Corruption Prevention Department

Government Outsourcing

Corruption Prevention DepartmentIndependent Commission Against Corruption May 2001

Government Outsourcing

CONTENTS

Pages

Introduction 1

Principles 1

Key Control Elements 2

Planning and Implementation 2

Policy and Procedures 3

Segregation of Duties 3

Conflict of Interest 3

Transparency 3

Contracting-Out System 3

Pre-qualification 4

Tender Document 4

Tender Invitation 5

Tender Procedure 5

Tender Evaluation 5

Contract Conditions 6

Contract Administration 7

User Feedback 7

Complaint Channel 7

Disciplinary Measures 7

Payment Procedure 8

Performance Appraisal 8

Management Information System 8

Internal/External Audit 9

Code of Conduct (Service Provider) 9

Further Advice 9

Annex – Summary Control Checklist 10-14

Government Outsourcing

Government departments face the challenge of meeting everincreasing demands for public services with limited resources.In recent years, many of them have looked to outsourcing asone of their key organizational strategies. Governmentoutsourcing is defined in this guide as the contracting out ofservices/functions which have been carried out by direct staffof government departments, e.g. management services ofgovernment properties and testing of vehicle roadworthiness.

This guide is intended to supplement the Government Storesand Procurement Regulations and other relevant governmentinstructions/circulars in assisting government departments toproperly control the outsourcing process to preventcorruption.

Government departments which outsource their services/functions should bear in mind that they remain accountableto the public to ensure effective and efficient delivery of theoutsourced government services by the service providers.Moreover, for successful outsourcing, governmentdepartments concerned should aim for :-

• a fair, open and accountable contract award andadministration system;

• effective partnering with the service providers based onspecific objectives, rights and obligations; and

• high standard of staff integrity of both the governmentdepartments and service providers.

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Introduction

Principles

The outsourcing process must be founded on an open,equitable and accountable system. For effective prevention ofcorruption, the government department concerned shouldincorporate the following elements in its outsourcing process :-

• thorough planning and implementation;

• clear policies and procedures;

• effective segregation of duties;

• avoidance of conflict of interest;

• system transparency;

• open and fair contracting-out system;

• effective, specific and enforceable contract conditions; and

• effective contract administration.

On the other hand, the service provider should be committedto :-

• providing quality service;

• supervising its staff properly; and

• observing ethical practices.

Successful outsourcing hinges on thorough planning andeffective implementation. Management should incorporate,where appropriate, the checks and balance suggested belowin the overall outsourcing plan, and ensure their fullimplementation.

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Planning andImplementation

Key Control Elements

While the Government Stores and Procurement Regulationsprovide general guidance on procurement of services, cleardepartmental policies and instructions should be laid downfor outsourcing and administration of service contracts.

To provide adequate checks and balance, the duties andresponsibilities for pre-qualification of service providers,preparation of tender specifications, tender assessment,contract award and administration should be segregated.

The outsourcing government department should ensure thatits staff strictly follow Civil Service Bureau Circular No. 19/92on the handling of conflict of interest in the appointment andadministration of the service provider and should issue tothem reminders periodically and on each outsourcingexercise. It is advisable for the government department tosupplement the Civil Service Bureau Circular withdepartmental circulars setting out particular scenarios ofconflict of interest for reference by staff.

To promote openness, it is important to provide transparencyof policies, procedures and practices.

To facilitate monitoring by service users as well as membersof the public, details of the services/procedures/practicesshould be widely publicized, e.g. through the departmentconcerned, information leaflet, media and on the internet.

Necessary safeguards should be in place to ensure that theprocurement is free from corruption and malpractice and thatit meets the principles of value for money, transparency, openand fair competition and public accountability.

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Policy and Procedures

Segregation of Duties

Conflict of Interest

Transparency

Contracting-Out System

The contracting-out process should follow the GovernmentStores and Procurement Regulations and relevantinstructions/circulars.

To ensure that only service providers of the right calibre areemployed, the government department may prefer a pre-qualification exercise to identify these service providers. Insuch a pre-qualification exercise, the management shouldensure that :

• there are clear and objective shortlisting criteria and awell-defined marking scheme;

• there are sufficient number of shortlisted service providersto ensure competitiveness; and

• if the pre-qualification exercise aims to identify the serviceproviders to be included on an approved list, they shouldbe regularly recruited by open invitation. Additions to/deletions from the list as well as performance appraisal ofthe service provider should be based on objective and pre-determined criteria.

The invitation for pre-qualification and the evaluation processshould follow the same principles of the tendering proceduresdescribed below.

Sufficient tender information should be given to potentialbidders to enable them to assess their interest and to preparea conforming bid. To provide a level playing field, the tenderspecification should be drawn up in an objective anddescriptive manner; performance specification rather thanbrand names should be stipulated. An outline of the tenderevaluation criteria and a warning against bribery should beincluded in the tender document.

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Tender Document

Pre-qualification

Opportunities for tendering should be open to all eligibletenderers. In the case of a restricted tender, all shortlistedservice providers should be given a fair chance to bid. Singletender should only be used in exceptional circumstances andmust be fully justified and approved by an appropriateauthority, e.g. Government Central Tender Board. Adequatepublicity should be given and sufficient time should beallowed for potential tenderers to prepare and submit tenders.

Tenders should be submitted in duplicate and lodged in asecure tender box. The tender box should have double lockswith the keys held separately by staff members of anappropriate level.

If e-tendering is adopted, the relevant Government SuppliesDepartment procedures should be strictly followed.

To avoid allegations of preferential treatment to a particulartenderer, tenders should be assessed based on pre-determinedcriteria. Personal prejudice will be reduced if an evaluation issubject to a well-defined marking scheme. If only pre-qualified service providers are invited to tender, the lowestconforming bid should be recommended for acceptance; anydeviation must be justified and approved by an appropriateauthority independent of the assessment team, e.g. acommittee or Government Central Tender Board.

To ensure objective assessment and to afford greaterprotection against bias or manipulation in open tendering, thetwo-envelope tender assessment system should be adopted.The envelopes containing the "quotation" should only beopened after the technical proposals have been properlyassessed.

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Tender Invitation

Tender Procedure

Tender Evaluation

For effective contract administration and prevention of abuse,the contract should clearly specify the rights and obligationsof both the outsourcing government department and theservice provider as follows :

Government Department

• service requirements;

• schedule of rates for the services (if applicable);

• handling of contract variations;

• rules and details of deducting or withholding payment forunsatisfactory services;

• termination of contract for persistently poor performanceor serious contract breaches;

• conditions for contract extension (if any);

• warning clauses against the acceptance or offer ofadvantages; and

• authorized access to information by Director of Audit foraudit purpose.

Service Provider

• reporting requirements;

• handling of confidential information;

• declaration of potential conflict of interest;

• the adoption of a code of business and staff conduct; and

• management structure and administration system.

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Contract Conditions

An effective and comprehensive system of site inspectionscomprising both regular inspections and surprise checks bythe government department concerned should be established.Supervisors of the staff concerned should also conductfrequent surprise checks to guard against possible collusionbetween their staff and the service provider.

To put in place an accountable system, proforma inspectionrecords should be maintained, irregularities should bereported, and instructions should be issued to the serviceprovider for timely remedial action.

Where feasible, electronic devices may be employed tocontinuously monitor the performance of the service provider,e.g. CCTV monitoring of security service.

For effective external monitoring, feedback from users shouldbe obtained regularly or at the time of the service delivery (iffeasible) by the government department concerned, e.g. viacompletion of questionnaires upon receipt of service orperiodically (i.e. opinion survey) to be returned to thegovernment department direct. The feedback should be usedto facilitate supervision and performance appraisal of theservice provider.

To further facilitate external monitoring by users and membersof the public, there should be effective complaint channels,e.g. hotline or provision of complaint forms addressed to thegovernment department direct, which should be adequatelypublicized. Procedures should also be laid down forhandling complaints received.

There should be a well defined and effective disciplinarysystem to ensure that appropriate action is taken against aservice provider whose performance is unsatisfactory, e.g. a

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Contract Administration

User Feedback

Complaint Channel

Disciplinary Measures

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de-merit point and payment deduction system, which shouldbe made known to the service provider and strictlyadministered.

To avoid fraudulent claims through corrupt dealings, theservice provider should be required to provide billing detailson a timely basis, which are subject to audit as follows :

• upon receipt of the invoice, the service provided should beverified against the relevant records;

• payment deductions during the period should be verifiedand applied;

• where feasible, the user should be asked to confirm thepayment details; and

• invoices should be submitted to an independent section(e.g. the accounting or finance office) for double-checkingbefore payment.

A formal performance appraisal system, taking into accountresults of supervisory checks, user feedback and complaints,should be set up to enable the performance of the serviceprovider to be evaluated in a fair, objective and systematicmanner.

Supervisory staff should compile assessment reports with theaid of a standard proforma periodically, say, quarterly, and atthe end of the contract, which should be examined andendorsed by a more senior staff member to ensure fairness.

To facilitate the senior management's monitoring of both theperformance and supervision of the service provider, amanagement information system should be set up, keepingkey information and statistics on the administration of thecontract, such as details of surprise inspections and

Management Information System

Performance Appraisal

Payment Procedure

documentation audits, irregularities committed by the serviceprovider, actions taken, payment deductions and ratings ofperformance appraisal.

To ensure that the system in place is in order, to furtherimprove its cost effectiveness and control, and to act as adeterrent against irregularities and abuses by staff or theservice provider, independent internal audit of theoutsourcing process should be performed periodically.Where feasible, external audit should also be arranged tofurther enhance the independence of the system review andbring in new dimensions for improvement and prevention ofabuse.

Staff of the service provider are performing a public duty inthe delivery/discharge of the outsourced government service/function. They should observe the stringent ethicalrequirements of a government servant. Service providersshould, therefore, be required to compile a staff code ofconduct governing, inter alia, acceptance of advantages,declaration and avoidance of conflict of interest, etc. forcompliance by their staff.

This module is one of a series of Best Practice Modulesprepared by the ICAC Corruption Prevention Department.The measures outlined above are not exhaustive and shouldbe tailored to meet the specific needs of individualgovernment departments. Government departments requiringfurther advice from the Corruption Prevention Department intheir outsourcing processes, particularly in assisting serviceproviders to draw up their business or staff code of conduct,should call Tel. No. 2526 6363.

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Internal/External Audit

Code of Conduct (Service Provider)

Further Advice

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Summary Control Checklist

The following checklist outlines the major areas for control. Ifa "No" answer applies to any of the questions, a controlweakness requiring special attention and proper justificationmay exist.

Planning and Implementation Yes NoAre the outsourcing activities well planned?

Are effective checks and balance built intothe system?

Are sufficient resources committed to effectiveimplementation of the plan?

Policy and ProceduresAre clear departmental policies andinstructions laid down for the outsourcingactivities and administration of the serviceprovider?

Segregation of DutiesAre the duties and responsibilities forprequalification of service providers,preparation of tender specification, tenderassessment, contract award and administrationeffectively segregated?

Conflict of InterestAre staff and persons concerned reminded to declare conflict of interest periodically andon each outsourcing exercise?

TransparencyAre the outsourcing policies, procedures andpractices effectively publicized?

Annex

Are service users and members of the publicinformed of details of the services providedand the complaint channel for unsatisfactoryservices, e.g. via information leaflets, themedia and/or the internet?

PrequalificationAre there clear and objective criteria and awell-defined marking scheme for shortlistingservice providers?

Are there sufficient number of shortlistedservice providers to ensure effectivecompetition?

Are there objective criteria for maintaining theapproved list of service providers?

Tender DocumentAre the service requirements clear andspecific enough for effective tendercomparison and subsequent contractadministration?

Are the tender specification objective, fair andreasonable?

Are the tender evaluation criteria and awarning against bribery included in the tenderdocument?

Tender InvitationAre all shortlisted service providers given afair chance to bid?

Is single tender properly justified andapproved by an independent authority?

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Yes No

Are adequate information and time given topotential tenderers to bid?

Tender ProcedureAre tenders submitted in duplicate and lodgedin a secure tender box?

Is the tender box fitted with double lock, withkeys separately kept by authorized staff?

Are Government Supplies Departmentprocedures followed for e-tendering?

Tender EvaluationAre tenders assessed against pre-determinedcriteria?

Is the two-envelope tender assessment systemadopted?

Contract ConditionsAre the service requirements clearly andeffectively specified?

Are the rights and obligations of bothcontracting parties clearly specified?

Are the rules and details of deducting orwithholding payment for unsatisfactoryservices included?

Is a probity clause included?

Is the service provider bound to adopt a codeof business and staff conduct?

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Yes No

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Yes NoContract AdministrationIs there an effective and accountable systemof site inspections by government staffconcerned?

User FeedbackIs there an effective external monitoringsystem for the outsourced services?

Is feedback from users obtained regularlyand/or at the time of the service delivery?

Complaint ChannelAre there established and well publicizedcomplaint channels?

Disciplinary MeasuresIs there a well defined and effective system todiscipline under-performing service providers?

Payment ProceduresAre invoices submitted by service providersverified?

Are payments made by an independentsection after double-checking the invoices?

Performance AppraisalIs there an accountable performance appraisalsystem?

Does it take into account results ofsupervisory checks, user feedback andcomplaints?

Is it made known to the service provider?

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Management Information System Yes No

Is there a management information system to facilitate monitoring of supervision andperformance of the service provider?

Internal AuditIs independent internal audit of theoutsourcing process performed periodically?

Corruption Prevention DepartmentIndependent Commission Against Corruption May 2001

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