The practice of performance-based contracting in developing countries' public procurement: the case of ethiopia

Pages402-431
Publication Date01 Apr 2017
DOIhttps://doi.org/10.1108/JOPP-17-03-2017-B005
AuthorBaynesagn Asfaw Ambaw,Jan Telgen
SubjectPublic policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 17, ISSUE 3, 402-431 FALL 2017
THE PRACTICE OF PERFORMANCE-BASED CONTRACTING IN
DEVELOPING COUNTRIES’ PUBLIC PROCUREMENT:
THE CASE OF ETHIOPIA
Baynesagn Asfaw Ambaw and Jan Telgen*
ABSTRACT. Performance-Based Contracting (PBC) is widely accepted as a
useful tool. It is believed that the use of PBC can assist the efficient
utilization of the public resources. The objective of this research is to assess
the extent of PBC application and the obstacles to applying it in the public
procurement systems of developing countries. Interviews and factual
analysis of procurement guidelines and contracts are used to collect data for
this research. The analysis results indicate tha t the majority of public
organizations have not yet used PBC even though it is allowed by the law.
This is due partly to lack of clarity in the procurement laws and lack of
capacity to use PBC.
INTRODUCTION
Since the last decade of years, public organizations have
developed a long-term view of adding value to their procurement
process and have adopted a new ways of contracting (Claassen, van
Weele, & van Raaij, 2008). Literature suggests that buyers,
regardless of whether they are buying goods or services or works,
need to add value or achieve an expected outcome with their
procurement (Boykin, 2005; Eldridge & Palmer, 2009; Heaviside &
Price, 2001). They have become aware that procurement has a
strategic responsibility that can play a pivotal role in public
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* Baynesagn Asfaw Ambaw is a Ph.D. candidate, Department of Technology
Management and S upply, University of Twente, and an Instructor, Ethiopian
Civil Service University. His research interest is in public procurement. Jan
Telgen, Ph.D., is Professor, Department of Technology Management and
Supply, University of Twente. His research interest is i n applied operation
research and public procurement.
Copyright © 2017 by PrAcademics Press
PERFORMANCE-BASED CONTRACTING IN DEVELOPING COUNTRIES’ PUBLIC PROCUREMENT 403
expenditure management, improving of good governance, enhancing
of economic development and commercial integration between and
within countries. For achieving the above listed and other
organizational objectives more efficiently and effectively, public
organizations have started to use performance-based contracting
(PBC) for their procurement process (Martin, 2007).
Applying a PBC system is believed to be a better option for
achieving their expected objectives (Hypko, Tilebein, & Gleich, 2010;
Kim, Cohen, & Netessine, 2007). However, very few of them do so,
believing it to be a riskier contract with low levels of predictability of
the contract results, while leaving more responsibility to the
contractor (Hypko et al., 2010). However, in recent years, PBC has
become a common practice in many government organizations
(Becker, 2008; Hannah, Ray, Wandersman, & Chien, 2010; Hypko et
al., 2010). It is a description of how the finished products or services
should perform over the agreed time period (Patil & Molenaar, 2011).
The approach describes what should be achieved in terms of results,
but not exactly how the producers or service providers should achieve
the results or fulfill the requirements of the clients (Anna, 2008). In
other words, the procuring entity tells the supplier/contractor what
they want done, not how the contractor has to do it (Sumo, van der
Valk, & van Weele, 2012). In this contracting approach, the
contractor is only paid when he/she has been successful in achieving
the pre-determined and mutually agreed objectives (Heinrich & Choi,
2007). As a result, it minimizes the risk for the buyer of the money
spent.
Using this contracting system, however, demands the procuring
entities to have the required technical knowledge and skills with
regard to how to spell out their requirements and manage the
contract, and to be able to evaluate the end results (Brown & Potoski,
2003). This helps them to become more successful in contract
performance and adds value for both the client and contractor (Tineo,
2007). However, much of the public procurement in developing
countries specifically is still contracted out based on input or process
specifications (i.e. the traditional approach) and employs inefficient
procurement practices (Becker, 2008; Kleemann & Essig, 2013). In
addition, many major public projects in developing countries face cost
and schedule overruns and require a huge amount of extra budget to
complete (Doer, Lewis, & Eaton, 2005). For example, this is a

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