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The cost of badly governed procurement

At least twice a year, the Malaysian public has the opportunity to see examples of badly governed procurement practices and their costs in the Auditor-General’s (A-G) Report. Some of these practices include random direct negotiations, inflated prices, unauthorised payments and purchases, payment for work that is out of scope, as well as the acceptance of incomplete or subpar services, works and goods.

It also includes negligence on the part of civil servants to manage and monitor the delivery of the contracts. Malaysia’s procurement regime is actually governed under rules that are quite high in standards. The statutes that govern procurement are the Financial Procedure Act 1957 and the Government Contracts Act 1949, and the instruments are the Treasury Instructions, Treasury Circular Letters and Federal Central Contract Circulars.

The existence of this legal and regulatory framework begs the question: Why does the A-G Report keep highlighting leakages and wastage in many government projects?  Knowing the cost of badly governed procurement is important to encourage not only the procurement officers, civil servants and contractors to carry out procurement exercises for the best value for money as possible, but also to encourage the public to monitor more closely the delivery of any projects that affect them. .

Unfortunately, the A-G Report -due to constraints in methods and resources -only presents a limited number of examples. The A-G Report 2017 Series 2, the latest submitted to the Parliament and available to the public, only presents 26 examples. As a result of this limitation, it is difficult to know how much of the taxpayers’ money is being wasted or lost in the process.

Yet, the reports provide us with insights on three dimensions of cost caused by badly governed procurement. The first cost is a direct cost to the procured goods, services and works. This is what makes procurement a costly exercise. The most glaring example of a direct cost is inflated payment for buying goods, services and works. However, direct cost does not always mean inflated price. The final price of the procured services, works and goods may be consistent with, or even lower than the initial agreed price. The problem comes when there are several improper payments made.

For example, payment for items that are not part of the contract’s scope, payments that are made without approval from authorised officers or payments made for undelivered services, works and goods. Then, there is payment for goods and works that are not utilised properly. This, too, can make procurement a costly exercise.

The second cost is an additional cost that the government has to bear as a result of the above direct costs. This can range from costs needed to repair substandard goods or buildings, costs needed to maintain assets and vehicles that were not supposed to be purchased, or unnecessary payments made due to the weak application system.

The final cost of badly governed procurement is the cost that the intended end users of the projects have to bear. An easy example of this is school children having to stay at home longer and parents having to fork out extra money for daycare because their school buildings are not completed on time. An extreme example would be loss of life or injury due to buildings or roads built using substandard materials of low quality.

These three dimensions of cost provide us with a full picture of costs that are incurred by badly governed procurement. The full picture is important because the amount of improper payments made, or the revised and inflated prices may be low in comparison to the total cost of the projects. But the second and third costs may be high, causing the projects to either fail or fall short of achieving their intended outcomes.

For example, the MyGST system was built with a cost of less than the initial agreed price (RM98.76 million compared to RM98.83 million) and the amount of improper payments made during the contract was considered low (around RM8.4 million). However, the system had some weaknesses affecting the ease of registration and efficiency of repayments. As a result of these weaknesses, the government had paid a tax return amounting to RM3.89 billion to taxpayers who did not reach the threshold.

Another example is a project to build water treatment plants in Orang Asli settlements in Pahang. About 85% of this project has been completed, with only a RM190,000 increase of the initial price of the contract. Despite this achievement, the water treatment facilities in 57 Orang Asli settlements (25% of the total settlements) are not functional.

The government’s exercise in procuring goods, services and works have immense potential in adding value for their citizens if they deliver the best intended services. One way of ensuring the efficient delivery of such services is a well-governed procurement ecosystem. With this in mind, one cannot help but wonder if Finance Minister Lim Guan Eng’s declaration that a new Government Procurement Act will be tabled this year will add value to the existing rules on government procurement, which some argue are already quite exhaustive.


Sri Murniati is a fellow at the Institute for Democracy and Economic Affairs (IDEAS)

First published in The Malaysian Reserved, 28th January 2019.

2019-01-28T13:45:02+00:00 28th January 2019|Opinion|Comments Off on The cost of badly governed procurement