About tenders and bidding

It is now common that tenders are floated for procurement of goods and services by government institutions and international donor organizations. The introduction of competitive tendering in industrial countries began in the nineties and has grown in importance ever since. Over the past few years it has been introduced in upcoming markets as well, including Ethiopia. In Europe, competitive tendering has become the procurement procedure for public authorities and those who carry out projects with funding from the European Commission will confirm this. They have to follow EU procurement procedures, while external evaluations and audits specifically look into the way how goods and services, required to carry out the project, are bought.
Tenders are now advertised frequently, while calls for proposals are also found on the websites of organizations, seeking the services of qualified and capable suppliers. Competitive tendering is thus widely believed to be an efficient way to save tax payers’ money, to increase competition between suppliers, encourage new entries and to avoid corruption.
While this sounds logical and straight forward, the introduction of tendering procedures have brought along many complications. After all, jobs used to be given to companies and individuals, who already had established a relationship with the organization or management and who had done similar work before. We need to recall again that here in Ethiopia we live in a culture where relationships are important. In other words, it is important who you know, not necessarily what you know.
The introduction of competitive tendering indeed upsets the way work used to be acquired. We therefore see the introduction of all kinds of strategies to adhere to the system and at the same time find the holes in the net, which there undoubtedly are. It is not for nothing that we often read in the newspapers about a certain tender that has been cancelled or that a second tender for the same project is announced. This seems to be more the rule than the exception but that may be a subjective observation on my part. In any case, the results of a first tender must be unsatisfactory to the awarding committee for it to cancel it and go for a second round.
One strategy followed by opportunistic bidders is to enter unreasonably low bids. Bids are normally screened on content and price, so low bidding will obviously enhance the chances to win. Let us examine the reasons for this strategy a bit closer.
From a positive point of view it is indeed possible that a company with innovative ideas on production methods is in a position to apply different and cheaper costing than its competitors. It is also possible that large companies benefit from their economies of scale and are thus able to offer production against lower prices. Less positive explanations for low bids, sometimes even lower than the suppliers’ costs, include the following:
1. To drive out competitors.
2. Some suppliers are subsidised.
3. Carelessness or ignorance.
In the first case, low prices are used with a consciously calculated loss. Some companies are even able to compensate this loss with profits gained in other departments or branches of the company, sometimes referred to as cross subsidy. This strategy of predatory pricing is often practised by large incumbent companies to force minor new entries to exit.
The second explanation can be seen as a variant of the first and is sometimes described as an attempt to compete with the help of tax payers’ money. In addition, subsidised competitors are usually not expected to produce high rates of return as compared to competing private firms. This adds again to their space to bid low.
The third explanation refers to companies which make mistakes when calculating their bids. This may be due to faults in their internal information systems, presenting wrong impressions of costs and revenues, while relatively new companies may also have unrealistic expectations as to price developments in the market.
Now, bids that are based on low profitability or even loss create the risk that the supplier will not be able to fulfil the conditions of the contract. In the short run this may cause sudden interruptions in delivery resulting in serious delays. Often, quality is compromised as well and insufficient quality control results in very little value for money. I have seen roads built in Addis Abeba which didn’t even survive one rainy season. Other projects are never completed and suppliers who don’t have the capacity or even the intention to deliver the goods are selected. There are countless examples of public funds being abused, while very little is produced for it in return. The procuring authority may thus be forced to procure the goods or services yet from another firm, often at considerable extra costs.
In any case, the end consumers face problems, for example when a road or bridge construction is delayed and road users face prolonged serious traffic jams as a consequence. In the longer run, the confidence in the supply of goods and services in a certain industrial sector deteriorates, poor quality becomes the acceptable norm and we say: “This is how it is in Ethiopia.” I find that hard to swallow. Where resources are scarce, we should be conscious to make sure that they are used to the maximum public benefit possible.
Irregularities in bidding are widespread and difficult to prevent though. Predators are smart after all and often pull others along in their unfair attempts for selfish gain. It is public money though which is at stake, meant for the benefit of many and not individuals. We therefore all have a responsibility to support legislation and fair competition by putting in bids that stand out in quality instead.