Probity and Financing of Large Projects - Essay Example

Running head: Probity and Financing of Large Projects The Importance of Probity in the Tendering Process and Financing of Large Infrastructure Projects in Dubai Name Course Instructor May 1, 2010 The Importance of Probity in the Tendering Process In recent years, probity has proved to be an essential element of the tender process. Because it is fueled by public skepticism of private involvement in public enterprise, its use in many countries has ensured a transparent process which is fair and honest. However, a disadvantage of probity is excessive probity elements which can cause a loss of focus in project objectives. On the other hand, probity is important because its resultant audit can reveal useful information. Results of the New Ticket System (NTS) tender probity audit in Victoria, for instance, indicated areas which had a conflict of interest (Victoria Government, n.d.). However, in most countries, probity is crucial in the tender process. The tender procedure in any country is a sensitive process which must involve the interests of all stakeholders, primarily the public who pay taxes that fund public projects. Consequently, systems which are incorporated should ensure transparency and fairness, and include checks and balances to deter favoritism and conflicts of interest. The use of a probity auditor, guided by rules laid set out by a code a practice, can meet this need. Probity is an essential tool where the public views the tender process with skepticism. It is particularly relevant where the process needs to be kept in check. Further, the probity auditor’s report can reveal weaknesses that can inform a better process. However, in a process where probity is instituted, the elements must be kept to a minimum in order to avoid a loss of focus in project objectives. If excessive criteria are included in the process, it can kill innovation and may overtake the selection process. In all tender procedures, a code of practice is also vital in order to inform all participants on the rules and guidelines informing the process. It is a code of behavior that is expected, particularly from those involved in awarding contracts. Thus, it eliminates conflicts of interest and unfairness. According to Templeman & Paradise (2006), the Australian government uses the private sector to procure public services in order to obtain advantages of cost and efficiency. These are termed Public Private Partnerships (PPP’s) and are usually five to ten years for information technology, and over thirty years for infrastructure projects. Consequently, probity issues are important. The government’s Guidance on Ethics and Probity in Government Procurement describes probity as ethical behavior in a procurement process that accords equal opportunity to all tenderers. This need for probity, as in most other countries, has been fueled by public skepticism of private involvement in public enterprise. There are disadvantages to probity. First, it can lead to excessive evaluation criteria which stifles innovation, and the elements of probity may overtake the selection process by lending too much weight on evaluation criteria rather than experience, innovation, and practicality (Templeman & Paradise, 2006). Second, one-on-one communication is forbidden in the bid process in order to ensure impartiality. This limits opportunities for tenderers to meet and discuss important issues in the project and the consequent bid submissions may be of low quality. Thirdly, where the probity elements in a process escalate, the objectives of the project may lose focus (Templeman & Paradise, 2006). However, because the tender process allows competent suppliers to tender, it accords equal opportunity to all tenderers. Further, inclusion of a probity auditor is essential in order to ensure the integrity of the process (Templeman & Paradise, 2006). A probity auditor advises the tender team, monitors and keeps the tender process within tender guidelines, ensures honesty and fairness, and supplies a report on the probity audit (Tender Advise and Probity Issues, n.d.). For instance, the New Ticket System (NTS) tender probity audit in Victoria identified over thirty members of the tender evaluation process who had a conflict of interest, and some documents of the tender process had found their way into the hands of a journalist (Victoria Government, n.d.). According to Contract Control International (2010), the tender document contains the scope of the tender, the skills required, restrictions, criteria for evaluation, and the details for submission. This is to ensure that the process is clearly defined and transparent. Further, probity is vital especially where public funds are involved and where competitive bidding is required from parties which have links to the client. Thus, a probity auditor’s task is to advice and monitor the process, ensure fairness, and report on the outcome. Wynne (2001) posits the view that the concept of probity is relative and varies according to context, e.g. with the environment, the requirements, and the decision makers. Probity envisages that the conduct of the auditor will be fair and the process will balance individual needs, community interests, and market needs. According to the author, probity is essential to protect those who do not have the ability to do so. The process places the community above the market and regulates the “unrestricted competitive market-place” where the right to trade is protected by the law. Thus, through the probity process, the market contributes to society (Wynne, 2001). In Dubai, for instance, the tender process was marred with irregularities a few years ago. It lagged behind countries in Europe in fair and transparent procedures, and the rules of procurement, which are subject to regulation by governments in Europe, did not exist in the Middle East (Cornford, 2007). According to the author, contractors lost out because a code of practice was not used in the tendering process, and in situations where contracts were awarded selectively, they did not deliver the best works. The regional manager of Hyde Consulting Middle East, Rod Stewart, posited the view that a transparent process would have increased the interest of more contractors. Now, a government department wishing to obtain services from the private sector must first advertise for the submission of tenders (Dubai eGovernment, 2010). Tender rules are strict and provide that a certain number of tenders are evaluated before a contract can be signed. Procurement processes typically involve an expression of interest, a request for proposals, and the submission of offers. All these elements are included in an assessment plan which is supplemented with a probity plan detailing guidelines for the process of procurement (Aiken, 2009). According to the author, an independent probity auditor guides and monitors this process. Using these types of system is essential in a country like Dubai because the numbers of infrastructure projects are many and involve large sums of money. Without a tender process which includes probity, the system would be riddled with corruption that eventually leads to low quality work and a loss of confidence in the government by the taxpayers. Dubai and Australia represent two countries where probity has become critical in the tender procedure. The process is driven by public skepticism in the involvement of private enterprise of projects funded by the taxpayer. It ensures honesty and fairness and curbs excesses of favoritism and conflicts of interest. By using a probity auditor, the process is managed by an independent interest who produces an audit report that can better inform future procedures. However, the probity process must not submerge the project objectives; it must be focused and contain relevant elements that will guide the process. If taxpayer interests are to take precedence over market interests in the “unrestricted market-place” (Wynne, 2001), then probity is essential and must be instituted in all tender procedures. References Aitken, S (2009). Procurement in Abu Dhabi. ArabianBusiness, Saturday, September 26, 2009. Retrieved May 1, 2010, http://www.arabianbusiness.com/568479-procurement-in-abu-dhabi Contract Control International (2010). Tender Advice and Probity Audits. Retrieved May 27, 2010, http://www.ccintl.com.au/tenders-probity-audits.php?pid=1 Cornford, R (2007, January). Calls for tougher legislation in the ME tendering process. ArabianBusiness. Saturday, January 20, 2007. Retrieved May 1, 2010, http://www.arabianbusiness.com/6404-calls-for-tougher-legislation-in-the-me-tendering-pro Dubai eGovernment (2010, April). Doing business with government. Retrieved May 1, 2010, http://www.dubai.ae/en.portal?bsns_expand_bsns,bsns_do_bussiness_govt,1,&_nfpb=true&_pageLabel=lifeEventDetail Templeman, D & Paradise, P (2006). "PPP: Probity and the Perpetual Processor". University of New South Wales Law Journal 282, (2006) 29(3). Retrieved May 1, 2010, http://www.austlii.edu.au/au/journals/UNSWLJ/2006/50.html#Footnote3 Tender Advice and Probity Audits (n.d.) Retrieved May 1, 2010, http://www.ccintl.com.au/tenders-probity-audits.php?pid=1 Victoria Government (n.d.). Probity of the NTS tender. Retrieved May 1, 2010, http://download.audit.vic.gov.au/files/Ticketing_System_Probity.pdf Wynne, M (2001, September). Some thoughts about Probity. Retrieved May 27, 2010, http://www.uow.edu.au/~bmartin/dissent/documents/health/probity.html Financing of Large Infrastructure Projects in Dubai According to Harnischfeger (2009), Dubai has in the past relied on short term financing for its infrastructure projects. An example is the U.S. $3.5 Billion Sukuk issued a few years ago and due later this year. The Emirate owes $ 85 Billion payable over the next three years, and still requires funding for roads, the public transport system, power, and water plants. In addition, there are on-going projects which are almost complete. According to Philippe Aroyo of BNP Paribas in the United Arab Emirates, Dubai should emulate Abu Dhabi and secure long term financing for projects, rather than short term loans which are re-financed every two years (Harnischfeger, 2009). Currently, Dubai is facing several repayment issues over the next few months; for instance, $1 Billion that is owed by the Civil Aviation Authority and due by November 4. As of 2007, the United Arab Emirates had project loans totaling $ 11 Billion (Reis e Sousa & Flippen, n.d.). However, due to financial constraints faced by the government, certain sectors of government may seek financing via Public Private Partnerships (PPP’s) (Harnischfeger, 2009). The chief executive of the Road Transport Authority, Abdul Mohsin Yones, is of the view that his agency would seek Public Private Partnerships in the future. Projects include roads, light rail, and a by-pass project. Due to the size and large financing required of these projects, PPP’s are the only logical avenue for financing. Regional commercial banks also undertake project loan syndication; but their financing potential is limited by an inability to provide long term loans since they rely on short term deposits (Reis e Sousa & Flippen, n.d.). However, because trading in debts is forbidden under Shariah law, the sub-prime crisis had little effect on Islamic financing. Therefore, Islamic financing has assumed significance in the region for capital projects. The Dubai Airport is an example where a Sukuk, or Shariah compliant bond, was issued. Admittedly, though, Islamic financing has been complementary (Reis e Sousa & Flippen, n.d.). According to Baeshen (2010), Islamic financing funds ventures that benefit society. However, they have historically financed real estate ventures. But the senior associate of King & Spalding’s Dubai office is of the view that there will be a shift from funding “Islamic” projects to primary Islamic structures because there has been skepticism about the current structures; for instance, the Dubai real estate boom which was fueled by real estate dealings rooted in Shariah which calls for investments to exist. The economic downturn, however, has seen a rise in other opportunities and governments are looking for other sources to finance large scale projects (Baeshen, 2010). According to the author, Islamic project financing has therefore grown due to unavailability of institutional funding in the market place. The MENA-OECD Initiative on Governance and Investment for Development has identified Public Private Partnerships as the key to infrastructure development in the MENA (Middle East, North Africa) region (MENA Workshop on Public-Private Partnerships for Infrastructure Financing, 2006). PPP’s are important for achieving public good and actively involve the private sector. However, this relationship must be governed within an appropriate institutional framework as the collaboration cannot by itself guarantee quality and low cost services. Further, countries in the region now recognize that the public sector cannot handle infrastructure needs on its own. In addition, PPP’s are avenues for efficiency, new techniques in management, and gains accrued from the knowledge gained from expatriates. Increasingly, PPP’s are sharing risks and asset ownership. In Dubai, infrastructure sectors have attracted private investment, particularly in telecommunications and power generation (MENA Workshop on Public-Private Partnerships for Infrastructure Financing, 2006). According to Deutsche Bank’s Frank Beckers, project finance is the dominant strategy used in the Middle East for infrastructure projects. Over fifty percent of projects in the Middle East are financed with loans and bonds compared to five percent globally (The next step for funding GCC infrastructure projects, 2009). However, beginning in 2009, GCC states started financing their projects within PPP’s, Islamic bonds, and private equity funds. In Abu Dhabi, for instance, $ 750 Million in Eurobond was issued to Dolphin Energy, and $ 530 Million was obtained for the financing of Qatargas II through Islamic financing. Infrastructure development in the UAE has been phenomenal in a short period of time. Modern cities have risen from the desert; road networks and airports have been constructed; and telecommunications, hospitals, luxury hotels, and schools have come up (Urban Development, n.d.). The private sector is taking a more active role in infrastructure development. In order to cope with infrastructure development targets, the government of Dubai increased public expenditure in 2008 to stimulate the economy. The increase in spending was targeted at large infrastructure developments such as the Al Maktoum International Airport, roads, and bridges. However, because of the reliance on outside financing, the credit crunch had the effect of reducing project finance and foreign credit. Lower oil prices also halted some infrastructure projects (Urban Development, n.d.). Currently, the method of evaluating large infrastructure projects may not be appropriate. According to Karim (n.d.), the past twenty years have seen an explosion in the growth of construction projects in Dubai and the government and private sector regularly commission new modern, structures. For instance, a Dh. 538 Million contract was awarded for the expansion of Dubai International Airport. The same contractor was awarded a further Dh. 20 Million for works at Jumeirah Beach Hotel. In another contract, a joint venture company was awarded Dh. 148 for construction of the Kendah House Project. The majority of awarded contracts are to foreign architects and consultants. However, the process is far from transparent. According to Karim (n.d.), most of the contracts are handed to contractors who then select their own architect. Further, architects are allowed to operate without a local partner, a uniform building code, and in many cases, contractors from the Gulf region are sidelined. The above illustrates one example of a flawed process in the construction industry. Despite the evident limitations, it is hoped that the 2008 Law No. (6) for “Procurements, tenders, bids, and warehouses for Abu Dhabi” will rein in some of these inappropriate practices (Aiken, 2009). Further, the procedure for advertising and submission of tenders may institute an efficient and transparent system which is kept in check by a probity auditor. These elements have been given priority by the government. Dubai can overcome its economic problems by using methods of acquiring and distributing finances that are transparent and of benefit to its citizens. Its previous practice of obtaining short term financing from regional banks does not augur well for an economy which is riddled with debt. Therefore, alternative avenues, in particular Public Private Partnerships, will be the logical course of action. Further, Islamic financing is a source that the Emirate can exploit because it is unaffected by speculation and selling of debt that is forbidden according to Shariah law. References Baeshen, F.S. (2010, February). The Way Ahead. Retrieved May 1, 2010 http://www.islamicfinanceasia.com/10_finance.php Dubai to Increase Public Spending By 20% in 2009 (2008). Retrieved May 1, 2010, http://usa2uae.com/tag/infrastructure-projects/ Harnischfeger, U (2009, October). Fresh financing for the long haul. Retrieved May 1, 2010, http://www.realinvestmag.com/news1.php?id=6645 Karim (n.d.). Building Blocks. Retrieved May 3, 2010. http://www.alshindagah.com/may98/buildingblocks.htm MENA Workshop on Public-Private Partnerships for Infrastructure Financing (2006, November). Organization for Economic Cooperation and Development. Retrieved May 1, 2010, http://www.oecd.org/document/19/0,3343,en_34645207_34645466_37419731_1_1_1_1,00.html Reis e Sousa, A & Flippen, S (n.d.). Opportunity Beckons. Finance In Perspective, Issue 4. Retrieved May 1, 2010 http://www.taylor-dejongh.com/news/downloadFiles/articles/Opportunity%20Beckons--Crunch%20Time%20for%20Middle%20East%20Infrastructure.pdf The next step for funding GCC infrastructure projects (2009, December). Retrieved May 2, 2010 http://dubaimetro.eu/featured/3777/the-next-step-for-funding-gcc-infrastructure-projects-2 Urban Development (n.d.). Retrieved May 1, 2010, http://www.uae.gov.ae/Government/urban.htm Read More