Analysis. Parliament. Articles.

Public Procurement Law: In Between of Equality and Exceptions

Saturday, 09 August 2014 1089
Author: Lesia Shevchenko
The new version of the procurement law adopted April had not stopped the efforts to use the legislative regulation of public procurement for lobbying narrow interests.

The newspaper “Dzerkalo Tyzhnya. Ukraina”, issue 27 as of August 8th, 2014, published an article by the "Open Society" Foundation President Lesya Shevchenko. She had analyzed the trends for political parties in Parliament on public procurement.

The analysis is based on the results of parliamentary monitoring done by the experts of the "Open Society" Foundation www.osf.org.ua

Monitoring of legislation on public procurement has made it possible to capture the following trend. Within three months after the adoption of a new law in Parliament dozens of draft laws had been introduced calling for exception of certain goods and services or other assistance to the producers. Significantly, these were initiated by the representatives of different political parties. Unfortunately, clear positions of political parties in Parliament on the procurement and budgeting regulation were hard to find in the election programs. As a result, the draft laws of various political parties (including political opponents!) promoted the interests of the same groups of industry lobbyists. Thus the political expediency and mercantile interests prevailed over the initial principles and values of the political actors.

The new version of the Law on Public Procurement was adopted on April 10th, 2014. It provided for less exemptions to prevent the uncontrolled use of public funds, and to ensure transparency and openness. Currently, 16 such exceptions are mentioned in the law. Also, special laws define the terms for procurement in more than 12 types of activities and for 10 kinds of goods and services.

Along with the Budget and Tax Codes, the Law on Public Procurement is the most popular target for amendments. During the seventh session of Parliament more than 50 changes were introduced. More than half of those provided for exceptions.

The new version of the procurement law in April had not stopped the attempts to use the legislative regulation of public procurement for lobbying narrow interests.

Lobbying for Guaranteed State Procurement for Some Producers

The draft law 4134a (as of June 19th by Party of Regions MP Serhiy Kaltsev) introduced the national treatment in public procurement of goods. The draft law provided for governmental authority to determine the list of industrial goods to be purchased exclusively from domestic producers. Moreover, it determined transport, energy and urban infrastructure projects developed entirely for the purchase of domestically produced goods. In fact, this is the scheme for guaranteed state orders for a few business sectors (engineering, automotive, building materials, manufacturing of pipes, etc.). At the same time the list of beneficiary industries is minimal, but objective. Following this logic, nothing shall prevent the expansion of the list with purchasing food, alcohol and so on. Lobbying capacities and appetite shall be the determinants for such expanding.

Additionally the draft law introduced the price discrimination to imported goods. When the foreign supplier wins a tender, the price is automatically reduced by 15%. Furthermore, it was proposed to empower the Cabinet of Ministers with the authority "to set a reducing factor for goods of foreign origin in up to 15% for certain types of industrial products and determine the use of this factor". Thus the government officials will be able to determine the beneficiaries of the relevant rules to please specific lobbying groups. What about the great temptation (in domestic realities) to benefit from this regulation?

Certainly, the industrial lobby continues to live in some other dimension. Ukraine has been the member of the World Trade Organization for six years. The country has signed the Association Agreement (including FTA) with the EU. In the meantime, the protectionist draft laws, resembling a return to a planned economy (foreign goods are deprived of access to public procurement procedures through price discrimination), keep being registered in the parliament.

It seems that the concepts of market economy and competition (the latter, incidentally, is protected by Article 42 of the Constitution) remain quite abstract to the lawmakers. Considering the privileged access to state aid in the past years, selected "entrepreneurs" are unlikely to refuse the use of public funds in the future.

Many companies seek to increase profits by using state aid and preventing foreign competitors from entering Ukrainian market. Unfortunately, such policy is in demand in Ukraine. On the other hand, what would be the fate of such firms? Of course, their foreign counterparts will have to resort to symmetric measures (under WTO rules), and Ukrainian products will be deprived of access to the markets of certain countries.

The motivation of the draft law author, described in the explanatory note, was interesting enough. Describing foreign experience of protectionist measures he referred to the website of independent monitoring organization, designed to reveal the danger of protectionism! Although due to the global crisis protectionist measures were prevalent in many countries, such vector was not considered strategically correct. On contrary, it undermined the development of free trade. In addition, a few countries were practicing comprehensive protectionist measures, unlike suggested by the draft law.

The draft law had quite general and very vague reasoning, which was typical for this kind of lobbyist laws. The share of foreign products in public procurement, as stated in the explanatory note, made up 15% (for some reason this number coincided with the proposed price reduction for international companies). At the same time, the note stated, the other countries were introducing protectionism. However, draft law’s supportive documents contain no analysis or reference for a market sector hindered by the lack of state support. Meanwhile, the Government led y the Party of Regions for some reasons preferred imported Hyundai. The trains of Kryukovsky carriage plant had been granted an access to the public procurement segment under the new government only. Strange, isn’t it?

The lawmakers willing to protect domestic producers, including on import, should be advised to think of specific beneficiaries of such decisions. This can be specific company, sector, city, or region. It will be interesting to learn the experience of operating companies. What import hinders their operation? Which imported products are necessary for production?  One shall never see the real picture by referring to the abstract experience of import substitution in other countries.

Caring for Athletes, Educators and ...Government Officials

The draft law 4252a (as of July 4th, 2014 by Oleksiy Kaida and Ihor Yankiv, "Svoboda") was designed to establish another exception to public procurement law. It provided for an exemption of the whole range of products and services to support the national sport teams, including air travel, transport, catering, accommodation, maintenance of sports facilities, special equipment and resettlement of training sites, sporting events of national and international levels, medicinal and pharmaceutical products.

Procurement difficulties and unpredictability of budget allocations that jeopardized normal training of athletes were mentioned in the explanatory note. For example, lack of fund allocations made it nearly impossible to ensure the competition or training of bi-athletes at the beginning of the year. That has become a tradition – the lawmaker stated. Also, the law did not encounter the peculiarities of specific sports. Competitions in athletics should be conducted at various sports facilities, while the law provided for simultaneous sports activities in one place.

Unfortunately, the practice and realities of life here contradict the legal language. By the way, similar trends can be observed in education. The complexity of the tendering procedure leads to grinding operations for food purchase for schools and kindergartens to the size of the so-called “sub-threshold” purchases. Tenders are avoided to feed the children. “Batkivschyna” representatives had once initiated the draft law 2055 to introduce the exception for kindergartens supply procurement.

Imperfect procedures create an ethical dilemma for officials. Should they act according to the law or should they achieve a desired result? Mentioned trends in sports and education suggest that the rejection of the tender procedures in general is seen as the solution to this dilemma. Exorbitant nature of the budget process and tendering procedures and their ability to abandon the competition remain another question. Perhaps, the failure was due to the insufficient training of professionals responsible for procurement, the lack of coordination among agencies, or the traditional bureaucratic red-tape? Did the Ministry for Family, Youth and Sports perform sufficiently to ensure that national teams are supplied in full?

Perhaps the government and international experts should examine the situation and find the real causes of problems. Are the budgetary or procurement procedures imperfect? Otherwise, if the poor regulations will be eliminated by multiplying the exceptions the law will become a legal fiction.

The same two "Svoboda" MPs had introduced a similar draft law 4827 (as of May 6th, 2014) offering the same exceptions. In addition the law provided for exception of lease of non-residential public-owned premises to state institutions. This provision, however, had the same reasoning as for the support of athletes. Of course, the lawmakers might have meant the lease of sports facilities. Yet, they proposed to exempt all cases of rent to state institutions from tendering procedures. Why?

In fact, such lease means shifting money from one governmental pocket to another. Is a tender procedure required for such a lease?

Firstly, the number of suitable premises to accommodate state institutions is very limited. In fact, they are selected by the departments of municipal property or the State Property Fund among the narrow "range" of facilities. Hence, the tender held by the district office of the Pension Fund among two property menegers, looks strange. Also, the opposite situation, when the property manager chooses between two tenants - the Tax Office or the Department of Education - is even more unrealistic. Moreover, it refers to the legislation on the lease of public and municipal property and not to public procurement law. It should be mentioned, that lease of such property at market prices is nearly impossible due to deficiencies in the legal framework.

Finally, the tender for lease of public and communal property by state is surreal, as in most cases these tenants pay a nominal fee of 1 hryvnia per year, which simplifies the calculations between the different budgets. It is clear for financers. So, what’s wrong with the tender committees?

Clarifications from the Ministry of Finance, the State Property Fund and Ministry of Economic Development are needed. What is the point to pay one hryvnia for rent?  Secondly, how this can be due to the tender procedures?

Security and Defense vs Competition and Transparency

The draft law 4886 (as of May 15th, 2014 by “Batkivschyna” MP Mykola Martynenko) looks, at first glance, quite useful during the anti-terrorist operation. The draft law introduced an exception for the military-industrial complex enterprises. Incidentally, such an exemption was provided by the previous version of the law on public procurement.

Parliament has already taken practical steps to simplify procurement for law enforcement agencies. On May 6th 2014 a procedure of negotiations in case of urgent need was introduced. The procedure, however, was simplified for end users of defense products, including the Ministry of Defense, Security Service, Border Agency, etc., but not the manufacturers. State-owned defense enterprises buying the components may be subject to the basic law on public procurement.

Policymakers and experts, thus, face the next dilemma: should they ensure the defense of the state, or increase the financial transparency and competition of state enterprises? Accountable expenditure of the public funds speaks for transparency; improved product quality speaks for competition. At the same time, disclosure of financial (or any other) information associated with the production of military products can be misused and lead to army losses. This risk was included in the Law on Public Procurement. Procurement cases protected by state secret were derived from the application of the law.

By the way, according to the EU legislation, the application of competition rules should not harm the state defense orders.

The draft law 4886 was assessed negatively by the Parliamentary Committee against Organized Crime and Corruption due to potential corruption risks.  Chief Scientific Expert Department traditionally does not support extending the list of exceptions, too. The difficulties defense enterprises face in tendering procedures and procurement of components and equipment, according to the Expert Department, can be solved by making such operations secret as provided by applicable law on public procurement.

A question of implementation of the election promises of "Bankivschyna" raises in the context of this draft law. Namely, the party promised "to create the conditions for fair competition". Perhaps, the election programs need more clarity and also the exceptions.

Protecting the Interests of Farmers

Identical draft laws 4779 (as of April 24th by “Svoboda” MP Olexandr Myrnyy) and 4132a (as of June 19th, 2014 by a group of MPs led by Kateryna Vashchuk, a former member of the Party of Regions, and now representing "European Sovereign Ukraine" group) serve as other example, when the reduction of the exceptions list in the new public procurement law did not satisfy the influential interest groups.

Both draft laws seek to return the exemption of Agrarian Fund interventions on a regulated market of agricultural products. The market, where the Agrarian Fund operates, itself enforces the competition in the procurement of goods with the public money – the authors state. However, an additional burden of tender procedures through price changes in the market leads to excessive public spending.

The supporting documents to both draft laws caused the same question. Do Agrarian Fund activities on a market of agricultural products promote the competition with real consequences? Alternatively, are these not just the formal features of the market?

***

The challenges of public procurement go well beyond the procurement process itself. They shed the light on the flaws in the budget process and government regulations. Public procurement legislation, thus, will not play the crucial role in ensuring economic competition, transparency and efficiency of public funds, unless solving the major issues.

Therefore, the adoption of such draft laws in the first reading should be accompanied with detailed study of each particular situation. Otherwise, simplified and abstract approach to adjustment of the basic law can lead to negative consequences both for the procurement process and the budget, but also for taxpayers and consumers of goods and services acquired through public funds.

Political parties need clear positions on procurement regulation and the budget process in general. Such position should serve as an indicator for voters and experts to assess political actors’ devotedness to European values and principles. Otherwise, the general and rather vague formulations will enable parliamentarians’ arbitrary interpretation of the principles of fair competition. 

Top news