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14 March, 2011  ▪  Yurii Nikolov

Dura lex

The announced reform of the state procurement system creates a legal framework for the uncontrolled use of over UAH 130 billion of budget funds per year
Government-sponsored bill No. 7532, which has been registered in the Verkhovna Rada, can fundamentally transform the system of government purchases, denying citizens, journalists, and even inspectors of the Chief Control and Auditing Directorate access to information about transactions worth billions of hryvnias involving certain government agencies. This is not an exaggeration but rather the conclusion many experts reached after combing though the document which is already scheduled for consideration by parliament's subservient MPs.
Price and issues
 
Government procurement is the purchase of services and goods by government agencies with budget money, i.e., at the expense of taxpayers, or by government enterprises at their own cost, i.e., using the money that would have to go into the state budget and, hence, indirectly enrich Ukrainians. Both components of the system have been utterly corrupt and, no doubt, need to be reformed. Reforms have in fact been continuing for a number years, and every portion of implemented legal changes made this sector increasingly nontransparent and corrupt. There were, however, exceptions, but they only prove the rule. The price is too high — in 2010, the state spent via bidding procedures UAH 172 billion, including UAH 132 billion shelled out by state-run enterprises, according to the State Statistics Committee. 
 
The Ukrainian Week has on numerous occasions written about how state-run enterprises spend money. One of the most recent cases was analyzed in the article “Tendernyi zabii” (Capitalizing on Tenders, Is. 2, 2011): Dniproenerho (in which the state-run Energy Company of Ukraine has a majority stake) bought 7.46 million tons of coal and anthracite from Rinat Akhmetov’s businesses to the tune of UAH 7.5 billion. The lion’s share of information, such as the results and course of the bidding, were taken from official sources, in particular Visnyk derzhavnykh zakupivel (The State Procurement Herald, Is. 56, 27 December 2010). Similar examples can easily be cited involving state-owned companies, such as Naftohaz, Ukrzaliznytsia, Ukrtelekom, Ukrnafta, etc.
The conclusion is evident: CEOs of state-run enterprises usually believe that the money their companies have are, so to speak, private and can be spent at their discretion. Publications in the mass media sometimes help correct to this faulty notion. For example, in the summer of 2010, a state-run enterprise purchased a very expensive Mercedes on directions from the Ministry of Justice, but after a public scandal Justice Minister Oleksandr Lavrynovych ordered his subordinates to get rid of the car.
 
 
Playing hide and seek
 
But Government-sponsored bill No. 7532, which would have to improve the regulation of government purchases, contains a number of novelties that go the opposite way. The most outrageous is one that removes from the scope of the law companies in which the state has a majority stake or a majority of supervisory board members. The bill also proposes that the government establish a separate procedure for such companies. The Economic Code, too, will have to be amended to reflect these changes.
 
MP Oleksandr Bondar, ex-head of the State Property Fund, believes that the government's initiatives “will remove tender-procedure money flow from the scope of law altogether: the ministries will simply set up companies for themselves to make all purchases though them.” MP Oleksandr Yefremov, head of the Party of Regions faction, begs to differ: “Due to the complexity and the time-consuming nature of tender procedures, state-run companies find it very hard to carry out economic activities and compete with private companies.” The Cabinet of Ministers, he added, simply wants to fix this situation.
The reader will remember that the current law on state procurement swamps both state companies and bidders with paperwork. This indeed turns tenders into a major headache: piles of papers have to be submitted to Kyiv for publication in an official periodical (The State Procurement Herald) and obtain approval from the Economy Ministry (the designated agency for state purchases). Any incorrect seal, or lack thereof, may stall a purchase for months on end. Sometimes these situations are unacceptable: it is unimaginable that the hungry military be forced to seek food on its own after the food supply system breaks down for some reason.
 
Sponsors of bill No. 7532 decided to abandon the requirement that nearly all documents needed for bidding, including reports on bidding results, records of bidding proposal announcements, etc., have to be published. But these are precisely the documents that contain information about the participants, their bids, and so forth. These are the reports and records that enable the public to check on whether two companies owned by the same person participated in the bidding, whether the winner’s bid is indeed the best, and so on. That is why the publication of this data is crucial. And it is not only about reporters’ interest —  this cash flow (once again, UAH 172 billion in 2010) needs to be transparent to the controlling bodies.
 
“As soon as The [State Procurement] Herald publishes information that only one company is participating in bidding, we intervene,” says Petro Andreiev, head of the Chief Control and Auditing Directorate. “After this many state-run companies cancel the bidding, because they understand they can be held criminally responsible if they spend the money… For example, auditors prevented the state-run company called ‘Obluhovuvannia povitrianoho rukhu Ukrainy’ to commission Incom Ltd. to do construction and installation works worth 54.1 million hryvnias. And there are examples like that in every oblast.” The Chief Control and Auditing Directorate, which has the authority to check how money is spent in state-purchase transactions, may lose its ability to prevent abuse if bill No. 7532 is passed.
 
Erasing all traces of crime
 
The present author has described these and other likely consequences of the reform to Mr. Yevremov, saying that both the current norms and the proposed novelties are no safeguard against abuse. An example has also been given: following the “open bidding procedure,” the Poltava regional branch of the State Land Cadaster Center signed an agreement with a private local company to rent office space. A regional branch of this kind of state-run company is unlikely to employ more than 100 personnel, but it agreed to shell out UAH 22.36 million for six months of rent. And this is Poltava, not Kyiv! Mr. Yevremov replied that cases like this need to be “the object of attention of law-enforcement agencies.” But bill No. 7532 creates conditions for concealing information from law enforcement officers, who usually obtain it from inspectors.
 
Incidentally, the Chief Control and Auditing Directorate specialists systematized data on state procurement schemes under ex-Premier Yulia Tymoshenko. Relying largely on this data, criminal cases were opened against a number of former officials. Why is the Azarov government changing this system? Isn’t there a desire, lurking behind this move, to make sure that no traces will be left? This way or another, if the bill goes through parliament, the country will again see chaos in this area as was the case a year ago when the previous government approved non-competitive procedures for purchases worth over UAH 30 billion, according to the Chief Control and Auditing Directorate and the Audit Chamber. Now the government seems to be starting a dance around a rake, coming dangerously close to stepping on it and getting bashed in the face. But the rake is many times bigger than it was in 2008–2009, because the cash flow is much greater and the purchases made by all state-run companies will no longer be regulated by law.
 
Information support
 
Paradoxically, the World Bank, the European Commission, and EU representatives not only support bill No. 7532 but are even threatening that the Ukrainian government will lose €600 million in financial aid if it fails to have it passed. Previously, international organizations carefully studied amendments to tender-related legislation and criticized them.
 
In a telephone conversation, a representative of the World Bank said, speaking on condition of anonymity for lack of authorization to reveal the official position, that the government’s initiative is supported with reservations. However, our contact refused to provide a list of these reservations, because they are part of the World Bank's correspondence with the Ukrainian government and their publication requires approval as a matter of business ethics.
 
The position of EU representatives is more or less known. They want to raise Ukraine’s bidding legislation to the world standard, particularly by fixing in law the concept of “framework agreements” which give state-run companies the right to make additional purchases from companies that have won respective tenders. There is hardly a need to explain that the combination of this idea and the norms contained in bill No. 7532 will totally corrupt the system. Another important thing for the EU is changes to regulations about urgent purchases. Under effective legislation, the one-bidder procedure is allowed if “there is an urgent need for goods, work, or services.” The EU justly observes that this formulation may legalize any abuse. For example, last summer officials in Kyiv used this procedure to spend several millions of hryvnias on services related to Independence Day celebration. The lack of competition between potential organizers, which would have likely saved budget money, was motivated, surprisingly, by extraordinary circumstances — orders to hold festivities were passed too late, and there was not enough time to arrange bidding. So what do Europeans suggest instead? Permitting the one-bidder procedure in cases when “special economic or social circumstances arise which make it impossible to follow the time schedule of the competitive bidding procedure.” It makes, essentially, the same difference. The celebration of Ukraine’s Independence Day may be considered both an urgent event or a special socioeconomic circumstance. Meanwhile, the one-bidder procedure accounts for 25–40% of all state purchases depending on the year.
 
The Ukrainian Week’s sources in international organizations say that the World Bank's support for bill No. 7532 is caused by its lack of awareness, particularly about norms excluding state-run companies from the scope of the law and denying access to information about bidding procedures. But what difference does it make? The government and the Presidential Administration hope to have the bill, flawed as it is, made into law as soon as March. There is virtually no counteraction, and the fact that state purchases would have to be a tool to foster medium business in Ukraine is being completely ignored, for some reason. Tender-related corruption has a beginning but no end, so to speak.
 
COMPLETELY OFFICIALLY
 
Below are some of the conclusions made by the VR Chief Scientific and Expert Directorate vis-à-vis measures to reform the system of state purchases and particularly how much they agree with the regulations of the framework Law “On Making State Purchases”:
 
– If the norm is removed from the Economic Code under which purchases made by communal unitary enterprises must follow regulations contained in the framework law, this may increase corruption in local self-government bodies and make bidding procedures indeterminate.
 
– Fully or partly state-owned enterprises and economic associations (with a state-owned majority stake in the authorized capital) will be making purchases following Cabinet of Ministers decisions rather than regulations fixed in the framework law. This approach does not fully agree with legal requirements.
 
– Exclusion of office rent services to accommodate government-funded agencies in the scope from the framework law does not fully agree with the main purpose of the law, which is to create a competitive environment, prevent corruption in this sphere, etc.
 
– The expansion of the list of goods, types of work, and services to be purchased by the state under other regulations may complicate legislation, weaken its integrity, and complicate bidding procedures.
 
– The proposal to exclude the norm under which one-bidder purchase procedures have to be approved by authorized agencies appears to be unjustified in view of the social importance attached to the transparency and legality of such procedures.
 
– Sufficient justification has not been provided to support changes to the procedure of publishing information about purchases and the narrowing of the scope of information to be made public. It should be noted that the new procedure will somewhat complicate information search regarding participants. As a result, this proposal, if implemented, will somewhat decrease the transparency of bidding procedures.
 
– The norm under which the purchasing company has to use the one-bidder procedure in cases when there is an urgent need connected to special economic or social circumstances is ambiguous and difficult to apply and may lead to negative consequences;
 
– The purchase of services and goods for Ukraine’s national sports teams, prosthetic and orthopedic goods, and training services for the unemployed does not fully agree with the main purpose of the law, which is to create a competitive environment, prevent corruption in this sphere, etc.
 
 

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