The socio-economic context in Tunisia is currently problematic and may still be so in the coming years. The COVID-19 crisis has only worsened this economic crisis. While the private sector faces several difficulties, the public sector continues to represent an essential pillar of the Tunisian economy. Public procurement, les marchés publics (MP), in Tunisia is of central and strategic importance as, in 2017, MPs contributed between 12% and 13% to the Tunisian economy. As these figures are higher than the international average, MPs present an opportunity to revive the economy, create jobs, and boost the employability of Small and Medium-sized Enterprises (SMEs).
However, several obstacles prevent public contracts from operating efficiently and acting as vehicles for sustainable economic growth. For example, the share of macro-level local finances remains very limited and the resources made available to local communities in Tunisia do not exceed 4% of the state budget.
Public procurement for local authorities is also governed by a complex legal arsenal. Law 89-9 states that the MPs of public enterprises must be organized by a decree. Furthermore, Article 102 provides for the obligation to organize MPs relating to local authorities by a decree that is dedicated to it.
Reorganizing the public procurement process can revitalize the national economy but to achieve this, new regulations, that will improve the prospects of wealth distribution and employment, are required.
This Policy Brief 1) addresses the difficulties of accessing and executing public contracts, 2) identifies the obstacles that prevent the public procurement system from operating effectively, and 3) provides recommendations on how to overcome these challenges and improve the MP process.
The difficulties in accessing and carrying out public contracts in local authorities
Exclusion of medium-sized enterprises
The SME incentive system offers very few incentives to SMEs. Article 20 of the 2007 Law on Economic Incentives stipulates that 20% of the annual orders planned for each public purchase must be reserved for small businesses. This excludes medium-sized businesses. For large municipalities that have significant financial resources, like Tunis for example, 20% represents a significant figure, which far exceeds the estimated amount of orders to be reserved.
For example, for civil engineering work, the maximum amount that can be awarded to a small business is five hundred (500) thousand dinars. However, if the Municipality of Tunis, for example, has fifty (50) million dinars dedicated to public works, 10 million dinars would therefore be reserved for small businesses. However, awarding 10 million dinars to a single small company would not be possible, so the municipality would be forced to apportion the projects and divide the awards amongst several small companies. This process would lead to incurring more management and coordination costs. This is problematic because, in some cases, projects need to be completed by one company, which often excludes small companies.
Limited resources of small businesses
Article 20 of the aforementioned 2007 law, which stipulates that 20% of PM must be reserved for small businesses, also requires that more than 25% of capital or assets of the small businesses must not be owned by a medium or large enterprise. This is to prevent a medium or large enterprise from winning PMs reserved for small enterprises by creating subsidiary companies. In theory, this is a good initiative but in practice, it creates an impossibility whereby a small company that meets the conditions of article 20 cannot implement civil engineering projects because these are often big projects that can only be completed by companies with large resources. This problem stems from the 2007 law on economic incentives which mentions small businesses but not medium-sized businesses. Therefore, medium-sized businesses should also be included.
Heavy financial burdens for SMEs prevent their effective participation in public procurement.
To implement MPs, especially large projects, SMEs must be financially solvent because there are rather heavy financial burdens. To participate in a public tender, a company must provide a provisional deposit of between 0.5% and 1.5% of the estimated amount of the order, to guarantee the seriousness of the offer. Once awarded the contract, the company must then provide a financial guarantee, of between 3% and 10%, depending on whether the contract is accompanied by a guarantee period. If the contract is subject to a guarantee period, the company must provide a holdback of 10%. For the company to receive an advance before starting any work, it must provide a bank guarantee for an amount equivalent to that of the requested advance. So, for a 100,000-dinar project, an SME must provide a 33,000-dinar bank guarantee; something that very few SMEs can do nowadays in Tunisia. Additionally, this guarantee must not affect the funds required to carry out the work in the contract. On top of all this, the municipalities take a long time to pay their bills.
Failures in the public contract execution mechanisms:
The three stages of public procurement are 1) the development of specifications, 2) the call for tenders and 3) the selection of a supplier. The execution of the public contract, the contractual period, is the riskiest phase and, paradoxically, it is also the least regulated phase. This is because it includes risks of corruption, poor workmanship, and poor execution
The Tunisian administration is, unfortunately, reluctant to make the necessary efforts to control the accuracy of the execution regarding two technical standards: the specifications and the chosen offer. The supplier must ensure that it conforms to the specifications of its own offer. The state tends to turn a blind eye to over expenditures. For example, merchandise that does not conform to the supplier’s offer is often accepted, as long as it conforms to the specifications. Many works received are thus immediately unusable because of this lack of control during the execution phase.
To address issues in the execution phase, it is necessary to develop preventive solutions to avoid the accumulation of incompatible tasks and to establish a system of “mutual control”. This work must be done upstream through the creation of procedural guidelines that formalize procedures, like contracting the services of a consulting firm or setting up a reception commission, that was previously conducted orally or informally.
Another big problem is the municipalities not respecting payment deadlines. This leads to some providers refusing to continue working due to the accumulation of debts. While addressing the municipalities’ payment difficulties is beyond the scope of this Policy Brief, some of the causes are poor judgment by local administrators and politicians regarding the difference between the budget, on paper, and the availability of funds. This is notably due to failures to collect municipal taxes and general administrative discipline, both of which are deeper issues.
Risks threatening the establishment of an effective system
The first risk is that relating to the contract approval system. Once the supplier has been chosen, the administration issuing the invitation to tender must make a final approval of the contract and of the supplier before it is signed. In the new Code of Local Authorities, there is an article which states that the municipal council must approve the contract. However, since the municipal council meets four times a year during ordinary sessions, this limits the ability of the board to validate these procedures. Therefore, each municipality has to either end the offers and provisional guarantees period or convene the council for an extraordinary session to approve the contracts.
The examination of offers report is written by an examination committee and is then reviewed by a marketing committee. If the marketing committee approves the draft contract, it is sent to the mayor for signature. This commission includes a public expenditure controller, a representative of the city council, a representative of the Ministry of Finance, a representative of the Central Bank, and a representative of the Ministry of Equipment. The new provision introduced by the Local Authorities Code will further burden the approval process for bids selected for public procurement.
The logic behind this new provision is based on the constitutional principle of greater administrative control for local authorities. This principle assumes that local authorities are no longer checked beforehand before taking action, so the system of market commissions cannot continue because they bring together representatives of the central state. However, it is now possible to set up a market commission, formed by elected municipal officials and which exercises market control, instead of leaving the decision to an assembly that meets only four times a year. In all state and local authorities services, several information systems have been used such as the “Adab”, “Rafik”, “and Sinda” systems. In addition to the electronic platform “Tuneps” which deals with online procurement.
This “Tuneps” system has been in the experimental stage since 2014. The use of this system has become mandatory for Local Authorities since 2019, but in practice, they cannot yet use it because the public accounting code has not changed as a result of the local authority code.
This Policy Brief proposes two types of recommendations: 1) regulatory measures that should be renewed and 2) measures that should be introduced.
1) Measures to be renewed:
• The public procurement allotment system must be applied more regularly. In practice, this means dividing the bids for public contracts into lots. This would have the advantage of allowing several companies to simultaneously benefit from the same offer and reduce the workload for SMEs which, generally, do not have great technical and financial capacities. For example, for a construction project, trucks would represent one batch, tractors another batch, and light cars a third batch. This would provide a financial advantage for the community and offer a social advantage for the suppliers. Although this measure already exists legally, in practice it is not always applied. It should be renewed and applied consistently. Allotment should be the mandatory principle and clustering should be the exception and a regulatory or legal text should be drafted to affirm this. When it is not possible to allot bids for a project, an explanation should be provided.
• Contracts should be reserved for medium-sized enterprises and not only small enterprises.
• A single bank guarantee for SMEs advances.
SMEs that win a public contract must present an advance of 20% of the amount of the contract. However, to have this advance the SME must produce bank guarantees, one up to 20%, one up to 10%, and another up to 3%. Instead of producing these three bonds, the administration should ask for a single bank guarantee for both the final guarantee and the advance. The regulations can unify the two into a single bank guarantee to simultaneously cover the risk of poor execution and the risk linked to the advance given to the supplier before the contract. This can be implemented through the decree to regulate local communities, by providing an article that unifies the final guarantee and the compulsory advance for SMEs into a single bank guarantee with a single rate of, for example, 10%.
2) The measures to be taken:
• Introduce an obligation to use “labor-intensive work”. The labor-intensive approach tends to promote all jobs that require an abundant workforce.
• Establish an inclusive economy approach. A set of neighboring local authorities should, for example, create a new entity for inter-municipal cooperation, which includes private companies, farmers, and retailers to undertake profitable activities. Currently, local authorities do not have the right to carry out activities for profit, however, this is possible through the inter-municipality that they can create. This is because the inter-municipality work is governed by a separate legal framework (law 89-9) and not by the code of local authorities.
3) Support measures:
• Reduction of deadlines: If the existing information system is digitized, Local authorities who pay late can be penalized. Once the payment order is issued, the digitized system can calculate the number of overdue days, add interest on arrears based on market interest rates, and automatically edit the amount to be paid by adding this interest. If this system is implemented, suppliers will not have to request payment of default interest in addition to having requested payment of the initial amount. This incentivizes local authorities to meet payment deadlines.
• Standardized documentation: Local authorities have difficulty with drafting specifications for public contracts due to a lack of time, skills, and funding. Consequently, they tend to copy and paste other specifications. Standardized tender documents should be created for all local authorities to use.