Report No. 30848-YU Kosovo Operational Procurement Review June 2004 Operations Policy and Services Unit Europe and Central Asia Region Document of the World Bank Table of Contents Executive Summary ...................................................................................................................... v Preface............................................................................................................................................ 1 Context ........................................................................................................................................... 2 Section 1: Legal Framework and Procurement Practices 1999 .June. 2004 ......................... 4 1.1 Legal Framework under FAI2/99.................................................................................. 4 1.2 Procurement Practices under FAI2/99.......................................................................... 1.2.1 Procurement Planning andAuthorization o fProcurementProcedures..................6 6 1.2.2 7 Use of StandardBidding Documents (SBDs)......................................................... Application ofProcurementProcedures................................................................. 1.2.3 7 1.2.4 7 ReviewofBidProtests............................................................................................ Evaluationo fBidsandAward of Contracts........................................................... 1.2.5 8 1.2.6 RecordKeeping...................................................................................................... 8 Section 2: Legal Framework under Law on Public Procurement N o 2004/3 . ........................ 8 2.1 Application of Procurement Procedures ........................................................................ 9 2.2 Procurement Planning. Design of Requirements.Authorization and Consolidation... 10 2.3 Procurement Procedures under LPP 2004/3................................................................ 10 2.4 Useof Standard BiddingDocuments (SBDs) ............................................................... 10 2.5 Evaluation of Bids and Award of Contracts................................................................. 12 2.6 Review of Bid Protests .................................................................................................. 12 Section 3: Institutional Framework for Public Procurement ................................................. 13 3.1 Procurement under FAI 2/99........................................................................................ 13 3.1.1 PublicProcurementAgency (PPA) ...................................................................... 13 3.1.2 Public ProcurementRegulatory Body (PPRE3) ..................................................... 14 3.1.3 Organization o fProcurement inContracting Authorities ..................................... 16 3.1.4 Training ofPublic Officials inProcurement......................................................... 17 3.2 Institutional Framework under LPP 2004/3................................................................. 17 3.2.1 Public ProcurementAgency ................................................................................. 17 3.2.2 Public ProcurementRegulatory Commission (PPRC) ......................................... 18 3.2.3 Public ProcurementRulesCommittee.................................................................. 3.2.4 Organization o fProcurement inContracting Authorities under LPP 2004/3.......18 19 Section 4: Control Environment ................................................................................................ 20 4.1 Audit .............................................................................................................................. 20 4.2 Corruption and Anti-Corruption Measures.................................................................. 22 .. 11 Section 5 Public-Sector Performance . ....................................................................................... 26 Section 6: Procurement Performanceon World Bank-financed Projects ............................. 27 6.1. Development of WorldBank Portfolio.......................................................................... 27 6.2 Decentralized Projects.................................................................................................. 29 6.3 RecommendedActions .................................................................................................. 29 6.4 UnacceptablePractices on WorldBank-financed Projects.......................................... 30 Section 7: RiskAssessment ........................................................................................................ 32 Section 8: Recommendations ..................................................................................................... 33 8.1 Recommendationsfor Legislative Reform .................................................................... 33 8.2 Recommendationsfor Institutional Reform .................................................................. 33 8.3 Recommendationsfor ImprovingProcurement Procedures. Increasing Transparency and Combating Corruption.......................................................................................... 35 8.4 Recommendationsfor Building Public Procurement Capacity .................................... 36 Section 9: Private Sector............................................................................................................ 39 9.1 Competitivenessand Participation in Public Procurement......................................... 39 9.2 Performance on Public Procurement Contracts........................................................... 40 ... 111 Tables Table 1:ProcurementProceduresunder FAI2/99 ................................................................... 5 Table 2: ProcurementProceduresundertheLaw on PublicProcurement2004/3 ..............11 Table 3: Authorityto SignPublicContractsunder FAI2/99 ................................................. 14 Table4: Exampleof ProcurementTransactioninNCAAudit Report 1999-2000 ...............21 Table 5: InstitutionsPerceivedto bethe MostCorrupt inM S I Survey,2003 ..................... 24 Table 6: RecurrentandCapitalExpendituresas % of ConsolidatedBudget,2000-2004 ...26 Table 7: RecurrentandCapitalExpenditures,2000-2004 (Euro millions) ........................... 26 Table 8: WorldBankPortfolioinKosovoas ofJanuary 31, 2004 ......................................... 27 Table 9: RecommendedThresholdsby ProcurementMethod ............................................... 29 Table 10: RecommendedPublicProcurementInstitutionsandFunctions ........................... 35 Table 11:Action Planfor PublicProcurementReforminKosovo ........................................ 37 Figures Figure 1:Public ProcurementRegulatoryBody.OrganizationChart ................................ 15 Figure2: Review of ProcurementAppealsby PPRB. 2003 .................................................... 16 Figure3: Evaluationof GeneralConstraintsto Operations ................................................... 25 Annex Annex: Listof ContractingauthoritiesGovernedby FAI2/99 iv Executive Summary Purposeof the Report The purpose o f this Operational Procurement Report (OPR) is to provide an assessment of the public-sector procurement system in Kosovo, including the legislative framework, the responsibilities and capacity o f the institutions entrusted with regulatory and review powers, the efficacy of current procurement practices and o f the control environment. The report makes recommendations to bring about legislative, institutional and procedural improvements in the conduct of public procurement and to bolster the capacity o fpublic-sector institutions to conduct procurement. The report also examines the performance o f procurement inprojects financed by the World Bank, assesses the fiduciary risk to Bank funds from procurement operations in Kosovo andmakes recommendations for the design o f procurement arrangementson new Bank- financed projects and for the future supervision o fprocurement to mitigate that risk. The OPR, along with the Financial Accountability Assessment being conducted by the World Bank simultaneously, forms part of the Bank's analytical work which is necessary to underpin the Bank's program in Kosovo. Both reports are expected to contribute to the objective, identified inthe Bank's current Transition Support Strategy (TSS) for Kosovo (April, 2004) o f improving public financial management, transparency and accountability in the expenditure o f public h d s . Key Findings Since the establishment of the UNMIK administration in Kosovo in 1999, the legislative framework for public procurement has been incomplete. Finance Administration Instruction (FAI) No. 2/99: "Public Procurement Using Kosovo Consolidated Budget Funds" was promulgatedby the Central Fiscal Authority inDecember 1999 as a stop-gap measureto provide for the urgent procurement needs o f the nascent UNMIK administration. However, it has remained inforce as the main legislative instrument governing public procurement inKosovo for three and a half years since then. FA12/99 provides a less than comprehensive framework for procurement operations, as it affords too much discretion to contracting authorities to choose the procurement procedure they will apply to a particular procurement transaction, which frequently results in insufficient attention being paid to the need for competition and transparency. The legislative framework is incomplete, as no implementingregulations have been promulgated to underpin the application of FA1 2/99 (see Section 1: Legal Framework and Procurement Practices). Thepractice of public procurement in Kosovo under FAI 2/99 is both inefficient and non- transparent. Procurement requirements are often badly packaged for tendering purposes, which reduces competition and has led to many failed tenders. The Direct Single Source Procurement procedure is overused and the criteria applied in the evaluation o f bids are overly subjective, therebyleavingthe criticalprocessofbidevaluation opento botherror andmanipulation. V Oversightof the enforcement of theprocurement rules is ineffective, as the two keyinstitutions which carry out regulatory and oversight functions, the Public Procurement Agency (PPA) and the Public Procurement Regulatory Body (PPRB), suffers fi-om limited capacity and, because there are both under ministries of the Provisional Institutions of Self-Government (PISG), they lack the independence necessaryto performtheir functions effectively. A recent external audit of the Kosovo Consolidated Budget for 1999-2000 found many procurement abuses, including the use of single source procurement for contracts where the regulations required competitive tendering and financial commitments under public contracts being entered into without the required authorizations (see Section4: Control Environment). A new Law on Public Procurement (LPP), substantially aligned with the EU Procurement Directives, was promulgated by the Special Representative of the U.N. Secretary General (SRSG) on February 9,2004 and became effective on June 9,2004. The newprocurement law offers a much more comprehensive framework for public procurement than FAI 2/99, particularly in that establishes Open Tendering as the main procedure for awarding public contracts and imposes controls over the use o f other, less competitive procedures. The new LPP also provides for a number o f valuable safeguards, which are designed to make abuses of the procurement procedures more difficult, to improve transparency in decision-making related to procurement and to ensure that more than one pair o f eyes review transactions in which competition may be restricted to a limitednumber o fbidders. However, the current situation is confused, as the new LPP came intoforce on June 9, 2004 but the new oversight bodies have not yet been established. Because FA12/99 has now been superceded by the new LPP, the oversight bodies and approval arrangements which existed under that Instruction have lapsed. However, because the Kosovo Assembly has not yet been able to agree on the appointment of the members o f the new Public Procurement Regulatory Commission (PPRC) and the new Public Procurement Agency (PPA), those new institutions have not yet been established. In the meantime, the current PPA and the Public Procurement Regulatory Body continue to function on the basis o f the old arrangements laid down under FAI2/99 without an apparent valid legal basis. Also, as the implementing regulations and standardbiddingdocuments (SBDs), which are required to underpinthe new LPP, have not yet been promulgated, contracting authorities do not know whether they may continue to use the regulations and SBDs which hadbeeninuse under FA12/99. Even the new procurement law fails to establish thefully independent institutions which are indispensable to the effective enforcement of the law. The Law on Public Procurement assembles a cumbersome and complex set o f three institutions which mix executive procurement functions with some regulatory powers in a new Public Procurement Agency and proposes to continue affording the executive branch of government a formal role inwriting the procurement rules under which it i s required to operate by providing for the participation o f the Ministry of Economy andFinance inthe Public Procurement Rules Committee. The control environment for public procurement in Kosovo i s also under-developed. Intemal auditing and control systems inUNMIKand the spendinginstitutions o f the PISGhave yet to be effectively established, which i s one o f the factors contributingto the occurrence o funauthorized spendingcommitments. While an external audit body, the Office o f the Auditor General (OAG) vi has recently been set up, it i s still under-resourcedandhas yet to achieve a credible audit record. Extemal audit functions for the Kosovo Consolidated Budget (KCB) have to date been carried out by the Netherlands Court o f Accounts, which has found significant abuses related to public procurement inits audit o fthe 1999-2000budget. While the available information on administrative corruption inKosovo is not comprehensive, it suggests that corruption does not appear to be a pervasive force inthe governanceprocess. That said, there have recentlybeen some high-profile incidences o f corruption which have resulted in prosecution. Firms participating in an Investment Climate Assessment, conducted by the World Bank, report that corruptionis one ofthe most severe constraints on their businessoperations. A recent major survey o f corruption on Kosovo concluded that "the UNMIK administration has been a poor role model for the Kosovars when it comes to transparency and accountability" and highlightedthe risk that corruption may flourish under current conditions inwhich UNMIK is increasingly handingover administrative functions to weak PISG organizations (see Section 4.2: CorruptionandAnti-Corruption Measures). The performance of UNMIK and the PISG of procurement on projects financed by the World Bankhas for some time beenunsatisfactory andhasbeen hamperedby highturnover of staff in UNMIK,resultingina lack ofownership. Breachesofthe procurement arrangementslaid down ingrant agreements between UNMIK andthe Bank are common. Despite the introductioninto implementingagencies o f dedicated Project Implementation Units, the capacity of UNMIK and the PISGto conduct procurement in accordancewith the World Bank's guidelines has remained very weak throughthe periodo fthe Bank's engagementinKosovo. This report rates theprocurement risk in Kosovo as high, inview of the fact that the new law, while an improvement over FAI 2/99, is as yet untested, because the institutional capacity in UNMIK, the PISG and local government bodies to conduct procurement is weak andbecause corruption is significant and no convincing programsto tackle it have yet beenimplemented. Key Recommendations The report recommends that UNMIK should enact a transitional legal instrument, perhaps in the form of an executive order, to provide a legal basis for the continued hnctioning o f the existing Public Procurement Agency and the Public Procurement Regulatory Body and to authorize them to carry out the functions o fnew PPA andPPRC on a transitional basis untilsuch time as those new institutions are formally established. The legislativeframework for public procurement should be completedby the promulgationof a comprehensive set of implementingregulations and standard procurement documents, whose use by all contracting authorities shouldbemade mandatory. Greater transparency and accountability of public officials conducting procurement transactionsshould be ensured by the launch of a public-access Internet website carrying full details o f public procurement operations in Kosovo and by publication of the decisions and the annual reports of the Public Procurement Agency, the Public Procurement Regulatory Commission and the Review Commission. vii Technical capacity for public procurement should also be built up in the public sector by launching a public procurement training program at the Kosovo Institute of Public Administration (KIPA). A cadre of procurement professionals should be trained as trainers and qualified to deliver courses resulting inthe award o f the "procurement professional certificate," as foreseenbythe new procurement law. Over the medium term, the new Law on Public Procurement should be amended in order to correct the flawed institutional arrangements for its oversight and regulation. In particular, the duties andpowers ofthe PublicProcurement Agency should be limitedto executive procurement functions and its regulatory functions should be removed, as the PPA should not both conduct procurement transactions on behalf o f public-sector institutions and simultaneously exercise authority over how procurement is regulated. The OPR recommends that all regulatory duties and powers should be concentrated in the Public Procurement Regulatory Commission. The Public Procurement Rules Committee should be abolished. Finally, in order to ensure the impartial review of bid protests, a new Public Procurement Review Commission should be established as an independent second-instance body to undertake administrative review of appeals. With regardto procurement on projects financed by the World Bank, it is recommended that the financial thresholds for International Competitive Bidding(ICB) for goods and works should be kept low, inrecognitionofthe weakness ofpublic-sector procurement capacity inKosovo and of the limited ability of the local private sector to meet public-sector demand for goods, works and services. The Bank should contain to prior review most procurement procedures which it finances. ... VI11 Preface Date of Report: The date of completion ofthe final Operational Procurement Review (OPR) is June 28,2004. Acknowledgments: Clearance of this report within the World Bank has been provided by Frangoise Bentchikou, Chief Counsel, Procurement and Consultant Services Unit, Legal Vice- Presidency; Sunil Bhattacharya, Regional Procurement Manager, Europe and Central Asia Region; and Pamela Bigart, Lead Procurement Specialist, Procurement Policy and Services Group. GovernmentCounterpart Organizations:This report is basedon informationcollected during three missions to Kosovo undertaken by the World Bank team during November 2003, January and June 2004. An extensive series ofmeetings was heldwith UNMIKandwith officials ofthe relevant Provisional Institutions of Self-Government (PISG), as well as with the private sector andwith other donors active inKosovo. Following submission ofthe draft OPRto UNMIK,the EuropeanAgency for Reconstruction (EAR) and the PISG in early June 2004, the draft report was discussed with key counterparts inKosovo andthis final version of the report reflects those discussions. The draft report was discussed with Mr. Thierry Bemard-Guele, Head of EAR Operations in Kosovo, and his staff; Mr. Alexander Borg Olivier, Legal Adviser, Office of the Legal Adviser, UNMIK and his staff; Mr.MarjanPerlaska, Chief Executive, PublicProcurement Agency, Ministry of Public Services; Ms. Sevdije Mehaj, Director, Public Procurement Regulatory Body, Ministry of Economy and Finance. EAR also provided written comments on the draft OPR. World Bank Team: This report was written by a team comprising Shaun Moss, Lead Procurement Specialist, Operations Policy and Services Unit, Europeand Central Asia Region (Task Team Leader), and Belita Korreshi, Team Assistant, World Bank Country Office in Albania. 1 Context Following the cessation o f hostilities in June 1999, Kosovo' was placed under United Nations administration by authority o f UN Security Council Resolution 1244. This Resolution established the UnitedNations Interim Administration Mission in Kosovo (UNMIK) and called upon it to: performbasic civilian administrative functions; promote the establishment o f substantialautonomy and self-government inKosovo; facilitate a politicalprocess to determine Kosovo's future status; coordinate humanitarian anddisasterreliefo f all international agencies; support the reconstruction o fkey infrastructure; maintain civil law andorder; promote humanrights; and assurethe safe andunimpeded return of all refugees and displaced personsto their homes inKosovo. Kosovo has been gradually progressing toward self-government since 1999. In order to help prepare for the.first phase o f self-government, the Kosovo Transitional Council was established early on to include representatives from ethnic Albanian, Serb and other groups. Local participation was broadened in early 2000 with the establishment o f the Joint Interim Administrative Structure inwhich 20 departments(equivalent to ministries) were co-managedby international and local experts. In May 2001, a further significant key step towards self- government was taken with the adoption of the Constitutional Framework, which sets out the Provisional Institutions of Self-Government (PISG), including the President of Kosovo, the Assembly and the Government. While the responsibilities of the PISG are growing, the Special Representative o f the U.N.Secretary General (SRSG) retains authority over key areas, such as security; setting "broad parameters" for fiscal policy, including setting the budget; and for signingnew laws into force andeffect after they have beenpassedbythe Kosovo Assembly. The current trend is towards a marked reduction in the number o f international civil servants working inUNMK and a concomitant increase inthe role o f local Kosovar officials incanying out the functions of government, including procurement, as UNMIK progressively hands over functions to the PISGdepartments. InDecember, 2003, the SRSG elaborated detailed "Standards for Kosovo", which have been endorsedby the U.N.Security Council and which are intended to define the minimum conditions -functioning democratic institutions, ruleoflaw, freedom ofmovement etc. -whichKosovo would have to meet to be considered a "normal society." In its approach of "standards before status", the U.N.has made it clear that these standards would have to be met before discussions on KOSOVO~S final status could begin. Political uncertainty and continuing security concerns have continued to hamperKOSOVO~S progress towards achieving those standards. ' Kosovo, Serbia and Montenegro, hereinafter Kosovo. 2 Purpose of the Operational Procurement Review (OPR) The objectives o fthe OPR are to: 0 provide an assessment of KOSOVO'S sector procurement system, including the public existing legal framework, organizational responsibilities and control and oversight functions; 0 examine current procurement procedures and practices, how effectively they work in practice and identify procurement practices unacceptable for use in Bank-financed projects; 0 undertake an assessment o f the institutional, organizational and other risks associated with theprocurement process; 0 make recommendations to bring about legislative, institutional and procedural improvements inthe conduct o fpublic procurement; assess the fiduciary risk associated with procurement on Bank-financed projects, including recommending appropriate procurement arrangements and the necessary level o fprocurement supervision for future Bankprojects. The OPR, along with the Financial Accountability Assessment beingconducted simultaneously, and the Public ExpenditureReview, scheduled for FY05, forms part of the Bank's analytical work which is necessary to underpinthe Bank's program in Kosovo. As well as facilitating the management o f procurement-related fiduciary risk in Bank-financed operations, the OPR contributes to the objective, identified in the Bank's current Transition Support Strategy (TSS) for Kosovo (April, 2004) o f improving public financial management, transparency and accountability inthe expenditure o fpublic funds. 3 Section 1:Legal Framework and Procurement Practices 1999-June, 2004 At the time of this assessment, the legal framework for public procurement in Kosovo is undergoing a fimdamental change, with the development o f a new Law on Public Procurement (LPP), which was promulgated by the SRSG on February 9, 2004 as UNMIK Regulation UNMIK/REG/2004/32and which became effective on June 9, 2004. The LPP replaces Finance Administration Instruction (FAI) No. 2/99: Public Procurement Using Kosovo Consolidated BudgetFunds, which was issuedbyUNMIK's Central FiscalAuthority onDecember 15,1999. The approachtaken inthis report is to review the legal framework providedbyFA12/99 andthe procurement practices observed under it, as it is likely that experience built up within Kosovo's institutions in three and a half years o f applying FAI 2/99 will have an impact on how those institutions apply the new LPP. The report also assessesthe legal framework that is provided by the new LPP and looks ahead to how ifmight counter some of the negative practices developed underFA12/99. 1.1 LegalFramework under FAI2/99 Following the adoption o f UnitedNational Security Council Resolution No. 1244 on June 10, 19993, which provided the mandate for the establishment o f the UNMIK administration in Kosovo, the legal framework for public procurement was hastily prepared by a drafting team within the Central Fiscal Authority (CFA), which took the World Bank's procurement and ' consultant guidelines as a template for their work. The legal instrument which resulted from their efforts was CFA Finance Administration Instruction (FAI) No. 2/99: Public Procurement Using Kosovo Consolidated Budget Funds (December 15, 1999). At the time o f its promulgation, this instruction was intendedto be a stop-gap measurewhich would be valid for only six months, yet it has remained inforce for three and a half years untilthe recent effectiveness of the new Law on Public Procurement on June 9,2004. The scope o f application of FA12/99 was to all institutions spending h d s from the Kosovo Consolidated Budget (KCB), publicly-owned enterprises and any entities in which UNMIK holds a significant ownership interest. This included 10 ministries, 17 entities subordinated to ministries, 8 separate offices, 30 municipalities and 9 other entities, such as the Kosovo Trust Agency and Korporata Energjetike e Kosovo (KEK), the electrical power company. Intotal, 74 institutions fell within the scope o fthe instruction. The full list o f institutions covered i s attached at Annex A: List of Contracting authorities Governed byFA12/99.4 FA12/99 was supportedby a numberof standardprocurement documents, which also have their origins in the Bank's standard bidding documents and forms. However, no implementing regulations or secondary legislation were enacted to underpin and clarify the application of the Instruction. The legislative framework o fFA12/99has, therefore, beenincomplete throughout its periodof application. Also, there were no user manuals to guide the contracting authorities' staff, The text of the law is available on the UNMIKwebsite at: http://www.unmikonline.org/regulations/index.htm Fulltext available onthe UnitedNations website at http://www.un.int/usa/sres1244.htm Source: Public Procurement Agency. 4 who are invariablyvery inexperienced inprocurement, inapplyingthe Instruction and the SBDs correctly. The range of procurement procedures provided under FA1 2/99 and their salient features are summarized inTable 1. Table 1:ProcurementProceduresunder FAI2/99 Procurement Conditionsfor Use Salient Features Procedure ..",.%...* Competitive The "'preferred" inetliod for the procurement of There should be at leasf 3 availabie Tendering goods or wnAs for large, complex requjremeizts. bidders. Requires publicationofmi Invitationto Tender, use of SBBs publishedby the PPRR, public bid openingsimultaiieouswith the expiry of LJsedfor large, coiriplex contracts where the ~ -*- Two-Stage Cempefitive technical requirements caiinot be precisely Tendering defined illadvmce, - - Restricted procurement o fgoods or works that Competitive fkoni a register of qualified Tendering iiiaiiitained hy the coiitractiiig au *-.- Competitive Used for simple reguirenierrts for the Shopping procurement of goods or services cf25,000, -...--.- Emergency Procuremenl I_.--.*--- Normal Used in all cases where the cortditions for use of Procurement the other consultant procedures are not met. Procedure for two-stage evaluatiuii Consultsnt proposals jii the first stage and fiizaitcial Services proposak inthe second.- e- ---,--.,"+ +--_ Selection based on Used for very srtzall assigmeiits for procurenient Shortlisted firms are invited to siibinit Consultants' of consultarit services 4t`25,Or)O. ssioiis of Interest. T Qualifications ity invites only the iiiost appicipriateyiialiific references to subinit ajo financial proposal, based on contract is negotiated, 5 Procurement ----- Procedure Least-Cost Selectionof andfor assignnieatscE2S,OQO, Consuitants --*--, _II*--- * Consultant Usedwhere the assignmentis simple andthe Services under a budget is fixed. FixedBudget *-<*** Direct Single Source physicalserviceswhere &hereis only one single supplier, wit~ioutcompezi4on. Procurement contract amendments ity is requiredto record le commodities eEf,250 - grocedureinthe ProcuremeiilKecord. l*_._ The contractis negotiateddirectly with a I" Single Source *--e* Selectionof single consulta~tt,without competition, Consultants Contractingauthority is requiredto use the same proceduresas for the Nomial justificarioii for the use o fthis procedure io ihe ProcuretnentRecord. 1.2 ProcurementPracticesunder FAI2/99 haseriesof interviewswiththePPA,PPFU3, contractingauthorities andbidders, conductedin Kosovo during two missions undertaken for this assessment, this review identified the following salient features o fpublic procurementpractices inKosovo. 1.2.1 ProcurementPlanningandAuthorization of ProcurementProcedures FA12/99 contains inadequate prohibitions against the splitting o f procurement requirements to avoid use o f the most open, competitive procurement procedures. As a result, contracts are often procured by procedures other than those required by the Instruction and projects are badly designed for procurement purposes, leading frequently to failed tenders where no contract can be awarded. One example, notorious in Kosovo, is the civil works contracts for Bankos Building, which, at the time of this assessment, had suffered from two failed tenders andwas the subject of a third procedure. Despite the fact that FA12/99 stipulates clear procedures for Authorizing Officers incontracting authorities to authorize the initiation of procurement procedures, the external audit o f the Kosovo Consolidated Budget for 1999-2000, conducted by the Netherlands Court o f Accounts, found many instances where procurement procedures and commitments had been entered into without the required authorizations and contracts had been authorized without adequate documentation on the evaluation o fbids (see Section 4.1). 6 1.2.2 Applicationof ProcurementProcedures One o f the major weaknesses o f FA1 2/99 is the lack o f clarity pertaining to the use of the different procurement procedures. Excessive discretion is allowed to the individual contracting authority to choose the procurement procedure it will apply to a particular procurement transaction, which frequently results in insufficient attention being paid to the need for competition and transparency. Inparticular, the Direct Single Source Procurement procedure is overused and abused. Although data on the performance o f public procurement in Kosovo are very hardto obtain, the Public Procurement Agency reports being left with no option but to issue manyexpostfacto approvals o fthe use ofDirect Single Source Procurement incases where the contracting authority has already awarded a contract by this procedure and the PPA can only rubberstamp it after the fact. As contracts above 500,000 are approved by the Deputy Special Representative of the Secretary General (SRSG), it must also be recognized that the PPA has frequently been presented with a fait accompli when the Deputy SRSG approves the use of Direct Single Source Procurement for such contracts. Therefore, the PPA is not solely responsible for such cases. 1.2.3 Use of StandardBiddingDocuments(SBDs) The SBDs issued by the PPRB, which are closely modeled on the World Bank's SBDs, are in widespread use throughout Kosovo. While the procurement staff o f contracting authorities interviewed for this assessment generally said they found the SBDs useful, many reported that they experienced difficulty in applying them inpractice, particularly the SBD for Large Works, which i s based on International Federation o f Consulting Engineers (FDIC) conditions. Given that FIDIC is inworldwide use, their difficulties may stem more from lack of experience in the procurement o f large works using such complex documents, rather than specifically from the documents themselves. Several contracting authorities expressed concern that, when they address questions about the application o fthe SBDs to the PPA, they do not receive satisfactory answers, as PPA staff are no more experienced than they themselves are and, therefore, are unable to advise them. It must be recognized that the PPA is in a somewhat difficult position, as contracting authorities turn to it for advice on the application o f SBDs which the PPA did not prepare: SBDs are promulgatedby the PPRB. The practical application o f the SBDs looks like an obvious area for improved collaboration between the PPA and the PPRB. Several contracting authority staff expressed the opinion that it would be helpful to have staff inthe PPAwho are specialized invarious aspects of public procurement (goods, civil works, consulting services, etc.) and to have a detailed user's guide for each SBD. 1.2.4 EvaluationofBidsandAward of Contracts Criteria used in bid evaluation usually combine price and other non-price criteria, typically delivery time, payment terms and the technical quality o f the goods offered, with price being weighted at 70 percent and non-price criteria makingup the remaining 30 percent ina system of evaluation based on merit points. This is a very subjective method o f bid evaluation, which i s open both to mistakes in the hands o f inexperienced procurement staff and, indeed, to manipulation and abuse. The widespread use o f such a subjective system for the evaluation of 7 bids also undermines accountability and the arrangements for review of bid protests because, when public officials are allowed so much latitude in the way they evaluate bids and select the winningbidder, it is almost impossible to provethat amistakehasbeenmadeor that wrongdoing hastaken place. 1.2.5 Review of BidProtests The arrangementsfor the review ofbidprotests are unsatisfactory inthree important respects. First, the procedures defined in FAI 2/99 are unfair to bidders, in that protests for contracts below <25,000 in value are reviewed only by the contracting authority against whose actions the protest is lodged. No bidder canbe expected to believe that such a review would be impartial or fair. Second, the procedural requirements for handling bid protests are unclear. For example, FAI 2/99 imposed no firm time limits on the contracting authority or the Public Procurement Regulatory Body (PPRB) to review protests and, should the bidder remain dissatisfied after having received the response from the contracting authority or PPRB, the only recourse offered byFAI2/99is arbitration. Therewas no clear provisionfor recourseto acompetent court. Finally, the PPIU3 as established under FA12/99, has lacked the independence essential to the impartial, credible review o fbidprotests, as it was a department within the Ministryo f Economy andFinance. 1.2.6 RecordKeeping FA1 2/99 contained clear requirements for record-keeping and placed an obligation on contracting authorities to maintainprocurement records insufficient detail to enablethe PPRB to verify that the applicable procedures had been followed. Despite these provisions, the external audit report of the KCB for 1999-2000, compiled by the Netherlands Court o f Accounts (NCA), found that record-keeping was wholly inadequate in many cases and that the absence of documentary records often rendered it impossible to attain the accountability of public officials for procurement decisions. . Section 2: Legal Framework under Law on Public Procurement No. 2004/3 For the past year, UNMIK and the PISG have been working on the drafting o f the new procurement law, with the clear objective o f bringing Kosovo's procurement legislation into alignment with the European Union (EU) Procurement Directives. Given that FA12/99 i s based on the World Bank's procurement and consultant guidelines, this represents a significant shift in direction. Both the World Bank and SIGMA (Support for Improvement in Governance andManagement: a joint EC-OECD program) provided technical commentary on various versions of the law during the drafting phase. The adoption of the law by the Government and submission to the Kosovo 8 Assembly was one o f the conditions under the Bank's Economic Assistance Grant (EAG) to Kosovo, which was successfully met in May 2003. The law also received a favorable opinion fi-om SIGMA with regardto its alignment with the EUProcurement Directives. The new Law on Public Procurement (LPP) was promulgated by the SRSG on February 9, 2004 as UNMIK RegulationUNMIK/REG/2004/3 andbecame effective on June 9,2004. The new LPP is a very lengthy, complex and comprehensive piece o f legislation. While the Bank, inits technical comments made on various drafts duringthe first halfo f 2003, expressed concern about the law's complexity, particularly inan environment where the level o f experience and expertise in procurement is very low, the drafters were strongly o f the opinion that the situation o f Kosovo demanded a law with a high degree of specificity, inorder to counteract the abuses which had been observed under FAI 2/99. As the new LPP has yet to be applied in practice, the soundness o fthat judgment has yet to be tested. The following are the salient features of the LPP, with particular emphasis on the sections intendedto remedypreviously identified weaknesses and abuses inthe procurement system. 2.1 Applicationof ProcurementProcedures The new LPP provides for an appropriate range of procurement procedures (see Table 2) and, indeed, sets a higher standard than the EUDirectives in some important respects. For example, the new LPP clearly establishes the Open Procedure as the main method of awarding a public contract; less competitive methods may be used only under clearly specified conditions. By contrast, the EU Directives allow the contracting authority to choose freely between using the Open Procedure and the Restricted Procedure. Also, the conditions for use o f the procedures other than the Open Procedure are more limited under the LPP than under the EU Directives. For example, the General Restricted Procedure may be used only when the goods, civil works and services can be supplied only by suppliers with appropriate technical, professional and financial qualifications or when pre-qualification o f only qualified bidders would be more economically efficient than an Open Procedure. However, the General Restricted Procedure can be applied only after the prior approval o f the PPAhasbeen obtained. The new LPP also has a number of safeguards, which are designed to make abuses of the procurement procedures more difficult, to improve transparency in decision-making related to procurement and to ensure that more than one pair o f eyes review transactions in which competitionmaybe restricted. These include requirements that: 0 the use of all procurement procedures other than Open Tendering be subject to prior approval bythe PPA; 0 where the Executive Director o f the PPA gives such an approval in response to an application from a contracting authority, his authorization must be published in the Procurement Register; 0 under any procurement procedure, if fewer than three bids are received, the contracting authority can proceed to award a contract only with the prior approval o f the Public Procurement Regulatory Commission (PPRC), the new body established to replace the PPRB. 9 Preliminary reactions fiom some of the contracting authorities, with which the draft law was discussed as part o f this assessment, indicate strong doubts about the workability o f the law, in particular because of its complexity and heavy bureaucratic burden which it i s likely to impose on contracting authorities. There are also concems about the requirement inthe LPP to obtain ex- ante approvals fiom the PPA for every usage of procurement procedures other than Open Tendering. These concems may be well-founded, as the PPA does not appear to have the resources to respond promptly to the high volume of requests for such approvals which it i s certain to receive. 2.2 Procurement Planning, Designof Requirements, Authorization and Consolidation The LPP seeks to improve procurement planning by requiring all contracting authorities to submit to the PPA, 60 days before the beginning o f each fiscal year, a detailed procurement forecast, identifying all the goods, works and services that they intend to procure in the next fiscal year, together with their estimatedvalues. This forecast mustbe updatedwithinten days of the contracting authorities' receipt of their final budgetary allocations for the fiscal year. The PPA's review of these forecasts will give it the opportunity to check that there is no splittingof procurement requirements to avoid the application of the law and that the correct procurement proceduresare planned to be used, according to the thresholds specified inthe LPP. Basedon its review, the PPA has the authority to consolidate common items and either procure them itselfon behalf of the contracting authorities or establish a separate contract award committee to procure them. It is clear that these measureswill have the desired effect only ifthe PPAhas the technical and manpower capacity to undertake thorough and timely reviews of procurement forecasts and to conduct consolidated procurement transactions itself, where it decides to do so. As currently resourcedand staffed, it does not. 2.3 Procurement Procedures under LPP2004/3 Theprocurement proceduresprovidedunder the newLPP are summarized inTable 2. 2.4 Use of Standard BiddingDocuments (SBDs) The new LPP also foresees the use of SBDs, which have yet to be written. However, the European Agency for Reconstruction (EAR) recently awarded a contract to finance a 1.0 million Technical Assistance assignment for public procurement in Kosovo, under which UNMIK and PISGwill receive extemal assistance in drafting SBDs inline with the new LPP. The fact that the SBDs requiredunder the new LPPwere not ready at the time the law came into force i s regrettable and is one of the factors which contributes to the reluctance of contracting authorities to apply the new LPP immediately, as they are unsure o f whether they should apply the old SBDs, promulgatedunderFA12/99 inthe interim. 10 Table2: ProcurementProceduresunder the Law on PublicProcurement2004/3 Procurement Conditions for Use Salient Features PrC@lj:$W- - Open lnall cases where cotiditions for use of Procedure other procedures are not met. fewer than 3 bids are submitted, a contractmay be --- General (i)Thegoods, civilworksandservices, p - 1 - 1 -7 Restricted becauseo f their technical or specialized andservices, subject tothe priorapproval ufthe Procedure nature, can only be suppliedby suppliers PPA, which mustbe published inthe Public with appropriate technical, professional or Procurement Register. Mininiuni3 bids are firimdal qualifications; Cij) required. Iffewer than 3 bids are submitted, a tioti of only qualified bidders contract may be awarded subject to PPRC waiver, e econonijcally efticiait &*-e- Special (i)Thecorisultiitgservicesrequired, .- Used fori Kestricted because o ftheir coiiiple services. Subject to the prior approval o fthe PPA, Procedure provided only from qual moreeconomically efXc 'qualifications, theninviteproposals Negoliation e-vaiue service coiitracts Procedure After Register Minimum 3 bids are required. Publication of a Colttract Notice ---_-_ -., , ***--_- val o f the PPA, which ~ " Negotiation Subject tci the prior Procedure niustbe publjslied jii the PublicPrwureinent: Without Register, Publication of a Contract Notice can be metby only one stipplier for tecfinical reeasons; (iv) hi cases extreme iir&emx. Price Quafation where the goods or services are"..-I-- readily acts for goads or services. where ailabfe &om B namber of supplieis. (ii) the cotitract value is of low value (4500-10,000) they do not need to be specifically or of niazimal value ('.@500).The request for d or custoinited (iii)there is an quotations must be sent to at least 3 bidders, - ed niarket fur such goods or services w _-- Procedure for I!sed for contracts for ;as, civil works PPRC shall publish special procedures,_.-- which Minimnabvalue or services, the value o f which is <.EYlO must provide for adequate competition, Contracts transyaremy and cost-effectiveness. 11 2.5 Evaluation ofBids andAward of Contracts The provisions o f the LPP regardingcriteria to be used inthe evaluation o f bids closely follow the EUDirectives, inthat they allow bid evaluation on one o f two bases: (i) lowest pricedbid the or (ii) economically most advantageous bid, determined bythe application o f a series of price the andnon-price criteria, such as payment terms, operating andmaintenance costs, delivery period, functionality, after-sales service and warranty. The LPP again sets a more demanding standard thanthe EUDirectives, as itrequiresthat, whenacontracting authority applies non-price criteria "to the greatest extent practicable, the contracting authority shall specify each criterion in an objective and quantifiable manner and express the weighting assigned thereto in monetary terms." While the use o f objective criteria in bid evaluation is a welcome advance over the use of subjective criteria under FA12/99, it will have the intended effect o f increasing transparency in procurement procedures and the accountability o f public officials only if procurement officers are trained inhow to apply objective criteria inan appropriate andaccuratemanner. 2.6 Review of BidProtests The LPP establishes a Public Procurement Regulatory Commission (PPRC), which replaces and takes over some of the functions of the PPRB under FAI 2/99. The PPRC i s better placed to performthose functions, giventhat it i s designed to enjoy greater freedom from the Government. The PPRC is a regulatory commission, whose President and members are nominated by the Governmknt and appointed by the Assembly (see Section 3: Institutional Framework for Public Procurement). One of the functions that it takes over from the PPRB i s that of review of procurement procedures. The LPP provides that the PPRC shall establish one or more Review Panels which have the power to: e review complaints receivedbythe PPRC; e conduct investigations into the facts surroundings such complaints; e issue an order to require a contracting authority or other party to submit information to the panel or appear before the panel; e issue an order to suspend or terminate a procurement procedure, set aside a contract award; e issue an order to a contracting authority to cancel or revoke a decision made by a contracting authority inrelation to a procurement procedure; and e issue an order requiringa contracting authority to pay compensation to a complainant. The LPP has very detailed and comprehensive provisions on the procedures for submission and review of complaints, including: e specification o f the minimum contents o f a complaint, required to establish its validity; 12 specification o f clear time limits within which the various parties to the review procedure are required to act; 0 automatic suspension o f a procurement procedure once a valid complaint is filed with the PPRC; and establishment o f the bidder's right to appeal a decision to a competent court, should the bidder remain dissatisfied with the Review Panel's final decision on the complaint. Taken together, both the procedural and the institutional arrangements o f bid protests under the new LPP are very comprehensive and, if properly applied, should go a long way to addressing one o f the major weaknesses o fFA12/99. Section 3: Institutional Frameworkfor Public Procurement The public procurement system in Kosovo i s essentially decentralized, in that contracting authorities carry out procurement transactions themselves; however, the system also features a degree of centralized control, in that, under FAI 2/99 the implementation o f procurement procedures above 25,000 has been subject to review and approval by the Public Procurement Agency. The following section describe the powers and obligations of each o f the key institutions for public procurement, both under FAI2/99 and as plannedunder the new LPP. 3.1 Procurementunder FA12/99 3.1.1 PublicProcurementAgency (PPA) The institutional structure of UNMIK comprises several units under the Deputy Special Representative in charge o f Reconstruction, among them a Central Fiscal Authority (CFA) and Central Procurement Executive (CPE). With the establishment o f the PISG, the CPE was transformed into the Public Procurement Agency (PPA), under the Ministry o f Public Services (MPS) and the responsibility for implementation o fprocurement was transferred from UNMIK's international personnel to local officials in December 2002. Before this date, both local and international staff hadjointly signed procurement authorizations anddocuments. The primary role of the PPA under FA1 2/99 was the review, approval and signature of procurement procedures and contracts above 25,000. Below 25,000, procurement responsibility was fully decentralized to the contracting authorities, which were authorized to conduct procurement transactions without reference to the PPA. Above 25,000, the PPA reviewed the biddingdocuments, checked that the procurement procedure hadbeen conducted in accordance with the relevant legislation and, for contracts in the range o f 25,000 to 500,000, the Director o f the PPA signed the contracts. Above 500,000, contracts were signed by the relevant Deputy Special Representative o f the Secretary General (SRSG), but only after the PPA Director had verified that the procedure by which the contract was awarded had been in compliance with the relevant legislation. These arrangements are summarized inTable 3. 13 Table3: Authorityto SignPublicContractsunderFAI2/99 FinancialThreshold Authorityto Sign Contract 4225,000 Approving Officer of Contracting Authority 25,000 - 500,000 Directoro fPPA S500.000 DemtvSRSG For low-value contracts below 25,000, compliance with the procurement regulations appears to have been very low, as the absence o f effective controls made it easy for contracting authorities to break down procurement requirements below this threshold and award a highnumber of low- value contracts, while avoiding the supervision of the PPA. This abusive use o f splittingwas one of the key procurement-related findings o fthe external audit o fthe Kosovo Consolidated Budget for 1999 and2000, conductedby the Netherlands Court o fAudit (NCA) (see Section4). The PPA currently has only 13 staff, who handle some 1,400 contracts annually. Although the procurement officers within the PPAhave a technical background ineconomics, engineering and law, they are mostly young and inexperienced. An international procurement adviser, who had been contracted by UNMIK to provide advice to the PPA throughout 2003, completed his assigned at the end of the year andhasbeen withdrawn without replacement. PPA staff have had some introductory-level training in procurement, but this ininsufficient to buildup their skills to the required level. Therefore, the PPA is understaffed and its capacity is too weak to perform its mandatedfunctions effectively. To date, under FA12/99, the placement of the PPA in the Ministry of Public Services has been less than ideal, as it meansthat the PPA Director was subjected to political pressuresfrom within the PISG in giving approvals for certain procurement procedures and contracts. The fact that the PPA Director reports havingbeen left with no optionbut to issue expostfacto approvals for the use of Direct Single Source Procurement already completed by certain contracting authorities may be evidence o f such influence. 3.1.2 PublicProcurementRegulatoryBody(PPRB) The PPRB was establishedby FA12/99, originally within the Central Fiscal Authority but later withinthe MinistryofEconomy andFinance. Its functions were conceived primarilyas: takingthe leadindeveloping new legislation andregulations; promulgating standardprocurement documents for use by contracting authorities; providing contracting authorities with guidance on the legal interpretation o f the regulations applicable to public procurement; printing aPublic Procurement Bulletin (PPB); providecontracting authorities with training inpublic procurement; reviewingbidders' appeals; inspecting the activities and records o f contracting authorities; and providing UNMLWPISG with annual reports on the activities of the contracting authorities andon the functioning o fthe public procurement system. 14 Under the provision of FA12/99, the PPRB's Director is appointed by the Minister of Economy of Finance and PPRB's staf`f of some 26 people is organized into three functional units, responsible for (i) and Procurement Documents (ii) Rules Review Committee and (iii) MonitoringandInspection. The organization chart o fthe PPRB i s presentedat Figure 1below. Figure1:PublicProcurementRegulatoryBody OrganizationChart - I c Director I Administrative Staff Rules & Documents Assistant Manager Monitoringand Committee Review Committee InspectionCommittee I 10ProcurementOfficers Ad Hoc Commissions The PPRB has promulgated standard bidding documents (SBDs) for the procurement of goods and works, standard invitations to quote for the competitive shopping procurement method, guidance notes on each of these documents, and standard bid evaluation report (BER) formats. The standard documents, which are in wide use by contracting authorities, are based on the World Bank's standardprocurement documents, with a similar structure that comprises standard instructions to bidders, a data sheet where variable information is entered, and both general and specific conditions of contract. In2003, the PPRB undertook 29 inspections, 15 of which were ofmunicipalities, only one of a ministry andthe remainder o fpublic entities or other services. A review of complaints handled by the PPRB in 2003 demonstrates that it reviewed 130 complaints (up from 40 in 2001), upholding the contracting authority's position in 84 cases (representing 65 percent of total cases) and either annullingthe tender or ordering the contracting authority to re-evaluateor re-tender in29 cases (22 percent). 15 Figure 2: Review of Procurement Appeals by PPFU3,2003 __..___ _ _ _ ~ - _ ~ - - __--__________ ~~~ _-______--_ -- 0Complaintrejected 5 2 ProcedureannuIIed 0Orderedre-tenderingor re-evaluation OValue of procurement ~25,000Euros Reviewongoing as at 12/31/03 I3Complaintssubmittedat . inappropriatetime ____ - __ Source:PPRBAnnual Report, 2003. While an examination of the correctness of the PPRB's decisions in these cases is beyond the scope of this assessment, the high incidence of support for contracting authorities' actions may be a cause for concern, particularly when taken in the context of the external audit report prepared by the Netherlands Court of Audit (NCA) for 1999-2000, which identified "shortcomings in compliance with instructions, internal controls and the retention o f supporting documentationfor procurement transactions" among its principal findings. The most immediate source for concern about the PPRB is its lack o f independence. When originally established, it was under the CFA within UNMIK and it has untilrecently been under the Ministry o f Economy and Finance, with the PPRB Director reporting to the Permanent Secretary of the Ministry. Given that the PPRB has historically been part o f the same governmental structures as the contracting authorities against whose actions the PPRJ3 reviewed appeals, bidders could not be expected to believe that the PPRB's decisions in such cases were impartial. 3.1.3 Organization of Procurement in Contracting Authorities FA1 2/99 contained few provisions specifying how the procurement function were to be organized in contracting authorities, other than that the Approving Officer o f the entity, usually the head o f the entity or a director of a major department, had to appoint an evaluator or a committee o f evaluators, with appropriate technical and procurement skills, to conduct the evaluation o fbids. The practice o f contracting authorities interviewed for this assessment varies considerably. In some cases, each department within a procuring organization conducts its own procurement, while, in others, the conduct of procurement i s concentrated into a dedicated Procurement Unit. The Ministry of Health, for example, has recently switched from an entirely decentralized 16 arrangement under which all departments conducted their own procurement to concentrating procurement into a Procurement Unit reporting to the Budget and Finance Director, who acts as the Approving Officer in approving all requisitions generated by line departments and authorizing the commencement o fthe procurement procedure bythe Procurement Unit.TheUnit has a staff o f three and handles annual procurement expenditures of 2.0 million, mainly for medical equipment andpharmaceuticals. 3.1.4 TrainingofPublicOfficialsinProcurement Provision of procurement training inKosovo has been inadequate since FA12/99 was enacted in 1999. Untilvery recently, there has been no provision o f procurement training inKosovo itself and only a handful of civil servants have traveled outside Kosovo for training. In a recent development, the Kosovo Institute of Public Administration @PA) launched a series o f short, mostly two-day courses, in which the trainers are usually international officers or consultants with expertise in areas related to procurement, such as law. The purpose of these short courses has been to explain the application of the new LPP. However, it mustbe realized that this is not technical training inprocurement per se. 3.2 InstitutionalFrameworkunderLPP2004/3 The new LPP proposes a different and very complex landscape for the oversight of public procurement inKosovo, comprising three main organizations: 3.2.1 PublicProcurementAgency The new LPP establishes the PPA as an executive agency within the Government, the Director and Board of which are nominated by the Government and appointed by the Assembly for a three-year term. The PPA's key duties andpowers are to: 0 review, approve andpublishtender notices; 0 review drafi biddingdocuments prepared by contracting authorities; 0 conduct a particular procurement procedure on behalf of a contracting authority ifthe PPA determines that such an action is necessary on the grounds o f professional expertise, cost-effectiveness or efficiency; 0 maintain a Public Procurement Register -a database containing current information on public procurement opportunities in Kosovo and electronic copies o f all tender notices, bidding documents, reports, complaints, contract award notices and other procurement documents generated by contracting authorities governed by the LPP - andpost these documents on apublic-access website; 0 publish statistical information on public procurement operations of all contracting authorities inKosovo; and preparereports on the activities o fthe PPA ando fcontracting authorities. 17 3.2.2 Public ProcurementRegulatory Commission (PPRC) The PPRC is responsible for the overall development of the public procurement system, for ensuringthat the public procurement system uses public funds rationally and effectively andthat itpromotes competitionandnon-discrimination. Its specific functions include: 0 monitoring and inspection of public procurement by conducting both ad hoc and regular audits ofprocurement activities conductedby contracting authorities; monitoring andsupervision ofthe implementationofthe law; carrying out administrative reviewo fbidprotests (see 2.5 above); providingadvice andinterpretation of the law to contracting authorities andbidders; establishing qualification requirements, developing tests and designing and delivering trainingprograms to meet the requirements o fpublic procurement professionals; 0 maintaininga list of all contracting authorities governed bythe LPP; 0 submitting an annual report on public procurement activities to the Government and the Assembly; 0 makingrecommendations to the Government and the Assembly for improvement of public procurement legislation and operations. The PPRC i s comprised of five members who are nominated by the Government and appointed by the Assembly for a five-year term. The LPP stipulates the minimum qualifications of the members and that they should have the status of civil servants. The LPP also offers certain safeguard against the removal o f PPRC members during their term. At least one of the five Commission members i s required to have the same qualifications required for a judicial appointment and that member i s designated by the Government to serve as Chairperson of the ReviewPanel, responsible for review o fbidprotests (see 2.5 above). 3.2.3 Public Procurement Rules Committee The Rules Committee comprises one member nominated by eacho fthe following organizations: 0 Public ProcurementRegulatory Commission (Chairperson o fthe Rules Committee); 0 Public Procurement Agency; and 0 Ministry o fEconomy andFinance. The main functions ofthe Rules Committee are to: develop and promulgate detailed implementing regulations, rules, instructions, guidelines, standardprocurement documents and forms for the implementation of the LPP; 0 ensure that the rules governing tender notices and bidding documents comply with EUlegislation for large-value contracts (goods and services X100,OOO; civil works X250,OOO); 0 develop precise procedures and forms to be used for each o f the procurement proceduresprovided underthe LPP (see Table 2 above); and 18 0 develop a procurement code o f ethics to be observed by public officials engaged in procurement, includinga clear set ofmandatory rules goveming conflicts o finterest, The Chairperson o f the Rules Committee, who i s always the PPRC nominee, is responsible for managing the operations of the Committee. Wlule the LPP places an onus on the Rules Committee to make its decisions by consensus, it allows for decisions to be made by simple majorityvoting inthe absence o f a consensus. These arrangements seem excessively complex for a territory as small as Kosovo and look disproportionately complicated when compared with those o f much larger and more populous countries, such as Poland, a nation o f some 39 million people and an EUmember, which has a single Public Procurement Office (PPO) (www.uzp.Pov.pl) for policy, legislative and oversight functions and a panel of arbitrators, maintainedbythe PPO, who review appeals. 3.2.4 Organization of Procurementin ContractingAuthorities under LPP200413 Incontrast with FAI2/99,the new LPPcontains very detailed rules on organizational matters, requiring each contracting authority to establish a Procurement Department, headed by a designatedProcurement Officer and staffed with specialists who must be qualified to undertake procurement in compliance with the LPP. The law holds Procurement Officers responsible for making sure that their entity's procurement transactions are conducted in compliance with the LPP and imposes an obligation on them to inform the PPRC o f non-compliance with the LPP, failing which the PPRC make strip them o f their procurement professional certificate (see below). The LPP also foresees and requires a dramatic scaling-up o f procurement training, as it requires the PPRC to develop and deliver at least three ten-day courses inprocurement each year and to issue a "procurement professional certificate" to all delegates who satisfactorily complete such courses. Inthis andmany other respects, the LPP sets relativelyhighrequirements for the qualifications of Procurement Officers and for their conduct. This rather utopian vision for KOSOVO'S procurement system is to be built on ground which i s currently fairly unpromising, given the very low level o fprocurement capacity ingovernment at the moment and the serious abuses and instances o f non-compliance with FA1 2/99 identified in the most recent external audit. The ground is, however, being prepared by a 1.O million Technical Assistance project for public procurement, funded by the European Agency for Reconstruction, the consultant contract for which has recently been awarded. The EAR-financed consultants will assist the Government to: develop secondarylegislation and regulations; 0 develop procurement manuals; 0 develop a trainingplan; 0 develop and deliver a training o f trainers program and hand over the training materials to the Kosovo Instituteo fPublic Administration (KIPA); and 19 0 deliver procurement training, at basic and advancedlevels, for up to 200 Procurement Officers. The success of this T A is clearly essential ifthe high standards set by the LPP are to become reality. Section 4: ControlEnvironment 4.1 Audit Given the absence of a SupremeAudit InstitutioninKosovo itself, external audits of the Kosovo Consolidated Budget for 1999 and 2000 were conducted by the Netherlands Court of Audit (NCA); the audit report was issued in September 2003. The NCA report recognized that the difficult post-conflict conditions which existed inKosovo in late 1999, when UNMIKbeganits operations, seriously affected the financial management o f the Kosovo Consolidated Budget; essential institutions, inf'rastructure and systems had to be established or re-established quickly, andthis contributed to the significant controlweaknesses which characterizedbudget operations in 1999 and 2000. Equally, the NCA audit report recognizes that gradual but considerable progress has been made in establishing an orderly financial management system and budget control. TheNCA audit report identifiedthe following weaknesses inU N M I K ' s systems: inadequate audit evidence ledto significant uncertainty about financial statements; 0 f'ragile accounting systems; 0 the absence of an asset management and valuation system; 0 severe weaknesses inthe financial reportingo fmunicipalitiesandpublic enterprises; revenues andexpenditureswere not soundly basedon the applicable regulations; manualtransaction processing resultedininefficiency and a highrisk of error; and 0 the absence o finternal audit units inmost public-sector institutions. With particular reference to the procurement of goods and services, NCA's audit report found that: 0 there were shortcomings in compliance with instructions, internal controls and the retention of supporting documentation for procurement transactions; procurement procedures or commitments were entered into without the required authorizations; purchase orders were authorized without adequate documentation on the evaluation of bids submitted; there was use of single source procurement for contracts where the regulations required competitive tendering; 20 0 there was splitting of procurement requirements in order to bring them under the applicable financial thresholds stipulated in the regulations, above which competitive tenderingi smandated; and 0 contracts were awardedina manner inconsistent with the bid evaluation criteria specified inthebiddingdocuments. One egregious example which the NCA identified in its audit involved a purchase order placed by UNMIKon the UnitedNations Office for Project Services (UNOPS) for the procurement of eight bulldozers, financed by a Dutch grant. NCA found a major discrepancy between the price information on the purchase order andthe price information on the Customs invoice contained in UNMIK's files. While the total value of the purchase order was US$2,666,836, the Customs invoice showed a total value of only $1,798,874, undervaluing the purchaseorder by $867,961 or 33 percent. NCA's repeatedrequests to U N M I K ' s Central FiscalAuthority for an explanation of the discrepancy went unanswered. While the NCA audit report records that it i s uncertain whether the value ofthe deliveredbulldozers is inaccordancewith the purchaseorder, this looks like either a case o f over-stating the contract price or understating the Customs invoice, possibly to avoidimport duties. Details of the NCA's findings are presentedinTable 4 below. Table4: Exampleof ProcurementTransactioninNCAAudit Report1999-2000 IDifference: I $ 108,495.151 $ 867,961.201 On the topic of asset tracking and management, Kosovo i s awash with stories o f equipment and supplies which have been bought with public funds "leaking" into private hands. These stories have some credibility, as there i s a sufficient number of documented reports, including some contained in the Management Systems International (MSI) corruption report (cited in 4.2 below), about equipment and pharmaceuticals which have gone unaccounted for in the health sector, where there is "little visible improvement" despite the considerable investments that have beenmade inthe sector (30 percent of the healthbudget goes on purchasingpharmaceuticals). Inorder to address the problems identifiedinits report, theNCArecommendedthat: 21 the Central Procurement Executive (CPE), the forerunner to the PPA, should strengthen its oversight of public procurement and enforce compliance with procurement regulations; the PPRB should issue reports on compliance with procurement regulations in accordance with FA12/99, a recommendation which appears not to have beenheeded; the establishment of an asset management system to track publicly-owned assets, including those acquired as aresult o fpublic procurement transactions; and authorizing, approving, certifying officers and the Central Financial Authority Treasury should check the completeness and correctness o f all mandatory documentation to provide evidence about the regularityo f expenditures on goods and services. With regardto the implementation of these recommendations, the new institutions, with clearer responsibilities andpowers, set up under the new LPPwill be essentialto the establishment of an effective and comprehensive operational fkamework within which public procurement can take place in Kosovo. On compliance monitoring, the PPRB does prepare an annual report on its activities but this report focuses more on the PPRB's activities (e.g., that it conducted, 29 monitoring and inspection exercises in 2003) than on reporting the degree o f compliance of the contracting authorities with the applicable legislation. Asset managementremains a weakness of the system and there are no immediate plans to set up an effective system for tracking and managingphysicalassets owned bypublic institutions. Finally, it i s understood that Treasury has now put in place measures to check the authenticity o f signatures on purchase orders and that full, originalpurchase order documentation isprovided. Developmentof ExternalandInternalAudit FunctionsinKosovo Within the framework of the four "pillars" or areas of responsibility which UNMIK has established for the involvement of international institutions inKosovo, under Pillar 4: Economic Development andReconstruction, which i s ledby the EuropeanUnion, the EUhas responsibility for setting up a supreme audit institution in Kosovo, called the Office o f the Auditor General (OAG). The legal basis for the establishment o f OAG is provided by UNMIK Regulation 2002/1S5 dated October 4,2002; the OAG was established and an Auditor General appointed in November 2003. A new project has also been launched to expand and enhance the existing internal audit functions, which have grown out of the Internal Audit Unit of the old Central Financial Authority, which has since been transformed into the Ministry o f Economy and Finance , a PISG institution. However, the operational capacity o f both intemal and external audit units remains limitedandwill take time to develop. 4.2 CorruptionandAnti-CorruptionMeasures Measuring corruption i s difficult under any circumstances. Given that parties to compt transactions have little incentive to talk about them, most surveys o f corruption tend to limit themselves to measuring perceptions of corruption, rather than corruption itself. However, measuring corruption in Kosovo is particularly difficult given that, due to its uncertain status, Kosovo is usually omitted from most international surveys o f corruption such as the Business * availableonthe UNMIKwebsite at: http://www.unmikonline.orglregulations/2002/RE2002~18.pdf 22 Environment and Enterprise Performance Survey (BEEPS).6 Also, while Serbia and Montenegro i s generally included in such surveys, data on Serbia and Montenegro are generally not accepted as beingrepresentative of Kosovo, again due to the province's unique circumstances. A further factor inhibitingempirical observation of corruption is the deeply adversarial nature o f political debateinKosovo, which createsan environment in which allegations of corruptionare habitually hurledby leaders of one ethnic group at another with the intent of gaining political advantage, but such allegations tendto bebasedon littlemore thanhearsayor illwill. While conducting this procurement assessment, the Bank team was besiegedwith reports o f corruptionrelated to public procurement. However, none o ftheir originators was able to back up the reports with hardfacts. Perhaps the most exhaustive study of corruption in Kosovo i s one conducted by Management Systems International (MSI) for the United States Agency for International Development (USAID) entitled "Corruption in Kosovo: Observations and Implications for USAID.7 This report i s based on a representativepublic opinion survey, conducted inMay 2003, as well as on focus groups and interviews with individuals and representatives o f major stakeholder organizations, including UNMIK, PISG, civil society, mass media, the private sector and international organizations. This survey concluded that: "while corruptionexists inKosovo.. .it does not appear that corruption is a pervasive force inthe governanceprocess andit does not appear to significantly undermine the capacity o f government to perform it duties anddeliver services ina fundamental way." Another encouraging findingofthe survey was that: "In comparison to other countries inthe region...corruption doesnot appearto be as widespread among public officials, the demands of corrupt officials are lower and the extent of citizen involvement in corrupt transactions i s lower in Kosovo than in other countries in Southeast Europe." While the survey also repeatsthe threat - often cited inKosovo -that corruption may increaseas UNMIK's international civil servants are progressively withdrawn and as powers are transferred to PISG organizations, nevertheless it points out, fairly, that "the UNMIK administration has been a poor rolemodel for the Kosovars when it comes to transparency and accountability." Interms of the prevalence of corruption, respondentsto the MSIsurvey, whenaskedthe question "What are the top three problems facing Kosovo?" identified corruption as the second most pressingproblem (38.9 percent), a long way behindunemployment (85.8) but ahead o f poverty (32.9), low incomes (30.9 ) and highprices (30.3). Inanother survey conducted by the Kosovo Institute for Democratic Society in 2003 only among respondents in Pristina, 66 percent of respondents described corruption as a major problem in their daily lives, while 85 percent described it as amajor probleminKosovo ingeneral. available online at h~tp://info.worldbank.org/govemance/beeps2002/ available online at http:llwww.usaid.govimissions/kosovoIpdftion.pdf 23 The MSIsurvey also asked respondents to identify the most corrupt institutions inKosovo; the top five are listed inTable 5, below: Table 5: Institutions Perceived to be the Most Corrupt inM S I Survey, 2003. Institution Percent of respondentswho believe that corruptionis high KEK 78.2% Businesspeople 57.0% PTK (TelecommunicationsCompany) 55.2% Customs 54.9% Inthe section o f its report which surveyedsix focus groups drawn from NGOs, business groups and the media, four o f the six focus groups identified public procurement as being among the most corrupt hnctions. All six of the focus groups rated U N M K ' s procurement operations as being corrupt. The focus group that comprised businessmen admitted to having been extorted by public officials in procurement procedures. Members o f the government perceived "pervasive corruption" in public procurement, as well as in the border police, customs, publicly-owned enterprises and large reconstruction grants from international donors. A section o f MSI's report dedicated to public procurement, also recounts several allegations o f corrupt practices related to public procurement, but few o fthese canbe substantiated infact. With regardto the impact of corruption onthe operations o fprivate-sector businesses inKosovo, a recent survey of enterprises (see Figure 3) indicates that 35 percent of surveyed firms identified corruption as a "major" or "severe" constraint to their operations, ranking corruption fourth amongthe eighteen constraints identified. In its efforts to combat corruption, the Government has established an Office of Good Governance under the PrimeMinister. In2002, this Office preparedthe Government's first Anti- Corruption Plan, which includes public awareness, legislative and administrative initiatives. UNMIK's main response to corruption has been the establishment, in November 2003, of an InvestigationTask Force (ITF), a special unit to fight corruption within its own ranks as well as in KOSOVO'S institutions, including publicly-owned enterprises and other entities funded by the consolidated budget. The ITF's role is to initiate, conduct and coordinate administrative investigations to identify fraud and corruption. Inone o f the most high-profile corruption cases to be successhlly prosecuted, German authorities sentenced a UNofficial in2003 to three and a half years inprison for the embezzlement o f some 4.5 million (US$5.2 million) o f international aid donated to KEK. There is some evidence, therefore, that anti-corruption measures are working. However, the separation of the justice and law enforcement functions, which are reserved for UNMIK, and administrative governmental functions, vested in the PISG bodies, creates a continuing vulnerability to corruption. 24 Figure3: Evaluationof GeneralConstraintsto Operations (percentof firms ranking constraintas "major" or "very severe") II 0 10 30 40 50 m 70 percent Source: Investment Climate Assessment, World Bank 2003. Another important element o f anti-corruption measures relates to the procedures for appointing civil servants. An essential component o f these measures is the Senior Public Appointments Committee (SPAC), which appoints senior public officials through a competitive selection process. The recently-appointed Executive Director o f the Public Procurement Agency was appointed by the SPAC. A gap in the system, however, exists with respect to senior public officials who were appointed before the SPAC came into existence. According to RegulationNo. 2001/36 "On The Kosovo Civil Service," such appointments should beretroactively reviewedby the Independent Oversight Board. However, that Board has yet to be created and, inits absence, appointments o f senior civil service positions, such as heads o f departments, have been left prone to the vagaries o f political patronage. As U N M I K ' s International Officers (10s) increasinglypull out of Kosovo, there is a real risk that many senior civil service positions may be politicized, resulting in the large-scale capture o f the top ranks o f the civil service by KOSOVO'S political parties and raising the specter o f political pressure being brought to bear on public procurement, as well as on many other areas o f public sector decision-making. Ifthis grave situation i s to be averted, it is clear that the Civil Service Oversight Board must be established and that it retroactively review senior appointments that have not gone through the SPAC process. 25 The same Civil Service Regulation contains a Civil Service Code o f Conduct, which imposes on civil servants an obligation to perform their duties honestly, not to misuse their official positions for personal gain andto usepublic resources efficiently, amongother duties. Section 5. Public-Sector Performance Information on recurrent and capital expenditure, based on International Monetary Fund(IMF) estimates, indicate that, as a percentage o f total budgetary expenditure, procurement expenditure has increased significantly in the five years from 2000 to 2004, when it reached 28.1 percent of budget expenditure. Table6: RecurrentandCapitalExpendituresas % of ConsolidatedBudget,2000-2004 The same information examined in monetary terms indicates that expenditure on procurement from the Kosovo Consolidated Budget rose fiom 90.2 million in 2000 to 295.5 million in 2003, with a further increase to 388.6 million budgetedfor 2004. Given an estimated GDP in 2003 of 1,317, this suggests that public procurement expenditure was 22.4 percent o f GDP, which is substantially inexcess o f the EUaverage o f 16.7 percent. Table 7: RecurrentandCapitalExpenditures,2000-2004 (Euro millions) - 2000 2001 2002 2003 2004 Goods and Services 75.2 90.9 148.4 193 188.6 Capital Expenditure 17 20.6 41.9 102.5 200 Total 92.2 111.5 190.3 295.5 388.6 This increase can be explainedby the establishment of the PISG andby including expenditures, which had previously been carried out by the donor community, in the budget. Recurrent costs have increased in line with capital costs, which likely reflect increased investments in post- conflict infrastructurerehabilitation. Based on data providedby the PPA for this assessment, there were a total of 464 procurement procedures undertaken in 2003, which resulted in the award o f 886 contracts. Of those 464 procedures, PPA figures indicate that 402 (87 percent) were by the Competitive Tendering procurement method, the most open and competitive method available under FAI 2/99. While this is encouraging as an indicator of the extent to which expenditures on procurement are exposed to competition, it is at variance with the anecdotal information collected by the 26 assessment mission, including from senior officials o f UNMIK, which suggests that Direct Single-Source Procurement is heavily over-used. Section6: ProcurementPerformanceonWorldBank-financedProjects This section reviewsthe quality ofthe performance ofBank-financedprocurement interms of its compliance with Bank procurement and consultant guidelines. It also identifies major problems from past implementation andrecommendsmeasuresto beintroduced to strengthenprocurement capacity in World Bank financed-projects. In addition, it provides a basis for decisions on the levelof intensityo fprocurement supervision over Bankoperations. 6.1. Development of World Bank Portfolio The Bank's first Transitional Support Strategy (TSS) for Kosovo, dating fiom September 1999, defined the Bank's strategy as helping to ensure the overall sustainability of the reconstruction and recovery effort by using the Bank's comparative advantage in aid coordination and policy advice and through selective financial support. A Trust Fund for Kosovo o f US$60 millionwas made available by the Bank andwas committedbyAugust 2001 to twelve projects, inaddition to two post-conflict grants ofUS$2 million. The Bank's resources have been complemented by co- financing of projectsinthe amount o fUS$62 million. Currently, the Bank's portfolio in Kosovo comprises nine active projects totaling US$31.5 million (see Table 8). Eleven projects have closed. The current pipeline contains three IDA grants totaling approximately US$15 million. The Human Development sector accounts for approximately 50 percent ofthe total portfolio, with four ongoing projects out o fnine. Table 8: World Bank Portfolio in Kosovo as of January 31,2004 WBTF =World BankTrustFund; IDA = InternationalDevelopment Association; IDF=Institutional Development Fund. 27 The Kosovo portfolio consists of small grants with relatively short implementation periods of up to four years. While a considerable number o f projects are implemented by PIUs, two are handled by "continuing" entities such as KEK and Kosovo Trust Agency, and inone case by the Community Development Fund (CDF) - a local non-governmental organization. While in the Community Development Fund IProject, the CDF was the Grant Recipient, in the Community Development FundI1Project, with the trend o f transferringhctions from UNMIKto the PISG, the CDF PIU is the Grant Recipient. It was established and will operate under UNMIK supervision. Indiscussions with PIUs on the preparation o f OPR, several common procurement problems were found. A widespread problem is the weak procurement capacity of staff inPIUS.Although some have received training in international organizations, such as ILO Turin, there is a need for further strengthening o f their capacity to conduct procurement inaccordancewith the Bank's guidelines. Recent experience indicates that most projects failed to keep up-to-date procurement plans, to use appropriate bidding documents for NCB (National Competitive Bidding), or to apply the recommended procedures for the evaluation o f bids for civil works contracts awarded by NCB. Often bid evaluation reports lack detailed information, such as the justification for contract award recommendation, grounds for rejecting a bid as non-responsive or the verification of bidders' qualifications, all issues which require detailed treatment in bid evaluation reports in order to obtain prompt clearancebythe Bank. Some newlyestablished implementingagencies do not have a clear understandingo fhow to start and finalize a simple shopping procedure, interms of drafting technical specifications, opening and evaluation of quotations. Quite often it is noted that PIUs cannot correctly adhereto the pre- and post-qualification processes. Post-qualification is conducted for the three lowest bids, while according to Bank guidelines, it should be applied only to the lowest evaluated bidder. In some projects, it was found that PIUs have established consultant rosters for engineering assignments, but these are not updated regularly and cannot be used as a reliable source for establishing long list, giventheir tendency to exclude unregistered consultants. Deficiencies in contract monitoring systems are another common problem. Given that many of the projects are jointly financed by other agencies, PrUs keep a summary list of contracts financed by each donor but fail to pay adequate attention to the aggregatethresholds within Bank grant agreements, which are frequently exceeded. While the process of handing over implementation functions from UNMIK to PISG i s ongoing, it has resulted in limited ownership of the projects by either UNMIK or PISG. Avoidable problems and delays are created, since both of them have limited capacity in World Bank procurement, and time-sensitive decisions on procurement sometime get lost in transition betweenthe two. To date, the World Bank has conducted a limited number of procurement post reviews. This is due, inpart, to the fact that contractswhich are, according to the grant agreement, subject to post review are frequently submitted to the Bank for prior review. This is yet another indicator of weak capacity in implementing agencies, which lack the confidence to take procurement 28 decisions which they are authorized to take without the comfort o f a "no objection" from the Bank. 6.2 Decentralized Projects Procurement arrangements for most of the projects are handled by headquarters-based procurement staff, except for one project, Education and Health, which i s decentralized to the Procurement Unit inthe Bosnia andHerzegovina Country Office. 6.3 Recommended Actions The following actions are recommended to improve the quality of implementation and supervision of procurement ofBank-financed projects inKosovo: The PWs should use the appropriate standard biddingdocuments for the procurement of goods, works or services, which should contain a draft contract, all acceptable to the Bank. 0 Banktask teams should ensure that the levelofpost reviewsconducted iskept at the level stipulated inthe applicable grant agreement. 0 The implementing agency should prepare a detailed procurement plan at the stage o f project appraisal and keep it up-to-date throughout the period o f implementation, with revisions being made at least once a quarter. Bank procurement staff should follow up assiduously to make sure that plans are kept up-to-date and implemented without slippage. Thresholds for International Competitive Bidding for goods and works should be kept relatively low at >US$lOO,OOO for goods and >US$300,000 for works. Below US$300,000 the procurement o f works may be conducted by NCB while, below US$100,000, Shopping may be used for goods andworks. Prior review thresholds should be set at the same level as ICB thresholds for goods and works, so that all ICB contracts are subject to prior review. For NCB for works, all contracts should also be subject to prior review. 0 The Bank should place an obligation on all implementingagencies, through post review reports and supervision missions, to establish and maintaina contracts register for goods, works and services financed byWorld Bank. 0 Task teams should strongly recommend that PIUs attendprocurement seminars organized bythe Bank inthe region, as, to date, attendanceby delegates from Kosovohasbeenlow. The following thresholds are recommended for application to Bank-financed contracts in Kosovo: Procurement Method Threshold Intemational ComDetitive Biddine: Works >US$300.000 I NCB: Works I us$loo,ooo Shopping: Goods and Works US$50,000; and 0 contracts with individual consultants >US$25,000. In the selection of consultants, shortlists of firms may comprise only firms from Kosovo provided that the assignment i s estimated to cost less than US$lOO,OOO and there is a sufficient number of qualified local consultants to generate competition. 6.4 UnacceptablePracticeson WorldBank-financedProjects When National Competitive Bidding (NCB) is used on Bank-financed projects in Kosovo, the following procedural waivers should apply to the Law on Public Procurement (LPP) inKosovo (UNMIWREG?2004/3 dated February 9,2004). Eligibility No restrictions should be imposed on employment of specific persons or origin of the goods or services to be supplied or provided. Procedures The OpenProcedure, as defined inSection 30 and related sections o f the LPP, shall be followed inall cases. Advertising Invitations to bid shall be advertised in at least one widely circulated Albanian-language daily newspaper inKosovo and in at least one widely circulated Serbian-language daily newspaper in Kosovo, allowing a minimumof 30 days for the preparation and submission o fbids. AssessmentofBidders'Qualifications 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 Albanian-language daily newspaper inKosovo and in at least one widely circulated Serbian-language daily newspaper in Kosovo a minimum of 30 days prior to the deadline for the submission o f pre-qualification applications. Minimumexperience, technical and financial requirements shall be explicitly stated in the pre- qualification documents, which shall be determined by a "padfail" method, not through the use o f a merit point system. Where pre-qualification i s not used, the qualifications o f the bidder who 30 i s recommended for award of contract shall be assessedby post-qualification, applying minimum experience, technical and financial requirements, which shall be explicitly stated inthe bidding documents. Participationby Publicly-OwnedEnterprises Publicly-owned enterprises inKosovo shall be eligible to participate inbidding only ifthey can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency o f the Government. Furthermore, they will be subject to the same bid andperformance security requirements as other bidders. BiddingDocuments Procuring entities shall use the appropriate standard biddingdocuments for the procurement of goods, works or services, which shall contain draft contract andconditions o f contract acceptable to the Bank. BidSubmission,OpeningandEvaluation a) Bids shall be submitted in a single envelope containing the bidder's qualification information, technical andprice bids, which shall be opened simultaneously at the public bidopening. b) Bids shall be openedinpublic, immediatelyafter the deadline for submissionofbids.The name of the bidder, the total amount of each bid and any discounts offered shall be read aloud andrecorded inthe minuteso fthe public bidopening. c) The evaluation of bids shall be done in strict adherence to the monetarily quantifiable criteria specified inthe biddingdocuments, and a merit point system shall not be used. d) Extension of bid validity shall be allowed once only for not more than 30 days. No further extensions should berequestedwithout the prior approval o f the Bank. e) Contracts shall be awarded to qualified bidders having submitted the lowest evaluated substantially responsivebid. PriceAdjustment Civil works contracts of long duration (e.g. more than 18 months) shall contain an appropriate price adjustment clause. Rejectionof All Bids All bids shall not be rejected and new bids solicited without the Bank's prior written concurrence. When the number ofbids received i s less than three, re-biddingshall not be carried out without the Bank's prior concurrence. 31 Securities Bid securities should not exceed 3 percent of the estimated cost of the contract; performance Securities, not more than 10percent. No advance payments shall be made to contractors without a suitable advance payment security. The wording o f all such securities shall be included inthe biddingdocuments and shallbeacceptableto the Bank. Section 7: RiskAssessment While, becauseo f the promulgation of the newprocurement law, Kosovo's legal framework for public procurement promises to be much sounder and more comprehensive than it has been to date, the new LPP is an entirely untested document. Much will depend on whether the many good ideas and controls inserted into the LPP are carried out inpractice. Only the passage of two or three years from June 9,2004, when the new law came into effect, will tell whether it has hadits intended effect. The regulatorv framework for public procurement inKosovo has been weak to date, with both the PPA and the PPRB embedded within PISG ministries and lackingboth the capacity and the independenceto do their jobs to full effect. The public institutions that conduct procurement are generally very weak in terms o f their procurement capacity and the level o f knowledge and technical skills inprocurement among public officials is as yet very low. The control environment has been similarly weak to date, with external auditing taking place only by the intervention of a supreme audit institution from another country and internal auditing totally undeveloped. Control systems within contracting authorities either do not exist or do not work. As the NCA audit found, procurement transactions frequently occur without proper authorization and financial commitments are entered into without appropriate linkages to budgetaryallocations. Corruption is significant and, to date, no convincingprograms to tackle it have been implemented. Measured against all of these parameters, the environment for conducting public procurement in Kosovo is one o f high risk. In this respect, Kosovo rates comparably with other countries in Europe and Central Asia Region that have recently embarked along the road of public procurement reform and whose procurement environments have also been rated as high risk in recent assessments undertaken by the World Bank, including Serbia and Montenegro, Albania, Macedonia, Turkey, the RussianFederation and Ukraine. 32 Section 8: Recommendations 8.1 Recommendationsfor LegislativeReform The World Bank indicated as recently as M a y 2003 that the then draft LPP of Kosovo was acceptable to the Bank.However, changes to the law have been made in the interim which are likely to undermine its efficacy in implementation, particularly regarding the institutions which will be responsible for ensuring its enforcement. Recommendations relating to institutional reform are presented under 8.2 below. Recommendations relatingto legislationare aimed mainly at completing the legislative framework for public procurement: 1. As a matter of urgency, UNMIK should enact a transitional legal instrument, perhaps in theform of an executiveorder, toprovide a legal basisfor the continued functioning of the existing Public Procurement Agency and the Public Procurement Regulatory Body and to authorize them to cary out thefunctions of new PPA and PPRC on a transitional basis until such time as those new institutionsareformally established. 2. Enact a completeset of implementingregulations to underpin theprocurementlaw, to clarijj its correct application andprovide detailed instructions on its application in key areas. Specific regulations should be enacted on procurement planning, selection of procurement methods, pre-qualification and post-qualification, bid evaluation and contract administration. 3. Promulgate a comprehensive set of standard bidding and contract documents, whose use should be mandatoy for all contracting authorities, covering prequalification, procurement of goods, civil works and consulting services, including standardforms of contractsfor each application. 4. Promulgate a set of procurement manuals detailing the correct application of the LPP, implementingregulations and SBDs. Assuming adoption of the recommendations on institutional reform (see below), the above recommendations would be for the Public Procurement Regulatory Commission to implement. 8.2 Recommendationsfor InstitutionalReform With regard to the institutions which oversee the implementationof the LPP andthe division of powers and responsibilities between them, in every country there are four main groups of tasks which need to be performed to ensure the efficient operation of a public procurement system. These are: o procurement policy and legislative development; o supervision; o monitoring and enforcement; o administrative review ofbidprotests. It is essential, for the transparent and effective operation o fthese functions, that the bodies which exercise them should be independent from the executive branch of government, which is the branchwhich conducts procurement. 33 InKosovo, becauseof the institutional legacy which the PISGhas inherited from UNMIK and because o fthe weakness of procurement implementation capacity inthe contracting authorities, a decision hasbeentaken to add a fifthfunction, namely: o anexecutive procurement function which isbeperformedbythe PPA. However, it is essential that the PPA's responsibilities should not include any functions which are regulatory innature - such as grantingwaivers for the use o f procurement procedures other than the Open Procedure - because the PPA is an executive agency within Government and, therefore, does not have the independence which i s essential to the credible performance of regulatory functions. For that reason, this report recommends that all regulatory functions should be removedpom the PPA and that it should be responsible solely for the exercise of executiveprocurementfunctions -that is to say,for doingprocurement. By the same logic, it is also essential that the executive branch of government should not be involved in setting the rules which will apply to it when it performs executive procurement fbnctions. Therefore, this report recommends that the PPA and the Ministry of Economy and Finance should be removedfrom the Public Procurement Rules Committee. Indeed, there i s little justification for having a Rules Committee at all, given that its functions can be credibly performed by the Public Procurement Regulatory Commission. To that end, it is recommended that the Public Procurement Rules Committee should be disbanded and that its rule-making functions should be subsumed into thePPRC. The one remaining change necessitated by these reforms would be to remove the review function from the PPRC, as it cannot be expected, on the one hand, to define procurement procedures and write rules and, on the other hand, to review appeals against procedures conducted under those rules. To that end, this report recommends the establishment of a new, independent Public Procurement Review Commission, which should be independentfrom government and which should meet the requirements of the EU Public Remedies Directive 89/665/EEC. Table 10 summarizes the proposed institutional arrangements recommended by this report. Implementation of these recommendations would clearly require an amendment to the LPP. It i s understood that, when the LPP was enacted, UNMIK and the PISG recognized that there were certain compromises made within the law, particularly inrespect o f its institutions. Therefore, it i s expected that there will already be acceptance on the part o f UNMIK and the PISG that these reforms are necessary. 34 Table 10:RecommendedPublicProcurementInstitutionsandFunctions To summarize the recommendationsinthe institutionalarea: 1. Limit the duties and powers of the PPA to executiveprocurement functions and remove from it functions which are regulatory in nature, such as granting approvalsto the use ofprocurement proceduresother than the Open Procedure. 2. Concentrate all regulatory duties and powers in the Public Procurement Regulatory Commission. 3. Abolish thePublic ProcurementRules Committee. 4. Establish a new Public Procurement Review Commission as an independent second-instance body to undertake administrativereview of bidprotests. 8.3 Recommendationsfor ImprovingProcurementProcedures,Increasing Transparency and CombatingCorruption Many of the deficiencies identified inthis report have already been addressedby the new LPP, which has much more comprehensive provisions than did FAI 2/99 relating to the manner in which public procurement procedures are to be conducted. Therefore, the key to makingsure that the planned improvement actually takes place will be to maximize transparency and public scrutiny over procurement operations, thereby holding public officials accountable for applying the law. The following recommendations are designedto promote this objective. 1. Launch apublic-accessInternet websitecarryingfull details of publicprocurement in Kosovo, including relevant laws, implementing regulations, standard procurement documents, invitationsto bid and contract award notices. 2. Publish all applicationsfrom contacting authorities to useprocurementprocedures other than the Open Procedure, as well as the decision made by the regulatory authority on each application. 3. Publish the annual report of the PPA, PPRC and the Review Commission on the publicprocurement website. 35 8.4 Recommendationsfor BuildingPublicProcurementCapacity The LPP already contains quite comprehensiverequirements for the trainingand certification of Procurement Officers and for the establishment of a ProcurementDepartment ineach contracting authority. Itwill be essentialthat the Public ProcurementRegulatory Commission sees that these important steps are taken. Therefore, the recommendations in this section are intended not to repeatthose measuresbutto complement them. 1. Establish apublic procurement trainingprogram at theKosovo Institute of Public Administration (KIPA), with a cadre of procurement professionals trained as trainers and qualified to deliver courses resulting in the award of the `@rocurement professional certificate" foreseen in the LPP (this measure is planned to be financed under theEAR TechnicalAssistancefor publicprocurement). 2. Once theprogram has been establishedfor 2-3 years, =PA should seek to develop an internationally-recognizedprofessional procurement qualification, for example by association with and accreditationfrom an international procurement body. The recommendations of this report are summarized in an Action Plan, contained in Table 11 below. 36 x x x x x x c 3 13 x x 03 M I I Section 9: Private Sector 9.1 CompetitivenessandParticipationinPublicProcurement The enterprise sector in Kosovo comprises some 30,000 formal businesses, with many more operating in the informal sector. Most firms are micro-enterprises, registered as sole proprietorships or partnerships and employing fewer than four employees. Very few f i m s are involved invalue-adding activities: 60 percent o f firms are engaged in wholesale or retail trade or service activities. The other major sectors, measured by the number o f firms active in them, are manufacturing (15 percent), construction (10 percent) and transportation, storage and communications (5 percent).' The privatization of socially-owned enterprises (SOEs) has proven highly political. While three rounds o f privatization, involving some 30 SOEs have been completed, the privatizationprocess was suspended in October 2003. Of the more than 500 SOEs in Kosovo, only some 75 to 100 have the potential to be sold as ongoingbusinesses. Private sector firms interviewed for this assessment expressed a low level o f confidence in the faimess o f public procurement processes in which they had participated. They generally had more confidence in the faimess of tenders conducted under rules imposed by extemal donors (World Bank, DFID) and subject to their scrutiny, thaninthose under FA12/99. Several bidders complained about unfair competition. This findingwas upheld by the results o f a recent survey on Kosovo's investment climate undertaken by the World Bank, where 45 percent of respondent firms rated unfair competition as a major or very severe constraint on their business, second only behind electricity supply. Typical o f the complaints expressed by private- sector firms i s being forced to compete against Non-Governmental Organizations (NGOs) for public contracts, the inference being that, because many NGOs receive charitable contributions, they do not bear their full costs and can feed this advantage into the prices they submit inpublic tenders. Because of KOSOVO~S unique circumstances, NGOs implement certain contracts there that they may not be interested in in other countries. For example, the Bank has approved the award o f a civil works contract to a foreign NGO, given the difficulty of getting any other entity to execute the works. Most firms expressed the opinion that the level o f detail contained intechnical specifications and scope of works included in bidding documents is considerably lower in tenders conducted by UNMIWPISGthanintenders issued under IF1procurement rules and supervision. Several private-sector firms also complained about unqualified firms winning public contracts and failing to execute them, generally ascribing this to the contracting authorities' failure to check on the experience and qualifications o f bidders before awarding contracts. Some also complained that one o f the reasons unqualified firms win contracts is that contracting authorities introduce into the evaluation process criteria which were not cited in the bidding documents, including paying personal visits to bidding firms, ostensibly to check that the bidders actually have the resources claimed intheir bids. Datareproducedfromthe World Bank "Investment ClimateAssessment" onKosovo, March2004. 39 9.2 Performanceon PublicProcurementContracts While there are no hard data available, the assessment heard many reports o f problems experienced inthe execution o f contracts. Biddersand contractors most frequently ascribed these problems to poor or inaccurate definition o f the technical specification or scope o f work in the bidding documents or to the contracting authority's failure to assess the qualifications of the winning bidder before awarding the contract. For works contracts, bidders complained that the works are not properly designed, engineeredor costed before the bidding documents are issued to the bidders. One contractor, active inroad rehabilitationworks, reportedthat it i s common for executedcontracts to exceedthe original priceby more than 100percent. Given that there is no formal mechanism in Kosovo for reviewing contract performance and performance audits are not conducted as part of intemal or external auditing, poor contract execution currently goes unchecked. 40 Annex: List of Contracting authorities Governed by FAI2/99 1.Ministryo fPublic Services a. Central Processing Center b. Department ofLocalAdministration c. Kosovo Cadastral Agency d. Statistical Office ofKosovo e. Department of Engineering andBuildingManagement f. DepartmentofAdministration andSupport g. Department ofEmergency Management h. Department ofInformationandTechnology i. CentralProcurementEntity j. KosovoInstituteofPublicAdministration 2. Ministry o fHealth a. University Clinical Center b. PharmaceuticalProcurementUnit 3. Ministryo fEconomy andFinance a. Central FiscalAuthority b. Tax Administration 4. Ministryo f Culture, Youth andSports a. Department ofNonResident Affairs 5. Ministry o f Education, Science and Technology a. Student's Center b. UniversityofPristina 6. Ministryof Transport andTele Communications 7. MinistryofAgriculture and Forestry 8. Ministry ofTrade andIndustry 9. Ministry of Environment andSpatial Planning 1O.MinistryofLaborand Social Welfare Office o fthe President Office o fthe PrimeMinister Office of the Kosovo Assembly Office o fthe Community Affairs Office o fthe MissingPersons Office o fthe GeneralRevision Office ofthe KPC Coordinator Office o f Ombudsperson Municipalities: 1. Municipality ofPristina 2. Municipality o fPrizren 3. Municipality of Gjilan 4. Municipality ofMitrovica 5. Municipality of Istog 6. Municipality ofDeqan 7. Municipality o fPodujeve 8. Municipality of FusheKosove 9. MunicipalityofKamenice 10. Municipality ofKline 11.MunicipalityofDrenas 12. MunicipalityofPeje 13. MunicipalityofLipjan 14. Municipalityo f Obiliq 15. Municipality o fVushtrri 16. MunicipalityofNovo Berd 17. MunicipalityofDragash 18. Municipality ofKaganik 19. Municipality o f Shterpc 20. Municipalityo fFerizaj 21.Municipalityof Shtime 22. Municipality of Suhareke 23. Municipality ofViti 24. Municipality ofMalisheve 25. Municipality ofRahovec 26. Municipalityo fZubinPotok 27. Municipality o f Gjakove 28. Municipality of Skenderaj 29. Municipality o fLeposaviq 30. Municipality ofZvegan Kosovo Police Services Kosovo Protection Troops Kosovo Trust Agency Customs Banking andPayment Authority DepartmentofJustice Housing andProperty Directorate KEK Trepqa