The cost of procurement in Iraq
CMS Cameron McKenna discusses public procurement processes in Iraq
IOCs operating Iraq’s oilfields need complex procurement of goods, materials, services and expertise that can reach up to 80% of the costs invested in a project.
The Iraqi Ministry of Oil (MoO) insist that regulations governing public procurement apply to procurement procedures of the IOCs in relation to IOCs’ subcontracts.
However, MoO’s position is somewhat undermined by partial exemptions of some subcontracts from these regulations and other strong arguments to suggest the stringent public procurement requirements are not applicable to IOCs.
The current Iraqi public procurement regulations are Instructions No 1/2008 on the execution of Governmental Contracts (procurement regulations) used to implement regulations outlined in Coalition Provisional Authority’s Order No. 87/2004 on Public Contracts.
These set out the entire public procurement cycle from pre-tender preparations, tender and evaluation process and post-award contract management for public contracts. The procurement regulations are quite time-consuming and complex and, from experience, viewed as an unnecessary burden stifling procurement activities.
It does not come as a surprise that the IOCs question whether the procurement regulations apply to subcontracts related to service contracts awarded by the Iraqi Government during licensing rounds (Subcontracts).
Currently, the MoO insists that the procurement regulations apply to the subcontracts. However, there are strong arguments which suggest that the procurement regulations do not apply.
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PARTIAL EXEMPTIONS FROM PROCUREMENT REGULATIONS
In 2011, the MoO sought to exempt subcontracts from some parts of the procurement regulations (Partial Exemptions).
The MoO stressed the uniqueness of subcontracts as it argued that: ‘[a]pplying the [Procurement Regulations] on these subcontracts deviates from the purpose for which the service contracts were entered and from the procedures of such service contracts which are different from other contracts’.
Unfortunately, this did not result in a full exemption, which would have been reasonable given the arguments above. To make matters worse for IOCs in favour of disapplying the procurement regulations, since only limited parts of the procurement regulations have been disapplied it is possible that the remainder apply.
While there are strong arguments to suggest that the procurement regulations do not apply, it remains to be seen which position will prevail as there are a number of counter-arguments advanced by MoO.
It follows that there is support for and against using the procurement regulations. Therefore each IOC will have its own view and stance on the applicability of the procurement regulations.
However, as a general comment, since cost recovery is at the forefront of most international oil company’s decisions, the Ministry of Oil has good leverage to insist on its view of the applicability of the procurement regulations.
With this in mind, it remains to be seen whether IOCs will favour to comply with the procurement regulations to (possibly) improve their chances of cost-recovery or whether they will adopt a more robust position to make their procurement processes easier.