World Bank procurement approaches: Overcoming supply chain challenges in the Pacific

Abstract

This paper explores the nexus of supply chain management (SCM) challenges and explains both the impact of recent global trends and the long-standing susceptibilities in Pacific Island Countries (PICs). The paper also discusses how these supply chain challenges exacerbate difficulties in procuring infrastructure investment projects. Finally, the paper summarises the practical solutions the Bank is pursuing through its procurement practices as an entry point for addressing supply chain management constraints. Supply chain disruptions had global repercussions in the aftermath of the COVID-19 pandemic and still present potential risks given on-going economic and geopolitical uncertainties. These challenges have come on top of long-standing supply chain difficulties in logistically complicated remote markets such as the Pacific Islands. Businesses operating in that environment contend with high logistics costs and transport expenses, which can be further exacerbated by volatile fuel prices. For contractors undertaking transportation works, there are added risks such as volatility in commodity markets for raw materials such as steel. Mobilisation costs to the Pacific Islands are also high, especially when contractors must transport equipment, goods, and potentially labour from abroad. This is on top of the significant risk of adverse weather events, with works being highly susceptible to flooding and extreme weather due to their location near coastlines. This high risk is difficult to insure, and bidders often struggle to obtain adequate insurance for their projects. Ultimately, the combination of supply chain issues, localised risks and small contract values have contributed to price escalation and weak market response to works procurements in Pacific Island Countries (PICs). The weak market response also reflects a tightening supplier market, as construction companies focus on more attractive projects within the large pipeline of domestic infrastructure projects in countries such as Australia and New Zealand. The World Bank and borrowers (client countries) are addressing this challenge through procurement approaches intended to make projects more attractive to bidders. Outreach on the consolidated pipeline of infrastructure projects in PICs highlights the opportunity for repeat business; a sequence of projects in the same location helps offset high mobilisation costs. Similarly, the Bank informs bidders of opportunities for local subcontracting or joint ventures, which can offset mobilisation costs and facilitate access to local labour. Tenders can also make greater use of rated criteria, which place emphasis on past performance, quality and sustainability factors. Finally, greater use of phased approaches and provisional sums can help to spread price risk more effectively over long duration contracts where clear information on future costs is not available. In the context of global uncertainty, this can offset price risk for outyear items.