance on dealing with conflict of interests and other malfeasance but compliance and enforcement of the regulations in a context where the PPDA is centralized but public procurement is decentralized is problematic;
4. Legal requirement for procuring entities to seek authorization (‘No objection’) from the PPDA to use exclusionary methods of procurement such as single sourcing. However, compliance, enforcement and quality of due diligence have been problematic as evidenced by the continued occurrence of procurements with problematic issues.
5. The PPDA has stepped up efforts to curb corruption by partnering Deloitte’s Tip Offs Anonymous, an ethics hotline where informants can report malpractices. Deloitte’s Tip Offs Anonymous has been offering the service for over 13 years and its core competency is the ability to keep informants’ identity anonymous. Deloitte submits the tip-offs with a report to concerned institutions to investigate but does not monitor the conclusion of the cases. Through the partnership, PPDA receives and considers reports on flouting procurement procedures, conflict of interest, disclosure of sensitive and privileged information, corruption, kickbacks and collusion, contract and procurement fraud and fast-tracking of registration processes and overriding policies, among others.
6. PPDA is in the process of establishing an E- Procurement System that will revolutionize procurement. This five-year project is being financed by the World Bank under the Digital Malawi Project.

2. What solution are you proposing?

1. Malawi’s Companies Act (and associated corporate affairs regulations) and public procurement laws are strengthened by including provisions to mandate the collection and open publication of beneficial ownership information of all companies. This, coupled with publishing the list of beneficial owners of companies that engage in public procurement will address the problem of procurement monopolies that have arisen through companies with a shared beneficial owner competing for contracts with each other. Likewise, the bids must contain the names of the beneficial owners which will appear in bid evaluation reports, Notices of Intention to Award and the Contract Award Notices published in widely read newspapers and the PPDA website .This will allow the citizens, civil society organisations and other non-state actors to ventilate the decisions made by the public officers especially when certain rules or principles like competition or value for money are violated.
2. Adoption of and instilling principles of Open Contracting in the public procurement process to increase transparency. This will minimize or completely stop the abuse of exclusionary procurement methods i.e. Single source and restricted tender.
3. Adopt and transition to centralized e-procurement to be managed by the PPDA to foster transparency and accountability hence promoting integrity in public procurement.

3. What results do we want to achieve by implementing this commitment?

The implementation of this commitment is expected to enhance efficiency, transparency, accountability and competitiveness in public procurement. The following output level results will be achieved:
a. Strengthened legal framework that require registration and disclosure of beneficial owners of companies.
b. List of beneficial owners published online and other media outlets and accessible to the public for accountability and transparency.
c. Paradigm shift to more open and competitive electronic public procurement process.
d. Increased citizen monitoring of public procurement through civil society organisations who will now be able to monitor cost-effectiveness in public spending and detect red flags for corruption, and generally support accountability in public spending.
e. Increased corruption prevention in public procurement through vetting of bids and beneficial ownership by the ACB.
f. Increased ethical conduct of officers in the public procurement profession as the mechanism will prevent public money ending up in private pockets of public officials; will detect and prevent unlawful arrangements among companies in public procurements and will prevent illusionary competition in tender procedures among companies with same beneficial ownership.

Commitment Analysis

1. How will the commitment promote transparency? How will it help improve citizens’ access to information and data? How will it make the government more transparent? The list of beneficial ownership will be proactively shared to the public through the PPDA website and other channels and will be available upon request under the Access to Information Act. The publication of the list of beneficial ownership coupled with increased open tendering and contracting will promote transparency which is necessary for accountability in public procurement.

2. How will commitment help foster accountability? How will it help public agencies become more accountable to the public? How will it facilitate citizens’ ability to learn how the implementation is progressing? How will it support transparent monitoring and evaluation systems? The procuring entities will be more accountable in the utilization of public funds because there will be more scrutiny from the public including civil society organisations due to easily accessed information on public procurements. The citizens will be sensitized on how to access the list of beneficial ownership from the PPDA and other contractual documents using the PPDA Act and the Access to Information Act. Access to information on huge public procurements will foster monitoring of public procurements by oversight bodies like the Anti-Corruption Bureau, the Auditor general, Parliamentary Oversight Committees, and civil society organisations.

3. How will commitment improve citizen participation in defining, implementing, and monitoring solutions? How will it proactively engage citizens and citizen groups? The commitment is envisaged to catalyze the participation of civil society in the process of developing the relevant amendments to the law. Once the amendment Bill will be published by the Ministry of Justice or Clerk of Parliament, it will trigger Civil society organisations and private sector associations including the MCCI to consider the Bill and develop their inputs and positions on the Bill and engage authorities such as the Ministry of Justice or the Legal Affairs Committee of Parliament on appropriate amendments to the Bill. The legislative process of the Malawi Parliament has a few points that invite public inputs into proposed legislation that is under consideration by Parliament. In particular, the Legal Affairs Committee of Parliament is expected, as per the Standing Orders of Parliament, to call for inputs into the Bill from the public and to hold a public hearing on the Bill as part of Parliament’s consultative process . Furthermore, civil society organizations can prepare their own bill and present to Parliament for consideration as a private bill or may present a petition to Parliament regarding the Bill The private sector is particularly targeted by the reform in this commitment. Upon publication of the first version of the Bill, Peak business associations at macro and sectoral levels, will be specifically asked to prepare and submit their views and suggestions on the Bill either before it is introduced in Parliament or during its consideration by Parliament. The disclosure of the list of beneficial ownership and the competitive open tendering processes and contracts will increasingly open public procurement thus stimulate public interest and activism against malpractices in the procurement cycle from advertising of tenders, evaluation of the bid documents, offering and signing of contracts and implementation, monitoring and evaluation of performance of the contractors.

Commitment Milestones

Requirement for the publication of the list of beneficial ownership of companies incorporated into the procurement law. [Legal provisions that make the publication of the list of beneficial ownership mandatory.]

Proactive disclosure of information of public procurement. [Public disclosure of beneficial owners of companies]