Risk identification peculiarities in public procurement of construction works
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Date
2020
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Ivane Javakhishvili Tbilisi State University Press
Abstract
State-funded construction projects are implemented through public
procurement in Georgia, in which the contracting authorities are governmental
organizations and the suppliers are commercial organizations. According to the
State Procurement Agency’s annual report 2018, contractual value of tenders of construction works was GEL 1,734,667,834 in this year, which significantly exceeds
the same figures for goods (GEL 717,837,509) and services (GEL 457,834,783). Due to
the large scale of construction work, the risk factors are high, also, there is a high
level of competition, the number of stakeholders, the estimated value and the
bidding requirements. The most common risks in the procurement of construction
works are the risks of competition because they are involved in the process both
residents and non-residents. One of the indicators of the level of competition in
public procurement is the average number of bidders participating in tenders. In
2018, the average participation index for goods was 1.94, for services - 1.76 and
for construction works - 2.93, which means that competition level in this sector
is the highest. Companies that operate in the field of infrastructure offen make
a business deal in order to reduce competition. Sometimes this is directly linked
to the related party risk.
Another problem is the corruption risk when the procuring entity adjusts
bidding documentation to one particular supplier or in other case, contracting
authority selects a supplier subjectively and purchase a high value construction
work under a simplified procurement.
According to the non governmental organization - Transparency International
Georgia, typical risk factors for the procurement of construction Works are: high
price dynamic - the difference between the expected procurement value and
the final (contract) value exceeds 20 percent, newly established company, low
competition or no competition supplier, offshore zone, political party donor.
Sometimes the bidding companys fail to fulfill its contractual obligations
or commit dishonest acts to gain the right to sign a contract. In this case, they
will be registered in the registry of dishonest suppliers - called Black list.
According law of Georgia on public procurement, “the Black List shall include
the data on mala fide persons, bidders and suppliers participating in public
procurement, who may not participate in public procurement and be awarded a
public procurement contract within one year after they are entered into the Black
List”. Such kind of companies cannot fulfill their contractual obligations because
they no longer have sufficient financial resources. Although state procurement
contracts provide for appropriate sanctions, the fines paid by the supplier
may not always compensate the damages for state. Especially, When its about
infrastructure projects, the damage caused by the suspension of construction
works is much higher. Therefore, the requirements for bidding are particularly
high in this area.
Finally, tenders for construction works are the most attractive to both local
and foreign companies due to their high cost. In 2018, there were announced
81 of tenders (with auction SPA or without auction NAT) worth more than GEL 5 million and 50 of these were tendered about whole or in part for construction
and civil works (CPV - 45200000). So eliminating the risks inherent in this field
is great importance. Although Georgian public procurement system is improving
every year and number of the companies interested in the procurement process
are increased, risk mitigation measures are still necessary.
Description
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Keywords
Tender, CPV Category, construction works, Risk indicators
Citation
Economics and Business, №1, 2020, pp. 92-106