Risk identification peculiarities in public procurement of construction works

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.