NB: This article was originally published in issue 10.11 of the Penang Economic Monthly.

When the open tender system was introduced by the Penang state government more than three years ago, its architects believed that the transparent process would once and for all eliminate irregularities and political partiality, two traits that were once almost synonymous with public procurement.

By and large, it has achieved its objectives. Yet at the same time it has also attracted a string of criticisms, including accusations of discriminating against the Malays on the one hand, and disenfranchising the Chinese on the other. So is it either or neither? How does the open tender system work and why is it perceived to discriminate?

A promise fulfilled
Within two weeks of the opposition’s historic victory in Penang in the 2008 general elections, the state’s executive council approved the use of an open tender system for all state procurements. This meant that all works procurements worth RM20,000 and above, as well as supplies and services procurements worth more than RM50,000, would be awarded through a public and competitive bidding process. For works procurements worth less than RM20,000 and supplies and services below RM50,000, contractors would be rotated through a balloting system.

An open tender system is basically a process that enjoins all qualified bidders in a contest to offer the best price, service and quality. Besides fostering competitive bidding, it must also be transparent. The objective is simple: to acquire the best possible deal in the name of public accountability.

In Penang, great care is taken to ensure that the process is as transparent as possible. Firstly, all procurement needs are advertised and published on each department’s or agency’s website, in addition to at least one local daily and the state government’s e-Procurement portal. All bids received will then be displayed for public scrutiny, without revealing the identities of the bidders. This is to make known the number of bidders and the quotations offered.

Once the tender deadline is up, the necessary evaluations will be made before the bids are presented to the Tender Board, or Quotations Committee for procurements below RM200,000. (Members of the Tender Board are appointed by the Chief Minister.) After a decision has been made, the winning bidder and corresponding details will be published online for all to see. It is only after a two-week objection period that an approval letter is sent out. If, however, a protest is lodged during this period and found to have basis, then the process loops back to the Tender Board for reconsideration (Figure 1).

In short, it was a complete departure from the previous practice. For the first time, there was an across-the-board competitive and public open tender process, a direct line of payment to recipients that effectively bypassed opportunistic middlemen and “turnkey” contractors, a transparent e-tender process via the e-Procurement portal and a two-week objection period.

In line with the new government’s mantra of “Competency, Accountability and Transparency” or CAT for short, Penang had, by a stroke of the pen, effectively put an end to the longstanding practice of directly negotiated awards, and with it, an end to a system that bred a rentier economy dependent on political patronage.

Market efficiency has been restored and the incessant problems of kickbacks, wastages and inflated prices have been replaced with sound financial prudence. Value for money, a Penangite’s cardinal maxim, is once again an official custom.

The open tender system in Penang, the first comprehensive commitment of its kind in Malaysia, has undoubtedly left its mark. Not only are the results reflected in the accounting ledgers, Penang has begun to receive a multitude of accolades and recognition, from Transparency International levying praise on the state government’s efforts to fight corruption to the awarding of the highest rating in the Auditor-General’s Report for two successive years.

As Penang quickly gained a reputation for its transparency, business confidence began to boom and the state reaped the rewards. A record RM12.2bil of investments – the highest in the country for the first time – poured into Penang in 2010, the lion’s share of which was RM10.5bil worth of foreign direct investment.

An economy that was only three years ago considered to be in graceful decline had suddenly discovered a newfound desire for living. Without missing a beat, the state government ploughed on with recent big ticket projects awarded via open tender, such as the RM37mil Aman Crag Resort redevelopment project on Penang Hill and the Bayan Mutiara township development that will add more than RM1bil to the state coffers from land sale alone.

Yet in the midst of all the success and prosperity, disgruntled voices continue to rumble.

Transparent discrimination?
By design, the open tender system operated by the state government is meant to promote merit at the expense of favouritism. However, that has not stopped certain quarters from claiming the contrary.

When the open tender system was first implemented, it came under intense criticism from state opposition leaders who saw it as an attempt to curtail Malay entrepreneurship. Through open tenders, it was suggested, Malay contractors would not be able to compete and would at the same time lose their rice bowl of government contracts.

It was indeed an alarming concern for a community programmed to believe that their livelihood depended on protectionist policies and that meritocracy was a blasphemous affront to Malay and Bumiputera rights.

However, after three years of executing open tenders, results have shown that not only is there no cause for concern, there is in fact much reason to celebrate. In a competitive environment, Malay contractors on average have managed to win more than 70% of government tenders.

For example, out of 53 tender awards issued by the Penang Development Corporation (PDC) from March 2008 to August 2011, 37 tenders or 69.81% were won by Malay contractors, representing RM124mil in value (see Figure 2).

In other agencies the share of the pie seemed even stronger. Tender statistics from the Department of Irrigation and Drainage (JPS) from 2008 to 2010 show that 100% of tenders issued were won by Malay contractors (Figure 3). That represents RM41mil worth of contracts. And at the Public Works Department during the same period, 94% of contracts went to Malay contractors by open tender (Figure 4).

Some would have hailed such results as a testament to the professionalism of Malay contractors. Others, however, have attempted to paint it as a blatant attempt to discriminate against Chinese contractors. Recently, a state opposition politician and former assemblyperson had accused the Chief Minister of “currying favour” with the Bumiputera community at the expense of the Chinese community. On the one hand, the Penang state government is being accused of being anti-Malay, while on the other it is purportedly also anti-Chinese.

“What we really are,” insisted Penang Chief Minister, Lim Guan Eng, “is anti-corruption.”

That being said, it does seem evident that a disproportionate amount of tenders have been won by Malay contractors. Could there possibly be some form of subtle or invisible discrimination at work after all?

Let us first delve deeper into the process. As mentioned earlier, only qualified contractors may seek to bid for a tender. To be qualified, a contractor has to be registered with the Ministry of Finance (MOF) and subsequently licensed in the appropriate category (from F to A).  In addition, the contractor must also be registered with the Contractor Services Centre (Pusat Khidmat Kontraktor or PKK) as well as the Construction Industry Development Board (CIDB).

Now, it is a fact that there are more Malay contractors – about 90% – registered as government contractors compared to any other race. On top of that, the Class F license classification, which is the lowest category, is open to Bumiputeras only. Perhaps the most meaningful information for the purpose of this analysis is that all tenders worth RM200,000 and below belong to the Class F category.

In other words, there is a federally imposed regulatory threshold that effectively means that only Class F contractors can participate in the bulk of tenders. Hence, institutional protection remains and there is no cause for concern about Bumiputeras or Malays losing out to other contractors. The only caveat is that now they will have to actually compete amongst themselves in a fair and transparent environment that rewards capability and punishes incompetency.

Of course, not every tender falls under the Class F category. What about the bigger projects and contracts? That is where there is real open competition between contractors across the board. Yet by and large, one also finds more Malay contractors in the other categories as well. This is because Chinese contractors had, in view of past practices, never really found it worth their while to participate in public procurement. This is in part due to the perception that government payments are often delayed, but more simply because they are able to find sufficient work from the private sector.

Therefore, the answer is really quite straightforward. Since there are more Malay government-licensed contractors who participate in tender bids, it follows that most of the tender awards will be won by Malay contractors. And the fact that all government procurements valued at RM200,000 and below are classified as Class F will necessarily mean that at that level, it will be a Bumiputera-only affair.

And because the Class F stipulation is a federal policy, it means that there is no question of any discrimination on the part of the Penang state government, both in policy and implementation.

Throw a stone, hit a contractor
This issue now brings to light some interest about the Class F phenomenon. Under MOF guidelines, contractors are categorised into six categories, starting from F to A. Each license classification determines the maximum amount that a contractor is able to bid on. As mentioned earlier, the ceiling for a Class F contractor is RM200,000 while Class A contractors can bid for jobs worth RM10mil and above (see Figure 5).

Now, here’s where the interesting bit is. Malaysia is a country with a disproportionately high ratio of contractors. In fact, as of 2005, there were 42,313 registered contractors. That’s roughly one contractor per 614 Malaysians. More interestingly, 35,253 of the total are Class F contractors. This basically means that 83% or four out of every five contractors are Class F Bumiputera contractors.

The lure of becoming a Class F contractor is an irresistible one for budding Bumiputera entrepreneurs. According to the Unit Peneraju Agenda Bumiputra (Teraju), the lead national coordinator of the Bumiputera business agenda, one in every five Bumiputera small and medium enterprises (SMEs) is a Class F contractor. In Penang alone, there are 1,277.

In recent times however, the going has been getting tougher for this group. Class F contractors face increasing difficulties in securing jobs due to the unsustainable nature of growth in this sector. While the construction industry grows at only two per cent a year on average, contractors increase by an average of 10% every year. There are increasingly more contractors than there are jobs.

Job scarcity is only one side of the problem. The real issue is the increasing inability of Class F contractors to compete with other contractors in the private market. This is the direct result of years of spoon-feeding and a politically-motivated protectionist policy that fostered not only government-dependency, but also political-dependency.

In fact, the roots of the political connection between Class F contractors and the political hands that feed them are so entrenched that Prime Minister Datuk Seri Najib Razak remarked in July 2010 that Malay contractors should “continue to support the United Malays National Organisation (Umno)” because “the fate of Umno and that of the Malay contractors is inseparable.

Umno leaders do exert considerable influence over Class F contractors, allowing the former to control the local economy and the politico-economic constituency.

Going by the statistics revealed earlier, it effectively means that one in every five budding Malay entrepreneurs is inextricably left with little choice but to cultivate a dependency on their local Umno representative.

Breaking free
When the Pakatan Rakyat coalition took over the Penang state government, procurement methods changed. The letter of support from the Umno division head was no longer necessary and Class F contractors submitted their bids through a transparent digital process that minimised human interaction.

“In the old days,” says Tahir Jalaluddin Hussain, president of the Class F Contractors Association of Penang, “winning a government contract had nothing to do with how efficient or competitive you were. It was all about whom you knew and how well you knew them.”

Tahir agrees that the open tender system practised today has encouraged greater productivity amongst Malay contractors. More importantly, it has eliminated the scourge of rent-seeking and patronage politics.

“Previously,” laments Tahir, “the road to a government contract was through the local Umno division head. There was no other way. And you had better be prepared to pay a commission. They don’t help you for free.”

The differences are now obvious, insists Tahir. “Those days, some contractors had multiple licenses. Some individuals had up to 20! What happened was that during site visits, they would bring their relatives and friends to act as independent contractors using their licenses, in order to increase their chances of sweeping as many jobs at stake as they could get. You would have up to 200 so-called contractors during some site visits.

“Today though, the state government no longer allows that. Only the actual license-holder is allowed to visit the site and submit a bid. Their identification card will now be checked and cross-referenced. This is to ensure that only genuine contractors are participating in tenders.”

If anything, the open tender system has created a more level playing field and allowed for increased competition. Even at the Class F level, this has allowed the more industrious contractors to fulfil their true potential and succeed on their own strengths. Fair access, increased competition and zero corruption – these are all the ingredients of a vibrant economy that will further contribute to Penang’s success.

Another positive outcome of the open tender system is the possibility of rehabilitating the image of Malay contractors. Those who now flourish will have done so, not as cronies but as legitimate businessmen. Where previously there was a negative image of Class F contractors, they are now slowly gaining professional pride.

However, many would argue that the greatest contribution of the open tender system, besides a more equitable distribution of access and opportunity, is its success in breaking the stranglehold of the long entrenched rent-seeking model.

“The biggest difference,” says Tahir with an air of confidence, “is that genuine Malay contractors are now getting contracts based on nothing else but their own capabilities.” And this is how it should be.