Amendments to the public procurements law are expected to further conceal the scale of the distribution of public funds to business entities close to the government
Recently, the parliamentary majority used the scandalous language bill to divert public attention from another law that it passed on July 4th. Under the new law, tenders by government-owned enterprises held for non-public funds will be out of the reach of public control.
The parliament voted for the law without any prior discussion and after just a minute-long speech from the Party of the Regions (PR) MP Oleksiy Plotnikov. Draft law No. 9634 On Amendments to Some Laws of Ukraine On Public Procurements, drafted by the Cabinet of Ministers, cancels the procedure whereby the purchase of goods and services by government-owned enterprises through tenders is irreversible, provided that the company pays for it with its own money, rather than public funds.
HOW MUCH IS IT WORTH?
How will this amendment affect the economy? According to Minister of Finance Valeriy Khoroshkovsky, UAH 400bn was spent and 110,128 contracts signed under public procurement procedures in 2011. Public spending in 2011 was UAH 332.8bn including more than 65% spent on salaries to public sector employees, social benefits and government debt. Thus, Так, social expenditures under the general fund of the public budget in 2011 totaled UAH 228.5bn (USD 28.5bn). Less than UAH 100bn (USD 12.5bn) was allocated through tenders. As a result, nearly UAH 300bn (USD 37.5bn) was qualified as “non-budget” funds in public tenders out of all the money that went through tender procedures. From now on, after the president signs the new law, this amount will be allocated in the shade, without public announcements of tenders or any competition at all.
What does this hold for government-owned enterprises acting as commercial entities? It means a total lack of public control over the use of the working capital. In other words, their advertisers will have the chance to save a penny on advertising blocs or media campaigns to refute criticism or clean up the reputation of their bosses.
Ukrainehas recently found that the State Administration of Affairs purchases fruit and vegetables for UAH 600 (USD 75) per kilo. Kharkiv authorities put up benches in the city’s metro station that cost the price of a Ukrainian-made car, while nuclear power stations order Lexus cars as “a key to nuclear safety”, let alone equipment which is overpriced by 300-500%, or consulting services and software worth UAH 10-25mn that will never be implemented in any way. Today, Ukrainians can openly see this. In certain cases, they can even submit a request to the Control and Revision Authority or Prosecutor General to find out where the public money goes. Sometimes, they can even get an answer because their supplier companies, even if filling the public budget just like average Ukrainian taxpayers, still get their profits from Ukrainians who, as consumers of services from state-owned companies, are supposed to take an interest in how their taxes are spent. Very soon, though, only several hundred authorized people, who will be kept under strict control, will have access to this information.
One other thing about the new law is that is restricts the functions of the Control and Revision Authority (CRA) whose key responsibility is to exercise public financial oversight of the way public money is spent and saved. Firstly, the CRA is no longer authorized to inspect all stages of the public procurement process. Thus, they will not be able to prevent fraud, only state the fact of a violation. Secondly, the Cabinet of Ministers will now be in charge of establishing the procedure for whom, when and how the CRA will inspect. Indeed, there is something about this. For instance, why give new leverages to the CRA if they can be handled manually? Yet, a notice about an upcoming inspection, or postponing it to a convenient time, may turn out to be pricey. Still, the new restrictions do not eliminate the opportunity to use the CRA as a tool of repression.
Clearly, no law will make the overregulated economy competitive, even if it makes tenders mandatory for any large-scale procurement. Still, transparency gives more opportunities to the interested parties. A prospect to appeal against trade procedures in court is one of them. Currently, no matter what violations occur during the tender process, the new version of the public procurement law will ruin any attempt to establish a competitive market in Ukraine.
What do these innovations mean for state-owned enterprises that order the tenders? In addition to opportunities to conceal tenders from the nosy public, they get another undeniable bonus: cancellation of appeals against the procedure by unsatisfied parties which, if abused by dishonest subcontractors, may drag the process of procuring equipment or badly needed services on for months or even years.
A CONSTRUCTIVE COMPONENT?
Currently overregulated by legislation and internal rules of state-owned companies, the tender procedure has artificially caused a situation where clients have to pay more because suppliers lack the time or incentive to participate in tenders that may drag on for years. As a result, most producers and intermediaries arrange prices between themselves using legal gaps. This results in pseudo-competition in tenders where half a dozen dealers and distributors of one producing plant make a show of competing with each other in open tenders. Their only function is to bump up the price that will leave a kickback for both the client, and the producer. As a result, tenders act as auctions, rather than a real search for a better price.
In the course of a persistent struggle for tender transparency, the process has accreted so many regulations and rules that it often overrides the basic concept of it: it is quality that has to win in the first place, not the price. Also, quality control during tenders should be highly professional. However, a frequent impression now is that the tail has come to wag the dog as the company’s tender committee and financial unit instruct technical specialists on what they should do. If the cancellation of tenders removed this ill balance in the operation of production enterprises, it would certainly be for good. At least, this would allow them to save money by getting rid of their own tender committees that often have dozens of employees at one enterprise. And they do not live on their salaries alone.
The potential benefit could definitely count if enterprise managers were appointed to develop the financial and production aspects of the business rather than their own welfare, or them trying to improve their party, or family relations, with those who appoint them. This prospect looks highly unrealistic today, especially through government regulation procedures.
Petro Poroshenko, the Minister of Economic Development and Commerce, insists that most state-owned enterprises (nearly 1,200 according to him) should be privatized. Today, this is a realistic opportunity to encourage their managers to play by market rules rather than family and clique interests. Yet, Mr. Poroshenko has already declared that monopolist enterprises that cannot be privatized should keep their procurement procedures transparent and open. How will this happen if the law omits the point despite having been drafted by the Ministry headed by Poroshenko?
Transparent procurement procedures will not rule out abuse of funds, especially in Ukraine. Otherwise, there would be no notorious Boyko’s platform, overpriced souvenirs bought by state monopolists, Euro 2012 preparation budgets swelled to twice, or more, the necessary amount, and multi-million spending on ordered articles and TV reports in the media (see The Chronicles below for more details). The Prosecutor General had collected many cases concerning abuse of funds even before the law was passed. Yet, uncontrolled spending will further fuel the problem while depriving the public of the opportunity to oversee the violations and exempting the officials involved in the fraud from the need to look back at the bad publicity caused by their misdeeds.
Just some of the notorious public procurements that have recently outraged the public due to the still open tender procedure
A PRICEY UPGRADE
Altcom, a development company connected to Vice Premier for Infrastructure Borys Kolesnikov, has become a symbol of public procurement, Party of Regions’ style. Since 2008, Altcom has received subcontracts worth a total of UAH 11.68bn (USD 1.46bn) with over half of that amount coming in 2011 alone. In June 2012, it received UAH 471.34mn (USD 58.9mn) to build roads in Poltava Oblast. This means that one kilometer of such a road would cost over UAH 30mn or USD 3.75mn to build. In July, after the tournament was over, news surfaced that the National Agency for Euro 2012 would allocate another UAH 140mn (USD 17.5mn) to Altcom for construction work at the Donetsk airport based on the non-tender procedure used during Euro 2012 preparations.
In March 2011, Chornomornaftogaz bought an offshore oil rig for USD 400mn to drill the Black Sea shelf for fuels. The media have found that this price was USD 150mn higher than the average price of platforms worldwide. Later, another platform was purchased for an identical price. The Latvian company that sold them then liquidated itself in January 2012.
European road signs
Before the Euro championship, Ukrainian cities introduced new plastic LED type signs. Kharkiv metro bought them for UAH 8,500, or slightly over USD 1,000 per piece, while regular non-LED signposts cost UAH 5,000 each. Kyiv bought 120 signposts for tourists for an average of UAH 15,000, or nearly USD 1,800 per piece, while Donetsk bought the same signs for UAH 9,000 or USD 1,125 per board.
Textbooks from a minister’s mother
In March 2012, the Education Ministry bought a series of textbooks for schools which offer education in foreign languages. The print house that published the books turned out to be the only participant in the tender. Ukrainian language textbooks for Moldovan-speaking children cost the taxpayers UAH 496.75 or USD 62 per copy, while Mathematics and Ukrainian Language for Polish-language schools were worth UAH 506 (USD 63) and UAH 647.9 (USD 80) respectively. The authors of every book included Olha Khoroshkovska, the mother of Ukraine’s First Vice Premier.
In early June 2012, Grant Service, a state-owned company that services official events of top government authorities, bought fruits, berries and vegetables worth UAH 2.6mn (USD 325,000) for the canteens of the Presidential Administration and the Verkhovna Rada’s banquette hall. According to the Public Procurement Newsletter, Ukrainian cherries for top officials cost UAH 63, while imported cherries were worth UAH 204; mangoes cost UAH 408, while blueberries and raspberries were purchased for UAH 576 and 672 respectively. Meanwhile, cherries, blueberries and raspberries cost from UAH 20 to 50 per kilo at most markets and stores in Kyiv, while mangoes sell for no more than UAH 60 per ripe top-rate fruit.
Going over the edge?
In August 2011, a media scandal resulted in the cancellation of a giant obscure procurement as the State Land Agency rejected a deal to buy plastic land markers from TOV Investeco. The deal was worth UAH 4.9bn or USD 612mn with each of the 50mn markers worth an appalling UAH 98.
In a recent poll, Razumkov Center, a sociology group, has found that 73% of Ukrainians fully or partly agree with the statement that political parties which spend a long time in power always have tainted reputation. So they only believe new political forces and their leaders