In the Egyptian petroleum sector the system of competitive tendering does little to promote transparency and fair competition among service companies. In a price-driven market, the emphasis is placed on the cheapest option. But at what cost? Egypt Oil and Gas explores the tendering process currently utilized in the Egyptian oil and gas sector in an effort to examine the long-term consequences of “cheapest is best.”
Tendering is a process through which petroleum companies (in this context referred to as operators) advertise their procurement needs with detailed technical specifications. The services companies respond via bid proposal in an effort to secure the operators contracts. There are three types of tenders: public tender, limited tender and local tender. A public tender is open to all qualified foreign and domestic suppliers. A limited tender is issued when elements of the contract restrict bidding to certain suppliers, contractors, or technicians that meet the given criteria. Local tenders are issued when participation will be restricted to local suppliers and contractors operating in the territory or governorate where the contract will be executed. During the tendering bid process, service companies who meet or exceed the specifications are considered to be technically acceptable. After basic technical acceptability has been established, a committee comprised of operator personnel and government officials evaluate the commercial or financial aspects of the tender. The committee makes final assessments and awards the contract.
EGPC is the governing body that sets and enforces the rules and guidelines for tendering to ensure compliance and prevent manipulation. Operators obtain permission from EGPC prior to issuing a tender. EGPC is involved in the committee review process that examines the technical and commercial aspects of proposals. EGPC is also responsible for receiving any complaints from service companies. For example, if the petroleum company does not invite a certain service company to a tender without any legal justification, the supplier can file a report with EGPC.
In addition to EGPC, Public Tender Law 89 of 1998 provides the legal framework to govern the tender process in Egypt. Applicable to numerous sectors and contexts, Law 89 governs procurement by all Egyptian ministries, departments and local government units. Law 89 was implemented to improve the transparency and efficiency of the tender process to ensure competitive fairness in awarding lucrative contracts for the acquisition of supplies, goods and services. However, due to lack a lack of clarity and overregulation the legal framework actually serves as a hindrance in the tender process, by adding yet another layer of bureaucracy to an already complex procedure.
Theoretically, the tender process is conducted according to set guidelines and procedures to ensure fair competition. However, given the nature and intent of the tender process (numerous suppliers and contractors competitively bidding for lucrative contracts) it is, implicitly, a prime environment for corruption and manipulation.
Through numerous interviews with domestic and international service companies Egypt Oil and Gas discussed problems in the tender process and key problems recurrently emerged. Several individuals spoke on the condition of anonymity. Overregulation stemming from bureaucratic procedures was often cited as a key problem. Excessive paperwork and delayed decision-making in a process that takes an average of three to six months to acquire necessary materials and services, a time-frame that does little to encourage efficiency and project growth. In fact bureaucratic delays stemming from excessive government regulation and oversight significantly stall projects and contribute to missed-deadlines that inevitably translate into budgets deficits. Exorbitant transaction costs, arbitrary decision-making and generally unresponsive governmental bodies were also cited as problematic elements of the tendering process.
Several service companies noted a distinct lack of transparency in the tender process. Observing that rules are ineffectively and inconsistently implemented resulting in a considerable gap between the regulatory framework and the actual application in the service market.
Neither EGPC nor operators provide clear criteria for evaluation. Numerous operators expressed frustration concerning the absence of feedback throughout the tender process “When I submit a proposal to company and I am rejected, I must know the reason for the rejection as it will help me develop my proposal in the future” stated one source. The lack of transparency stemming from the absence of evaluation criteria results in an ambiguous process open to corruption, manipulation and preferential treatment. “Some companies want to award a certain service company that’s why they hide any evaluation criteria. It’s not a fair competition. I don’t see why we can’t get a detailed evaluation sheet,” stated Magdy Wedad, Managing Director for Integrated Services at PICO.
Corruption in the tender process is not uncommon and relatively unsurprising given the developing-world context wherein government officials and underpaid civil servants can augment wages via manipulation of a process that awards profitable service contracts. According to numerous sources within the service sector manipulation and corruption in the tender process in Egypt is conducted in both an overt and passive manner. Overt methods involve bribery, extortion, embezzlement, as well as tampering with official documents. A more passive brand of corruption can be observed in the form of preferential treatment, inside influence, price leakage, bid pooling, and illegal gratuities.
In addition to abovementioned problems, overwhelmingly service companies complained about the current emphasis on price over quality. Numerous service companies noted that pricing is the most important aspect of the tender process with little concern for quality. Profit maximization via low cost is certainly not a groundbreaking business ethic. However the ‘cheapest-is-best’ dynamic currently characteristic of the service sector has long-term implications, especially for an industry that thrives on precision manufacturing and technological skill. Wedad emphasized the shortsightedness of price fixation, noting the cheapest options often translate to poor equipment, inefficiency and a lack of expertise.
“Lower prices end up costing the operators more in the future due to poor quality which will inevitably decrease production,” he added. Amr Manhawy, Sales & Operations Manager of Sea Harvest Service Company, clarified that clients are always looking for the lowest price and often negotiate with the suppliers to decrease the price. “Some operators do ask for price discounts after winning a tender. It increases pressure on us to offer higher discounts. There is no obligation to decrease the prices but we don’t want to lose our clients.” Suppliers are under pressure to keep costs low in order to maximize profit margins. Suppliers can lower costs by using cheaper labor, equipment and materials that typically translate to inferior, poor quality products or services. Some competitors in the service market utilize inexperienced personnel or laborers in an effort to cut costs and maximize profits, a dangerous prospect given the often-technical tasks and challenging environments that service companies typically operate.
To improve the tender process in the service market alternative models should be examined and emulated. Petroleum companies in Abu Dhabi apply the Price Escalation System to their tender process. This system allows service companies to make changes to contracts based on price fluctuations of supplies and equipment. The ability to revise contracts could be particularly useful in a rocky economy like Egypt where the currency is fluctuating. The inability to amend contracts can lead to corruption and an increase in low-quality supplies. Companies who are unable to change their contracts are sometimes forced to deliver their goods for the same price but of cheaper quality. This inflexibility therefore leads to bad quality products and inefficient production. The only oil operator that currently applies the price escalation model here in Egypt is BP. One source pointed out that EGAS is more advanced than EGPC as they are more flexible in terms of accepting any price differences. One reason why they are more flexible then EGPC is that they mainly deal with international oil companies, who see the advantage of flexible contracts.
Another approach is to examine how other countries evaluate the tender process. Wedad personally believes that Egypt could learn a great deal from the Mexican model. As an international company, PICO has applied for tenders in Mexico and around the world. Based on Wedad’s experience, he sees the Mexican tendering model as very detailed and focused while at the same time being very transparent. Here in Egypt, EGCP simply requires a commercial and technical proposal for the tender application. In Mexico, company financial statements, internal documents, previous tender reports, and equipment price reports are needed in addition to commercial and technical proposals. This extra information makes the tender process more detailed, more effective, and more transparent. The Mexican model also uses well-trained tender evaluators who prioritize quality over price. “Here in Egypt the tendering system is corrupted. We should learn from others and share our experiences. The Egyptian petroleum sector should be better exposed to the international entities,” said Wedad.
In addition to looking at other models, EGPC should enhance their communication with service companies. EGPC has yet to establish any sort of conference or dialogue with leading operators and service companies to discuss what the market needs. The major problem with EGPC is the lack of communication and the delay that causes the tendering procedures. “I need the government to provide a better environment and support us with better roles to work and to increase my investment. The government should allow for detailed feedback to enhance the quality of the tendering process,” said Wedad. Another source mentioned the need for EGPC to deal with complaints in a timelier manner. Better communication will not only speed up the tender process but it will create more confidence in an already lacking sector.
In addition to communication Egypt should also enforce rules and regulations it already has on the books. For example, the Small and Medium-Sized Enterprises Development Law 2004 which gives domestic companies a competitive advantage over large multinational companies by automatically giving them a 10% price addition to their tender bids. Wedad emphasized that this law should be activated to encourage the national companies to invest more in the industry. He stated, “The national companies can technically compete with the international companies, but the government needs to enhance this competition through tactical measures.” This mechanism is not new to the region as countries such as Oman, Libya, and Kuwait each have regulations that either give a set percentage advantage to domestic companies or stipulate that domestic companies must be used before foreign ones. In any case, oil field services companies need to see some sort of change if they want to continue doing business in Egypt.
Amidst Egypt’s faltering economy and broader political unrest government officials should take significant steps to increase efficiency in a sector as vital as the oil and natural gas sector. Many service companies, both domestic and foreign, are discouraged by the lack of transparency and shortsightedness of those that govern the sector. The rampant corruption and lack of ethics that is prevalent in the industry decreases performance and discourages investment. At a time when Egypt is struggling, the government should take measures to improve the tender process to make it more accessible and appealing to domestic and foreign investors. At the same time Egypt must not be shortsighted in their decisions. While cheaper may sound better, it is not synonymous and may end up causing problems in the long run. Officials should gain insight from alternative models to improve the tender process that is currently utilized in the Egyptian oil and natural gas sector.
By: Effat Mostafa