Thailand Public Procurement

Overview: Procurement Cases and

Design Problems

Sirilaksana Khoman
National Anti-Corruption Commission,
Bangkok, Thailand

Presented at the
ASIA PACIFIC PROCUREMENT PARTNERSHIP
INITIATIVE (PPI)
1st Sub-Regional Meeting (East & Southeast Asia)
Hanoi, Vietnam, 30 November - 01 December, 2010

1
 The long and winding pipeline
Minister‟s discretion

Waste water treatment

project
 Questions

 What problems are encountered in

government procurement in Thailand?
 What are the causes of the problem?
 What can be done to alleviate the problems?

3
 World competitiveness report assessment
7 2. Procurement based on
1. G-procurement technology and encouragement of
provides necessary innovation
goods and services
Average for
7
developing countries

Score 1 – 7 (best)

Thailand
0

7 3. Policies and
contracts neutral
among firms
7

5. No bribes
connected with 4. New governments honor commitments
procurement projects
made by previous regimes
7 4
“Special payment” as percentage of value of government contract
Source: Adapted from Saovanee Thairungroj et.al. (2010)
“Special Payment” Year (percent of respondants)
(% of value of
contract) 2001 2003 2009
0% 3.8 0.4 3.9
Less than 6 % 18.0 27.9 34.3
6 - 10% 11.0 36.1 16.7
11 - 15% 4.8 10.1 0.9
16 - 20% 2.8 0.4 0.9
More than 20% 2.3 0.2 0.3
Don’t know 57.5 25.1 43.0
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 Problems
 Loopholes and opportunities for corruption
 Inefficient use of public funds
 Lowest price
 Delays

 Cumbersome rules

6
 Incidence of transparency problems
 High risk areas:
 Ad hoc emergency projects, such as relief of
natural disasters
 National security projects that require secrecy
 Repair and maintenance projects where difficulties
occur in assessing work required
 Non-durable items that are used up
 Large projects where the returns are high

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 Risks at each stage of procurement
 Project initiation

 Technical specifications and reference prices

 Canvassing suppliers

 Tendering process

 Contract design and management

 Verification and acceptance of work

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 Main Causes
 Institutional and legal framework
 Patron-client network and corruption rings
Causes: Institutional and legal framework

 Proliferation of regulations and amendments

 Only one has the status of an Act; exemptions
abound
 Little incentive to serve efficiency goals

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 Institutional Framework

 No central purchasing agency

 Comptroller-General‟s Department, established
7 October 1890
 Office of the Auditor-General, established 20 July 1932
(transformed from inspection department, formerly the
Royal Audit Office set up in 1875, became an
autonomous and independent statutory body in 1999
after the 1997 Constitution
 Ministry of Interior
 State enterprises and public organisations

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 Procurement laws and regulations in Thailand?
 Office of the PM Regulations B.E. 2535 (1992) amended 6
times (latest: 2002)
 Office of the PM Regulations regarding Electronic
Procurement B.E. 2549 (2006)
 Ministry of Interior Regulations regarding procurement for
local administrative organisations B.E. 2538 (1995); 2548
repealed.
 Large state enterprises (such as PTT, EGAT, Thai
Airways) and public organisations established under their
own Act have their own procurement regulations (based on
the OPM Regulations of B.E. 2535)
 Act regarding public tendering offenses B.E. 2542 (1999)
covering both public officials and private sector
 Regulation of the Audit Committee on Fiscal and
Budgetary Discipline B.E. 2544 (2001)
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 The 6 tendering methods in the OPM
Regulations B.E.2535 can be classified into two
groups:
 Without competition: Special method, Special Case
method, and negotiation
 With competition: Price search, Open bidding and
open bidding through electronic means.
 Tendering method
 6 methods are specifed: negotiation, price search,
open tendering, special method, special case
method, and open electronic tendering
 Methods determined by value thresholds:
 Negotiation for procurement of less than 100,000
Baht
 Price search for procurement between 100,000
Baht and 2 million Baht
 Open electronic tendering for procurement over 2
million Baht

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 Tendering method

 Method determined by conditions:

 Special case method used by government agencies
specified in LAO regulations given the following conditions:
 when the LAO is the producer or hirer as approved by
the Prime Minister
 when there is a law or a Cabinet Decision approving
purchase or hiring, including other agencies specified by
law or by Cabinet decision, such as the purchase of
pharmaceuticals (Article 61)
 Method determined by value threshold and conditions:
 Special method for procurement for which there is
justification (Article 23 and 24) for procurement above
100,000 Baht 15
 Thresholds for authorisation
 Negotiation, price search, and open tendering:
 Head of department: not exceeding 50 million Baht
 Permanent Secretary: 50 – 100 million Baht
 Minister: more than 100 million Baht
 Special method (Articles 23, 24 similar to GPA
Article XIII)
 Head of department: not exceeding 25 million Baht
 Permanent Secretary: 25 – 50 million Baht
 Minister: more than 50 million Baht
 Special case method:
 Head of department able to approve without limit, with prior
approval of the Prime Minister or Cabinet
 Thresholds for authorisation: LAOs
 PAO: President: not exceeding 100 million Baht, Governor: above 100
million Baht
 Pattaya City: Pattaya City Manager: not exceeding 100 million Baht,
Governor: above 100 million Baht
 Municipality (1) Municipality Council: Mayor not exceeding 100 million
Baht, Council: not exceeding 300 million Baht, Governor: above 300
million Baht
(2) Mayor: mayor not exceeding 300 million Baht, Governor: above
300 million Baht
 Value Thresholds (for special method, procurement from ad hoc subsidy,
domestic loan, aid, and foreign loan)
 1. PAO Governor: above 10 million Baht
 2. Pattaya City Manager: not exceeding 10 million Baht, Governor:
above 10 million Baht
 3. Municipality (1) Council: mayor: not exceeding 10 million Baht,
Municipality Council: not exceeding 20 million Baht, Governor: above
20 million Baht
(2) Mayor: mayor: not exceeding 20 million Baht, Governor:
above 20 million Baht
 For special case method: no limit
 Tambon (sub-district) Administration

 Chairman of the Administration Committee can authorize

without limit, except for conditions under Articles 44 and 45
 Chairman can approve amounts not exceeding 50 million Baht
 Tambon Administration Committee: 50 – 100 million Baht
 District Officer: 100 – 200 million Baht
 Provincial Governor: above 200 million Baht
 Special method, procurement using subsidy, domestic loans,
foreign loans, and foreign aid
 Chairman: not exceeding 5 million Baht
 Tambon Adminstrative Committee: 5-10 million Baht
 District Officer: 10-20 million Baht
 Provincial Governor: above 20 million Baht
 Special case method: Chairman can approve without limit
 Tambon (sub-district) Administration

 Chairman of the Administration Committee can authorize

without limit, except for conditions under Articles 44 and 45
 Chairman can approve amounts not exceeding 50 million Baht
 Tambon Administration Committee: 50 – 100 million Baht
 District Officer: 100 – 200 million Baht
 Provincial Governor: above 200 million Baht
 Special method, procurement using subsidy, domestic loans,
foreign loans, and foreign aid
 Chairman: not exceeding 5 million Baht
 Tambon Adminstrative Committee: 5-10 million Baht
 District Officer: 10-20 million Baht
 Provincial Governor: above 20 million Baht
 Special case method: Chairman can approve without limit
 Thai OPM regulations
GPA tendering tendering method

1. open tendering 1.Negotiation

2. selective tendering 2.Price search
3. limited tendering 3.Open bidding
“insofar as is strictly necessary where, for
- 2 step open bidding
reasons of extreme urgency brought about by (Technical bid and price bid)
events unforeseeable by the procuring entity, the
goods or services could not be obtained in time 3. Special method
using open tendering or selective tendering;” 4. Special case method
5. Electronic bidding (Ministry
of Finance)
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 Central Government Procurement by Method, FY 2005-2009

Method 2005 2006 2007 2008 2009

(%) (%) (%) (%) (%)

Negotiation 17.79 14.78 13.89 14.94 17.05

Selective tendering/search 21.52 16.08 13.89 11.98 12.01

Open tendering 30.71 26.90 16.83 10.71 9.35

Special method 12.28 11.58 14.10 16.98 17.03

Special case method 7.64 5.81 7.21 8.24 8.57

e-Auction 10.07 24.85 34.07 37.15 35.98

Other 0.00 5.75 7.09 6.24 6.07

Total 100.00 100.00 100.00 100.00 100.00

Open tendering + e-auction 40.79 51.74 50.91 47.86 45.33

Source: calculated from Comptroller-General's Department data

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Ministry Open tendering Other tendering
and e-auction methods

1. Industry 3.80 % 96.2 %

2. Commerce 8.74 % 91.26 %

3. Transport 68.30 % 31.7 %

4. Tourism and 78.33 % 21.67 %

Sports
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Calculated from Comptroller-General‟s data, 2009
 GPA Article X Technical Specifications and Tender
Documentation

 A procuring entity shall not seek or accept, in a

manner that would have the effect of precluding
competition, advice that may be used in the
preparation or adoption of any technical
specification for a specific procurement from a
person that may have a commercial interest in
the procurement.
 Similar provisions in Thailand, but enforcement
is a problem, especially with projects involving
very advanced technology.
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 Article X Technical Specifications

 2. In prescribing the technical specifications for the

goods or services being procured, a procuring entity
shall, where appropriate:
(a) specify the technical specification in terms of
performance and functional requirements, rather than
design or descriptive characteristics;

 Not specified in Thai regulations (example: 4000 buses)

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 Remedies?
 E-procurement: competition or collusion, cost
savings?
 Reverse auction: opposite views
 Procurement committees
 Citizen/stakeholder participation and
monitoring
 Problems with practice or design
 Assessment of transparency in
E-procurement
Announcement Time Supplier
period for tendering qualifications
(3-30 days)

Announcement at G- E-auction
Procurement website Award of
1179 projects in 2009 contract
with preliminary
information

1.00 > 30 days, 0.75 between 16- 30 days, 0.50 between 7-

15 days, 0.25 < 7 days, and 0.00 if no announcement or
announcement after tender date minus 0.25 if track record of
supplier inappropriate
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 Results
% projects
60
54.6
50

40

30 29.3

20
12.2
10
3.1
0 0.8
0 0.25 0.5 0.75 1
Score 27
 Selection of supplier
 Bid rigging or bid collusion - bidding rings
Sub-contract bid rigging
Bid suppression
Complementary bidding
Bid rotation
 Corruption ring in 2002-2003 – longan pledging
Provincial
Assistance Sale of non-
Committee คชก. PWO อคส./MOF อตก. redeemed
produce
Acceptance point Dried longan
* Queue skipping fee producer
*inflated
estimates of
*substitution Quality verification contract
production of rights * A/B grade becomes AA
*Bid collusion
Producers/ *Falsifying/substit
cooperatives
Leasing of private uting dried longan
silo/warehouse
* same company
*sub-standard packaging
*non-existent stock
*siphoning of produce
Pledge price from warehouse
BAAC ธกส. AA 72 Baht/kg.
A 54 Baht/kg.
B 36 Baht/kg. 29
 Corruption ring in 2004
* Por Heng not qualified to bid (misconduct/malfeasance)
Department of *bidding price of 19.75 Baht/kg (higher
Agricultural Por Heng Inter Trade Company than competitors) – corruption right
Promotion from the choice of supplier
*No delivery of dried
longan of 49,985.41 tons

inflated
QC Grading Point of QC Warehouse
substitution acceptance
estimates of
of rights CMU. *fraud for drying CMU *nonexistent Export
production Purchase
point of
.
Producer fresh longan *substandard
quality
Substandard quality
* resold at
low price

Krungthai อ.ต.ก.
Bank Marketing Organisation for
Farmers (MOF)

Check
payment

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Patron-Client Network and Corruption

Relationships among members within

the Patron-Client Structure
(a) Vertical Cooperation:
exchanges of resources
and services
(b) Horizontal Rivalry

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 Rivalry between Clans/ „Puak‟ or Sub-Clans,
Choosing Clan Affiliation
Fighting each
other to control
the resources or
Clan A to be promoted Clan B
higher in the clan
Providing Providing
services and resources
political to the client
support to in his own
the patron in sub-clan
the sub-clan
A1 A2
B1 B2

choose choose
People choose clans according to the
perceived benefits which could depend on
member size and resources of the clan

The poor and the under-privileged People with

who are not accepted into any clan independent
are left without resources and
source of
protection
power
 Corollary
 Procurement projects likely to be
shared among members of the group
 Politically, members evaluate actions
or policies as being beneficial or
detrimental to the group or sub-
group‟s interests
 Vicious self-perpetuating circle
 Nature of „interest groups‟ or „puak‟
 Groups/clans/puak are collective entities: their members (local
politicians and office holders, supporters, followers) share an
identity.
 puak consists of personal relationships, and are integrated by a
leader who had been instrumental in building up the group (and
who can „deliver‟ resources including a certain number of votes at
election time, number of people for ad hoc protest rallies)
 Knowing that one belongs to the same puak encourages
communication and cooperation. Belonging also provides safety,
under the protection of the „mosquito net‟ that the group provides.
 Conversely, there is suspicion of people from other puak, as well as
people whose affiliation is not clear.
 Groups can be unstable as some clients may make their own
contract with the patron, and this can even breed hostility and
rivalry between sub-groups
 Cost and benefit calculations favor remaining in a group if
you do not have independent source of power
 In order to „deliver‟:
 Key players are placed in the bureaucracy to carry out key
tasks
 Provincial political groups and influential families not only
try to capture local political positions, but also try to build
bases of support in the bureaucracy and in the police force.
 This is one of the reasons why being a government MP is
so important: they are able to lobby ministers and
ministerial officials to put their people in important
administrative positions.
 Bureaucrats also lobby their local MPs to use their
influence to obtain transfers and promotions. Such a
service is reciprocated at a later point, perhaps during
election campaigns.
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 Flows within Patron-Client Networks in Thailand

Bureaucracy Politicians
B C or P

B1 B2
C1 C2 P3

P1.1 P1.2 P2.2 P2.3

B1.1 B1.2 B1.3 C3 C4 P2.1

N1.2.1 N1.2.2 N2.2.1 N2.2.2

Notes: B = bureaucrats, C = capitalists, P = politicians, N = non-politicians

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What changed in Thailand: the 7 C‟s
 Constitution
 Concentration of political power
 Crisis of 1997
 deCentralisation
 Civil Service reform
 Consumerism
 Corruption

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 1997 crisis: technocrats discredited
 “The first lesson of economics is scarcity. There
is never enough of anything to satisfy all those
who want it.
 The first lesson of (populist) politics is to
disregard the first lesson of economics”

 Thomas Sowell (paraphrased)

 “Quasi-fiscal” measures
 TRT used “quasi-fiscal” measures more than any
other government
 Normal budgetary discipline circumvented
 Proper evaluation, feasibility studies, and
scrutiny absent -> allocation of funds to high
risk groups/projects -> moral hazard
 Easy manipulation by politicians
 Tendency to disregard fiscal burden and
consequences for macroeconomic stability
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 Quasi-fiscal budget as a proportion of total government budget
and GNP

2002 2003 2004

Quasi-fiscal budget (million Baht) 103,669.0 295,993.0 569,597.9

% of GNP 1.9 5.0 8.7

% of total government budget 10.1 29.6 49.0

GNP 5,446,043 5,930,362 6,576,023

Total government budget 1,023,000.0 999,000.0 1,163,500.0

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 Legal reform
 Amendment of the NACC law: whistle-blower
protection.
 Procurement law: will be proposed
 Strengthening of complaints mechanism,
oversight, procurement audits.
 Other initiatives

 Membership of the WTO‟s GPA.

 Ratification of the UNCAC; membership in
OECD Anti-Bribery Convention?
 Integrity pacts with private sector, encouraging
integrity pacts among professional and business
associations, eg. medical suppliers, construction,
supply chain, involving civil society.
 Pro-active, pre-emptive anti-corruption action
 Benefits of GPA membership
 Transparency
 Probably more efficient use of government budget

 Stimulates fair competition

 Helps honest and efficient suppliers

 May lead to industrial growth and development

 Possible opportunities for Thai suppliers to access

GPA member procurement markets

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Benefits in terms of transparency
1
3 Increased
1. Foreign suppliers efficiency in
Increased use of
number government
of bidders budget
2
2. Increased
transparency

4
3. Opportunities
for Thai suppliers
Access to foreign
in foreign markets markets

44
44
Examples of procurement cases initiated by foreign
governments
 2005: US Department of Justice and SEC fined Invision
Company for bribing Thai official in the CTX explosives
detection device case
 2008: Japanese Government prosecuted Nishimatsu
Construction Co for allegedly bribing Thai officials in case
of BMA’s drainage tunnel project
 2009: Los Angeles court convicted defendants in the
Bangkok Film Festival bribery case

45
45
 Other initiatives

 Pro-active, pre-emptive anti-corruption

action
4,000 „NGV‟ buses – approval process,
technical specifications, lack of competition
Difficulties in designing procurement system
 Multiple objectives of government procurement
 Designing system that aligns with personal
incentives
 Same behavior/ opposite motives
 Strict conformity
 “Special method”
 Lowest price
 Detailed specifications
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 Conclusions
 Causes of problem: legal and institutional
framework, network relationships of patrons
and clients
 Remedies:
 strengthening of legal and institutional structure and
measures, including whistle-blower protection;
 Pro-active, pre-emptive anti-corruption action

 Civil society and stakeholder engagement; integrity

pacts
 possible membership in international agreements on
procurement 49
ADB support for research?
 Remedies: unanswered questions
 E-procurement: competition or collusion, cost
savings?
 Reverse auction: opposite views
 Procurement committees
 Citizen/stakeholder participation and
monitoring
 What are the appropriate intervention points?
 Problems with practice or design
Need research to sort out the issues: ADB role?
 Ultimate goal of procurement
 Use a country‟s resources efficiently
and effectively
Lack of capacity

Corruption

 E-procurement e-government

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