Ethics at Work: Government tender system in need of reform

Currently, all exemption requests must be processed by a special central committee, which doesn't belong to any particular ministry.

zelecha 88 (photo credit: )
zelecha 88
(photo credit: )
The Israeli public has already gotten used to the frequent disputes between the government, advocating more flexibility, and Finance Ministry Accountant General Yaron Zelekha, advocating stricter governance. The latest version is government support for a proposal to reform the tender process, to make it easier for government ministries to hire contractors without making a formal public tender. Zelekha commented that "[Special] interests, rather than efficiency, stand behind the decision," adding that norms of governance would be severely harmed. Minister Meir Sheetrit replied in turn that "Zelekha's approach is completely distorted." This is a dispute with very high stakes, both financially and ethically. Currently, government offices are required to hire contractors through a public tender for even relatively small contracts. The process involves defining the precise needs of the office, publicizing it, soliciting offers from competing suppliers each of whom must be an approved supplier and finally a virtually automatic acceptance of the best-sounding bid. Because this process is a Procrustean bed that doesn't suit every kind of government contract, offices request frequent exemptions. Currently, all exemption requests must be processed by a special central committee, which doesn't belong to any particular ministry. This guarantees a high level of independence, but unfortunately having one committee for exemption requests for the entire government means that the committee is overwhelmed. Exemption requests themselves take months to process, so the restrictive bureaucracy of the tender process is replaced by a comparably restrictive bureaucracy for the exemption process. A related problem: the gained in independence from a central committee is lost in lack of expertise; those ruling on granting an exemption are almost by definition not qualified to judge on the need for an exemption. The new bill, which has its origin in an inter-ministerial committee, would create a committee within each ministry to judge the smaller exemption requests. "Small" requests make up most of the total number yet not most of the shekel amount (since a few huge contracts account for a large fraction of the total sum of exemptions sought). The advantage: more, small committees each of which is better able to deal with the requests, and committees within the ministries that are better qualified to judge the merits of the request. The disadvantage: the tender process was imposed in the first place to restrict the freedom of ministers to direct business to political allies; the new law would create a bypass road which is in itself under the authority of the minister. As Economic Affairs Committee head Moshe Kahlon pointed out, the government is the largest purchaser in the economy, so billions of shekels are at stake. There are many good reasons for creating more exemptions from this requirement. The bidding process is unquestionably cumbersome; the proof is that private firms seldom use it. In the private sector, customers can buy from anyone they want anytime they want. They don't have to wait weeks or months to acquire goods or services, or to change suppliers if they're unhappy. Sometimes a firm is looking for one item, but a supplier convinces them that they really need something else entirely. Companies don't always take the most attractive-sounding bid, because they recognize that sometimes bargain prices or inflated promises can cost a fortune in compromised quality or promptness of service. Another famous downside of the tender process is "low-balling," where companies intentionally make unrealistically low bids knowing that once the contract is signed and work begun, they will have the customer over a barrel. Then the contractor can demand higher payment or threaten to back out of the deal and leave an important project uncompleted. Another concern, the one voiced by Kahlon, is that while the process is explicitly designed to prevent discrimination, by its nature it discriminates against small businesses. Attaining approved supplier status can itself be a cumbersome and expensive procedure. Once it is attained, becoming aware of tenders, filling all the bureaucratic requirements for a tender and making very long-term commitments can be difficult for a small firm. Large firms can devote staff to these tasks and thus enjoy big advantages in the fight for contracts. On the other hand, Zelekha has an important point too. There's a good reason Israel, like most countries, requires government offices to use tenders for most contracts. Unlike companies, government offices are not always extremely interested in saving money; after all, it's not their money. Often ministry officials are much more interested in expediency or in helping out their political allies. Private sector employees who try this tend to get weeded out pretty quickly because the buck stops at the top management. But in the public sector, there is so much turnover among the ministers that long-term accountability is minimal. Zelekha points out that there is already an adequate procedure for exemption from the tender process, and making exemptions even easier to obtain would not do much to improve efficiency - all it would do is to make it more efficient to waste public funds. Opposition leader Binyamin Netanyahu has sided with Zelekha, stating that the far-reaching procedural reforms introduced when he was finance minister are adequate. Sheetrit disagreed; he asserts that "the current situation is paralyzing the country." The government believes that since the new committees will have to publicize their findings, they will find it hard to discriminate against suppliers. More transparency should make up for less independence. From that point of view, the real question is whether the proposed reform will create more efficiency at a minimal cost in lost oversight. My opinion is that the current situation is untenable. The efficiency/oversight tradeoff is actually not as simple as it seems. The current process is far from perfect at preventing meddling; instead of blatantly favoring their political allies, officials can do so subtly by rigging the original tender offer. The taxpayer suffers a double whammy: the contract is given to a second-best supplier, and a ministry official is distracted from his actual work by the need to spend time cleverly rigging the bids. I think the rhetoric in this latest battle is overheated, and that both Zelekha and Sheetrit have important points and defensible positions. My inclination is to favor the reform "on points" - Zelekha's point about reduced oversight is absolutely valid, but despite its importance it is outweighed by the sheer number of opposing considerations: flexibility, transparency, decentralization and helping smaller businesses. Disclosure: I occasionally work for companies that compete for tenders. In experience these have been small companies, though I'm happy to work for large ones too. This could possibly affect my judgment. The writer is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem College of Technology.