ARTICLE | THE REFORM OF PUBLIC PROCUREMENT IN UKRAIINE: TARGETS, ACHIEVEMENTS AND CHALLENGES

By UDI Associate Maryna Rabinovych

INTRODUCTION

According to the WTO (2016), the share of public procurement in the global GDP accounts for 10-15 percent[1].  The notion ‘public procurement’ refers to “the purchase by governments and state-owned enterprises of goods, services and works”[2]. Insufficient competitiveness and transparency of public procurement were repeatedly emphasized as the key issues to be addressed through reforms in Ukraine. Over the period from 2000 to 2016, Ukraine’s system of public procurement underwent several waves of reforms, providing for multiple revisions of the framework public procurement law. The reason for that has been that several times newly adopted public procurement laws were not implemented as originally drafted, but complemented with corruption-friendly exemptions, “watering down” the advantages of these laws’ provisions[3]. In view of such vicious circle, it came as a surprise that in 2016 the EU recognized to be public procurement as “one of the flagship reforms of the current government”, praising numerous achievements in this domain[4].

Does this mean that the new government made a breakthrough and introduced a truly transparent and competitive public procurement system? What are the exact advantages of the reformed public procurement legislation? And is it possible to cheat on ProZorro, the open electronic tender system? Answering these questions requires an in-depth analysis of the current wave of procurement reform, addressing the rationale and importance of public procurement as a reform field; official targets of the reform, as well as its achievements and challenges.

Why is public procurement so important?

There are four major reasons, why public procurement is a crucial reform domain.

Foremost, transparent public procurement means increase efficiency of public spending, resulting from companies’ trying to offer ever more competitive prices for the goods and services, required by public agencies.

Next, public procurement relations represent a crucial component of the rule of law. In other words, due to its tight links to fairness, transparency and non-discrimination, public procurement serves as a litmus test for these aspects of rule of law and good governance in a society.

Third, a chance to participate in a transparent and fully competitive tender procedure stimulates private sector enterprises to improve their capabilities and produce innovative solutions. In turn, along with the strengthening of the rule of law, private sector development contributes to economic growth.

Fourth, as public procurement becomes ever more important within the global GDP, favourable legislation and procedures in this domain are capable of enhancing a state’s role in the world trade and attracting foreign direct investment. Since globalization presupposes tight link between a state’s success in international economic relations and its economic growth, openness and competitiveness of public procurement sector once again conditions economic growth.

TARGETS OF THE PUBLIC PROCUREMENT REFORM

The targets of public procurement reform in Ukraine are stipulated in multiple sources, such as the documents of National Reform Council and the EU technical assistance project “Harmonization of Public Procurement System of Ukraine with EU Standards”. However, the most comprehensive list of targets can be found in the National Strategy of Reforming Public Procurement (“Roadmap”)[5]. These targets include:

• Approximation of Ukraine’s public procurement legislation with the respective legislation of the EU. 152 of the EU-Ukraine Association Agreement (AA) provides for the five-stage process of approximation of Ukraine’s public procurement legislation with the sources of the EU law (acquis communautaire) that shall be completed in eight years following the AAs’ entrance into force[6]. The scope of approximation, set by the Roadmap, includes the harmonization of standard procurement procedures, techniques and instruments; introduction of flexible procedures for lower-cost contracts and improving the mechanisms of protecting private interests that suffered from the actions of public agencies that launched a tender.
• Developing an institutional infrastructure of public procurement, especially with regard to the monitoring of the system’s effectiveness through economic analysis means. The above aim also encompasses optimizing control over public procurement domain and ensuring independence and freedom from bias in the activities of the appellate body.
• Creating and developing unified e-procurement system, based on the international and EU ‘best practices’.
• Developing the system of education of public procurement specialists and professionalization of the public procurement domain
• International cooperation in the public procurement domain, including the opening up of Ukraine’s public procurement market to foreign companies

All the tasks and targets of the Strategy are expected to be achieved by 2022. That is why, now it is too early to assess the results of the Strategy’s implementation as a whole. However, as the first stage of the Ukraine’s legislation to the EU’s acquis is already completed, it is possible to analyze the steps that were taken to achieve the Strategy’s targets and which deficiencies of the system need to be addressed as soon as possible.

ACHIEVEMENTS OF THE REFORM

The EU reports and media sources praise public procurement as the ‘flagship’ reform field in Ukraine, wherein significant successes have been achieved so far, despite the system’s opposition to change[7]. The key achievements to found in the above sources are as follows.

First, Ukrainian Government managed to complete the first stage of the approximation of public procurement legislation with the respective regulations and directives of the EU within the timeline, envisaged by the DCFTA. In particular, the abovementioned Public Procurement Strategy and the new Law of Ukraine “On Public Procurement” were adopted. These terms, concepts and standards, contained in these framework documents, were acknowledged to comply with acquis communautaire and provide Ukraine with an opportunity to proceed with the second stage of the approximation process.

Second, the framework Public Procurement Strategy and Law created the basis for launching the electronic tender system, called ProZorro. ProZorro plays an integrating role vis-à-vis a number of authorized electronic forums for conducting public procurement, and allows for the cooperation between a public agency and private company, registered at the different e-procurement forums[8]. The new Public Procurement Law obliges public agencies to use ProZorro in cases, when the price of goods or services to be procured equates to or exceeds UAH 200 thousand (or UAH 5 million in case of works)[9]. While the Public Procurement Law does not regulate the procurement of objects below the given thresholds, they are governed by respective bylaws that provide for flexible procurement conditions.

Enhancing data openness (‘everyone sees everything’ principle) and serving as a forum for open bargaining, ProZorro also allows private entities to appeal against public procurers electronically and, thus, suspend the procurement procedure until the decision in the case would be adopted[10]. As compared to the 2014 version of the Public Procurement Law, the new appeal procedure does not let a public procurer a ‘space for maneuver’ to ‘wrap up’ the suspicious procurement before the appeal is considered by the Antimonopoly Committee. It is also praised for reducing the number of formal reasons under which the Antimonopoly Committee was previously allowed to refuse from the consideration of an appeal. To make appeals more effective, the founders of ProZorro currently elaborate on a DoZorro system to monitor ‘suspicious tenders’ and link the outcomes of monitoring to an appeal procedure.

For the time being, ProZorro is being linked to two more achievements. First, having developed from a “volunteer-led initiative” to the “nation-wide procurement reform”[11], ProZorro exemplifies bottom-top approach to reforms and Ukraine’s strengthened civil society. As regards the ‘ends’ of ProZorro, it has already been reported to save public funds, accounting for UAH 8 billion, and is expected to save up to UAH 50 billion annually[12].

The professionalization of public procurement is the key domain to be targeted in 2017. So far, the key achievement in this area has been the development and launching of a 6-week free online course on public procurement for officials and business[13]. Given the number of public servants and private entities’ representatives, requiring knowledge in the sphere of public procurement, mass online learning is considered to be an effective procurement professionalization tool.

Finally, approaching Ukraine’s international cooperation in the field of public procurement, it is to mention that in 2016 Ukraine officially joined the WTO Agreement on Government Procurement (GPA). The GPA provides for liberalizing public procurement markets of forty five Members to the WTO and is continually revised to counter the discriminatory aspects of domestic procedures. Joining the GPA is associated with the expansion of market access opportunities for Ukrainian businesses and enhancing the competitiveness of public procurement in Ukraine through creating the framework of foreign companies’ participation therein.

To sum up, the first post-Euromaidan Government of Ukraine managed to make a range of important steps in the domain of public procurement, contributing to the achievement of virtually all targets of the reform. However, as it is illustrated in the next sub-chapter of the article, it is still early to relax and call public procurement reform an ‘ultimate success’.

CONTINUING THE REFORM: THREATS AND CHALLENGES

The analysis of the dynamics of the public procurement reform in Ukraine allows distinguishing a range of normative and practical concerns in the public procurement domain:

1. The threat of the gradual introduction of numerous amendments to the framework Public Procurement Law and the adoption of by-laws, containing the exemptions from the use of ProZorro in particular groups of cases

According to the comprehensive analysis of the public procurement reform efforts, conducted by Stewart (2013), the vast majority of the previous waves of public procurement reform in Ukraine failed due to the ‘floods’ of exemptions from open bargaining procedures. The most vocal example in this regard has been the fact that the procurements, made for 2012 European Soccer Championship were exempt from the application of standard open bargaining procedure[14].

2. The existing practice of dividing large procurements into small ones to keep them below the threshold that requires using ProZorro

The analysis of public procurement-related data of key state enterprises suggest that in 2016 many of them conducted a large number of small-scale procurements to avoid open bargaining, based on ProZorro. Among such enterprises the newspaper ‘Ekonomichna pravda’ mentions Selydivvugillya (408 under-the-threshold procurements in 2016), the Administration of Sea Ports of Ukraine and sea ports (102013 under-the-threshold procurements), Ukrainian Railways (4791 under-the-threshold procurements) etc. Using under-the-threshold procurements allows setting prices that are significantly higher or lower than the average market prices and, thus, realize corrupt schemes[15]. Given the fact that the current thresholds are set in accordance with the EU acquis communautaire, nowadays no remedy is available to capture the misuse of under-the-threshold procurements.

3. The practice of misusing formal reasons to deny competitive propositions and creating room for ‘kickbacks’ and money laundering (the winning supplier is still selected by individuals, not the system)

A range of media sources reported important state enterprises to deny the most beneficial offers for the sake of promoting kickbacks and nepotism[16].

4. In practice, price remains the only criterion[17] by which ProZorro recommends to select a supplier of goods, services or works

This leads to a number of challenges. First, the criterion of quality of goods and services to be supplied does not normatively play any role in determining the winner of the open bargains. Thus, there is a threat of cheap low-quality goods and services suppliers becoming the ultimate leaders for ProZorro. Moreover, the system does not operate any criteria related to the reliability of suppliers. Subsequently, according to the data, gathered by the OpenDataBot[18], in 2016 the companies, blacklisted by the Antimonopoly Committee of Ukraine, won more than UAH 460 million through Prozorro[19].

5. There are differences in tender procedures, applied to the domestic and foreign suppliers

In case of domestic suppliers, the procurer first conducts the evaluation of economic efficiency of the offers and then checks whether an offer is in conformity with the tender documentation. In case of foreign participants of tenders, the process looks vice versa. First, the tender committee of the procurer assesses the offers from the formal standpoint. Next, only selected offers (that were not denied due to formal reasons) undergo the process of cost-effectiveness check. Such procedure creates a barrier for the foreign enterprises’ participation in tenders.

6. DoZorro remains a forum for discussions for ‘offended suppliers’, not linked to the formal monitoring of ‘suspicious tenders’

While the development of institutional infrastructure of public procurements largely remains the ‘work in progress’ (especially with regard to delimiting authorities between the control and law enforcement bodies), DoZorro is still incapable of effectively monitoring ‘suspicious’ tenders.  The major reasons for that include the lack of a normative link between civil society’s monitoring of public procurement and the launch of governmental control procedures, as well as the underdevelopment of the web-platform itself.

7. Incomplete state aid reform

Successful reform of public procurement needs to be accompanied by the changes in the domains of competition and state aid. The key issue with regard to the ongoing state aid reform deals with the exemptions from reporting state aid, contained in the 2014 State Aid Law. As noted by experts of the EU Support for Public Procurement project Stuart, Cemnoloskins and Roginska (2014), the above exemptions create “the real risk that the Law would become unworkable and a virtual certainty that it will fail to comply, in practice, with the EU standards”[20].

CONCLUSIONS

Given its tight links to the issues of competitiveness, rule of law and economic development, the transparency and efficiency of public procurement procedures in a state are of significant importance for both domestic and external stakeholders.

Since 2000, public procurement has repeatedly become an emphatic focus of reforms that never succeeded due to governments’ failures to implement well-formulated laws. Against this background, the post-Euromaidan public procurement reform (tightly linked to the implementation of the EU-Ukraine Association Agreement) looks promising. Its achievements already include progress in the approximation with the EU acquis; reporting specific savings thanks to e-procurement and enabling Ukraine to join the WTO GPA.

Nevertheless, the reform is far from over. A successful achievement of the reform targets requires taking a range of steps, such as:

• Continuously strengthening civil society’s monitoring of the changes and amendments to public procurement legislation and the state of its implementation
• Improving DoZorro system and creating normative links between DoZorro and improved institutional infrastructure of public procurement
• Countering the practice of enterprises’ misusing under-the-threshold tenders at the normative and implementation levels
• Elaborating on the introduction of non-price factors into the performance of ProZorro system to emphasize quality and reliability of suppliers
• Creating equal conditions for the domestic and foreign participants of public bargaining procedures
• Proceeding with the reforms of competition and state aid.

[1] See: WTO (2016). Government Procurement Gateway. Retrieved from https://www.wto.org/english/tratop_e/ gproc_e/gproc_e.htm.

[2] OECD (2011). Government at a Glance 2011. Paris: OECD Publishing, p.148

[3] For an insightful analysis of the dynamics of public procurement reform in Ukraine, see: Stewart, S. (2013). Public Procurement Reform in Ukraine: the Implications of Neopatrimonialism  for External Actors. Demokratizatsiya, Vol. 21(2), p.198.

[4] See: EEAS (2016). EU Report: Ukraine Carrying Out Unprecedented Reforms. Retrieved from https://eeas.europa.eu/headquarters/headquarters-homepage_en/17066/EU%20report:%20Ukraine%20carrying%20out%20unprecedented%20reforms.

[5] Cabinet of Ministers of Ukraine (2016). Decree “On the Strategy of Reforming the System of Public Procurement (Roadmap) of 24 February 2016.. Retrieved from http://zakon5.rada.gov.ua/laws/show/175-2016-%D1%80?test=4/UMfPEGznhhb5N.Zi.Q86bGHI4GMs80msh8Ie6.

[6] EU-Ukraine Association Agreement, Title IV ‘Trade and Trade-related Matters’, Art.152. Retrieved from http://eeas.europa.eu/archives/docs/ukraine/pdf/5_ua_title_iv_trade_and_trade-related_matters_en.pdf.

[7] See: fn 4; OSW (2015). The Bumpy road. Difficult Reform Process in Ukraine. Retrieved from https://www.osw.waw.pl/en/publikacje/osw-commentary/2015-12-03/bumpy-road-difficult-reform-process-ukraine/

[8] Markevich, I. (2016). ProZorro: Working in a New Way. Retrieved from http://blog.liga.net/user/imarkevich/article/23283.aspx.

[9] For an in-detail analysis of the thresholds’ functioning, see: Bilans Consulting (2016). Procurements Under-the-thresholds: Organization of Procurements and Responsibility. An Example of the Procedure of Under-the-threshold procurement. Retrieved from http://bilans.com.ua/stati/gosudarstvennye-zakupki-v-ukraine/135-doporogovi-zakupivli-organizatsiya-zakupivli-ta-vidpovidalnist-zrazok-poryadku-zdijsnennya-doporogovikh-zakupivel.   

[10] For an in-detail analysis, see: fn 8.

[11] Bugay, Y.(2016). ProZorro: How a Volunteer Project Led to Nation-wide Procurement Reform in Ukraine”. Retrieved from http://www.open-contracting.org/2016/07/28/prozorro-volunteer-project-led-nation-wide-procurement-reform-ukraine.

[12] Nefiodov, M. (2016).ProZorro Has Already Saved More Than 8 Billion From the Public Funds. Retrieved form https://www.slovoidilo.ua/2016/12/02/novyna/ekonomika/prozorro-vzhe-zaoshhadyla-byudzhetu-ponad-8-milyardiv-hryven-nefodov

[13] The course can be reviewed at: https://courses.prometheus.org.ua/courses/Prometheus/PP101/2016_T1/about

[14] See fn.3.

[15] See: Gribanovksi, O., Shapoval, N.(2017). Selydivvugillya and Other State Enterprises that Cheat ProZorro. Retrieved from http://www.epravda.com.ua/cdn/cd1/2017/01/selidovvugillya-ta-inshi.

[16] See, for instance: Andiruchenko, P. (2016). The Dark Side of ProZorro. Available at:  http://www.epravda.com.ua/rus/columns/2016/10/24/608798; Bilinska, N. (2016). How the Assurances in the Transparency of Public Procurement can be Converted into the Competition with Pre-defined Results. Retrieved from http://zib.com.ua/ua/125413-yak_zapevnennya_v_prozorosti_tendernih_zakupivel_mozhna_pere.html.

[17] For an overview of the role non-rice factors play in ProZorro, see: Dubova, J. (2016). Issues and Problems with Public Procurement. Retrieved from https://buhgalter.com.ua/articles/zakupivli-za-derzhkoshti/pomilki-ta-problemi-pri-elektronnih-zakupivlyah/

[18] OpenDataBot is a service that monitors open data registrars to prevent raiding and ensure the control of counter-agends. More information is available at the website: https://opendatabot.com.

[19] OpenDataBot (2017). Companies from the Blacklist of the Antimonopoly Committee  Won Moore Than 460 million UAH Through ProZorro. Retrieved from https://opendatabot.com/blog/25-prozorro-black-list

[20] Stuart, E., Cemnoloskins, S., Roginska, I. (2014). Report on State Aid Mapping for Ukraine. Retrieved from http://eupublicprocurement.org.ua/wp-content/uploads/2014/12/Report-on-Regional-mapping-ENG.pdf.