Report No. 24396 Bosnia and Herzegovina Country Procurement Assessment Report Social Protection June 2002 Core Services Unit Europe and Central Asia Region Document of the World Bank CURRENCY Currency Unit = Convertible Marka (KM) US$ 1.00 = KM 2.236257 (March, 2002) FISCAL YEAR January 1 - December 31 ACRONYMS & ABBREVIATIONS BER Bid Evaluation Report BiH Bosnia and Herzegovina CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPPR Country Portfolio Performance Review CTF Consultative Task Force EBF Extra-Budgetary Fund EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia Region EU European Union FBiH Federation of Bosnia and Herzegovina FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service FY Financial Year GPA Government Procurement Agreement of the World Trade Organization GTZ Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) GmbH ICB Intemational Competitive Bidding ICG International Crisis Group IFI International Financial Institution IMF International Monetary Fund IS International Shopping KM Convertible Mark LPP Law on Public Procurement MOF Ministry of Finance NCB National Competitive Bidding NGO Non-Governmental Organization NS National Shopping OHR Office of the High Representative PEIR Public Expenditure and Institutional Review PIC Peace Implementation Council PMAU Project Monitoring and Auditing Unit RPA Regional Procurement Adviser RS Republika Srpska SAI Supreme Audit Institution SBD Standard Bidding Documents SES Single Economic Space SFRY Socialist Federal Republic of Yugoslavia TA Technical Assistance TGL Treasury General Ledger UNCITRAL United Nations Commission for International Trade Law UNDP United Nations Development Program WGPP Working Group on Public Procurement WTO World Trade Organization Regional Vice-President: Johannes F. Linn, ECAVP Country Director: Christiaan J. Poortmn, ECCO4 Acting Sector Director: Richard B. Westin, ECSCS Task Team Leader: Shaun 0. Moss, ECSCS BiH CPAR Table of Contents TABLE OF CONTENTS Executive Summary ............................................i Introduction ............................................i Overall Assessment ............................................ ii A. PREFACE ......................................... . V7 A. I Date and Bases for the Report ............................................ vi A.2 Acknowledgements ............................................ vi A.3 Participating Government Organizations ............................................ vii A.4 World Bank Team ............................................ vii B. BACKGROUND ............................................II B.1 Country Background ............................................ viii B.2 Bank Portfolio in BiH ............................................ ix C. FINDINGS ......................................... . I PUBLIC SECTOR ............ ..1 C. 1 Legal and Regulatory Framework .I C. 2 Procedures, Practices and Application .4 C.3 Organization and Resources .13 C.4 Audit & Anti-Corruption Measures .16 C. 5 Public Sector Management Perfornance .19 C. 6 Performance on Bank-Assisted Projects .22 C. 7 Risk Assessment .25 C.8 Recommended Supervision Plan .26 C.9 Unacceptable Practices on Bank-financed Projects .27 PRIVATE SECTOR ...................................................... 29 C. 10 Competitiveness and Participation of the Private Sector ............................................. 29 C. 1 I Performance on Public Contracts ................................................. 29 C.12 Commercial Practices ................................................ 30 C. 13 Private Sector Perspectives on Public Sector Procurement ......................................... 31 D. RECOMMENDEDACTIONPLAN ............................................. 32 D.1 Recommended Actions .32 D.2 Measures to be Taken by the Governent .39 D.3 Measures to be Taken by the Bank and Other Financiers .39 D.4 Technical Assistance .40 D.5 Timetable .40 BiH CPAR Table of Contents D.6 Funding Procurement Reform ................. .......................................... 40 D.7 Monitoring and Follow-up Plan .................... ....................................... 41 ANNEXES Annex A: Status of Bank Group Operations in Bosnia and Herzegovina Annex B 1: Expenditure Assignrments by Level of Administration Annex B2: Canton-by-Canton Planned vs. Actual Procurement Expenditures, Annex B3: Budgeted Expenditure on Goods, Services and Capital Expenditures by Level of Administration Annex C: Supplemental Letter on National Competitive Bidding (NCB) Procedures Annex D: Proposed Action Plan for Public Procurement Reform in Bosnia and Herzegovina Annex E: Map of Bosnia and Herzegovina TABLES, BoxEs AND FIGURES Table 1: BiH: Division of Responsibilities ............................................................. viii Table 2. BiH: Current Composition of World Bank Loan Portfolio .............. .................... x Table 3. BiH: Thresholds Governing the Application of Procurement Methods ............... 7 Table 4. BiH: Supervisory Functions Performed by the RS MOF . .................................. 15 Table 5. BiH: Budgeted Recurrent and Capital Expenditures on Public Procurement .... 20 Table 6: BiH: Delegated Procurement Thresholds, Sarajevo Office ................................ 24 Table 7. BiH: Applicable Thresholds by Procurement Method ................. ...................... 27 Box 1: Scope of Procurement Rules .................... ......................................... 3 Box 2: Procurement Methods under the FBiH Decree and RS Law .............. .................... 6 Box 3: Provisions on the Protection of the Rights of the Bidder ...................................... 12 Box 3: Summary of Procurement Risks Factors and Recommended Actions .................. 33 Figure 1. Budgeted Procurement Expenditure on Goods, Services and Capital Expenditures by Level of Administration, 2000 (KM Million) ......................... 21 Figure 2: RS Road Directorate Budget, 2001 .................................................... ......... 22 BiH CPAR Executive Summary EXECUTIVE SUMMARY INTRODUCTION The importance of public procurement to the creation of a "single economic space" in Bosnia and Herzegovina (Bill) has been recognized by the Peace Implementation Council in its Brussels Declaration of May 2000. The provisions of BiH's State Constitution that require full freedom of movement of persons, goods, services and capital throughout BiH can be met only if a harmonized set of procurement rules is in place. Public procurement is also key to meeting the stated objective of creating a level playing field for private sector development, given that the government is a major customer for most private sector companies. The timing of this assessment is particularly relevant given that BiH is at a crossroads: as external aid is slowing, the country needs to generate sustainable growth of its own. A central part of sustainable growth and fiscal stability will be more prudent management of scarce public resources, including exerting greater control over procurement expenditures and achieving better value for money in government contracting. Procurement reforn is an increasing priority as BiH seeks to move towards a Stabilization and Cooperation Agreement with the European Union, which will ultimately require harmonization of BiH's public procurement laws with EU legislation. This first assessment of procurement in BiH looks at all areas of public procurement operations in BiH, including the legislative framework, the performance of regulatory functions, the enforcement regime, the capacity of public sector institutions to conduct procurement, and the effects of corruption on procurement. It was carried out in consultation with counterparts from Ministries of Finance of the State of BiH, of the Federation of Bosnia and Herzegovina (FBiH), of the Republika Srpska (RS), and of the cantons of Sarajevo, Travnik and Mostar and Banja Luka municipality, all in the early stages of exercising their authority in public procurement operations. Before finalization, a draft of the report was discussed at a meeting of the Working Group on Public Procurement (WGPP) in Sarajevo on June 3, 2002, which was attended by senior representatives of the State Ministry of Treasury, Federation Ministry of Finance, Republika Srpska Ministry of Finance, Brcko District, the European Union Delegation and the Office of the High Representative. This final version of the report has been produced only after consideration by that Group. This CPAR forms an integral part of the World Bank's (WB's) activities in BiH as presented in the Country Assistance Strategy (CAS) of June 2000 and the CAS update of October 2001, and serves a number of its key themes, particularly: * Ensuring reduced and more efficient public spending: Governments at all levels spend significant sums on procurement and increasing the efficiency of these expenditures is essential to reducing public spending. * Increasing transparency: Improving access to informnation on bidding opportunities and public contract spending, and reducing public officials' discretion in awarding bids are important measures for increasing transparency. * Institution building: Improving the ability of public institutions at all levels to spend public funds on procurement efficiently and reinforcing the institutions that regulate procurement are imperative institution-building tasks. i BiH CPAR Executive Summary * Fighting corruption: The risks of corruption are particularly high in the area of public procurement, and increasing transparency, accountability, and competitiveness in public procurement is an indispensable part of combating corruption. * Promoting access to the World Trade Organization (WTO) and European Union (EU): Reform of procurement legislation is an essential step in aligning BiH legislation with EU law and with the WTO Agreement on Government Procurement (GPA). OVERALL AsSESSMENT The CPAR's key findings, including risk assessment, the strengths and weaknesses of the public procurement system currently in place, and the main features of a proposed action plan are summarized below. Key Findines & Risk Assessment Procurement is a Procurement has not to date been considered to be a core function of neglected function. government, worthy of specialized staff and dedicated organizational units. Yet public In 2000, government at all levels of administration spent some KM 670 procurement matters million (US$300 million) on the procurement of goods, services and to MR. capital investments, about 15 percent of total budgeted expenditures and just over 7 percent of BiH's GDP. Making public procurement more cost effective can make a big difference in the use of scarce public resources. Based on experience in other countries, governments can realize savings of as much as 20 percent through competitive public procurement, which would hold out the promise for BiH of savings in excess of KM 130 million (US$60m). The absence of a The State bears responsibility for foreign trade policy, part of which State law on public entails taking the lead role in managing relations with BiH's foreign procurement is a trade partners, foremost among which are the European Union (EU) and serious omission. the World Trade Organization (WTO). The future development of economic relations with both of these parties will require Bosnia and Herzegovina to align its public procurement legislation with the EU Procurement Directives and the WTO Agreement on Government Procurement (GPA). Yet, at the moment, the State does not even have its own law on public procurement. This is a serious omission which needs to be put right as a matter of priority. The public Based on the analysis of its legislative framework, the effectiveness of procurement its regulatory institutions, the strength of its enforcement regime, the environment is capacity of its institutional and human resources, and the threat of high-risk corruption, the assessment found that the environment for conducting public procurement in BiH is high-risk. ii BiH CPAR Executive Summary Strengths and Weaknesses LeeaI Framework: The FBiH Decree On Procedure of Procurement of Goods, Services and Contracts and the RS Law On Procedures for Procurement of Goods, There are many Services and Works provide a less than comprehensive framework for weaknesses in the the conduct of public procurement, fail to provide a clear set of rules for current legal system. the conduct of public tenders and afford excessive discretion to public officials in making decisions about awarding government contracts. While the legislative enactment in the Federation is particularly weak, given its status as a Decree rather than a law, the level of compliance with the legislation is low in both entities and at all levels of administration. Current frameworks The RS Law is patterned on the FBiH decree and they provide a are reasonably reasonably uniform procurement regime in BiH, making it easier for all aligned, and local bidders to participate across entity boundaries. FBiH recognizes governments are the weaknesses of the decree and is ready to draft and enact a sound willing to harmonize procurement law. them further. Current Practices: The assessment found many instances of bad and abusive practice. For example, because the legislation vaguely stipulates only "a reasonable Gaps in the period" for bidders to subrnit their bids, purchasers abuse this provision legislation breed to restict competition and favor a preferred bidder by allowing as little many abusive as three days for bid submission. The process of bid evaluation is also practices in public particularly susceptible to rnanipulation, as the legislative provisions are procurement. both inadequate and opaque. For exarnple, they do not require procuring entities to pre-disclose the bid evaluation criteria to the bidders, an essential element of transparency. The benefits of Successes in procurement under WB guidelines have introduced local competitive bidding officials to the benefits of open, competitive bidding, and it is not are becoming known. difficult to find people in government who appreciate the lower prices and savings thereby obtained. Some large A few experienced purchasers that have worked with donor financing, purchasers are using including major public utilities, have adapted donors' standard bidding standard bidding documents for use in procurement programs funded from their own documents for all sources. procurement. Oreanization & While responsibility for enforcement of procurement legislation is Resources: vested in the MOFs, regulatory functions are often not being performed in practice because these institutions have not dedicated resources to the Abusive practices are regulatory ftmctions and because they lack staff with the necessary fostered by poor specialized skills. As a result, the level of compliance with the enforcement. procurement legislation in both entities is low. iii BiH CPAR Executive Summary Capacity to conduct At all levels of administration, procurement is being handled, often procurement is weak improperly, by untrained, non-specialist staff. This further compounds the weaknesses in the legislation. The arrangements When a dissatisfied bidder lodges a complaint against the actions of the for holding public public official relating to public procurement, it is reviewed by the officials accountable Ministry of Finance at the relevant level. Bidders are therefore being are inadequate. denied the right to an independent review of their appeals. Because of the ineffectiveness of the court system, bidders rarely seek judicial review. Given that bidders cannot get redress for their grievances, public officials who breach the procurement rules are not being held accountable. Counterparts are The two WB procurement staff based in Sarajevo spend about 20 being trained by WB percent of their time delivering training to government staff working on Sarajevo office staff. the implementation of Bank projects, which is gradually bringing up the level of expertise of counterpart procurement staff. However, no level of government currently provides procurement training for its own staff. Audit & Anti- External audit functions were introduced in late 2000, with the corruPtion: operationalization of the Supreme Audit Institutions (SAIs), one each at the State and entity levels, with co-ordination arrangements under the Although external State SAI and a uniform legislative framework. Although the SAIs are auditing functions still in their infancy, their operation to date has already verified how have been established critical the external audit function is to the transparency and reliability recently of public sector financial management systems and the credibility of government financial statements. Since their establishment, all three SAIs have invested substantial efforts in capacity building simultaneously with undertaking a significant audit of the public administration institutions, comprising a large portion of sub-entity governments. procurement-related Recent survey evidence indicates that corruption is regarded as corruption remains a widespread by 60 percent of the general public, 54 percent of public major problem. officials and 52 percent of entrepreneurs. 73 percent of respondents believe that bidders have to make an unofficial payment to win a public sector contract, usually around 4 percent of the contract price. The Government has rightly recognized, in its Action Plan for Combating Corruption published in February 2002, that tackling procurement- related corruption should be one of its prionties and has identified the enactment of new procurement legislation as a key component of such efforts. Private Sector: Private sector companies profess a low level of confidence in the conduct of public tenders, complaining about excessive demands for The private sector bribes made by public officials, about their bids being rejected on has little faith in the frivolous grounds and about a pervasive lack of transparency in the bid fairness of public evaluation process. Many believe that the winners of public tenders are tenders. determined in advance and simply choose not to submit a bid. iv BiH CPAR Executive Summary Action Plan Summary New, harmonized The State of BiH, the FBiH, and RS should each enact a new Law on procurement laws at Public Procurement, consistent with each other and aligned with State and both entity international bodies of law in this area, such as EU law. levels are needed. Laws should be A comprehensive set of implementing regulations should be drafted to supported by underpin the new procurement laws and to clarify how they are to be comprehensive applied in practice. These regulations should be adopted by the State implementing and both entities, as well as at sub-entity levels. regulations, and standard Once the new laws and implementing regulations are in place, a procurement comprehensive set of standard procurement documents for goods, civil documents, works and services should also be developed and their use by all public procuring entities made mandatory. Organizational A Central Unit on Procurement should be established within the BiH reform is needed to State Ministry of Treasury to take the lead in the drafting of a new State improve Law on Public Procurement. The State should also have a coordinating enforcement. role, enshrined within the new State public procurement law, in ensuring harmonized laws, implementing regulations and practices at entity and sub-entity levels of administration. The FBiH Ministry of Finance and RS Ministry of Finance should each establish a dedicated Procurement Unit with increased enforcement powers, which should be defined in the new laws. At the canton level, where most expenditure on public procurement takes place, the responsibility of the Cantonal Secretariats of Finance for public procurement should be more clearly defined in the new Federation procurement law. Public officials The report recommends several measures to improve accountability, should be held more including nominating an institution to carry out independent accountable. administrative review of bid protests and requiring the oversight bodies to submit an annual report on public procurement to the appropriate legislative body at their level. Strengthening internal and external audit functions is critical, particularly the functions of the Supreme Audit Institutions in auditing procurement transactions. A system of training Within a clearly-defined national training strategy for public public officials in procurement, covering all levels of administration, BiH should aim to procurement should establish a training system that is sustainable over the long term. A be established. number of educational institutions should be identified in key centers that can set up and deliver an agreed curriculum for public procurement training. A wide-ranging program of training courses in public procurement is needed to upgrade the skills of public officials to carry out the procurement function. v BiH CPAR Preface A. PREFACE A.1 Date and Bases for the Report This report was completed on June 21, 2002. The report is based on the results of interviews with more than 50 public institutions and private companies during a World Bank mission that visited Bosnia and Herzegovina (BiH) from February 19 to March 9, 2001. The mission held discussions with public sector institutions at state, federation, cantonal, municipal and city levels of administration, as well as with many private sector companies in both the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS). The assessment is also based on analysis of the laws, documents, completed questionnaires, and other information collected by the mission. BiH comprises two distinct entities, FBiH, which in turn comprises 10 cantons, and RS, which is made up of 63 municipalities. Analyzing the procurement regimes of all public entities was beyond the resources of this assessment. The assessment focuses on the federal government in FBiH, the cantons of Sarajevo, Mostar and Travnik, the republican level of government in RS, and the municipality of Banja Luka, with the objective of presenting a reasonably representative picture. Several public enterprises, at both entity and municipal levels, also participated in the assessment. A.2 Acknowledgements The mission members wish to acknowledge the extensive cooperation and assistance received from officials and staff of the public organizations, state agencies, and private companies interviewed. Mr. Christiaan Poortman, Country Director, and Mr. Simon Gray, Lead Country Officer, offered invaluable guidance on the scope and overall direction of the assessment in advance of the mission. Ms. Sebnem Akkaya, Senior Country Economist and Task Team Leader for the Public Expenditure and Institutional Review (PEIR), with which this assessment was jointly conducted, offered advice and guidance throughout the mission and drafting stages. Mr. Roberto Tarallo, Senior Financial Management Specialist, and Mr. Siew Chai Ting, Senior Financial Management Specialist in the Bank's Sarajevo Office, who conducted the related Country Financial Accountability Assessment (CFAA), provided essential inputs to the assessment and the report on accountability and auditing issues. Mr. Armando Araujo, Director, Procurement Policy and Services Group, acted as peer reviewer for the report. Mr. Joseph Ingram, the Bank's Country Manager in Bosnia and Herzegovina, and the staff of the Bank's Sarajevo and Banja Luka offices offered the mission invaluable assistance, especially Ms. Jasmina Hadzic, Ms. Irina Smimov, Ms. Nermina Sljivo and Mr. Stevan Raonic, all of whom helped in arranging the mission's program. Ms. Ana Cristina Hirata and Mr. Mohammad Ilyas Butt assisted with the formatting of the report. Ms. Suzanne Snell Tesh assisted with the editing of the report. vi BiH CPAR Preface A.3 Participating Government Organizations The assessment was conducted in consultation with counterparts from the Ministries of Finance of the State (BiH)), the Federation (FBiH) and the republic (RS), as well as the Ministries of Finance in the cantons of Sarajevo, Travnik, Mostar and Banja Luka Municipality. This initial CPAR for BiH took place 18 months after the effectiveness of FBiH's first procurement decree and during the time that the first RS procurement law was being drafted. Because the federal and cantonal Ministries of Finance in FBiH had not been actively exercising the authority accorded them by the decree, and because procurement legislation was not yet in place in RS, the concerned officials were not fully familiar with the subject of public procurement at the time of the mission's visit and this limited their degree of participation. A draft of the report was discussed at a meeting of the Working Group on Public Procurement (WGPP) in Sarajevo on June 3, 2002. At that meeting, senior representatives of the State Ministry of Treasury, Federation Ministry of Finance, Republika Srpska Ministry of Finance, Brcko District, the European Union Delegation, the Office of the High Representative and the World Bank discussed and agreed on the report, including its key findings and recommendations. This final version of the report has been produced only after its consideration and adoption by that Group. The participants in the meeting agreed to work together, both under the auspices of the WGPP and through more frequent, less formal working meetings, to implement the recommendations of the report. A.4 World Bank Team The World Bank team that worked on this report comprised Mr. Shaun Moss, Senior Procurement Specialist, Europe & Central Asia Region, Task Team Leader; Mr. Nikola Kerleta, Procurement Analyst, World Bank Sarajevo Office; Ms. Djinita Foco, Consultant; and Ms. Jadranka Majstorovic, Consultant. vii BiH CPAR Background B. BACKGROUND B.1 Country Background More than six years have passed since the new government structure for Bosnia and Herzegovina (BiH) was first established. As envisaged in the Dayton Peace Agreement, BiH has evolved into a single sovereign state with a decentralized administrative structure: the State of Bosnia and Herzegovina is the central authority and the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS) are its two constituent entities. This multi-tiered governance structure was further expanded in March 2000, when the Brcko territory was declared an Autonomous District. The two Entities are politically, administratively, and fiscally autonomous. They also have different governance structures: the Federation is decentralized, being composed of 10 cantons with significant fiscal authority and their constituent municipalities. The RS is centralized, with relatively few functions decentralized to its constituent municipalities and no mid-level governments. The political system is a parliamentary democracy, with a tripartite presidency at the State level. The State and Entities operate under democratically elected legislatures. The Brcko District presently operates under the transitional supervisory authority of the Office of the High Representative (OHR) and will do so until its final status has been clarified. This structure operates with significant decentralization of the decision-making power to the sub-national govemments. In their respective jurisdictions, the Entities exert all public functions not expressly assigned to the State by the State Constitution (see Table 1 for a summary overview of State and Entity responsibilities). ~~~~~v Measured by the extent of its *-.7. I . , expenditure decentralization, BiH is extremely decentralized by State Entities and/or Sub-Entity ertional dards. T S Governments intemational standards. The State Monetary Policy All other economic and social govemment accounts for only a policies marginal portion (1.5 percent) of Overall foreign relation Foreign relations with bilateral and on-budget consolidated BiH general policies multilateral institutions Trade and customs policy All other tax policies and tax govemment expenditures. The administration consolidated Federation govemment Regulations on intemational Inta-entity affairs/justice and accounts for nearly three-fourths of and inter-entity criminal law, police; regulation of intra-entity BiH expenditures and the RS for the telecommunications system, systems pf transportation and remaining approximately one- transport system and traffic telecommunications rtha iti te Enes control fourth. Within the Entities, Immnigration, refugees and Defense, resettlement and decentralization to the municipal asylum policies reconstruction provision of public level is limited, but significant services; social security system. decentralization to the cantons exists in the Federation. Together, the cantons and municipalities are responsible for over half of the total consolidated Federation general govemment expenditures, with the Federation exhibiting perhaps one of the most decentralized govemance structures in Europe. At the time of the CPAR mission in February 2001, five years of post-war recovery had raised BiH's GDP to about half its pre-war level. With substantial intemational support, including WB health and education sector loans, infrastructure networks had been repaired and schools and health clinics had reopened. In parallel with the physical reconstruction, institutional viii BiH CPAR Background infrastructure was also being rebuilt, starting with currency, trade, and tax structures. From 1999 the focus had been on first-generation reforms of public finance, the banking system, and the courts, along with privatization of state enterprises. The joint visit of the teams preparing the CPAR, the Country Financial Accountability Review (CFAA), and the Public Expenditure and Institutional Review (PEIR) took place at roughly the mid-point of the Bank's second Public Finance Structural Adjustment Credit, and was timed to gather information for the next stage of reform, which is designed to move BiH further the road towards integration with the wider European economy. Bringing procurement legislation, procedures, and practices into line with European Union standards is an important step towards reaching full economic integration for BiH. As the Bank's first assessment of procurement in BiH, this report points the way to achieving this goal. Establishing sound procurement rules and practices will mean saving money and using public resources more efficiently, boosting private sector development and raising the level of public trust in government. The CPAR shares the objectives of the PEIR of diagnosing current strengths and weaknesses and designing a second generation of reforms targeting prudent resource management to support the transition from dependence on external assistance to sound and self- reliant governance that can attract both donor and investor funds on its own merit. B.2 Bank Portfolio in BiH The Bank's portfolio in BiH currently comprises 17 loans totaling US$317.15 million (see Table 2). Twenty-two loans, including two structural adjustment loans, have been completed. The current pipeline contains seven new projects totaling US$151.8 million. ix BiH CPAR Background Table 2. BiH: Current Composition of World Bank Loan Portfolio Loan Year Year Amount Loan No. Project Name Signed Closing (US$m) N001-BOS Emergency Industrial Restart 1997 2003 10.0 N003-BOS Essential Hospital Services 1997 2002 15.0 N040-BOS Forestry 1998 2002 7.0 3191 -BOS Local Development 199 2003 15.0 3202-BOS Basic Health' 1999 2004 10.0 3262-BOS Enterprise and Bank Privatization Project 1995 2002 50.0 3257-BOS Enterprise Export Facility Project (Beef) 199 200' 12.0 3269-BOS Pilot Cultural Heritage Project 199 2003 4.0 3258-BOS Public Finance Structural Adjustment Credit HI 199 2002 72.0 3351 -BOS Education Development Project m 2 200 10.6 3385-BOS Mostar Water and Sanitation * 200 2005 12.0 3400-BOS Emergency Labor Redeployment 200( 2003 15.0 3439-BOS Social Sector Structural Adjustment Credit - TA 2000 2003 3.55 3466-BOS Trade and Transport Facilitation 2001 2004 11. 3533-BOS Local Initiatives HI 2001 2005 20.0 3534-BOS Electric Power Reconstruction III 2001 2005 35.0 3538-BOS Cormunity Development 2001 2005 15.0 Total: 17 Projects I F 317.1 Indicates projects for which the procurement fidudary function has been partially decentralized to World Bank Sarajevo Offlice. A detailed breakdown of World Bank Group Operations in Bosnia and Herzegovina is presented in Annex A. x BiH CPAR Findings-Public Sector C. FINDINGS PUBLIC SECTOR This section briefly reviews the main legal enactments which currently govern public procurement in Bosnia and Herzegovina, records the scope of application of the applicable instruments and the extent to which legislative texts are accessible to the public. The section also examines the forces currently driving the need for reform in this area of legislation. C.1 LEGAL AND REGULATORY FRAMEWORK C.1.1 Legal Instruments Issued to Date The only legislation dealing directly with public procurement in the FBiH is a Decree On Procedure of Procurement of Goods, Services and Contracts that became effective on August 18, 1998, following its publication in the Official Gazette No. 31/98. The decree is based on the UNCITRAL Model Law on Procurement of Goods, Construction and Services, 1994. The decree provides a less than comprehensive framework for the conduct of public procurement. Its weaknesses include * excessive discretion allowed to public officials when making decisions about awarding government contracts, * the prohibitions against breaking down procurement requirements into smaller-value lots are inadequate. This allows public purchasers to break down their requirements in order to avoid using the most competitive procurement method, Open Bidding, * the absence of a specific provision against using proprietary definitions, including brand names, to define procurement requirements, * opaque provisions on the evaluation of bids and ineffective arrangements for the review of bidders' complaints (see Section C.2 for a detailed treatnent of these issues). In addition, its status as a decree issued by the executive branch, rather than a law passed by the Federation Legislature, has critically undermined its status and contributed to a low level of compliance by the public institutions to which it applies. Application of the decree is, at best, inconsistent and, at worst, absent in a large number of institutions. Many Federation government officials interviewed for this assessment, including some responsible for sizeable procurement spending, were unaware of the decree's existence. To its credit the FBiH Government, having recognized the weakness of the decree and the necessity for the stronger legal power of a law, has indicated to the Bank its readiness to draft and enact a law on public procurement. While this is a welcome development and while a new public procurement law can reasonably be expected to carry greater force than the current decree, the enactment of such a law will not, of itself, solve the problem of weak enforcement. 'Letter from the Deputy Minister, Federation Ministry of Justice to the World Bank, dated March 29, 2001. 1 BiH CPAR Findings-Public Sector During 1998, when the Federation was drafting its decree, the Bank encouraged the Government of RS to collaborate with the Federation in drafting harmonized legislation. RS was unready to proceed at that time, in part because of the slower pace of reform these and in part because, given that the Bank's portfolio in RS developed approximately a year later than it did in the Federation, the dialogue between the RS Government and the Bank was less advanced. At that time, public procurement in RS continued to be regulated by legislation carried over from Yugoslavia. In May 2001, RS enacted a new Law On Procedures for Procurement of Goods, Services and Works that was drafted by the RS Ministry of Finance (RS MOF), drawing solely on its own resources. The RS law is closely modeled on the Federation decree, with only a few differences in procedural detail, and therefore shares its weaknesses. One beneficial effect of this alignment is that the decree and law provide a reasonably uniform set of provisions governing public procurement in both entities, which makes it easier in principle for a bidder located in one entity to bid on a contract in the other, other constraints notwithstanding. This is an important consideration, as the Peace Implementation Council (PIC), in its Brussels Declaration of May 2000, has specifically recognized public procurement as an essential component for creation of a "single economic space" that is a critical economic reform in BiH. A harmonized set of procurement rules throughout the territory of BiH is also important in order to meet the provisions of Article I.4 of the State Constitution of Bosnia and Herzegovina"': "There shall be freedom of movement throughout Bosnia and Herzegovina. Bosnia and Herzegovina and the Entities shall not impede full freedom of movement of persons, goods, services, and capital throughout Bosnia and Herzegovina." The glaring gap in the legislative landscape is the absence of a procurement law at the BiH State level. While the State budget is relatively modest (see C.5 below) compared with those of the FBiH, RS and cantons, a State procurement law is clearly desirable because it would create a more formal framework for harmonization of the laws of the two entities. A further important factor driving the need for a State procurement law is that the State is vested by the BiH constitution with responsibility for foreign trade policy, so it is the State that takes the lead role in managing relations with Bosnia's foreign trade partners, including the European Union (EU) and the World Trade Organization (WTO). It will fall to the State Government, therefore, to lead the critical future steps of aligning BiH's procurement legislation with those partners' systems. C.1.2 Scope of Application of Current Enactments The scope of application of both the Federation decree and the RS law is reasonably comprehensive, both in terms of the sources of funding and of the categories of institutions that they cover. The Federation decree applies to federal administration authorities and federal institutions and other bodies. It also applies to cantonal administration authorities and other cantonal bodies, to city and municipal administrations if funds are provided by cantonal, city or municipal budgets, unless cantons have put in place their own public procurement regulations, in which case, the latter would apply. This assessment found no evidence that any had done so. Procurement by public enterprises is also govemed by the decree, when they spend funds from the federal, cantonal, city or municipal budgets. i "Declaration of the Peace Implementation Council," Brussels, May 23-24, 2000 www.ohr.int/docu/p20000524a.htm ii Constitution of Bosnia and Herzegovina, December 14, 1995 available at www.ohr.int/dpa/default.asp?content_id=372 2 BiH CPAR Findings-Public Sector The RS law applies to republican administrative bodies, republican institutions and other republican agencies using funds provided by the RS budget, and to municipalities and cities using funds provided by municipal or city budgets. Public enterprises are also covered. In addition, procurement funded by a loan obtained or guaranteed by a republican body, such as the Health Insurance Fund, comes within the scope of the law. Box 1 below presents a graphical representation of the coverage and gaps of the current procurement legislation. Box 1: Scope of Procurement Rules GoStvee GovbRLwPmerctue No specic prurent egislationinB fko Disrictc PbiAc ilit Governed by FBiH DecrPee on Prcurment Govemed by RS Law on Procurerent l|No specific procurenment legislationi in foroe C.1.3 Public Accessibility of Legal Texts on Public Procurement Bosnia and Herzegovina has an effective Official Gazette system, whereby all legislative acts become effective only upon their publication in the Gazette. While the Gazette ensures that the public has adequate access to legal texts at the time of their publication, it has clearly proven inadequate for the task of informing public officials of the existence of the Procurement decree in FBiH. More active dissemination will be necessary to increase awareness of the FBiH decree and RS law, as a precondition for better enforcement. 3 BiH CPAR Findings-Public Sector C. 2 PROCEDURES, PRACTICES AND APPLICATION This section provides a step-by-step commentary on the practical application of the BiH Procurement decree and the RS law to the procurement process, from procurement planning through to contract administration, and highlights how the weaknesses of these two enactments regularly show through in bad procurement practices. This assessment is based on interviews conducted during the assessment and on responses to detailed questionnaires on procurement operations. C.2.1 Procurement Planning Procurement planning is weak among public sector purchasers, although rather more developed among the public utilities. Such planning as does take place tends to be limited to what is required to fulfill the annual budgeting cycle. Once budgetary allocations have been made, little or no control is applied to the packaging of contracts to maximize competition or to ensure effective implementation of projects. Delays and perennial shortfalls in financing also interfere with effective procurement planning during the course of the financial year. In the Federation Government, it is common for ministers to cancel procurement expenditures in October or November of each year, in order to enable them to balance their budgets at year-end and attain the overarching requirement to meet payroll costs. Such actions habitually disrupt contracted payments and the performance of contracts. It is clear that the interface between, on the one hand, budget planning and implementation and, on the other, procurement planning and contract administration needs to be re-examined. As part of its related Public Expenditure and Institutional Review (PEIR), the Bank has already observed that wage and salary bills make up a very high share of expenses in all public institutions and that they crowd out all other expenditures. Other factors that aggravate this problem are weakness in technical capacity in budget planning, frequent revenue policy changes over the last three years, and poor expenditure rationalization and prioritization. Introduction of a more balanced appropriation of resources within hard budget constraints, in order to avoid ad hoc year-end cuts, is one of the challenges which the PEIR seeks to address. C.2.2 Eligibility of Bidders for Participation in Public Procurement In both FBiH and RS, participation in public bidding is open to foreign and local bidders equally, with all tenders conducted by the Open Bidding procurement method required to be advertised internationally. In practice, however, many Open Bidding tenders are advertised only locally, as public entities cannot afford the cost of placing advertisements in foreign newspapers. Both enactments contain restrictions on the participation of certain groups of bidders, such as those who have not successfully performed a contract based on Open Bidding during the previous three years, those who are under bankruptcy or liquidation proceedings or who have been declared bankrupt, and those against whom proceedings have been started for failure to pay taxes or social insurance contributions. Government-owned enterprises in BiH are eligible to participate in public tenders and, indeed, there is evidence that a significant number of contracts are placed with such enterprises. C.2.3 Prequalification Both the Federation Procurement Decree and the RS law envisage the use of pre-qualification as an adjunct to the Open Bidding procurement method to identify qualified bidders for goods, works or services estimated to cost >KM 1,000,000 (>US$464,01 1). This assessment found no 4 BiH CPAR Findings-Public Sector evidence that pre-qualification is used, probably because, given the modest level of procurement expenditure, there are few contracts above the specified threshold. C.2.4 Participation by Foreign Bidders In contrast to many other national procurement regimes, there is no financial threshold to differentiate between national and international bidding in BiH. In practice, however, procuring entities generally operate international tenders only when they know that the equipment required is not manufactured in BiH. Given the destruction of much of the country's manufacturing base during the 1992-95 war, most Open Bidding tenders for sophisticated equipment are conducted internationally. By contrast, procuring entities tend to restrict participation in procurement methods other than Open Bidding to local bidders. Neither the Federation decree nor the RS law has any provision on the application of a margin of price preference to domestic bidders. C.2.5 Minimum Participation Requirements Both the decree and the law require that a minimum of three bids must be received in order for a tender to be considered valid. In all cases where fewer than three bids are received, the purchaser may either re-bid or cancel the tender proceedings. While the assessment observed some reports that this requirement leads to wasted time and administrative costs, many public officials who participated in the assessment consider it a valuable safeguard against the manipulation of tenders. 5 BiH CPAR Findings-Public Sector C.2.6 Procurement Methods Both the Federation decree and the RS law provide for the same range of available procurement methods. These are summarized in Box I below. * t* U i~~Jj;V~UA;.- r nov~C. ;'.'r',' -4','t r! o hdilILarr e i4--j,dedi Ziddgnigiwii aii d, goodii,4 . 1-foreigii-bidders .e dithe ,* 7It2r'. oc1r~g enuhl 1t,nZamlnw-'----- bIL- int; oM*soablicabo.wT :~,..~t'i<#>petd t6'jirfentitbs-rehi -W >?ndtpladerfor,subinssion tnd1ppar-4 d if_ade F;;srt rb _ t).;z*tT.z-1pn(t-,pppr.u --t, . e . Jaeffi-->i.;u+;ll.^-i 6 is j f-ex g;1f- . ..--.s .;biddusg:do9umnentsxuaf6rmbdi'I9s. ofjthetse1cctiontro 'htwmmn9nbd,pan&a ardteqxntractohe 'miost favorabi viJ obt95medi-.g 'V9t . - -documn*nb &re "defined&mAie - decre*hmt hr tiitFbdie flua@ou4i*ana>d.diifl4o*nWp. ort6ti'at .rJ .rUV, =;tig';drsei,e mov s >:g worksfiand. ; 'serie2s->KMifi A---O OOOO AJ$44O1 idCiM 9 1;M i iotug: -6 ,A4ct.mrw Ar ;_goods. or whei e1)he=un beoof-hid + -I JjtS'k bod r.worh4ll.ny3n?mergdncyl9a5es (u1y*ere-p[e-quhficatlnba led-e coictdT, tm --encinentus~4rv e;tha rixcie ,n}lnrEareit oi theZ ; ' ^' 1rhsn n pracit, so.wevXe?Zutchiio als3esaraely4toughfb o,i'ven :lbe pddrocg-enbry liS ) rre4UWreK.to iAvii.t::e 1fastthf-e:bdi:fi.bi i efory za*arcgett si obfe- !~ -.-codLcted either ai. adornestic &T" lwrnddUedie'-itiknternrioad tfie procuring entity t.',,i', Hmustsoit atlastorSigs64n e iothrae3a ioO 'Bidd ng rother respects A.i.. n apparent f -inz ,sior,go inrn1 uniteed ,BiddlngL ,ftbtitie. absence .-ofc!a_uupsper. -.9.> . thrsholdi for fiisr.ethe&providesgpocunnnStLe AfiiWec"eissivei ~dsretion to use"thxs method- iil 1id ii 4ibLi ii Ridi4't.Ia$.i * rsatherthathenon csx 'e 4 ,, Qi d. : 1 ,.-~:Conenmg:Pked Bids:t.haijeth^tl ,rus8d4orr (i).finibedtgoods' (ii) con'sumnable materials r-(i kn ' (1) ' g o oid s i _ _ ' t e5,. . , h i -etma l';f AN-i s'irigl aprocir u tseits(iv a.9wemrMrwhegy thepr i ar !idyI r~ ~~~-'- -,; l bevenr6.0 TIS280 rdKf0 O>iSS 81he procuring enntytyis requir d tol . ce of the I.nvitatongo a Bidi 1. , Fedociiiin s-a,f`dFf .ap prourting ens ensurethconfidenthy.fteqirter:Th eillegisIyation gives;.no'g'aneo ., bow thetinEng .bidshoulfi'beseleted. ..4..;a t,vv-etE .... t .,, *- : * -. :-!- P Direct Negotiations: Undei7 idoukemnent.:nethodNiiastifse'is subject to the prior'agreemnent of - .the MQF ai.the genti may - . negotiate directly with K prrocurementy of;gdts;4works or-seryicesg- S,-'-,£; is ,,--1,, L *;;; ,, ; ,ion i- '-,:¸; ii.' n - uLimiteideBidding oSrasyddoi(# &4t¾erhat0iuWt f `riWp iprotu-reoent ofpserovicerMg 000 --1mw7 (I.S$2 320)..The Letter. of olg th& l t to -bies 'drf for iof-cotract,la btef desciptiont of the enc tJfeAdeadlrecOpfuu bsson bf& tiste inende meo of ; .S ',-,1;9,.evaluatioWn';;of bidiai.addf tiautids efi-excessig -b-idsceti r tis mthid. th eo ,r- -ra prthani eT.h Z.I.Z. sttof 7e b:ddernd prepearcFostesminate. 6 BiH CPAR Findings-Public Sector Procurement estimated to cost KM50,000 n/a Goods Open Bidding (>US$23,200) Works Services >KM50,000 n/a Goods Limited Bidding ( (> US$23,200) Works >KM60,000 US$ 27,840) (U $23,200) approve award of contract. (a) According to the FBiH decree, all usages require prior approval by MOF at Federation or cantonal level. In practice, however, given the current weakness of enforcement, such approvals are seldom sought or given. C.2.8 Forms of Communications Both enactments omit any mention of electronic forms of communication in the conduct of public procurement. Given the increasing computerization of many govemment functions in Bosnia and Herzegovina, provisions for electronic procurement in the public sector are likely to be important to the future development of the legislation governing public procurement. C.2.9 Solicitation of Participation in Procurement Proceedings For Open Bidding, the procuring entity is required to publish invitations for bids in: In the Federation: * the Official Gazette of the Federation in the Bosnian or Croat language; and * one daily newspaper in the Federation in the Bosnian or Croat language; and * an appropriate international publication in the English language. 7 BiH CPAR Findings-Public Sector In Republika Srpska: * the Official Gazette of RS; and * one daily newspaper in RS; and * an appropriate international newspaper. While neither enactment defines the minimum contents for advertisements, a selection of notices examined for this assessment showed them to be fairly comprehensive and to contain all the information necessary to enable bidders to make a decision on bidding. The most commonly used publications are Oslobodenje and Dnevni avaz, both of which are in wide circulation within the Federation and both of which, importantly, cover both the Bosniak and Croat areas. In RS, bidding opportunities are usually published in Glas Srpsi. C.2.10 Bidding Documents The FBiH decree and RS law require the procuring entity to prepare "adequate tender documentation" for which he is entitled to charge bidders a fee. The legislation offers no guidance on the level of such fees but tenders observed for this assessment show them to be in a wide range of KM 50-500 (US$23-230). Public entities have no standard procurement documents to use in public procurement. The low level of experience and skill in drafting bidding documents prevalent in most public institutions results in poor quality procurement documentation, which magnifies the weaknesses in the FBiH decree and RS law. One of the serious weaknesses of these instruments is that the minimum specified contents of bidding documents omit a requirement that technical descriptions of goods should be neutral in character and that they should not create technical obstacles to competition. As a result, throughout the public sector but particularly at cantonal level, procuring entities simply send potential bidders a list of their requirements, often defined by brand name and propriety serial number, and invite them to submit their prices. This practice clearly limits participation, often to a single local authorized dealer of the named foreign manufacturer and creates a significant barrier to competition. Another problem observed by the assessment is that, because public entities do not have their own standard bidding documents, many leave it to the seller to provide the form of contract, using the seller's terms and conditions. Not only does this mean that public entities fail to use their purchasing power to obtain the most favorable terms and conditions of contract, but it also results in the purchaser's contractual position being inadequately protected. On the bright side, there is a small number of relatively sophisticated purchasers, particularly among the major public utilities, which have had experience of implementing externally financed projects. Most of these have adapted standard bidding documents (SBDs) published by the World Bank or EBRD for use in procurement programs funded from their own sources. C.2.11 Time Allowed for Preparation of Bids The legislation contains only a loose requirement that procuring entities should allow bidders "a reasonable period" to obtain the bidding documents and submit their bids. The excessive discretion afforded to public officials by this provision facilitates abuses, such as cases, observed during the assessment, where as little as three days had been allowed for bid preparation. In a major public tender for the procurement of telecom cable, bidders were allowed only 10 days to prepared their bids-a wholly inadequate period for such a large purchase. Clearly this provision 8 BiH CPAR Findings-Public Sector in the legislation is open to manipulation by a procuring entity who wishes to favor a preferred bidder and restrict competition by other bidders. Balancing this, the assessment also noted that some purchasers allow 21 days from the date of publication of the invitation for bids to bid submission, which is a more realistic period, although still far short of intemational best practice, including EU standards. C.2.12 Clarification and Modification of Bidding Documents The FBiH decree and RS law establish the bidder's right to seek clarification of the bidding documents from the procuring entity and obliges the procuring entity to respond to all such requests submitted no later than 14 days before the deadline for submission of bids. Should the procuring entity decide, either of his own volition or in response to a bidder's request for clarification, to modify the bidding documents, the legislation obliges him to inform all bidders who have purchased the bidding documents of such amendment not later than seven days before the deadline for the submission of bids. While the legislation is not specific on this point, it may be infemred that, should the procuring entity wish to amend the bidding documents within seven days of the bid submission deadline, he would be obliged to postpone the deadline appropriately. C.2.13 Language Both the FBiH decree and the RS law provide that bids shall be submitted in the local language but that, under Open Bidding, foreign bidders may submit their bids in English. C.2.14 Bid and Contract Price and Currency The FBiH decree provides that bids may be priced in the currency of Bosnia and Herzegovina, the Convertible Mark (KM) or in convertible currencies, while the RS foresees bid prices being expressed only in KM. Many of the bidding documents examined for this assessment were silent on the matter of currency. It is assumed, therefore, that, in such cases, the procuring entity leaves it up to the bidder to determine in which currency(ies) he expresses his bid price. Often, the treatment of bids expressed in different currencies during bid evaluation is not specified in bidding documents, so the bidder does not know at what exchange rate his bid price will be converted for evaluation. This is one of many barriers to transparency in bid evaluation. C.2.15 Bid Submission and Opening The legislation requires that the bidding documents should specify the deadline for timely submission of bids and the time and place for the opening of bids and that the procuring entity should open the bids at the time, date and location specified in the invitation for bids. However, there is no requirement that the bid opening should follow promptly after the deadline for submission, which is considered to be one of the prerequisites of a transparent procurement process. In other respects, the legislation is reasonably sound in this area, in that * the procuring entity is required to keep all bids sealed until the time of opening, * there is a public bid opening, at which the right of bidders to attend is established, * late bids must be rejected, * bidders' names and bid prices are announced at the public bid opening, and * the documents comprising each bid must be recorded in the minutes of the bid opening. 9 BiH CPAR Findings-Public Sector Bid opening is undertaken by a three-person committee, members of which should be drawn from the procuring entity's own expert staff or independent experts. Directors of public enterprises or institutions are excluded from membership of such committees, which is a valuable safeguard against high-level interference in bid evaluation. C.2.16 Bid and Performance Securities The legislation contains no provisions on bid or performance securities, which is a significant diminution of the protection afforded to public entities against irresponsible conduct by bidders and contractors. In practice, however, many procuring entities, surveyed for this assessment, primarily those who have had experience of IFI-financed procurement, do require both types of security. They usually require bid securities equal to 2 percent of the bid price and performance securities in the amount of 10 percent of the contract price. C.2.17 Bid Validity Period The legislation specifies no requirement as to the minimum period during which bids should remain valid. Nevertheless, most purchasers stipulate the requirement in the published invitation for bids, with the usual requirement being 90 days. C.2.18 Examination and Evaluation of Bids Both the FBiH decree and the RS law require that the bid evaluation committee may commence evaluation only if a minimum of three bids have been received, otherwise the tender is considered to have failed and re-bidding automatically ensues. While the legislation requires that evaluation should be conducted only in accordance with the criteria specified in the bidding documents, this provision fails to achieve adequate transparency because these criteria are invariably poorly defined. The criteria commonly used in evaluation include: * bidder's previous experience of similar contracts; * bidder's prior experience in BiH; * quality of goods offered; * price; * payment terms offered; * delivery period offered; * financial solution offered (in the case of supplier financed contracts). The specific method by which these criteria are to be applied in evaluation is generally not pre- disclosed to the bidders, a sine qua non of transparency. By contrast, the practice of most committees is to work out the specific method of evaluation during the bid evaluation process itself. A common practice recorded by this assessment is that, in the preliminary stages of evaluation, bidders who do not meet a certain level of prior experience are rejected, then the remaining bids are evaluated using a system of merit points awarded to each bid against the remaining criteria to determine the "most favorable bid" and the ranking order of the other bids. Clearly, the arbitrariness with which the criteria actually used in bid evaluation are developed and the fact that they are not disclosed in advance to the bidders seriously reduces transparency and leaves in the hands of committee members an excessive amount of discretion in making the contract award decision. 10 BiH CPAR Findings-Public Sector C.2.19 Notification of Contract Award and Entry into Effect of the Procurement Contract Having received the minutes of the bid opening and evaluation from the committee, the procuring entity is required immediately to inform the winning bidder that his bid has been selected. One day later, the procuring entity is required to inform the losing bidders of the selection of the winning bidder. The legislation specifically prohibits the procuring entity from forming a contract with the winning bidder until the other bidders have been informed, a measure which facilitates the operation of the provisions to protect the rights of the bidder (see below). C.2.20 Payment As described under C.2.1 above, budget cuts are a frequent cause of late payments on public contracts. Another factor which reduces competitiveness in public tendering is the widespread use of "compensation" as a method of payment, particularly at the cantonal and municipal levels and in the public enterprises. Under such arrangements, suppliers provide goods or services to a public entity in return for the off-setting of their debts to the procuring entity, for example, a tax debt or a debt for the supply of water or electricity. In RS, the assessment noted that some public enterprises, primarily the municipal water and electricity sectors, use compensation to make payments for 70-90 percent of the contracts which they award annually. Not only is objective evaluation of competing bids impaired by this form of payment, but some sectoral public markets are effectively limited to those bidders who are clients of the procuring entity. In this respect, the widespread use of compensation acts as a significant barrier to entry to new bidders, both local and foreign, into those markets. The prevalence of non-cash forms of payment also presents a substantial obstacle to the implementation of procurement reforms. C.2.21 Records of Procurement Proceedings The legislation requires the committee to produce minutes of the bid opening containing "all relevant information," without specifying which information should be recorded. The committee is required immediately to send these minutes to the purchaser, along with the submitted bids in a separate envelope. Because there are no specific requirements as to how long these minutes should be retained, there is a risk that subsequent auditing may be obstructed. In the limited number of cases where this assessment was able to observe retained procurement records, they were generally in poor order and, in some cases, incomplete. 11 BiH CPAR Findings-Public Sector C.2.22 Bid Protest The bid protest provisions in both the FBiH decree and the RS law confer a dissatisfied bidder only the right to have his protest reviewed by the purchasing entity and, if he remains dissatisfied with the outcome of that review, by the Ministry of Finance in the relevant entity. The procedure and the time limits set for actions to be taken by the various parties are summarized in Box 3. Box 3: Provisions on the Protection of the Rights of the Bidder Evaluaton Committee informs employer of result of bid evaluation (same day) Empioyer Employer | 3 | Losing 8 Employer 3 |iBidder 15 MoF must informs informs |days |bidder days should davs may davs make a winning _losing | submit respond _lodge *- decision on bidder l bidders appeal to l to l appeal bidder's Ia employer bidder's l |with MoF appeal appeal a rejected claim to the and and copy and copy Courts copies relevant Employer relevant MOF |MOF l In the Federation MOF, the minister has established, by a decree dated November 20, 2000, a three-person committee comprised of MOF staff to review all complaints referred by bidders to the MOF relating to tenders undertaken by Federation-level purchasers. During 1999, no complaints were submitted to the committee, a fact which the MOF ascribes to a low level of awareness among both procurng entities and bidders of the existence of the FBiH decree and/or of its provisions to protection the rights of the bidder. During 2000, the committee reviewed 15 appeals from bidders, all of which it rejected. Most complaints were submitted by bidders who had submitted bids that were priced lower than the price of the winning bid but who had not been awarded the contract. The committee examined the bidding documents, minutes of the bid opening and the procuring entity's bid evaluation report and satisfied itself, in all cases, that the rejection of the lowest price bid had been justified. While none of the 15 appeals submitted during 2000 was upheld, the Federation MOF asserts that the very submission of such complaints demonstrates that awareness of the FBiH decree had increased since the previous year and that the bid protest procedure is functioning satisfactorily. 12 BiH CPAR Findings-Public Sector At the sub-federal levels in the Federation, complaints should be reviewed by the cantonal or municipal authorities, such as the cantonal Ministries of Finances. In practice, however, the sub- federal institutions participating in this assessment reported no appeals from bidders against their procurement decisions. Given the recent enactment of the procurement law in RS, it is too early to make any assessment of the efficacy of the same provisions there, as the bid protest system has yet to be tested. The location of responsibility for reviewing bidders' complaints in a line ministry of government is one of the major weaknesses in the design of BiH's public procurement system. Having bid protests reviewed by the MOF means that bidders are denied the right to have their appeals subject to independent administrative review; few have confidence in the partiality of the MOF's decisions in this area. More generally, the Foreign Investment Advisory Service (FIAS) has also found that "the absence of effective and independent mechanisms for appeals and for public accountability by various government agencies" is a significant disincentive to potential foreign investors in BiH.1" In the design of planned reforms to BiH's public procurement system, arrangements for ensuring independent administrative review of bidders' complaints will be critical, especially given the recognized unreliability of the country's court system. C.3 ORGANIZATION AND RESOURCES This section looks at how responsibility for the conduct and oversight of public procurement is apportioned to the various institutions at the five different levels of administration in BiH, reviews how oversight functions are being performed and briefly examines options for the future organizational design of government institutions affecting public procurement. C.3.1 Organization of the Procurement Function within Public Institutions Both the FBiH Procurement decree and the RS law place the responsibility for the conduct of public procurement with the various public institutions that are covered by the scope of application of the legislation (see Section C. 1.2 above). In most procuring entities in BiH, responsibility and accountability for the conduct of procurement are not clearly assigned to a particular department, manager, or group of staff. In the majority of cases, it is an across-the-board function undertaken by many managers and staff as an adjunct to their main job functions. The great majority of public officials undertaking procurement do so without any specialist training in the subject, which contributes to a low level of skill in the conduct of procurement. When combined with the fact that these public servants are attempting to apply a legal instrument which is itself flawed in its lack of clarity about procurement procedures, it is not surprising that error is commonplace and the scope for abuse wide. In a small number of larger public organizations which undertake significant procurement expenditure, procurement is either allocated to a specific department, which undertakes procurement in addition to other administrative tasks, or to a dedicated unit. For example, in the FBiH Electroprivreda, the electrical utility, the Commercial Department undertakes procurement as one of a number of functions. In the Sarajevo Canton MOF, there is a dedicated Common Service that handles the procurement of office supplies on behalf of all Ministry departments, " Bosnia and Herzegovina: Commercial Legal Framework and Administrative Barriers to Investment" October 2001, Foreign Investment Advisory Service. 13 BiH CPAR Findings-Public Sector while other procurement requirements, such as civil works, continue to be handled by the cantonal MOF works department. Such arrangements are an improvement in terms of accountability for procurement. Nevertheless this assessment found that, with only a few exceptions, the ability of such units to perform procurement satisfactorily is still undermined by a number of factors, primary among them the many weaknesses in the legislation and absence of trained staff. C.3.2 Roles of the Federation Ministry of Finance, Cantonal Ministries of Finance and Republika Srpska Ministry of Finance Authority over public procurement at the various levels of administration in BiH operates within the complex legal and constitutional structure created by the Dayton Peace Accordv which ended the conflict in BiH, based on the State, Federation, Republican, and cantonal constitutions. In all, there are 13 constitutions in force in the country, plus a unique provision for Brcko District, which is currently governed by an OHR-appointed international supervisor. The complexity of the administration resulting from these constitutional arrangements is highlighted by one recent estimate that Bosnia and Herzegovina has at least 181 ministers for its 3.7 million people at five levels of administration (state, entity, canton, city and municipality)<. These constitutional arrangements provide a limited role for the State of BiH and a high degree of autonomy for each entity. All powers not specifically vested in the State in its constitution (including foreign trade and customs policy) are conferred upon the entities of FBiH and RS. Given that the State government cannot generate revenues from taxation, except in a small number of specific instances, State expenditure on recurrent and capital expenses is relatively modest, with the bulk of expenditures on procurement being made by the two entities of FBiH and RS and by the cantons, municipalities and cities (see C5 below). Within the Federation, legal and administrative authority has been decentralized and parallel institutions have been set up in each of the ten cantons, each of which has between six and twelve ministries, including its own Ministry of Finance. The Federation MOF has supervisory authority over procurement financed from the federal budget, while the respective cantonal MOFs have parallel authority over procurement financed by cantonal, city and municipal budgets. In RS, the same functions are vested in the republican MOF in respect of procurement financed by the republican budget, while in the municipalities and cities, the relevant Secretariat of Finance perforns the designated functions. The designated procurement-related functions of the respective Ministries of Finance are to: * provide budget beneficiaries with instructions in accordance with the decree/law; * issue approvals, consents and make decisions regarding the application of the decree/law, including giving prior approval for the use of the Limited Bidding and Direct Contracting procurement methods; * punish breaches of the decree/law by budget beneficiaries by canceling an appropriate amount of their financing from the budget in cases where they fail to conduct a procurement procedure in accordance with the decree/law, or where they award a contract other than in accordance with the decree/law. General Framework Agreement for Peace in Bosnia and Herzegovina, December 14, 1995. "Bosnia's Precarious Economy: Still Not Open For Business," International Crisis Group Balkans Report No. 115, August 7, 2001 available at www.crisisweb.org/projects/showreport.cfm?reportid=375 14 BiH CPAR Findings-Public Sector This assessment found that, in the Federation, the majority of these functions are simply not being performed in practice and the level of compliance with the decree is low. The reason appears to be that procurement has not to date been considered to be a core function of government, worthy of specialized staff and dedicated organizational units. Rather, it is typically handled as an adjunct to a given ministry's core function. Nor has any official or unit of the Federation MOF been given specific responsibility for performing oversight functions over procurement. Senior officials in the Federation MOF admit that they lack the resources and skills necessary to supervise public procurement. At the cantonal level, some senior officials in cantonal MOFs, interviewed for this assessment, were entirely unaware of the obligations which the decree places on them to supervise procurement. Since the RS procurement law was enacted only in May 2001, it is as yet rather early to tell how well it is being enforced. Information provided for this assessment by the RS MOF indicates that it is performing at least some of the functions assigned to it under the law (see Table 4) Table 4. BiH: Supervisory Functions Performed by the RS MOF, May-December, 2001 Applications for use of Direct Contracting approved 25 Applications for use of Limited Bidding approved 23 Applications for use of Limited Bidding rejected 9 Waivers granted to the application of the law 6 Number of legal opinions on the Law given to Procuring entities 6 Source: Ministry of Finance, Republika Srpska. Unfortunately, it is not possible to calculate, using these data, the incidence of procurement methods other than Open Bidding in RS, as the law places no obligation on public purchasers to provide the MOF with information on the number of procurement procedures that they undertake. Under the auspices of the EU-BiH Consultative Task Force (CTF), a Working Group on Public Procurement (WGPP) has been established to oversee the future development of the country's public procurement system, including its legislative and institutional framework, for which the EU is considering financing Technical Assistance under its Single Economic Space (SES) Project. The WGPP is chaired by the Deputy Minister of Treasury at State level and comprises representatives of the State Ministries of Foreign Trade and Economic Relations, Civil Affairs & Communication, and EU Integration, and the FBiH and RS Ministries of Finance, as well as representatives of the OHR, UNDP and World Bank. The Group held its first meeting in January 2002 and considered the proposed scope of the EU's planned TA, as well as organizational options for the future regulation of public procurement in BiH. While those deliberations are still at an early stage, one option being considered is to establish a Central Unit in the State Ministry of Treasury, which would take the lead in developing a new State law on public procurement. The Unit would work with the FBiH and RS Ministries of Finance in developing harmonized laws in both entities. In light of the State Government's responsibility for foreign trade policy, it should take the lead in developing a State procurement law. However, the establishment of such a unit is unlikely to address the pressing need to improve enforcement at the entity, canton, municipal and city levels. Furthermore, because the State spends only modest sums on procurement and the bulk of such expenditure is made at the level of the entities and cantons (see Section C.5), it is at those levels that the institutional arrangements 15 BiH CPAR Findings-Public Sector for enforcement most need to be bolstered, in order to have an impact where most public money is spent. C.4 AUDIT & ANTI-CORRUPTION MEASURES This section reviews internal and external auditing arrangements in BiH, revisits past surveys of procurement-related corruption in BiH, and examines both past and current anti-corruption programs. C.4.1 Current Audit Measures The Country Financial Accountability Assessment (CFAA) of BiH, which was conducted simultaneously with the CPAR, examined current public sector financial controls and auditing. The key findings of the CFAA regarding internal controls and extemal auditing were as follows. Internal Controls. Until they were dismantled in January 2001, the Payment Bureaux were the key element of the internal controls system for public sector in BiH, a function inherited from the former SFRY system. They were in charge of the administration and quasi-audit functions of financial transactions broadly, including those of the various economic subjects-such as budgetary transactions, business entities and individual taxpayers. Under this system, MOF intemal control functions were limited to basic, documentary controls over accounting and reporting of spending units, and custodial-type oversight. These functions were not conducted systematically or as part of any overall managerial control within an organization, but rather focused on investigations relating to uncover abuses of public officials in the use of property and economic resources, rather than prevent and/or minimize their occurrence. In that respect, they were "control activities" which fall somewhere between the internal control and intemal audit. At present, this surrogate of audit functions is still exercised by the MOF Inspection Units in both Entities and the Financial Police, with the latter particularly active in investigating financial frauds. Nevertheless, the Inspection Units have inadequate mandates, are insufficiently staffed, poorly equipped and scarcely trained to carry out their duties efficiently and effectively. In general, the present financial controls are characterized by on-site inspections, putting the emphasis on individual cases rather than on the establishment of comprehensive internal audit systems-with management responsible for ensuring the operation of appropriate controls for the ministry/agency-that are well-coordinated with the newly established external audit functions. As a result, auditing and related inspection activities are fragmented and either overlap or fail to have adequate coverage. The present environment also makes it easy to circumvent the financial controls because decisions to release funds in line ministries are often communicated vaguely, with cases of violation of statutes, for instance involving amounts for which no delegated authorizations exist; there is very little follow-up controls to ensure that funds have been spent as intended; accounting records and supporting documentation are incomplete allowing for appropriate audit trail. With the development of computerized Treasury systems in BiH, many basic internal financial control functions would be routinely performed off-site as an integral element of the system by a unit within the Treasury. The Treasuries hold exclusive authority for transfer of funds and this will substantially improve budget execution control and cash management functions. Furthermore, the introduction of ex-ante controls over the legality of expenditure types and amounts, based on the budget appropriations approved by the Parliament, and the introduction of financial controls over accounting and reporting will contribute to a more orderly and disciplined management of public finances. 16 BiH CPAR Findings-Public Sector External Auditing. External audit functions were introduced in late 2000, with the operationalization of the Supreme Audit Institutions (SAIs), one each at the State and entity levels, with co-ordination arrangements under the State SAI and a uniform legislative framework. The objective of their establishment was to effectively address chronic weaknesses in financial transparency and accountability of the public administration in BiH. Although the SAIs are still in their infancy, their operation to date has already verified how critical the external audit function is to the transparency and reliability of public sector financial management systems and the credibility of govermment financial statements. Since their establishment, all three SAIs have invested substantial efforts in capacity building simultaneously with undertaking a significant audit of the public administration institutions, comprising a large portion of sub-entity governments. During this initial phase, poor accounting and financial reporting in the public sector has, however, been a major obstacle to the proper and timely audit of government finances; several budget beneficiaries and institutions were simply unable to provide the SAIs with their financial reports. Therefore, strict enforcement of existing rules and regulations on public sector financial accounting and reporting, as well as ensuring that the SAIs enjoy full access to auditable accounting records of publicly funded transactions should be an urgent priority for the State and the entity governments in the near term. C.4.2 Measurements of Corruption in BIH Corruption is widely regarded as being a major problem in BiH and it directly affects procurement. A series of Anti-Corruption Diagnostic Studies conducted by the Bank at the request of the Government of BiH in 2000 found that: * Corruption is regarded as "widespread" by 60 percent of the general public, 54 percent of public officials, and 52 percent of entrepreneurs. * Seventy-three percent of respondents believe that bidders sometimes have to make an unofficial payment to win a public sector contract and 25 percent think that such bribing is the usual practice. * The standard bribe rate for government contracts is reported as being 4 percent of the contract price. * Opportunities for corruption associated with public tenders increase due to several factors, primary among them being inaccessibility of information about the tender and complexity of the tendering process. * State enterprises and firms with Foreign Direct Investment (FDI) are less vulnerable to changes in the legislative/regulatory framework than new firms, small firms and private firms, mainly because they have better access to advance information on planned changes in laws and regulations. * There are important factors which deter bidders from participating in public tenders, notably: * their inability to obtain information on bidding opportunities in time to prepare a bid; * unfair competition; * non-transparent tender conditions; * excessive demands for prepayment; * Twenty-two percent of respondents thought that corruption would lead foreign investors not to invest in BiH, while 10 percent thought it would retard the development of the private sector. 17 BiH CPAR Findings-Public Sector Other authoritative studies on the subject support the conclusion that corruption is widespread and that is presents a significant barrier to both FDI and local private sector economic activity. One such study, by the International Crisis Group (ICG)"' concluded that "...corruption is the most common complaint heard from businessmen. The most common fonn of corruption revolves around the various inspectors and minor government officials.. .Those in power use their influence to award lucrative contracts to cronies and family members." A crude measure of the value of procurement-related bribery in BiH can be derived by applying the alleged bribe rate of 4 percent to the value of public procurement expenditure of KM 669 million in 2000 (see Section C.5), yielding an estimate of KM 27 million or some US$12.0 million paid annually in bribes to public officials for government contracts. The total economic cost of procurement-related corruption is likely be to much higher, taking into account other effects, such as overpayments for contracts, excusing contractors for poor performance, and purchasing poor quality goods. C.4.3 Current Anti-Corruption Measures Given its position as the chief civilian peace implementation agency in BiH, and its responsibilities overseeing the implementation of the civilian aspects of the Dayton Peace Agreement on behalf of the international community and for coordinating the activities of the civilian organizations operating in BiH, the Office of the High Representative (OHR) has historically taken the lead in anti-corruption initiatives. In February 1999, OHR developed the first Anti-Corruption Strategy for BiH,"' which combined the investigation and prosecution of individual fraud, corruption and economic crime cases by OHR's Anti-Fraud Department (AFD) with a systemic anti-corruption strategy built on the four "pillars" of (i) eliminating opportunities for corruption, (ii) transparency and reporting (iii) control and penalties and (iv) education and public awareness. This strategy recognized that procurement-related corruption had become part of "large-scale fraud and corruption in the government" and recommended: * the creation of procurement systems at the various levels of government based on the principles of economy, efficiency, accountability and open competition; * the extension of the model of Procurement Monitoring and Audit Units (PMAUs), which had been set up to monitor procurement on Bank-financed projects, to all public sector procurement, irrespective of the origin of the funding; * the opening up of most government financial and procurement procedures and decisions to public scrutiny, on the basis that they do not involve any sensitive or individual privacy issues; * that the entities should adopt, by March 1999, clear procurement regulations which can be verified by independent auditors. While the OHR has done much good work in fighting corruption in BilH, not all of these recommendations have been implemented. In some cases, a specific recommendation has been vi "Why Will No-one Invest in Bosnia and Herzegovina? An Overview of Impediments to Investment and Self-Sustaining Economic Growth in the Post-Dayton Era," International Crisis Group, April 21, 1999. "Comprehensive Anti-Corruption Strategy for Bosnia and Herzegovina," February 15, 1999, available at www.ohr.intiohr-dept/afd/ac-cor-stratldefault.asp?content_id=5240 18 BiH CPAR Findings-Public Sector superceded by other measures; for example, the establishment of Supreme Audit Institutions (SAIs) in FBiH and RS has overtaken OHR's earlier recommendation on the extension of the PMAU model to all publicly funded procurement and, with hindsight, the SAI are the more appropriate institutions to perform these functions, given their accountability to the legislatures. In others, the recommendation has been partly met, such the enactment by the RS, in May 2001, of a Law on Public Procurement, although the law does not meet the standards of "economy, efficiency, accountability and open competition" laid down in the recommendation. More recently, the State government has taken a more proactive role in anti-corruption and has promulgated, in February 2002, its own Action Plan for Combating Corruption,' which foresees an ambitious and comprehensive set of reforms, including a new Law on Public Procurement, in accordance with EU standards, at the State level, to be complemented by amendments to the entity legislation to bring them into conformity with the new State law. Responsibility for promulgating this new law is vested in the State Ministry for Treasury and in the Ministries of Finance of FBiH and RS. The Anti-corruption Action Plan foresees the completion of this work by August 2002, though there may some doubt about this ambitious timetable, given the likely timing of the availability of EU Technical Assistance for public procurement (see Section D.4). The Anti-corruption Action Plan also foresees the adoption of other laws which should impact positively on future public procurement operations, including a Law on Preventing Money Laundering, Law on State Service/Public Administration/Preventing Corruption, Law on Conflict of Interests and a Law on Responsibility of Legal Persons for Criminal Offenses, as well as reinforcing the currently weak institutional arrangements to fight corruption by establishing an Office for Combating Corruption and Organized Crime. C. 5 PUBLIC SECTOR MANAGEMENT PERFORMANCE This section attempts to quantify, based on currently available budget data, the financial value of expenditures on public procurement by the various levels of administration in BiH and examines the extent to which, in the case of one major public purchaser in Republika Srspka, procurement expenditures are exposed to competition. Given that neither the FBiH nor the RS Ministry of Finance collects or publishes any information on expenditures on public procurement, an attempt at quantifying these expenditures for this assessment has relied on budget data published by sources such as OHR and the International Monetary Fund (IMF), as well on data collected by the World Bank in the course of the PEIR. Public procurement makes up a substantial component of total budgeted expenditures in Bosnia and Herzegovina, representing 14.7 percent of total budgeted expenditures in 2000 or 7.2 percent of GDP (see Table 5). By comparison with other, wealthier countries - for example, the European Union, which spends 11-12 percent of GDP on public procurement - it is clear that recurring budget difficulties in Bosnia have reduced governments' ability to invest in the development of the country's physical infrastructure and in the delivery of better public services. In fact, the figures presented below do not represent the totality of public spending on procurement, as they omit procurement expenditures made by public utilities, which are off-budget. As most of the a "Action Plan for Combating Corruption" February, 2002 published by Ministry of Foreign Trade and Economic Relations, Council of Ministers of BiH; Ministry of Justice, Government of FBIH; Ministry of Justice, Governmnent of RS available at www.prsp.info/english/index2.htm 19 BiH CPAR Findings-Public Sector public utilities are municipal enterprises at the sub-entity level, this underlines the importance of bolstering enforcement of the procurement rules at the sub-entity level. Table 5. BiH Budgeted Recurrent and Capital Expenditures on Public Procurement 1999-2000 (KM millions) 1999 2000 GDP 8,323 9,261 Total Expenditures 4,161 4,553 of which... Goods and Services 402 406.2 Capital Expenditures 296 263 Total Procurement Expenditures 698 669. as % of Total Expenditures 16.77% 14.70% as % of GDP 8.39% 7.230 Note: Figures include all levels of administration plus EBFs. Breaking these figures down by level of administration, it is apparent that the relatively limited role of the State Government, foreseen in the Dayton Agreement, is reflected in its budgeting; it spends only 3 percent of total procurement expenditures (see Figure I below). In the Federation, while the FBiH Government spends only 7 percent of the total (KM 54M), the cantons have 33 percent (KM 256M), reflecting the fact that they bear primary responsibility for the delivery of public services. In RS, the Government budgeted to spend 21 percent of the total (KM 166M), while the municipalities budgeted only KM I 9M (2 percent), again reflecting the much larger role which the Republican Government plays in the provision of public services in RS than does the Federation Government in FBiH. The figures also demonstrate the importance of extra budgetary funds (EBFs) as financiers of public procurement: the combined expenditure of FBiH and RS EBFs is KM167M or 21 percent of total expenditures. Among the three main EBFs - health, pensions and unemployment - the health funds are the major spenders, expending substantial sums on the procurement of pharmaceuticals and medical equipment. 20 BiH CPAR Findings-Public Sector Figure 1: Budgeted Procurement Expenditure on Goods, Services and Capital Expenditures by Level of Administration, 2000 (KM Million) 38.74 19.02 26.40 53.78 165594 1 e 2 5 5 . 8~~~~~~~~2558 89.88 - 128.02 0 State * FBiH Government 0 FBiH Cantons o FBiH EBFs * FBiH Municipalities El RS Government MRS EBFs O RS Municipalities A detailed breakdown of budgeted expenditures on goods and services and capital expenditures, by all levels of administration and extra-budgetary funds (EBFs) for both 1999 and 2000, is presented in Annex B1. Looking at performance against budget, Annex B2 presents a detailed comparison of actual expenditure vs. budgeted expenditure by nine of the ten cantons in FBiH in 2000. These data show an overall expenditure overshoot of 28 percent or KM 39.8 million, with wide variations in performances of individual cantons, ranging from under spending by 3 percent (KM 61,098) in Gorazde-Upper Drina Canton to overspending by 61 percent (KM 7.1 million) in Una Sana Canton. The highest-spending canton, Sarajevo, overspent by KM 11.4 million (18 percent), though this was partially offset by a 7 percent increase in revenues. A closer look at the 2001 budget of one of the major public spenders in RS, the Republic Roads Directorate, provides instructive evidence of the degree to which procurement expenditures may be exposed to competition. Figure 2 shows the breakdown of the Directorate's 2001 annual budget of KM 60.5 million. 21 BiH CPAR Findings-Public Sector Figure 2: RS Road Directorate Budget, 2001 El Routine Maintenance 0 Winter Maintenance o Construction & Rehabilitation 1.0 0 Landslide Works 1.0 1.0 IS Brdge Works 4.50_7 25.00 1 Consulting Services El Traffic Counting 2.501> | I O Co-Financing *PB & Banking 5.000 '~ ~ J Fees 5.00 E3 Land Acquisition a Administration E Reserve Budgeted expenditures on Routine Maintenance (KM 25M) and Winter Maintenance (KM 5M) have been earmarked to be contracted directly with regional road maintenance public enterprises in the municipalities where the road works are planned to take place. While it is planned that these public companies will be privatized in 2002, after which the Roads Directorate will be required to put these contracts out to competitive tender, it is surely open to question whether cost-effective use of scarce budgetary resources can be achieved when half of a major spending body's expenditure is contracted without exposure to competition. This case is also illustrative of the impact of the structure of the supply market and the slow pace of BiH's privatization program on competitiveness in public procurement: because none of the regional road maintenance companies has yet been privatized and private sector provision remains underdeveloped, the Roads Directorate is effectively locked into a situation in which competition is difficult to achieve. The Bank's Road Management and Safety Project, the US$30.0 million IDA credit for which was signed in June 2002, will finance US$36.63 million in civil works for the rehabilitation of roads, bridges and tunnels in both RS and the Federation. While this project does not contain a specific privatization component, nevertheless it will provide a powerful stimulus for the privatization of these regional road maintenance companies, as eligibility to participate in tenders financed under the credit will not extend to public companies which are dependent agencies of the Borrower. C. 6 PERFORMANCE ON BANK-ASSISTED PROJECTS This section reviews the experience to date of the government's performance of procurement in accordance with the World Bank's procurement guidelines on Bank-financed projects and highlights major problems affecting procurement performance. It also reflects on the experience of the decentralization of the Bank's decision-making authority over procurement to the Bank's Sarajevo office since March 2000 and suggests a series of measures to be taken to tighten fiduciary control of future procurement operations to be financed by the Bank in BiH. C.6.1 Development of the World Bank Portfolio 22 BiH CPAR Findings-Public Sector and the high level of corruption in the country. The PMAUs played a useful role in overseeing the conduct of procurement on the ground, as well as in disseminating procurement knowledge to some twenty PIUS whose staff were inexperienced in procurement under World Bank guidelines. The fact that PIU procurement staff knew that they were being monitored throughout the procurement cycle no doubt helped to boost compliance with the guidelines and raised the confidence of the international donor community that the potential threat of corruption was being tackled. As the Bank's portfolio has developed, second generation Bank-funded projects are increasingly associated with policy reform and the nature of procurement contained in these projects has changed commensurately (for example, by including more complex consulting services assignments) which poses new challenges for the involved implementing agencies. As part of this shift, the nature of the loan portfolio has moved away from infrastructure projects and now contains relatively more projects in areas such as health, labor market reform, and education. The performance of procurement on Bank-financed projects has historically been handled by Project Implementation Units (PIUs), rather than by the line ministries of the governments themselves. This organization arrangement was considered necessary in order to attract and retain staff with the necessary qualifications and experience to undertake procurement. However, both the Governments and the Bank now share the objective of mainstreaming the activities so far handled by PrUs into regular government functions. To that end, as part of the most recent Country Portfolio Performance Review (CPPR) on Bosnia, conducted in March-April, 2001, it a strategy was agreed that would reinforce the process of gradually mainstreaming PIU activities back into government functions and rationalize and consolidate the functions of the existing PIUs. It is envisaged that these steps will serve the objective of building government capacity to a level which would permit line ministries successfully to undertake project preparation, implementation and monitoring from their own resources. C.6.2 Common Procurement Problems The fourth Country Procurement Portfolio Review (CPPR)X found that the performance of procurement on Bank-financed projects was generally satisfactory, though it did note several failures by implementing agencies to update procurement plans regularly and found that that most PIUs had experienced difficulty in identifying procurement-proficient staff. Given the specific political and cultural sensitivities of BiH, the common practice in the Federation is that the PIU Director and Deputy Director posts are invariably filled by people from the two main communities, Bosniak and Croat. In some cases, the need to strike this balance has led to unqualified candidates filling these key positions. Recent experience indicates that most projects continue to experience problems with bid evaluation, which often takes too long and is compromised by political interference and breaches of confidentiality. Often, bid evaluation reports lack the precision and clarity needed to secure prompt clearance from the Bank. Sources of such problems include the fact that members of evaluation committee are often unqualified for the job, leading to inaccurate outcomes, or they fail to dedicate sufficient time to the task, resulting in the evaluation process being interrupted and, in many cases, dragged out over several weeks. In the Bosnia portfolio, the number of procurement-related complaints which the Borrower and the Bank receive is amongst the highest of any country in ECA Region. It is not surprising to note that most relate to bid evaluation. 'Country Procurement Portfolio Review, Bosnia and Herzegovina, April 19, 2001. 23 BiH CPAR Findings-Public Sector C.6.3 And Some Successes There have also been noteworthy successes in procurement carried out in Bosnia under Bank guidelines and it is not difficult to find people in government who have had cause to appreciate the benefits of competitive bidding. For example, in procuring textbooks by National Competitive Bidding (NCB), the Federation Ministry of Education paid KM2.70 per book for mathematics textbooks and KM2.50 per book for English textbooks, whereas it had previously paid between KM8.00 and KM10.00 for books which it considered of inferior quality, using national procurement procedures under its own funding. Unit costs for civil works were found to have declined steadily throughout the implementation of Second Emergency Education Reconstruction Project, from US$232 per square meter to US$102 per square meter for the construction of school classrooms, due in part to the growth in size of the supply market for civil works in the Federation. By contrast, commensurate economies were not achieved in RS, where the construction sector remained relatively less developed. C.6.4 Decentralization of Procurement Fiduciary Functions In March 2000, the World Bank approved the partial delegation of procurement fiduciary functions for nine current projects and four projects under preparation (see Table 2 above) to the Country Office in Sarajevo, enabling Sarajevo-based procurement staff to issue "no objections" on contracts up to the following thresholds: Table 6: BiH: Delegated Procurement Thresholds, Sarajevo Office Civil Works US$100,000 for goods, so that most contracts fall above the prior review threshold and are subject to prior review by the Bank. * Bank task teams must ensure that the level of post-reviews conducted is brought up to the level foreseen in the various Development Credit Agreements by the end of CY 2002. * Keep to a minimum, procurement by less competitive procurement methods, including International Shopping and National Shopping, such be kept to a minimum for all new projects (both per contract and aggregate thresholds; see Section C.8 below). * The Regional Procurement Adviser (RPA), the Bank's most senior procurement official for Europe and Central Asia (ECA) Region, should assiduously follow up all procurement-related complaints by bidders. * The Bank's Investigations Unit should investigate all allegations of procurement-related fraud or corruption. C. 7 RISK ASSESSMENT Any assessment of risk in a country's national public procurement system should be based on the stage of development of its legislative framework, the effectiveness of its regulatory institutions, the strength of its enforcement regime, the capacity of its institutional and human resources and the threat of corruption. * BiH's legal framework is both incomplete and insufficiently robust to provide for a clear, rules-based environment for conducting public procurement, because it contains two separate instruments of different legal status in the Federation and RS but no State procurement law. Both entity instruments fail to provide detailed instructions on the procedures by which public tenders should be conducted, thereby reducing transparency and affording excessive discretion to public officials in the exercise of decision-making authority over public contracts. * While, both in FBiH and RS, reanlatorv functions for public procurement are vested in the appropriate Ministry of Finance, their responsibility for oversight is defined 25 BiH CPAR Findings-Public Sector unclearly, particularly at the sub-entity levels, and the authority of the MOFs to ensure compliance is unclear. All of the institutions charged with this responsibility lack both adequate budget and staffng to enable them carry out their responsibilities effectively. * The enforcement regime which underpins the procurement legislation is particularly weak in BiH. External auditing is still in its infancy and current mechanisms for reviewing bidders' complaints lack objectivity. As a result, the accountability of public officials for the procurement decisions which they make is undermined. * With a few exceptions, the public sector institutions which conduct procurement are ill- equipped for the task. Most ministries do not have dedicated organizational units to undertake procurement, and staff who handle the task invariably do so without training. The entire country lacks a planned training system for procurement. * Corruption in BiH is widely recognized as being a real and widespread problem and appends itself particularly to public procurement, given the substantial expenditure which all levels of administration make in this area. Measured against all of these parameters, the environment for conducting public procurement in Bosnia is one of high risk. In this respect, Bosnia rates comparably with other countries in Europe and Central Asia Region which have only recently embarked along the road of public procurement reform and whose procurement environments have also been rated as high-risk in recent CPARs, including the Federal Republic of Yugoslavia, the Former Yugoslav Republic of Macedonia, Albania, Turkey and the Russian Federation. C.8 RECOMMENDED SUPERVISION PLAN Giving the rating of BiH as a high-risk country from a procurement point of view, the Bank's approach to supervision should be suitably cautious. Specific approaches to supervision should include the followinge * The Bank should conduct procurement capacity assessments on all institutions charged with implementing new Bank-financed projects. * Given the lack of any regular capacity in BiH to train the country's own procurement staff, project launch workshops on new Bank projects should be conducted for every project and should contain at least two days of project-specific procurement training; * for civil works contracts, the appointment of consultants to carry out design and construction supervision should be required. * Bank procurement staff should review bid evaluation reports (BERs) with particular diligence and insist on a full and detailed justification of the recommendation for the award of contract. In all cases where an implementing agency initially submits a BER with insufficient information, this should be returned to the implementing agency with a requirement that full information be provided to justify the recommendation. * The Bank should place an obligation on all implementing agencies, through Credit Agreements and/or Sub-Credit Agreements, to establish and maintain an asset register for all goods and works financed by Bank funds. * Bank Task Team Leaders should make sure that procurement post reviews are conducted by every supervision mission and that the Back-To-Office report of every supervision mission contains a specific annex dealing with procurement post review, which should be sent promptly to the Regional Procurement Adviser. The Bank's procurement specialists, both those based in Sarajevo and those based in headquarters, should play a full role in fulfilling this objective. 26 BiH CPAR Findings-Public Sector * The Bank should have an independent procurement review conducted in BiH during the next year or two. * Should the Bank accept the Open Bidding procurement method, according to the LPP, as NCB in Bank-financed projects, the Bank should pay special attention to the supervision of this procurement method. Table 7 shows the recommended financial thresholds for procurement methods for BiH. Table 7. BiH: Applicable Thresholds by Procurement Method Procurement Method Threshold ICB: Works >US$500,000 NCB: Works US$100,000 International Shopping: Goods US$50,000; and * contracts with individual consultants >US$25,000. At least one in five contracts that are subject to post-review should be post-reviewed by the Bank. The Bank's procurement staff based its Country Office should ensure that sufficient post-reviews are scheduled and undertaken to achieve this proposed ratio as soon as possible and, in any case, by the end of calendar 2002. Given the under-developed status of BiH's consulting industry (see Section C.10 below), shortlists for consulting assignments on Bank-financed projects may comprise entirely national consulting firms only if the assignment is estimated to cost less than US$100,000. Bank task teams should make a determination, on a project-by-project basis, that there is a sufficient number of qualified firms to provide adequate competition at competitive cost. In cases where Bank funds are on-lent through financial intermediaries in accordance with paragraph 3.12 of the Bank's Procurement Guidelines, procurement of contracts for goods and works estimated to cost less than US$250,000 per contract may be undertaken in accordance with established commercial practices acceptable to the Bank. C.9 UNACCEPTABLE PRACTICES ON BANK-FINANCED PROJECTS The following practices, which have been observed in the procurement legislation of BiH, should be amended for National Competitive Bidding (NCB) financed by the Bank as follows: * registration of bidders should not be required as a pre-condition of bidding;; 27 BiH CPAR Findings-Public Sector * invitations to bid shall be advertised in at least one widely circulated national daily newspaper, allowing a minimum of 30 days for the preparation and submission of bids; * pre-qualification should be required for large or complex works; invitations to pre- qualify for bidding shall be advertised in at least one widely circulated national daily newspaper a minimum of 30 days prior to the deadline for the submission of pre- qualification applications. minimum experience, technical and financial requirements shall be explicitly stated in the pre-qualification documents; * government-owned enterprises should be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency of the government and of the contracting authority; * the Borrower should use the appropriate Bank standard bidding documents for the procurement of goods, works or services; * bids should be opened in public, immediately after the deadline for submission of bids; where bids are invited in two envelopes, both envelopes (technical and financial) shall be opened at the same time; * evaluation of bids should be made in strict adherence to the criteria declared in the bidding documents and contracts shall be awarded to the lowest evaluated substantially responsive bidder; * price negotiations with the winning bidder shall not be undertaken, except where the bid price is substantially above market or the procuring entity's cost estimate and then only if negotiations are carried out to try to reach a satisfactory contract through reduction in scope and/or reallocation of risk and responsibility which can be reflected in a reduction in contract price; * For the procurement of goods and works, all bidders should be required to submit a bid security in the amount specified in the bidding documents, which, at the bidder's option, should be in the form of a letter of credit or bank guarantee from a reputable bank; * civil works contracts of long duration (e.g. more than one year) shall contain an appropriate price adjustment clause; * all bids should not be rejected and new bids solicited without the Bank's prior concurrence; * when the number of bids received is less than three, re-bidding should not be carried out without the Bank's prior concurrence. A template supplemental letter to future credit/loan agreements, to be signed between BiH and the Bank, is appended at Annex C. 28 BiH CPAR Findings-Private Sector PRIVATE SECTOR This section examines the extent to which the private sector in Bosnia is able to supply public sector demand, describes commnercial purchasing practices in the private sector, and provides a view of the country's public procurement system from the perspective of the private sector companies interviewed for the assessment. C.10 COMPETITIVENESS AND PARTICIPATION OF THE PRIVATE SECTOR In 1999, the private sector accounted for only 35 percent of Bosnia's GDP, a figure which is substantially below the average for other South-East European countries. This modest level of private sector economic activity is due in large measure to the slow start and uncertain progress of the privatization program, which got under way only in 1999. Industry production in Bosnia and Herzegovina was hard hit by the 1992-95 war, due not only to the destruction of many factories but also by the severance of traditional trading links. When part of the SFRY, Bosnia benefited from a concentration of industrial production on its territory. Recent estimatesJU indicate that industry's share of GDP has fallen to around 22 percent in both BiH and RS, although there has been modest growth in 2001 from the very narrow base left after the war. The largest industrial sector is manufacturing, which is spread across the textiles, wood, base metals, and foodstuffs sectors. Before the war, Bosnia boasted a construction sector which was competitive internationally and enjoyed particular success in winning major infrastructure contracts in countries belonging to the Non-Aligned Movement. However, as a result of the war, that market collapsed. Driven by high levels of post-war investment in infrastructure, the construction sector grew by 18 percent in 1997 and 29 percent in 1998, before slowing to a 25 percent rate of growth in 1999. There has been significant deceleration in 2000 as reconstruction activity slowed, followed by a further sharp decline iri construction output in the second half of 2001. In RS, construction output contracted by 27 percent during the first nine months of 2001, when measured against the previous year. Given the limited scale of private sector economic activity in BiH and the sharp contractions in manufacturing and construction precipitated by the war, the requirements of public sector purchasers can seldom be met entirely from the local private sector. The consulting sector in BiH remains underdeveloped and, other than perhaps in the engineering sectors, there are few national consulting furms capable of undertaking major consulting assignments on their own. On sizeable, externally-financed assignments, most local firms bid joints with or as subconsultants to larger, foreign consulting firms. C.11 PERFORMANCE ON PUBLIC CONTRACTS The performance of local civil works contractors on publicly funded contracts is mixed. There are a small number of reputable contractors, mainly private sector, which have grown relatively strong on the back of the externally financed, post-war construction boom and which carry that performance through to government-funded contracts. These contractors have won and performed satisfactorily on contracts financed by the World Bank, EU, EBRD and local sources. However, X Economist Intelligence Unit Country Profile of Bosnia and Herzegovina, 2001. 29 BiH CPAR Findings-Private Sector there is a much larger pool of contractors, both publicly and privately owned, who remain weakened by the wartime collapse of traditional local and regional markets and who have failed to diversify. Some of these contractors have run as much as 60 percent late in the performance of works contracts awarded as a result of local tenders. Collusion and attempted bid rigging among local contractors is a major concern for public purchasers: the local office of one major IFI reports that a comparison of bids submitted by local contractors on one of its projects revealed a "perfect straight line" in the range of prices submitted by local contractors. It is clear that govermment purchasers must remain vigilant against such abuses. Due to the historical illiquidity of the local banking sector and, in many cases, their own parlous financial state, many Bosnian contractors have experienced recurring difficulties in obtaining bank guarantees, bid securities and performance securities. This gives rise to a relatively high incidence of non-responsive bids on IFI-financed projects, where such instruments are required. As with many other areas of law, contract law in BiH is currently undergoing reform. The German technical assistance organization GTZ is assisting with the redrafting of the Law on Obligations, which includes provisions on many types of contracts. A survey undertaken in the preparation of the Business Environment Adjustment Credit"' found that, while opinion is divided about the technical adequacy of the existing Law on Obligations, which dates from the former Yugoslav legal system, it is widely recognized that: "the system of contract enforcement in BiH is seriously flawed. Businesses uniformly complained that contracts are often not enforced by the judicial system. Courts allow contract debtors to delay enforcement, often for years. Nor do courts uniformly enforce the law... Even if a judgment is ultimately obtained, it is difficult to enforce in fact because of limitations in enforcement mechanisms provided in the Law." This observation is consistent with the finding of this assessment, which found non-payment to be a serious difficulty restraining the development of private sector suppliers and contractors (see Section C. 13). The recognized failures of the Bosnia court system to enforce contracts is exacerbated by the under-developed status of commercial arbitration in the country. While the basic legal framework for commercial arbitration substantially exists under the Law on Civil Procedure, the practice of commercial arbitration is absent and Bosnia lacks the institutions to provide arbitration and mediation services. C.12 COMMERCIAL PRACTICES Given the uncertainty of commercial relationships in the aftermath of the war, the prevalence of corruption and the business community's lack of faith in the judiciary to enforce contractual obligations, commercial purchasing practices are characterized by aversion to risk, leading to increased value being placed on long-term trading relations with trusted suppliers. Competitive tendering by private companies is rare. x,. Business Environment Adjustment Credit Identification Mission: Post-Mission Report on the Commercial Legal Framework and Enforcement Regime in Bosnia and Herzegovina, May 2001. 30 BiH CPAR Findings-Private Sector The following recurrent private sector practices were noted. * Direct contracting is widely used; * Price negotiation is the norm; * Where competition is present, contract award is invariably to the lowest priced offer which meets the basic technical specifications. * Purchasing of goods from the domestic market is done mainly through a simple purchase orders, paid in cash and, in many cases, without an invoice. * Most business-to-business commercial relationships are based primarily on trust, built upon satisfactory past performance. Private companies are wary of entering into new supply relationships, which has the effect of limiting competitive sourcing. Some companies retain satisfactory sourcing relationships with the same supplier over several years, without resorting to competition. * There is a high incidence of contracts not being performed. Given the weak judiciary, many enterprises prefer not to involve themselves in formal dispute resolution procedures but choose, instead, to resolve such cases through informal negotiations. C.13 PRIVATE SECTOR PERSPECTIVES ON PUBLIC SECTOR PROCUREMENT "Winning contracts depends on knowing the right people, not on knowing the regulations" General Manager of a Bosnian production, design and engineering comipany March, 2001 Private sector companies that were interviewed for this assessment professed a low level of confidence in the conduct of public tenders, complaining about excessive demands for bribes made by public officials and about their bids being rejected on frivolous grounds during bid opening. Many bidders alleged that the results of most local tenders are widely known in advance within the tightly knit local manufacturing sector, although some were frank enough to admit that this sometimes works in their favor also. Most complained about a lack of transparency in the bid evaluation process, citing examples of contracts being awarded to bids which omitted to offer major items but where the contract price was subsequently increased substantially above the initial contract price, allegedly to make good this shortfall. Many complained that, even when they win a contract, the procuring entity forces them to match the lowest price for every item from among all the other bids submitted, as a precondition for contract signature. While some bidders recognized that the quality of procurement documentation had improved, particularly among those utilities which had adopted World Bank or EBRD documentation as their own, they nevertheless complained that this improvement was undermined by a lack of rigor in applying the procurement procedures. Finally, all suppliers and particularly construction contractors complained about difficulties in getting paid, usually due to very complex payment procedures often requiring signatures from three separate officials (Bosniak, Croat and Serb). As most contracts lack arbitration clauses or any provision allowing contractors to charge interest on late payments, the ubiquitousness of the non-payment problem appears to act as a significant brake on the development of private sector businesses. 31 BiH CPAR Recommended Action Plan D. RECOMMENDED ACTION PLAN D.1 RECOMMENDED ACTIONS This section sets out a series of recommendations designed to address the various weaknesses in the public procurement environment in Bosnia and Herzegovina, as identified in the preceding sections. The recommendations are grouped to address the major areas of focus, including legislative reform, procurement procedures and practices, increasing accountability, organizational reform and capacity building. In their Letter of Development Policy dated April 4, 2002 to the World Bank, the Governments of BiH, the Federation and Republika Srpska and have undertaken "to adopt strong, harmonized public procurement legislation at all levels of government for all public institutions" and have stated their intention to "level the playing field for private sector participation in public procurement." To achieve these bold objectives will require the implementation of a set of reform which is both comprehensive and coordinated. The recommendations presented in this section are intended to assist Bosnia and Herzegovina in moving towards these objectives. Annex D presents a detailed list of tasks with a timetable and indications of responsibility and monitoring indicators. D.1.1 Legislative Reform The State of Bosnia and Herzegovina, the Federation and Republika Srpska should each enact a new Law on Public Procurement (LPP), which should be consistent with each other and aligned with international bodies of law in this area, such as EU law. At the meeting of the Working Group on Public Procurement in Sarajevo on June 3, 2002, the various levels of administration agreed to work together, both through the WGPP and by more frequent, less formal working meetings, to draft such a set of laws within the timetable outlined in the Action Plan appended to this report at Annex D. While the process of legislating in Bosnia and Herzegovina is always complex and the specific provisions of each enactment will have to be crafted in detail during legislative drafting, it is clearly desirable that the State law on public procurement should set the main rules, which should be mirrored in the entity laws. In addition, the State should have an overall coordinating role, which should be defined in the State public procurement law, authorizing it to ensure harmonized laws, implementing regulations and practices at other levels, for example by reviewing draft enactments at entity and other levels before they become effective. The WGPP and the separate levels of administration will need to be able to call on specialist, external legal expertise to assist them with legal drafting. As part of the drafting process, the cantons in the FBiH should be consulted, in order to make sure that any cantonal instructions which exist which may conflict with the new Federation law are identified and arrangements are made for those instruments to be conformed with the new law. A comprehensive set of implementing regulations should be drafted to underpin the new LPPs and adopted by the State and both entities. Once the new laws and implementing regulations are in place and as an essential tool for improving the quality and consistency of the public procurement process, a set of standard bidding documents (SBDs) for the procurement of goods, civil works and services, should also be developed and their use by all public procuring entities made mandatory. These SBDs should be introduced in a 32 BiH CPAR RecommendedAction Plan manner which ensures that public procuring entities understand the documents and are supported by the provision of training to explain their proper use. In order to reduce variation in the application of the new LPPs, it will be essential to put in place a comprehensive suite of implementing regulations, designed to make the provisions of the LPPs as clear and specific as possible. Again, implementing regulations adopted by the State and the two entities should be harmonized to the fullest extent possible, in line with the LPPs themselves. The current weakness of commercial arbitration arrangements and state of uncertainty in contractual relations act as major constraints on the ability of the BiH economy to grow and to attract foreign investment. Therefore, the Government should institute reforms to ensure the enforcement of contracts, including reform of the Law on Civil Procedure to prevent delays and reform the Law on Enforcement to ensure that judgments can be effectively enforced. The Government should facilitate commercial arbitration and mediation and establish commercial courts or specialized commercial sections within the court system. As an immediate measure to address the deterrent effect which the absence of arbitration rules and institutions has on potential foreign bidders, contracts between Bosnian public purchasers and foreign contractors, suppliers or consultants should provide for international arbitration under internationally-recognized arbitration rules, such as UNCITRAL, to be conducted at a recognized international arbitration institution. D.1.2. Procurement Procedures and Practices The numerous weaknesses in the FBiH decree and the RS law, as identified in Section C.2 above, should be addressed in the drafting of the new LPPs and implementing regulations. Also, the risks which they create for abuses and corruption in public procurement, as identified during this assessment and in the Anti-Corruption Diagnostic Studies, should be reduced and, where possible, eliminated. The most egregious of these risks are described in Box 3 and recommendations are made to address them. Box 3: Summary of Procurement Risks Factors and Recommended Actions Risk - FactorsCin - - .- Recommendagions -. . . ~~-lbr_:ig1n . . - ,- Z-{nc -5 *T7Ci - - ; z - Bidders- are unawabe':o . or.: od lsifiv e 9 ba, i.d unclear about .he nrules> u i . .on'' jnaih y jqjE fl j goveming how 'they sh1d, . u reh, fie,g,.ti-,sF, e ,i sA bid for pub h gusaio nsco,ii,d-'. _ulati .. -- -x ~~gWlc~~~Prvu cu?itM ia - . -- . _-, 1 w j v* J ,_, P,TIiCourJchers maye- FRelervant ffl'4ii-eu18 zTh- , , 3 t , i i- not reql . own procure t L e n n =-- n b tile - ai ~~iz:o avi sing Op.en a gL '.'5 * -- t ti ,- ~ ~ ~ ,-. 8idding ... d - .... . , < ,, | Z 3 33 IR 4., K. " - -7, , 5 ie 7; 0 - ij q g j 31 Ar, :,I V, en Pg BV SL U T A V, O r a' 63 J SI V, At -'CA g4 'q, IJI C3 GA B W9 .2 F, Z L s, % F OA d: 92 2 Li El ra. ",fl r- 'a Ln K BW 1 Cy 1.) -?T Z C4 .0 in -.0 no cli m nq J L . "I 'I 0 I C) - . - -_ - .1 'X2 0 ri -T 11L . ' - - , &I LE A- P' O. CL .25 m f 2 M r- rj v U. EJ -R. J LI rkle 'S T "d ci M :f- O 13 L) -- I - r ;; C. 17: A ;A U CQ !4) ea E! 47 PD, EL BiH CPAR Recommended Action Plan .~~~~~~~~~~~~ .J . S. . :|- ->__.:>t ',r...C-..r,-, )-*, - s;c1j;.,' ,S -~ .- .. *~~ I bbCSC s',d a *~ nL -, si,. Wid.s ;c'K Yu]es riu5,ic O-.- T5; , F, ,,,-';j'Krh9ax 'a;due *r-.rRuteofmtg fior i;ldf-'-6dii C:NUC11T; -2 rey ;.ithaspr rv ker bt Is toaf dcJs Ui - . .: 5uCr ;d iS -. t _D E u ^.: 41:!|%-wili ficior bie u .1VQflAesi -.f1> Jd tj eM& rClinl 1d oe. '. 4f~3s jS- .'KS.i~Z r.resi' , ,.; ' ' - > - : 'r . ." ,L5:e.si C,j '1udf .*tI he-o 'psTino TFUM~- > 1- ~|- '~ -ucga ir; 1.._ lS:c Cixa6w "SC pz a 'A'~~ Is i. 1 ~ - ~C --E -?'c . c eri EW' -rils TO. 5 L. z i rvS''i -.ows ni.-. -n -~ciaIs : a - . - -.ids' - . r> z.cˇ-" .I-tenIs ,:v Rorf:tre JY Fr-',rd. >-,d$ . ?102twbT'_ _t^ ;d'i-STS . ___ Z- __________I K >I -|..Sw,h .o- tu ebti of!] -:. e3 "___ ; _ ; *6 -%s it C:;: --1s . -;Cl ti- E.I .: 'v'A- Zev; Ve'tCa?<:w bod ~iudDbt ILp ;i4ut6S-S oisP ~ai^> o. c s:ons -o p.blic. - ... -v7 . J1 ., 1 o FS oi zxb& Sn - i - bd- ; 5V<. Ut-S-_ %S otic .. . n ' * -; AMros5 *Wi-rh 9 ccti_d* .~~~~~~~~~~~~~~ . | ,b ,nI~a o- .o p,^rd3vi;s cooqc by iE-pubcssj*ali ; .~~~~~~~ ~~~~~ -i . l3:ddi.nr-iv a . ,- ~. .~~~~~~~~~~~~~~~~~~~~~~~ L% o __ su 1..' .Oelil Tr -i s l Fze-LO _rs| .Jd , .C - v, t o f xT-iXscd;tpeX-................. :S-iS _________________ _iari 3c i .i-.iL deJs.'-, ID' 11 2 Organizational Refforra-d x-h r-zLic tbLetuWrxii:~. Andk'. X L bre reie of3 ognizai o l!-.mnal desig to ]support publc prcuemn re- 181 sforms inJ tranition ---- conrisi Cnrl n Esen uoe!q ovrteps.dcd-eelsta n odlta a 'Ucs^lclyp -teze:<-.5i jd j<5 -P ; --;. }i ; _- WS=dE i: '-: -Sti ' *s-.I A., cffJ-out- workedwellinseveralcounrdiebCis that of aneS; idependen Ofic uli P Uremen l iocated i 8yhM.*'Thi o bein folloed s b land gov.pl) ithuaniabi. (w.rZtv.t) anda . .- , : . , q Slovaka (), forexample. Other cuntries have optd for the estblsh t ofby -pubc ID.1.2 Girggamlmdoa&n Refoirm A brief review of orgnnizational design to support public procurement refoha s in trfosition costtries in Central and Easte, c Europe over the past decade reveals that one model that has workedwell in several couintries is that of an independent Office of Public Procurement, located outside line ministry and usually reporting directly to the Prime Minister or Cabinet of Ministers. This model has been followed successfully by Poland (www.uzpngov.pl), Lithuania (www.vt.lt) and Sloval,a (wwwtuvoprovsk), for example. Other countries have opted for the establishment of an independent Public Procurement Coxmission or Boarde a model whach has been followed by the Republic of Montenegro (www.nabayka.cg.3u! and Turkey. In all these cases, the key feature is the agency's independence, which is essential to enable it to ensure the application of the procurement law without being subject to political influence. Independence is also a prerequisite for this body to operate effectively when conducting administrative review of bidders' protests, a function typically assigned to such organizations. In BiH, there is a particular risk that, given the recognized weakness of the existing public institutions and the size and complexity of government bureaucracy (see Section C.3.2), the establishment new institutions is likely to produce equally weak, if not weaker, institutions. It seems prudent, therefore, to explore how organizational oversight of public procurement could be strengthened within existing institutions. The WGPP has stated its intention to establish a Central Unit on Procurement at the State level within the State Ministry of Treasury and to entrust this 35 BiH CPAR Recommended Action Plan unit with taking the lead on behalf of the State in the drafting of a new State Law on Public Procurement. The CPAR supports the recommendation to establish a Central Unit on Procurement within the State Ministry of Treasury. Equally important, however, is the need to address organizational requirements at the entity and sub-entity levels, particularly because, as the data presented in Section C.5 and Annex 5 demonstrate, that is where most expenditure on procurement takes place. Therefore, the CPAR recommends that: The Federation Ministry of Finance and RS Ministry of Finance should each establish a Procurement Unit. These units need not be large to perform the functions required of them. Indeed, they could be as srnall as three or four people and, therefore, effectively budget-neutral. The most important consideration is that both MOFs should dedicate some resources to performing essential oversight and regulatory functions for public procurement. The specific functions of each of these units should be worked out as part of the process of drafting the new LPPs and should be defined in them. At the WGPP meeting of June 3, 2002, the RS Ministry of Finance stated that it has already drawn up an organizational restructuring plan which will create just such a "complex" dedicated to public procurement in the timescale envisaged by the Action Plan (see Annex D). At the sub-entity levels, it is also important to explore options to strengthen the implementation and oversight of procurement, particularly in the high-spending cantons in the Federation (see Annex B). The role and functions of the Cantonal Secretariats of Finance, in relation to public procurement conducted within their cantons, should be clearly defined in the new Federation Law on Public Procurement. Each Cantonal Secretariat of Finance should nominate a senior officer to perform the mandated procurement-related functions. In some cantons, the level of expenditure does not appear to warrant dedicated procurement units, while others have relatively large procurement spends There clearly is an argument for dedicating some resources to procurement as a specialist task, either on a department-by-department basis or on a common-user item basis, as is currently done in the Common Services of the Sarajevo Canton MOF. Concentrating resources in this manner will facilitate future efforts to professionalize the procurement function, enabling staff who do procurement as their sole function to obtain specialist training and to improve their skills through experience. D.13 Increasing Accountability It is essential that the authorities at all levels of administration in BiH realize that the drafting and enactment of new, harmonized public procurement laws is only one piece in the complex jigsaw of interlocking components necessary to construct an effective compliance and enforcement regime for public procurement. Other indispensable components must include: * clear political will and demonstrated leadership on the part of public figures to fight corruption and to counter vested interests; 36 BiH CPAR Recommended Action Plan * effective means to ensure that public officials observe the new procurement rules; * strong oversight of public procurement by public bodies, including central legislative institutions, entity-level legislatures and cantonal assemblies, the Supreme Audit Institutions (SAIs) and civil society; and * the availability of a well-functioning complaints mechanism for aggrieved bidders, backed up by independent administrative review (see below). All of the reforms proposed in this report will contribute towards the construction of such a regime in BiH and they all reinforce one or more of the above components. Other salient reconmmendations include: To enhance oversight by pubUc bodies, the institutions charged with performing regulatory functions for public procurement at each level of administration (State Ministry of Treasury, Federation Ministry of Finance, RS Ministry of Finance, Cantonal Secretariats of Finance) should be required to submit an annual report on public procurement to the appropriate legislative body at their level. In order to afford civil society the opportunity to confirm whether the new procurement rules are being observed, these annual reports should be published. All procuring entities should be required by the new LPPs to publish notices of procurement contract awards promptly after contracts become effective. Given their current lack of specialized procurement and technical skills to conduct audits which are specific to the procurement function, the SAIs should make use of the rights, given them in their founding statutes, to employ "specialized consultants" - that is, independent auditors - to carry out independent technical and compliance audits of procurement transactions. The internal audit departments in public institutions should routinely conduct business process audits of the procurement function, in order make sure that tendering procedures are being correctly followed. Each major procuring entity should develop its own pubUc procurement rule book, defining the procurement rules clearly and comprehensively and in a manner which is fully consistent with the applicable legislation. This rule book should be made available to all public officials handling procurement transactions. With regard to increasing the accountability of public officials specifically for their actions related to the conduct of procurement, the key reforms needed include enforcing a procedures for reprimanding public officials who are unaware of or breach the applicable legislation and strengthening the bid protest system. The latter measure should have the aim of ensuring that bidders' rights to protest against breaches of the applicable legislation by public officials are adequately established and defined in the legislation and that, should a bidder remain dissatisfied with the response of a procuring entity to his initial protest, the bidder has the right to an independent administrative review. Given that the recommendations made above on the establishment of Procurement Departments within line ministries at the different levels, it is clear that these departments cannot conduct independent reviews of complaint. Therefore, another institution should be identified which will perform this key function. The choice of that institution is not for this report to make. Rather, it should be a matter for discussion with the government and 37 BiH CPAR Recommended Action Plan for decision at the time of drafting the new procurement laws. In the meantime, the CPAR recommends that: Governments at all levels should put in place procedures for notifying and, if necessary, penalizing public officials who ignore or breach the applicable procurement legislation. The Working Group on Public Procurement should examine options for the choice of institution(s) to carry out independent administrative review of bid protests and make a recommendation to the relevant Ministries, which should be reflected in the drafting of the new LPPs. One organizational option for handling bid protests, which should be explored fully during implementation of the reform program, might be to establish Complaints Committees at State, FBiH and RS levels, comprising representatives of the level of administration against which the protest has been lodged, For example, in the Federation, when the Federation Complaints Committee considers a protest lodged against a canton, it might invite representatives of that canton (but not of the involved procuring entity itself) to participate in the Committee. Given that the accountability of public institutions and officials is the main theme of the Country Financial Accountability Assessment (CFAA) report on BiH, which is submitted to the government, its recommendations are not repeated here. It is sufficient to note that the CFAA recognizes that the main change toward the establishment of a strong control environment is to institutionalize intemal controls and both internal and external auditing within BiH's public sector institutions. D.l.4 Training and Capacity Building As this assessment has identified (see Section C.3. 1 above), one of the key reasons why public procurement in BiH is currently so prone to error and abuse is that it is being conducted by public officials who are not specialists in the function and who have received no training in procurement. There is, therefore, clearly a huge need to train public officials in procurement. The good news is that the EU's planned Eurol.5 million Technical Assistance for public procurement in BiH is likely to contain a substantial training component. It should be kept in mind that training should take place within a well-planned, systematic and comprehensive framework. This is essential, not only to improve the quality of procurement carried out by public officials but also to underpin the effective implementation and success of the planned procurement reform program. To that end, the CPAR recommends that: The State Ministry of Treasury, FBiH and RS MOF should develop a national training strategy for public procurement, which should cover all levels of administration and should take as its central objective the creation of a training system which is itself sustainable over the long term. Assistance to the government with the development of such a training strategy might form part of the EU's Technical Assistance. As a minimum, this strategy should define the numbers. grades, employing institutions and locations of public officials to be trained, make recommendations for a national curriculum for procurement training and for core content of training courses. It is important that customized short courses on the importance and key principles of good procurement management be provided to senior government officials and that a graduated suite of 38 BiH CPAR Recommended Action Plan more technical courses should be delivered to practitioners. The latter should include, for example, the principles of public procurement, raising the awareness of current public procurement laws and implementing regulations (in order to minimize the kinds of problems identified under C. 1.3 above, where public officials have been found to be wholly unaware of the legislation governing their activities), procurement procedures, use of standard procurement documents, writing technical specifications, bid evaluation criteria and methodologies, procurement rules of IFIs, ethics of public procurement, the importance of BiH's Anti-Corruption Action Plan for public procurement, contract law, record keeping, handling bid protests, dispute resolution, project management and contract administration. In order to promote the establishment of a sustainable training system for public procurement, a number of educational institutions in key centers should be identified which will set up and deliver the agreed curriculum for public procurement training. Universities and technical colleges should be encouraged to include project management and procurement modules in technical courses, for example, in undergraduate engineering programs. Once this national training program for procurement has been estabUshed and operational for some time, requirements should be introduced that only staff who have successfully completed the required training would be eligible to fill dedicated procurement positions in the public service and to serve on evaluation committees. It is also incumbent upon public authorities at all levels to help private-sector bidders increase their awareness and understanding of the tendering rules, particularly of any new legislation which will be enacted in the future. Bidders also need to be informed of how they can best access information about bidding opportunities and be trained in how to write responsive bids. To that end and as a medium-term measure, the State Ministry of Treasury, FBiH MOF and RS MOF should develop short information and training workshops for bidders to increase their awareness of bidding opportunities, to explain the new procurement legislation and to train them in the preparation of responsive bids. D.2 MEASURES TO BE TAKEN BY THE GOVERNMENT It is clear that the primary responsibility for implementing the planned procurement reforms lies with the Bosnian authorities at State, entity and the various sub-entity levels. In particular, it is incumbent upon the State Ministry of Treasury, FBiH MOF and RS MOF to work together effectively in drafting new, harmonized public procurement laws during the second and third quarters of calendar 2002, to have them approved within their own governments and to submit them to their respective legislatures for passage. Likewise, implementation of the Action Plan presented with this report is primarily for the governments to fulfill. D.3 MEASURES TO BE TAKEN BY THE BANK AND OTHER FINANCIERS The finalization of the CPAR should be seen by all parties concerned not as an end-point but as the beginning of a process. Based on the Bank's experience in other countries, it may take several years to implement procurement reform successfully. Even when the first reforms have taken hold, continuous development will still be required, especially is BiH is to stated path of harmonization of its legal environment with that of the EU. Throughout this process, the Bank will maintain an active dialogue with the BiH authorities, through periodic visits by public 39 BiH CPAR Recommended Action Plan procurerrment reform specialists and through its staff based in Bill, to promote effective reform of public procurement and will provide technical assistance, if required. The Bank will also make its legal and procurement staff available to review and provide comments on the new draft laws, implementing regulations and bidding documents. The Bank should continue holding procurement training seminars for the staff of implementation agencies responsible for Bank-financed projects. Previous Bank seminars held in BiH have been successful in making public officials aware of the benefits of a transparent and competitive procurement system and in increasing familiarity with international procurement practices. The next of these seminars should be scheduled for FY03 (July, 2002-June, 2004) D.4 Technical Assistance The BiH governments at all involved levels will need Technical Assistance to implement this reform program in a timely and effective manner. The immediate need is to provide the State Ministry of Treasury, FBiH MOF and RS MOF with expert legal assistance for the drafting of new, harmonized Laws on Public Procurement. The EU is already planning a Euro 1.5 million Technical Assistance for public procurement, the Terms of Reference for which have yet to be drafted. The EU has undertaken to consult with the Bank in the preparation of those TOR, to make sure that they are based firmly on the findings and recommendations of this report. The EU-financed consultants are expected to be in place by October, 2002. D.5 Timetable The time-bound Action Plan which forms Annex D to this report and which covers the main recommendations made by this report, was discussed and agreed with the WGPP at its meeting in Sarajevo on June3, 2002 and has been accepted by all the parties. D.6 Funding Procurement Reform The main source of finance in the short term for the technical assistance which Bosnia will need to implement the recommendations contained in this report is likely to be the European Union, which has already earmarked funds for Technical Assistance for Public Procurement in BiH. The EU has undertaken to share the Terns of Reference for that TA with the Bank at the draft stage, in order to make sure that the final TOR are firmly grounded in the findings and recommendations of this report. Subject to reaching agreement with the World Bank on the recommendations and Action Plan contained in this report, the World Bank would also consider financing part of the sizeable scope of activities which the reform program entails. There will clearly be a need to ensure that the activities funded by the EU and any which may be financed by the Bank are both coordinated and complementary. 40 BiH CPAR Recommended Action Plan D.7 Monitoring and Follow-up Plan The key group for monitoring and ensuring follow-up of the Action Plan is the WGPP. In order to assist the WGPP and the governments to track the effectiveness of the planned reforms, it is also proposed that the TOR of the EU-financed consultants should include assistance to develop a monitoring plan, including detailed set of indicators of the performance of the public procurement system at all levels of administration, supported by a plan for collecting the necessary data. The WGPP should meet at least quarterly and, in advance of each meeting, the State Ministry of Treasury, FBiH MOF, and RS MOF should submit reports detailing progress made in the previous quarter against the recommendations and proposing a work program for the coming quarter, to be agreed by the WGPP. 41 Annexes ANNEXES ANNEX A: STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA A. STATEMENT OF BANK LOANS'd" (As of December 31, 2001) USS Million (Less Cancellations) Fiscal Loan No. Year Project Loan Un-disbursed IBRD'" 4038-BOS 1996Consolidatlon Loan A 28.6 0.0 4039-BOS 1996Consolidatbon Loan B 284.9 0.0 4040-BOS 1996Consolidation Loan C 307.1 0.0 Total 620.6 Of which: Repaid 249 Total Now Held by the Bank 595.7 0.0 TFBH" (Under Disbursement) TF-024030 1996Emergency Recovery Credit 45.0 0.0 TF-024031 1996Emergency Farm Reconstructon 20.0 0.0 TF-024032 1996rEmergency Water Supply 20.0 0.0 TF-024033 1996Emergency Transport 35.0 0.0 TF-024034 1996Emergency District Heating 20.0 0.0 TF-024035 1996 Emergency War Vctims Rehabilitation 5.0 0.0 TF-024040 1996 Emergency Education Reconstruction 5.0 0.0 Total 150.0 0.0 IDA 2897-BOS 1996Emergency Educaton Reconstruction 5.0 0.0 2896-BOS 1996 Emergency War Victims Rehabilitation 5.0 0.0 2902-BOS 1997Emergency Housing Repair 15.0 0.0 2903-BOS 1997Emergency Power Reconstruction 35.6 0.0 2904-BOS 1997 Emergency Public Works and Employment 10.0 0.0 2905-BOS 1997 Emergency Landmines Clearance 7.5 0.2 2906-BOS 1997Emergency Demobiliation and Reintegration 7.5 0.0 2914-BOS 1997Transition Assistance Credit 90.0 0.0 xii The status of these projects is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and cinrulated to the Executive Directors on April 30 and October 31. xi Consolidation Loans A, B and C were approved on June 13, 1996 and became effective on June 14, 1996. xv Trust Fund Annexes STATUS OF BANK GROUP OPERATIONS IN BOSNIA AND HERZEGOVINA A. STATEMENT OF BANK LOANSx (As of December 31, 2001) US$ Million (Less Cancellations) Fiscal Loan No. Year Project Loan Un-disbursed N001-BOS 1997 Emergency Industry Re-Start Guarantee 10.0 0.0 N002-BOS 1997Emergency Microenterprise/Local Inibatives 7.0 0.0 N003-BOS 1997Essential Hospital Services 15.0 0.3 N032-BOS 1998Transport ReconstrucUon II 39.0 0.0 N035-BOS 1998Education Reconstructon II 11.0 0.0 3028-BOS 1998Reconstruction Assistanoe Project 17.0 0.0 3029-BOS 1998Emergency Natural Gas 10.0 0.0 3070-BOS 1998Emergency Pilot Credit (RS) 5.0 0.0 3071-BOS 1998Power 11 25.0 1.4 N040-BOS 1998Forestry 7.0 1-5 3090-BOS 1998Public Finance I (Structural Adjustment) 63.0 0.0 3191-BOS 1999Local Development 15.0 12.6 3202-BOS 1999Basic Health 10.0 7.0 3262-BOS 1999Enterprise and Bank Privatization Project 50.0 23.6 3257-BOS 1999Enterprise Export Fadlity Project 12.0 7.6 3269-BOS 1999Pilot Cultural Heritage Project (LIL) 4.0 2.3 3258-BOS 1999Second Public Finance (Structural Adjustment) 72.0 18.5 3351-BOS 2000Educabon Development Project III 10.6 8.1 3385-BOS 2000Mostar Water and Sanitabon 12.0 9.2 3400-BOS 2000 Emergency Labor Redeployment 15.0 13.4 3439-BOS 2000Social Sector Structural Adjustment Credit - TA 3.55 3.30 3466-BOS 2001 Trade and Transport Facilitation in SEE 11.0 10.9 34650-BOS 2001 Social Sector SAC (SOSAC I) 20.0 0.0 35330-BOS 2001 Local Initiatives II 20.0 19.8 35340-BOS 2001 Electric Power Reconstruction III 35.0 33.1 35380-BOS 2001 Community Development 15.0 14.8 3531- BOS 2001 Privatizabon TA 19.8 19.6 Total 709.6 207.2 Grand Total 859.6 207.2 Annexes ANNEX B1: EXPENDITURE ASSIGNMENTS BY LEVEL OF ADMINISTRATION Expenditure State Entities Assignments Federation Republika Srspka Federation Cantons Municipalities Republic Municipalities Immaigration, Immigration, Refugees and Refugees and refigees and asylum refugees and displaced persons displaced persons polcies asylum policies Juukce International & Intemal Police Intemal affairs/ Local police lsrnal Security and inter-Entity affairs/justice and justice and police criminal law police enforcement munications Regul. inter-Entity Intra-Entity Reg. Radio TV Intra-Entity telecom. system regulation intra-canton regulation Pubc Transportation Regulates Intra-Entity Reg. Intra-canton Intra-Entity -National transportation system -Inter-Entity traffic control Social Safety Net and Social Assistance- FBiH Pension Social Social Assistance SR Pension system Social Welfare joint system (being Assistance-joint -joint Assistance (Refugee consolidated) programs) Categorical S.Ass. Energy Electricity Electricity transmission lines transmission lines Roads Highways Local roads Highways Local roads Railroads Railroads Defense (army) 100 percent 100 percent Economic and social 100 percent 100 percent policies Reconstruction 100 percent 100 percent programs Education -Universities and -Pre-school -Universities and -Pre-school research institute -Primary school research institute -Primary school -Teachers' salaries part. maintenance -Teachers' salaries part. -School buildings. -School buses - School buildings maintenance. Subs. -Secondary Subs -School buses -All levels Schools education Health care Primary healthcare Ambulance Primary healthcare Ambulance Hospitals services Hospitals services Medical research Healthcare Medical research Healthcare institutes - FBiH supplies institutes supplies HIF (fragmented) - SR HIF Sanitation 100 percent 100 percent (Garbage Collection) Sewerage treatment 100 percent 100 percent Water and Public 100 percent 100 percent Utilities Housing and Housing policy City planning Housing policy City planning Spatial/City Planning Culture, Sport, Museums Culture, sports, Museums Culture, sports, Recreation, Parks, Theaters parks, street Theaters parks, street Street Lighting lighting lighting Fire Protection 100 percent 100 percent Libraries 100 percent 100 percent Environment and use Concurrent responsibility Concurrent responsibility of natural resources Annexes ANNEX B2: CANTON-BY-CANTON PLANNED VS. ACTUAL PROCUREMENT EXPENDITURES, 2000 (except Neretva) Una Sana Una Sana Variance Posavena Posavena Variance Tuzla- Tuola-Podrinje Variance Zenica-Dobol Zenica-Dobol Variance Gorazde- Gorazde- Variance Planned Actual Planned Actual Podrinj6 Actual Planned Actual Upper Upper Drina Planned DPlane Actual Procurement of Materials and Services by Canton. 2000_ Procurement of maeals 2,941,260 5,453,090 461.660 576.043 3.553.970 5,534,363 2.456,000 2.244,722 315,510 664,725 Maintenance 452,810 4,487,892 321,170 1,104,412 _ 1,961,035 2,163,513 1,563,900 1,492,522 783,686 1,079,061 Contracted services 2,251,612 4,503,502 449,358 939,705 3,454.602 8,325,724 1,737,400 2,647,298 429,043 367,029 Sub-Total Procurernent of Materials & Services 5,645,682 14,444,484 8,798.802 1,232,188 2,620,160 1,387,972 8,969,607 16,023,600 7,053,993 5,759,300 6,384,542 625,242 1,528,239 2.110,815 582,576 Capltal =enditures by Canton. 2000 Procurement of buildings 742,877 542,197 560,000 14,679 1,250,000 10,758,733 3,000,000 . 160,612 | 25,325 Procurement of equipment 2,103,500 1,943,550 395,000 793,693 150,000 3,567,030 3,000000 1,918,099 40,000 83,697 Procurementofotherfixedassets 1,650,000 1,281,996 43,506 = 31,210 - 119,336 = 157,000 6,484 Reconstruction and investment maintenance 1.584,479 655,020 300,000 96,382 7,500.000 36,245 7,500,00 14,124,443 _ 401,568 | * | ISub- Total Caia Ependitures 6,080.8581 4,422,7631-1,6580931 1.255.0001 948,260 -308.7401 8.960.000 1433285,493.2181 13,500,0001 16,161,87812,661,8781 759,1801 115,5061 44.3674 Total Materials & Services + Capitali xpenditure 111,726,5381 18,867,2471 7.140,7091 2,487.1881 3,568,4201 1,081,232117,869,6071 30,416,818112,547,211| 19,259,3001 22,548,42013,287,12012,287,4191 2,226,321| 41,098| Variance % 61% 43% 70% 17% -3% Annexes ANNEX B2 (CONTr'D) Central central Variance Neretva Neretva Variance West Herzeg- West Herzeg- Variance Sarajevo Sarajevo VaiHance Herceg- Herceg- Variance Total Ail Total All Vauiance Bosnia Bosnia Actual Planned Actual ovina ovina Actual Planned Actual Bosna Bosna Actual Cantons Cantons Planned Planned Planned Planned Actual 1,167,370 G2,849708 I 0 970,629 2,777081 I 17,678293 D,517.555 503=630 761,548 30,050.322 30,178,835 919,591 1,844,405 t _ _ 495,765 936,185 7,742,565 6,531,875 353,200 406,559 14,593,722 20,048.424 3,861,005 3,588,631 921,618 1,354,055 _ 18.522.291 42,494,383 423,600 1,590,892 32.050,529 65,809,219 _ 5,947,966 8,080,744 2,132,778 0 0 0 2,388,012 5,067,321 2,679,309 43,943,149 58,543,813 14,600,664 1,280,430 2,758,999 1,478,569 76,694,573 116,034,478 39,339,905 - 261,337 a 3,784,000 1,782,097 2,334,728 2.619,376 _ - 546,980 11,832,217 16.550,724 2,383,649 1,138,080 ( 800,000 851,582 _ 7,974,924 6,768,455 _ 260,000 425,748 17,087,073 17,489,934 - - 0 400.000 30,698 5,138,000 3,951.664 _ 300,000 D 7,645,000 5,404,894 4,405,411 5,012,834 0 0 2,500,000 4,764,020 4,944,500 3,824,352 1 1,900,000 20,081 _ 31,035,958 28,533,377 6,769,060 6,412,251 4356,809 0 0 0 7,484,000 7,428,397 55,603 20,392,152 17,163,847 -,228,305 2,460,000 992,809-1,48,191 67,600,248 68,038,929 438,68 S 14, n l 01 9,872,0121 12,495,71812,623,7061 84,335,3011 75,707,60111,372,3591 430 8 82114,073,40739,8, 14% no oata reported 27% 18% 0.3% 28% Annexes ANNEX B3: BUDGETED EXPENDITURE ON GOODS, SERVICES AND CAPITAL EXPENDITURES BY LEVEL OF ADMINISTRATION 1999-2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 2000 State 218.3 266.9 22% 15.7 26.4 69% - - 0% 15.7 26.4 69% 7% 10% Federation Federation Govemment 800.7 984.4 23% 19.4 17.9 -8% 15.7 35.9 129% 35.1 53.8 53% 4% 5% Cantons 1,326.8 1,345.2 1% 131.9 119.2 -10% 231.2 136.6 -41% 363.1 255.8 -30% 27% 19% EBFs 1,038.4 1,163.7 12% 104.9 114.7 9% 4.3 13.3 209% 109.2 128.0 17% 11% 11% Municipalities 276.2 293.6 6% 45.9 48.8 6 38.7 41.1 6% 84.6 89.9 .6.2% 31% 31% Total Federation 3,442.1 3,786.9 10% 302.2 300.6 -1%e 289.9 226.9 -22%, 592.1 527.5 -10.9%° 17% 14%1 Regublika Srvska RS Govemment 765.8 801.8 5% 98.3 92.6 -6% 42.3 73.3 73% 140.6 165.9 18% 18% 21% EBFs 340.0 441.1 30% 31.6 35.0 11% 2.6 3.7 42% 34.2 38.7 13% 10% 9% Municipalities 110.6 114.9 4% 14.6 15.1 4 3.7 3.9 5% 18.3 19.0 4% 17%/ 17% Total RS 1,216.4 1,357.8 12% 144.5 142.8 -1Y 48.6 80.9 66% 193.1 223.7 16%A 16%° 16%, Grand Total 4,876.8 5,411.6 11% 462.3 469.8 2% 338.5 307.8 -9% 800.8 777.6 -3% 16%1 14% Annexes ANNEX C: SUPPLEMENTAL LETTER ON NATIONAL COMPETITIVE BIDDING (NCB) PROCEDURES BOSNIA AND HERZEGOVINA [Date] International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Re: Credit No. _-BOS ( Project) Representations and assurances relating to National Competitive Bidding Procedures Dear Sirs: We refer to Schedule 3 to the Development Credit Agreement of even date herewith between Bosnia and Herzegovina and the International Development Association (the Association) for the above-captioned Project. Bosnia and Herzegovina represents [Wording to be added by the country lawyer] A. Registration (a) Bidding shall not be restricted to pre-registered firms. (b) Where registration is required, bidders (i) shall be allowed a reasonable time to complete the registration process and (ii) shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification. (c) Foreign bidders shall not be precluded from bidding. If a registration process is required, a foreign bidder declared the lowest evaluated bidder shall be given a reasonable opportunity to register. B. Advertising Invitations to bid shall be advertised in at least one widely circulated national daily newspaper allowing a minimum of 30 days for the preparation and submission of bids. C. Pre-qualification When pre-qualification shall be required for large or complex works, invitations to pre- qualify for bidding shall be advertised in at least one widely circulated national daily newspaper a minimum of 30 days prior to the deadline for the submission of pre-qualification applications. Annexes Minimum experience, technical and financial requirements shall be explicitly stated in the pre- qualification documents. D. Participation by Government-owned enterprises Government-owned enterprises in Bosnia and Herzegovina shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency of the contracting authority. Furthermore, they will be subject to the same bid and performance security requirements as other bidders. E. Bidding Documents Procuring entities shall use the appropriate standard bidding documents for the procurement of goods, works or services, acceptable to the Association. F. Bid Opening and Bid Evaluation (a) Bids shall be opened in public, immediately after the deadline for submission of bids. (b) Evaluation of bids shall be made in strict adherence to the monetarily quantifiable criteria declared in the bidding documents. (c) Contracts shall be awarded to qualified bidder having submitted the lowest evaluated substantially responsive bid and no negotiation shall take place. G. Price Adjustment Civil works contracts of long duration (e.g. more than eighteen (18) months) shall contain an appropriate price adjustment clause. H. Rejection of Bids (a) All bids shall not be rejected and new bids solicited without the Association's prior concurrence. (b) When the number of bids received is less than three, re-bidding shall not be carried out without the Association's prior concurrence. Very truly yours, Bosnia and Herzegovina By: Authorized Representative Annexes ANNEX D: AGREED ACTION PLAN FOR PUBLIC PROCUREMENT REFORM IN BOSNIA AND HERZEGOVINA 2002-2004 ID Task Name Stad End Oura 2|0 02|0 02 | Administfative MonlbAng Indicators 02103I~I10410I1o3Ic04 IofIQ021030k ResponaiblIty by 1 Draft New State LPP 10/1Q2002 3/31/2003 130d S_ UMOT WGPP _ Rnc f WCPP 2 Draft New FBIH LPP 10t1/2002 3/31/2003 130d _ F UOF WGPP Monthly Report to WGPP 3 Draft Now RS LPP 10/12002 3t31t2003 130d RS MOF WGPP Monthly Report to WGPP 4 Gov't adopt draft LPPs 4t1/2003 4/30/203 22d * s WGPP G Dcaft s by Staab, FBie 5 Gov'ts submit draft LPPs to StfI GO.I. RSFDaf lwsavilbl Govtts abmit dra UPPs to 8/1t2003 51/12003 Od O s R WGPP Monthly Report to WGPP o Legiastures consider draft LPPS 8/1/2003 6/30/2003 43d L*MtbNS WGPP Montly Report to WGPP 7 New LPPs become effective 7/1/2003 7/1/2003 Od O s _ uf WGPP Publia3don In Officlal Gazeits 8 Prepare Implementing regulations 2t3/2003 7/1/2003 107d _SaFUoT MOFP WGPP RM -t i Sp in draft VW 7/1/2003 7/31/2003 23d ~ ~ ~ ~ ~ ~ ~~SU MOT. F554 GP Regs. published by Slate and Adopt Implementing regulatons 7/1Qoo3 7t31t2003 23a M s MoF WGPP Pegntities 1 0Prea/2/tndad0id3ngSta MOT. Fee W P Monthly Report to WGP. Prcuments td20d3 9d30n2003 87d sO RS MiOF WGPP SBDs avaiable In draft and finl SUM1 MOT. Fa WIGPP S s published by State and 11 IAdopt standard bidding documents 9/1/2003 3/31/2004 1 53d MOF. RS MOP GP entites 12 Establish Central Procurement Unit /3/2002 7t3/2002 23d S tws MOT WGPP Monthly Report to WGPP ________________________ _______ _ _ _ _ _ _ _ __________________________ ~~U nit operational 13 Establish FBiH Procurement 6/3/002 7/3/2002 23d 3 P MOP WGPP Monthly Report to WGPP Department __ 027__2___MHMO W P UnIt operational 1 Establish RS Procurement 6/3/2002 7/3/2002 23d RS MOF WGPP Monthly Report to WGPP Department __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Unit operational Cantonal MOFs should nominate 7/31/2002 12/31/200 110d Caon MOP. WGPP Dectna ot Canton Gov's Iofficia In charge of procurement 7_3____0 12_i_202__ Cw_______n_____ _____ WGPP_ D_c_ons_of _anton_Govl Annual Reports on Public Sta moTr. Fe"s A 16- Procurement submittd to 12/31/2003 12/31/2003 Od RsUOFs.catt WGPP Annual Repost published Legislatures MOF. Annual Reports on Public stla MoT. FBeH & 17 Procurement submIed to 12/31WN 12t31/2004 Od RS MOFP.C r&Oh WGPP Annual Reports published Leglilatures MOF I 18 Nominate body to conduct 1/8/2003 1/8/2003 Od State, F9IH. G P Body operational I administrative revlew of bid protests RS Govts Ptr pubalc pnocurement 3/3/2003 630/2003 8ed Rs mOFP. cafe. WGPP Draft and final strategy prepared 19 DeorlpcubIpricurementpocrmrdSf MOTPB. 20 Develop curiculum for procureme 62003 10/30/2003 109d RS MOFS 'Caonla WGPP Monthly Report to WGPP traIning ~~~~~~~~~~~~~~~~~~~~~~~~~~f%MOT, F _____ 21 Identify institutions to conduct 8/2/2003 10/1/2003 88d RS MOFS. Ca'In WGPP Selection process undertaken training programs MOPS 22Conduct training seminars In 11/03 2/05 30dnStleution WGP_ Frs_corss_el 22procurement 10____2003 ____11_2005___________ns_____ons IBRD 31889 60,,& C 18 O A T I A -Cl._0AT __ CROATIA i A 6 ;A X CROATIA Bosonslki Brad _ -s An } a) fi Kalinovlk (Srp Brod) A d ;, t J ,S esa , o Novi Bansco G j - }(Nov, Gi6d) ~. (Srp Grodi-sko) A5- - 45- 0\ .Prqledor vDMrrloc0 ._ozIn