Report No. 39948-UA Ukraine Country Procurement Assessment Report 2006 November 12, 2006 (Updated March 30, 2007) Operational Policy and Services Europe and Central Asia Region Document of the World Bank UKRAINE COUNTRY PROCUREMENT ASSESSMENT REPORT2006 Table of Contents ExecutiveSummaryand Addendum of March30. 2007 ............................................................... 1 1 8 3 Institutional Frameworkand ManagementCapacity.................................................................... 2 Legislativeand RegulatoryFramework 4. ProcurementOperations............................................................................................................... . ..Introduction..................................................................................................................................... ........................................................................................ 11 15 23 6. E-Procurement.............................................................................................................................. 5. IntegrityandTransparency of the PublicProcurementSystem ................................................... 37 7 Public Procurement Contract Performance .................................................................................. .. 41 43 .................................. 45 9. Risk Analysis andthe CPAR 2006 Action Plan........................................................................... 8 Approximationwith EUProcurementDirectivesandAccessionto WTO 47 -32 Table 2. Trends in TenderingMethods, 2002-05 (inpercent)............................................ Table 1. Summary of Procurement Risk Factors and RecommendedRemedies....................... 43 Annex 1 DetailedImplementationPlan(Based on 2001 and 2006 Recommendations) . ..............-50 Annex 2.Performance Indicators ............................................................................. -53 Annex 3.OrganizationalChart ofPublic Procurement System ........................................... -55 Annex 4 Procurement OrganizationAfter 2005 Amendments.,.......................................... . 56 Wielogorska. Irina Shmeliova. BenedictaT.Oliveros-Miranda(ECSPS). Knut Leipold The World Bank team included: NaushadA.Khan. ECSPS(Task Team Leader). Anna Gulnara Suyerbayeva(consultant). (OPCPR). ChristianH. Walser (internationalprocurement lawyerkonsultant).and Ukraine CPAR -Executive Summary Ukraine Country ProcurementAssessment Report 2006 Executive Summary' and Addendum of March30,2007 In 2005, Ukraine spent more than US$4 billion, about 5 percent of its GDP, on public procurement. Since 1996, the World Bank, the EU Tacis Program, and USAID have worked with the Government o f Ukraine to put a fair, open public procurement system in place. A comprehensivePublicProcurementLaw (PPL) was enacted in February 2000. The World Bank reviewed and prepared a detailed Country Procurement Assessment Report (CPAR) in 2001. The report recognized both achievements and remainingchallenges- in particular, the need for a stronger legislative framework, improvedprocedures and practices, implementation o f the existing law, improved institutional capacity, compatibility with internationalbest practice, and an end to corruption. The report cited the need for transparent rules, standard bidding documents, strengthening o f institutional and organizational resources, expanded responsibility for the Authorized Agency (the oversight and support body in the Ministry of Economy, known as AA), and increased capacity among procuring entities. The present CPAR continues the Bank's commitmentto reform in light of the political and economic changes o f the past five years. The assessment was conducted within the framework of the OECDDAC pillars for public procurement. Among the many positive developments discussed herein, the report points to many World Bank recommendationsthat were implementedthrough amendments to the PPL. In 2002, only 7 percent o f tenders (just under 50 percent in value) were awarded on an open basis. By 2005, that number had increased to 26 percent (69 percent o f value). The percentage of sole- source contracts was reducedcorrespondinglyfrom 21 percent in2000 (24 percent o fvalue) to 10 percent (15 percent by value) in 2005. The same positive pattern holds in price quotations and restrictedtendering.2 Among negative developments, amendments to the PPL in November 2004, June 2005, and December 2005, seriously diluted and fragmented government procurement authority. Important functions were transferredto non-governmental organizations despite the reasonable progress toward international standards being made by the Authorizing Agency within the Ministry of Economy. This reorganization not only cost the country many years of expertise gained by the AA, it resulted in an abrupt departure from acceptable standards. Moreover, the shift of oversight responsibility to the Department of Audit and Review (KRU) and to the Accounting Chamber (AC) has created a conflict of interests-because the same bodies that supervisethe procuringentitiesare now also auditingthem. Several recent EU member countries offer successful models on approximationwith EU of procurementlegislation and regulatoryframework.These countries provide usefulexperience 1The World Bankteam would liketo thank its counterpartteam inthe Ministryof Economy,whichceased to exist as an Authorized Agency when the December2005 amendment to the PPLtook effect. The Bank team also thanks the manyrepresentativesof public and privatesector agenciesfor their excellent cooperationinpreparingthis report. Sole-sourcedprocurementis still high in Ukraine. These figures do not includesole-sourcecontracts by state-ownedenterprises(SOEs) andthose that are excludedfrom the PPL. 1 Ukraine CPAR -Executive Summary on how to approximate a PPL with acceptable EUnorms, includingmeasuresfor the organization o f public procurementandthe resolutionof complaints. Ukraine has nearly completed its negotiations on WTO membership and negotiations for accession are now being underway. In order to accede to the WTO Government Procurement Agreement, Ukraine will have to resolve several issues (discussed in this report) that arise from itscurrent publicprocurementenvironment. This analysis covers the current legal and regulatory framework, organization of procurement, procuring entities' capacity to conduct procurement, internal and external controls, anticorruption measures, and prevailing practices. In brief, it says that the public procurement environment is now at "high risk." Major findings and corresponding recommendations are summarized below. Before the three major amendments came into force in late 2004, 2005 and early 2006, Ukraine had a reasonably good public procurement law. The amendments reversed the situation. The November 2004 amendment started the deterioration by removing important functions from the Authorized Agency, for example, responsibility to provide methodological advice and Standard Bidding Documents (SBDs). The amendment in June 2005 transferred functions normally exercisedby the state (for example, Public ProcurementOffice) to the Tender Chamber o f Ukraine(TC), anNGOthat is not subject to the controlsroutinely imposedon bodies and individualsresponsible for public administration.The amendment in December2005 set new rules on the organization, oversight, and control of public procurement, which simply led to further fragmentationof government authorityover publicprocurement. Several private organizationshave come to dominate public procurement, These includethe Center for Tender Procedures and Business Planning (CTP) an NGO; and the European ConsultingAgency (ECA), an enterprise relatedto CTP. The CTP officially holds patents and copyrights for numerous biddingdocuments and methodologies, including SBDs that are nearly identical to those of the World Bank. Market participants frequently assert that CTP pressures them to usethese "copyrighted" documents for a fee, and that potentialbidders must pay CTP for questionable services, includingcommissionson successful bids. Procuring entities cannot implement the PPL effectively. The fully decentralized public procurement system distributes functional responsibility to procuring entities at all levels of government. Each o f these procuring entities currently conducts procurement through a permanent five-member tender committee whose members receivejust two weeks o f mandatory training. Procuringentitiesthus have little opportunityto buildpermanent or specialized capacity internally. Logistics departments of the large entities do little beyond assigning their member to the permanenttender committee, with these staffmembersexpectedto performtheir usualjobs in addition to their committee responsibilities. Private sector representatives assert that the permanent tender committee reinforces potential for collusion, corruption, illicit alliances, and conflicts of interest. Consultants, contractors, and suppliers interviewed for this assessment expressed dissatisfaction with many procurement practices, especially the ascendance of TC as the Authorized Agency and its role in complaint resolution. They cite the need for more information sources on tenders, and criticize bidding documents with unclear technical specifications, insufficient time for preparingbids, unjustified cancellationof tender procedures, frequent delays in contractualpayments, etc. Such practices have discouragedcompetition-only 2 or 3 bids pertender on average in 2005. 2 Ukraine CPAR-Executive Summary Public procurement is integrated with budget planning and execution but needs to be improved. Planning is usually limited to a list of contracts and estimated budgets, with little attention to timing, contract packaging, procurement methods, and scheduling. Funds are often not available to spending units until late November or December, leaving little time for procurementbefore the fiscal deadline runs out. Capacity in controls and auditing is weak, though improving. The Department of Audit and Review (or KRU, of the Cabinet of Ministers), the Accounting Chamber (the supreme audit institution), the Treasury, and the Internal Audit Department of the procuring entity are responsible for controls and auditing. In principle, controls can be carried out either before or after procurement; but in practice, they are frequently carried out after. The functions of KRUand AC overlap, though both entities generally limit themselves to compliance. The procurement auditing system has major gaps; indeed, the only systematic reviews are those carried out by Treasury prior to contractualpayments. Anticorruptionrules are scattered and poorly enforced.Anticorruption policy does not clearly define offenses, due process, sanctions, or enforcement. The Ministry of Economy has provided leadership in modernizingthe public procurement system, including electronic government procurement (e-GP). Electronic transactions and information disclosure is in line with the integrated Electronic Ukraine program, which is supported by the PPL, the nascent e-signature law, and the electronic document law. Use of the Internet grew by more than 2,500 percent between 2000 and 2005. However, there is a need for a stronger e-GP standards framework to provide clearer procedures and formats for online publication. Several technical issues (discussed in the body of this report) need resolution so as not tojeopardize the progressalready achieved inthis area. A countrywide campaign on procurement is necessary to raise awareness in the private sector and among the public at large. This campaign should cover the contents, implications, and benefits of an efficient, open public procurement system, and it should stimulate political support. Because the mere official publication of regulations does not raise public awareness, an outreach program through newspapers, television, and radio would help achieve this objective. The Authorized Agency would need strengtheningto orchestrate this broadercampaign. Recommendations The detailed implementationplan in this report includes short-, medium-, and long-term recommendations. However, the most pressing concern is the current procurement legal framework and institutional structure. Once the legal framework and institutional structure has been streamlined, the public procurement system would need to be strengthened as a whole. Towards that objective, the Bank team strongly recommendsthe following measures: Primary Recommendation-Repair theLegal, Regulatory,and Institutional Framework 9 Seek parliamentary approval to revoke or substantially rework the December 2005 amendment of the PPL, consideringin particular the inappropriaterole that is assigned to the Tender Chamber andother nongovernmentalentities. 9 Reorganizethe institutional structure for public procurement to conform to international standards andthe principle of separationof powers. 3 Ukraine CPAR -Executive Summary 9 Establishanindependentmechanismto reviewbiddercomplaints. 9 Establisha central AuthorizedAgency whose responsibilitiesincludepolicymaking, the authorityto draft primary and secondary legislation,preparationand updatingof standard biddingdocuments, provisionof free legal and professionaladvice, publicationof tender opportunitiesand contract awards, and monitoringand oversight.This body would report directlyto the Cabinet of Ministers,or it couldbe part of another government body. 9 Finalize and make available to procuring entities the standard bidding documents preparedby the former AuthorizedAgency inthe Ministry o f Economy. 9 Create conditionsfavorable for a competitivemarket for procurement.Advisory services not provided by public entities should be provided by private firms, but subject to competitionin accordancewith the PPL. Secondary Recommendations-Strengthen the Public Procurement System 9 Install permanent procurement capacity within the structure of procuring entities, including the use of ad hoc tender committees through appropriate provisions in the amendedor the new law. 9 Consolidate legislationandregulationsonanticorruption,includingrealenforcement. 9 Introduceex-antecontrolsas well as continuethe presentex-postcontrols. 9 Implementa strategy for electronicgovernment procurement(e-GP). 9 Establish a single, official, free of charge e-GP portal and a correspondinghard-copy publicationmanagedby the AuthorizedAgency. 9 Enhancecapacity and skills ofthe AuthorizedAgency to undertake a countrywidepublic awarenesscampaign. Status as of March30,2007 The World Bank submittedthe draft CPAR to the GOU in December 2006. In late January 2007, the Ministry of Economy informedthe Bank that the government officials from the Ministriesof Economy, Finance, and Health Protection; National Bank of Ukraine, and the Antimonopoly Committee had completed their review of the Report and were prepared to discuss their observations with the World Bank team. The Ministry o f Economy also providedthe Bank with detailed written comments. The introductory paragraph of the document containing these comments said: "The informationcontained in the Report reflects on the whole the real state of public procurement in Ukraine in 2006". The document also referredto further amendments to the Law that the Verkhovna Rada passed on December 1, 2006, and which came into effect on March 12, 2007. The Bank team arrivedin Kiev on March25 and discussedwith the Government team representing the agencies listed above on March 26 and 28 their comments on the draft report. A representative,o f SIGMA also participated in the discussions. The discussions mainly related to the application o f the public procurement law and its amendments to state-owned enterprises, and the role o f commercialbanks inpublic procurement. The changes introducedby the December 2006 amendment to the PPL as well as the President's instructionthat a new draft law be enacted and promulgated by August 15, 2007 were also discussed. The following Addendum datedMarch30,2007, deals with the amendmentto the PPL dated December 1,2006, and the major comments receivedfrom the GOU on the draft report.Finally, the Bank hopes for the implementationof the recommendations of this report in the draft public procurement law under preparation. 4 Ukraine CPAR-Addendum Addendum March 30,2007 After the submission o f the Draft CPAR to the Government for review and comments, the Parliament of Ukraine, on December 1, 2006, enacted Law No. 424.V on amendments to the PPL. Most parts of this law became effective on March 12, 2007, following the President's signature. When signingthe amendment, the Presidentemphasizedthe needfor further improving public procurement and to enact by August 15, 2007, a new PPL based on the best international practice. The Speaker o f Parliament has already established a standing working group for improvingthe public procurement legislation. This Addendum deals with the issues that the Government team raisedafter reviewingthe Draft CPAR. The Government and the World Bankteams discussedthese issues in Kiev on March 26 and 28,.2007. It also deals with the main features of the amendment of December 1, 2006, referred to above. In the opinion of the World Bank team, the December 2006 amendment negatively impacts the PPL as it substantially increases the power of the Tender Chamber, which is a non-governmental entity, and expands its role in public procurement even further. This Addendum does not reflect the provisions of the December 2006 amendment, enacted after the submission of this Report to the GOU. Instead, it briefly explains below two major sets of issues as dealt with in the amendment. The first set of issues results from an amendment of Article. 3-3, which, in a major reorganizationo fthe supervisory functionover public procurement, replacesthe "Special Control Commission (SCC) on Public Procurement Issues under the Accounting Chamber" with a newly created entity called the "Interdepartmental Commission on Public Procurement". The SCC, under the previous amendment, had partially replaced the functions of the former AuthorizedAgency (See para. 20 o f this Report). In addition to three representatives of the Tender Chamber, the InterdepartmentalCommissionwill consist of representatives of the AccountingChamber, the State Auditing and Inspection Service, the Antimonopoly Committee, the Ministry o f Economy, and four representatives from two parliamentary committees. Like its predecessor, the Interdepartmental Commission may also "decide to include representatives of social organizations, scientists, and so on". It is not clear whether these "representatives.. .scientists,etc." are entitledto participate inthe decision-makingo f the new Commission, nor is it clear to whom the new Commissionreports.The Commission (see Art. 3-3 (7)), area....shallfurnishthe Tender Chamber.,,withcopies of all decisions andconclusions in "in order to ensure public control in the public procurement the course oftwo days from the date of adoption". This meansthat the Commission, as a governmental entity, has to report about its activities to a non-governmentalentity (i-e., the Tender Chamber). Inthis context, the Tender Chamber (see Art. 17-3(8) even has the right, "in order to exert public control'y...to initiate a lawsuit in order to appeal decisions....of the Commission...." to the court. The additional functions of the new Commissioninclude: (i)a "register of unscrupulous bidders" without any indication of who decides, under what rules of due process that a bidder has been unscrupulous(See Art. 16-1) on the grounds for declaring a bidder unscrupulous), and (ii)a "register of participants in procurement procedures" (Art. 16-1). The difference between this 5 Ukraine CPAR-Addendum "register" and the "thematic catalogue of participants o f procurement procedures" to be publishedby the Tender Chamber (see below, and Art. 17-3(10)) remains unclear. 0 The second major set of issues results from a substantialincrease o f the functions of the Tender Chamber (See paragraphs 16through 19 of this Report). The most importantof these seems to be its newly established right (See Art. 17-3(10), third sub-paragraph)), "...to study the commodity market and promote atmosphere of competition in the public procurement area". The amendment explains this function as "to put out a thematic catalogue of participants of procurement procedures...with nationwide distribution, also publishedinwhich should be informationon bidders, marketsand priceson goods, works and services...." Informationon potential"participants" is to be includedin the catalogue upon application of the person or firm concerned. An applicant can appeal to the Commission a refusal by the Tender Chamber to include any such information in the catalogue. This appears to be acceptable, but it should be recalled that (i)the Tender Chamber has the right to appeal the Commission's decisions to the court; (ii)only "participants, information on whom is included in the catalogue", can submit tender proposals; and (iii)the listing of such informationhas to be renewed annually (Article 17-3( lo), fifth sub-paragraph). As a result, the Tender Chamber (as a non-governmental entity without any apparent public oversight) will have the power to delay the participationof any bidder inpublic procurementwith impunity. This does not appear to be in the public interest. Inthis context, it is worth mentioningthat evaluationof tenders (see Article 26 (7)) must now include "rating of the bidder in the register of participants..," referringdirectlyto Article 16-1. With reference to the comment on the draft CPAR on the inclusion of state owned enterprises, irrespectiveof their nature of operations, under the applicationof the public procurement law, the Bank maintains its position as expressed in paragraphs 109 and 110 of the CPAR. These paragraphs state that a general coverage o f the entire sector o f state owned enterprises is inappropriate and will adversely affect their efficiency and damage the national economy. However, taking into account Ukraine's interest in approximationof its procurement legislation with the EuropeanUniondirectiveson public procurement, the WorldBankrecommendsto make a distinction between entities operating in the water, energy, transport, telecommunicationand postalservices, on the one hand, and entitiesof a commercialand industrialnature, on the other. The group of utilities (whether public or private undertakings) should be covered by the public procurement law since (i)they are established for the specific purpose of meeting needs in the general interest, (ii)do not have an industrial or commercial character, and (iii)operate on a monopolybasis activities relatedto the utilitiessector. The other group o fstate owned enterprises of a typical industrial and commercial nature should be excluded from the procurement legislationand be allowedto apply common commercialpractices.The PPL for many reasons is not designed to include the public commercial and industrial sector. It should more precisely define the activities in the utilities sectors to be covered as well as the exemptions allowed, and a list of entitiescoveredby the law shouldbe established. On the comment regarding the bid resolution mechanism, as changed by the amendment of December 2006, the World Bank considers that though there are some proceduralchanges about lodginga complaint, the mechanism itself still needs further improvement.Now the complaint is lodged with the Commission only and a copy has to be sent to the procuring entity, Tender Chamber and Treasury (commercial bank). The Commissionhas to send a copy of the received complaint to the above-mentioned institutions as well, which is duplication. The Commission makes a decision, and the Tender Chamber has the right to providethe Commission with its own 6 Ukraine CPAR -Addendum conclusion.At the same time, the Tender Chamber has a strongrepresentation (three members) in the Commission. With reference to the NationalBank of Ukraine's comments on the role of commercial banks o f checking procurement documents o f their clients for compliance with the provisionsof the PPL beforemakingpayments, the World Bank believes that this functionbelongs to executivebodies, such as State Treasury and not to commercial banks. Because of this requirement, the use of client-bankelectronic systems to process paymentsbecomes impossible,which results in reduced efficiency and extra charges to the bank for the verificationprocess. Furthermore, such a control by commercialbanks cannot be efficientfrom the view of public procurement as it providesfor a formal check of the availability o fa certainset of documentswithout analyzingthe contents. It is recommended that all references to the obligations of commercial banks to perform control functions under the PPL be removed. The Government providedthe Bank with the latest information on the status of the Interagency Commissionon public procurementfollowing the December2006 amendment In accordance with Article 3-3 of the PPL, the Commission operates under the AMC. The Commissionmembers include:one representative each o f the Accounting Chamber, Department o f Audit and Review (KRU), State Treasury, AMC, MoE; three representatives from the parliamentary committee dealing with public procurement market issues, and three representativesof the Tender Chamber.Thus, 11 members of the Commissionare appointed. The Commissionis a public collective body and is vestedwith powers that are set out inthe Statute o f the Interagency Commission on Public Procurement, approved by Resolution # O M rsh o f 03.21.2007 and is postedonthe site ofthe AMC o f Ukraine(www.amc.gov.ua). The Commissionhas a series o f responsibilities, the major ones being: examination of protests concerning tender violations on the part of the procuring entity; issuing o f conclusions to the procuring entity as to the application of restricted tendering and single-source procurement procedures. The scope of the Commission's authority (concerning the binding nature o f decisions) applies to public authorities, and decisions and opinions issued within itsjurisdiction are mandatory for execution by procuring agencies, bidders and other entities whom they concern. Decisions or opinions that are placed before the Commission are approved by a Commissionmeetingafter discussion, the Commissionmembers enjoyingan equal vote in taking decisions (each member has one vote). Only Commissionmembers, or persons substitutingthem on a temporary basis, may vote. The meetings are consideredvalid when at leasttwo thirds of the membersare in attendance(8 persons.) 7 Ukraine CPAR 2006 Country Procurement Assessment Report 2006 1.INTRODUCTION Background 1. Countriesspend between5 to 15 percent of their GDP on procurement.Efficiency in public procurement achieves substantial savings in public expenditure. Public procurement assessments are a regular feature o f World Bank technical assistance to member countries, including Ukraine. Country procurement assessments often support public procurement reform, includinglegislationandregulationsand institutionalstrengthening. 2. Ukraine enacted a comprehensive Public Procurement Law (PPL) on February 22, 2000. The first World Bank Country Procurement Assessment Report (CPAR) for Ukraine finalized in November 2001 included an action plan for improvingsystemic efficiency o f public procurement. Since the 2001 CPAR, the country has undergone numerous political and economic changes with natural concurrent evolution of the public procurement system. In light of these changes, the Government and the World Bankjointly undertook the present review of the legal and regulatory framework for procurement, institutional capacities, actual practice, and the integrity of the system as a whole. This assessment was undertaken with a view toward further improvements. Methodology 3. The World Bank team and the Government worked closely in carrying out this assessment. The Bank's counterpart team comprised senior staff o f the Department for Coordinationof State Procurement (DCSP), also known as the Authorized Agency (AA) in the Ministry of Economy (MoE). In addition to in-depth review of all procurement-related legislation, laws, and regulations,thejoint team intervieweda wide spectrum of procuringentity representatives and other interested parties.This includedministries, committees, municipalities, state-owned enterprises, manufacturers, suppliers, contractors, and representatives from civil society.The World Bank team held separate workshops on the assessment for procuringentities andthe privatesector. Interviewsand wide-rangingdiscussions provideda broadview of how the system works. Initially, case studies were planned for a select group of procurement items. However, with the abolition o f the DCSP in the Ministry of Economy, the Bank team was not able to obtainthe necessary data for the case studies. 4. The findings and recommendations contained in this report are derived from analyses of procurementand related legislation, as well as informationfrom the interviews and workshops. The report adopts the format o fthe OECD/DAC3pillarsfor public procurement, which are based on well-accepted international procurement practices. The CPAR team also collaborated closely with the World Bank Public Financial Management (PFM) team, which preparedthe UkrainePublicFinancialManagementReport (PFM). DACGuidelinesand ReferenceSeries-Harmonizing DonorPractices for EffectiveAid Delivery (Volume3). "StrengtheningProcurementCapacities inDevelopingCountries," OECDDACRoundtable on Procurement.Paperpresentedat the ParisHigh-LevelForumon Aid Effectiveness, February2005. 8 Ukraine CPAR 2006 Cooperation among donors 5. 'The World Bank and Sigma, a joint OECD-EU initiative4, reviewed the public procurement system of Ukraine in parallel. Findings and drafts were regularly shared. Although the reports differ slightly in emphases and detail, the main conclusions and recommendations are consistent. In addition, the Bank team met with major donors in Ukraine before undertaking the assessment. These included the U.K. Department for International Development (DFLD), the Swedish Development Cooperation Agency (Sida), the EU Commission, UNDP, and USAID. These donors were debriefed on findings and preliminary recommendations. Public procurement inUkraine before and after the 2004-05 amendments 6. Before the amendments of November 2004, June and December 2005, the PPL and the organization o f procurement in Ukraine was broadly consistent with international practice (see Annex 3). Procuringentities were essentially responsible for their own procurement. As the AuthorizedAgency (locatedwithin the Ministry ofEconomy), the Department o fCoordinationof State Procurement (DCSP) providedsupport to these entities and was responsible for trainingand bid complaint resolution. This system was moving steadily towards meeting international standards for procurement. 7. Following the amendments (See Annex 4), certain public procurement functions were assigned to an NGO, the Tender Chamber (TC). The TC was granted authority to publishtenders and contract award notices; to play a major role in bid complaint resolution;and to approve the use of single-source and restrictedtendering.These amendmentsdistributedpublic procurement authority among several government and nongovernmentalbodies. The result was fragmentationof public procurementauthority.The amendment o fDecember 15,2005, came into effect on March 17, 2006, leading to the transfer o f the Authorizing Agency's functions from DCSP to the Antimonopoly Committee (AMC) and to other government bodies. As a result, DCSP's expertise, acquiredthroughhardyears of experience, was lost. Implementation status of the 2001 CPAR Action Plan 8. The 2001 World Bank CPAR provided input to the government on the strengths and weaknesses of the system. It included an action plan for improvement, including strengthening institutional arrangements; improving DCSP oversight, monitoring, and support roles; improving procedures and practices; empowering procuring entities through capacity building; and enhancing accountabilityof public servants. 9. Since the passage of the Public Procurement Law in 2000, Parliament has adopted nine amendments. The first major amendment in 2001 implemented World Bank recommendations in some areas. The next four amendments were the result of a compliance process related to changes initiated by other pieces o f legislation; and one amendment added preferencesto domestic agriculturalproducers. The final three amendments led to the transfer of significant public procurement functions-normally the domain o f government- to the private sector. The four "positive" amendments included:(a)changes inthe PPL to facilitate publication of biddingopportunities and contract awards in a procurement bulletin; (b)extension of limits on Sigma is principally financedby the EU.This particular work was financedby the U.K.Departmentfor InternationalDevelopment(DFID) andthe SwedishInternationalDevelopmentCooperationAuthority (Sida). 9 Ukraine CPAR 2006 contracts without competition for works by 50 percent of the initial contract value, subject to approval by the AA; (c) deletion of Article 35 of the PPL, which specified that an entity reimburse a contractor for "unreceived" revenues ifa procuringentity terminates its contract; and (6)provisionsenablingmultiyearcontracts for procurementof works. 10. Most recommendationson procurementcapacitybuildingwere implemented.These includeddevelopment of training institutions;trainingtrainers at the nationallevel; development ofmaterials;andtrainingat all levels for procuringentities. 11. Several recommendations of the 2001 CPAR Action Plan were not implementedas of mid 2006. These include loweringof thresholds, which restrictparticipationof foreign firms in competition; establishment of an independent public procurement agency under the Cabinet of Ministers; and strengthening of the DCSP. Proceduresfor selectingconsultingservices yet to be specified in the PPL. Standard bidding documents are still not mandated. Regulations for blacklistingcompanies engaged in corrupt practices have not been drafted. License and permit registrationis still a conditiono f bidding, not a conditionofcontract award. Organizationof this report 12. The analysis and main findings of this report are presented as follows: Section 2 analyzes the legislative and regulatory framework o f late 2005 through this writing in 2006. Section 3 analyzes institutional framework and management capacity. Section 4 covers procurement operations, including functionality of the public procurement market, contract administration, and provisions for dispute resolution. The report then discusses integrity and transparency o f the system (Section 5), e-procurement (Section 6), public procurement contract performance (Section 7), and gradual harmonization with the EU directives and eventual accession to the WTO (Section 8). Section 9 presents risk analysis and the 2006 action plan. Recommendations in respective sections o f the report are highlighted with bulletedarrows ( ). Key recommendations are summarized in Section 9 and repeatedin the executive summary. The four annexes provide more detailed information-the detailed implementation plan (Annex l), performance indicators in accordance with OECDDAC "pillars" (Annex 2), graphic representation of the organizationo f procurement beforethe 2005 amendments (Annex 3), and a graphic representationofthe organizationof procurementafter the 2005 amendments (Annex4). 10 Ukraine CPAR 2006 2. LEGISLATIVEAND REGULATORY FRAMEWORK Issuesin the current legislativeframework 13. Until November 2004, Ukraine had a reasonably good Public ProcurementLaw in general conformity to internationally accepted good practices. However, three major amendments-drafted by parliamentary committees and passed by Parliament in 2004 and 2005-introduced fundamental changes. The amendment of November 18, 2004, altered the responsibilities of the AA in several ways, and introduced the concept of using paid consultancy services for public procurement.The amendment of June 16, 2005, transferredfunctions normally exercised by a state body to an NGO called the Tender Chamber of Ukraine. The amendment (passed on December 15, 2005; in effect March 17, 2006) included provisions for public procurement organization, oversight, and control that are unusual, ambiguous, and inconsistent with internationally accepted practice. Furthermore, the legislative process excluded stakeholder discussion and participation, including the then Authorized Agency. 14. The new provisions benefittwo groups.First, those who createdand operate the Tender Chamber, now exercise undue power over the public procurement process. Second, other private sector entities have profited at public expense through their ties to the Chamber. Issues underthe November2004 amendmentof the PPL 15. The November2004 amendment relievedthe AA of its responsibilities for providing consultancy and methodological support, standard bidding documents, and other informationto entities involved in public procurement.The amendment mandated the use of "certified" information technology systems for publishing tender notices (even though no such IT systems were in place at the time), and payment for tender documents. Finally, "experts" were authorizedto assist in bid evaluation, subjectto contracts (with implied payment of fees). Issuesunderthe June2005 amendmentof the PPL 16. Established under the law governing public control of public procurement, the Tender Chamber is described as a "nonprofit union of public organizations operating in compliance with operative Ukrainian legislation." The meaningof this description has defied clarification. Despite repeated efforts, the Bank team could not obtain a list of TC members or copy of the statutes that regulate the TC decision-making mechanisms [Article 17(4) of the PPL]. The June 2005 amendment endowed the TC with three governmental functions (discussed below). Although its Supervisory ' Council includes a number of parliamentarians and representativesof public bodies, the council is a mere "advisory body" [Article 17(4) and 17(6) of the PPL]. Its members serve "on a voluntary basis" (Article 17.4 and 17.5). An arrangement of this sort might arguably be acceptablewere TC a "common NGO" dealing with typical mattersof NGO concern. Butthis is not the case. TC is operatingas a policymaking body. It has operational authority for public procurement, yet it is outside public supervisionor control. 17. The first function assigned to the TC is restricted tendering and single-source procurement.Ifprocuring entities were left to their own discretion, many would probably opt for the least competitive procurement method-and that is precisely why they are guided by procurement laws. In letter of law, the PPL requires AA approval to bypass or limit competition. TC management says that it does so. However, its "right" to make exceptions was made explicit in a letter from the Treasury to its regional offices on August 12, 2005, as well as in a TC 11 UkraineCPAR 2006 document, "Conclusion" (August 15, 2005), which is essentially a commentary on the June 2005 amendment. 18. The second public function assigned to the TC is the right to control publicationof the official procurement bulletin. Under the June 2005 amendment to the PPL, a procuring entity must publish an announcement in either the Procurement Herald (published by the State Owned Enterprise createdby the MoE) or the informationbulletinpublishedby the TC. This is to be done before carrying out "the procurement procedure" (which otherwise implies open tendering). This needlessly increases the costs for bidders, because the only way to know about all bidding opportunities would be to subscribe to both publications. (Further changes would occur becauseo fthe December2005 amendment, as discussedbelow). 19. The third function usually belonging to the AA is the right to issue "opinions" regarding complaints by aggrieved bidders. Although these opinions were technically nonbindingon the AA (which retainedthe prerogativeof makinga decision), the PPL provision created ambiguity. Even if the Tender Chamber "opinion" is said to be merely advisory, a favorable recommendation is sufficient for a bidderto appeal a negative ruling by the AA. The court often sides with arguments based on the TC view. The opinion of an NGO not apparently subjectto public oversighteffectivelyoverturns the decisions by the publicbody. Recommendation Articles 17.1 through 17.5-as well as any other references to the Tender Chamber and its powers and responsibilitiesunder Ukraine's February 22, 2000 Law on Procurement o f Goods, Works, and Services for Public Funds (as amendedon June 16 and December 15,2005)-should be deleted without substitution. Essentially,the notionofpublic procurement is incompatiblewith the allocation of core government functions to a private sector entity not accountable to the public. The provisions of Article 37-now unclear at best-will become even less clear once all referenceto the TC is deleted. Therefore, the article will needto be redrafted. Issuesunderthe December2005 amendment of the PPL 20. Parliamentamended the PPL again on December 15,2005. This createdunusual new rules for organizing, overseeing, and controllingpublic procurement. These rules do not enhance transparency or a sound institutionalarrangement,nor are they consistent with generallyaccepted norms for separation of powers within democratic governments. With several senior Ukrainian lawyers expressing concerns over the constitutional implications, the president vetoed the amendment on January 13, 2006. The parliament, however, overrode that veto on February 21, 2006. The president then signed the amendment on March 10, 2006, and it came into force upon publicationon March 17,2006. 21. Several features of the December 2005 amendment adversely affected the institutionalintegrityand transparencyof public procurement.These are as follows: 0 The amendment abolished the AA functions exercised by the MoE Department of Coordinationof State Procurement (DCSP) with no transitionperiod. Some but not all of DCSP's public procurement responsibilities were transferred to the Antimonopoly Committee (AMC), which was set up for another purposeunder another law and has little experience with procurement. With one or two possible European exceptions, no country has placed an agency such as the AMC in charge of public procurement, and with such limited powers. Executive functions do not usually fall within the competence of a 12 UkraineCPAR2006 competition policy agency, and furthermore become less effective because of fragmentation. Parliament has assumed control of state supervision of public procurement. A fundamental conflict is created by granting responsibilities that normally belong to the executive to the legislative branch. The Special Control Commission (SCC) on Public Procurement Issues establishedunder the Accounting Chamber (AC) to oversee the public procurement function has created a conflict of interest. This is inconsistent with the international practice in which a body such as the supreme auditing institution provides independent oversight of the state budgetand is therefore not involved inbudget execution. e As noted, the June amendment sets up a secondprocurementperiodical under the Tender Chamber. This amendment no longer cites the original publication circulated by the AA (via the MoE Joint Stock Company), making the TC information bulletin in effect the sole mandatory publication. A new "specialized publication" (presumably produced by the private sector) may be potentially authorized, with the proviso that all announcements must be published in both publications. This raises the question of which version would prevail were textual discrepancies to appear simultaneously. This is important because certain deadlines begin on the publication date. It is, therefore, not surprising that the TC has already issued its "conclusion" that its publication is mandatory. Single-source and restricted tendering permission can be obtained either from the AMC or from the TC. However, most procuring entities are likely to seek this permission from the TC, which has the authority to grant it on its own, rather than from the AMC, which must first receive the SCC approval. The mechanism for bid dispute resolution is unclear. Bidders or third parties lodge protests with the TC and the procuring entity or the SCC. The latter takes a decision "with due regard to the TC's opinion." Interms o f the legislation, it is not clear whether the opinion is binding or merely advisory. This situation is further aggravated by two unclear, conflicting provisions on court appeals over administrative decisions. e Article 17-3 (12) states that "the activity of the Tender Chamber of Ukraine, as well as the results of such activity including conclusions and other documents of the Tender Chamber of Ukraine, may be appealed only byjudicial procedure in compliance with the Law." This represents a far-reaching change. It implies that conclusions and opinions of the TC are binding unless otherwise challenged through a judicial procedure. In other words, TC can make "administrative decisions" without being held accountable under the Administrative Law or Code. Application of the law to all state-ownedenterprises (where the state's share exceeds 50 percent) is inconsistent with the broader principle that SOEs operate by the rules of normal commercial practice. The introductionof additional domestic preferences, both implicit and explicit, could well affect Ukraine's membership of the GPA arising from its commitments inthe WTO. The law places additional responsibilitieson other bodies under Articles 3-2 and 17 (Part 2). However, the enabling legislationof these bodies, which otherwise governs their roles and responsibilities, has not been amended. This places them in an unclear situation regarding their own activities. 13 UkraineCPAR 2006 Recommendations > The December 2005 amendment of the PPL contains provisions conducive to inefficiencies in public expenditure. These provisions need to be reconsidered. > Since the 2004 and 2005 amendments substantially changed the PPL, preparation of a new draft PPL would help procuring entities to comply more effectively with their legal obligations. It would also allow considerationo f recommendationsof the 2001 CPAR as well as those of other international donors. 14 Ukraine CPAR 2006 3. INSTITUTIONALFRAMEWORK AND MANAGEMENT CAPACITY Institutional organization of public procurement as of March 2006 22. Before its abolition, the public procurement functions assigned to the Department of Coordination of State Procurement (DCSP) were considered appropriate for a government agency, and generally consistent with international practice. The DCSP issued bylaws, provided methodological guidance and support to procuring entities, approved noncompetitive exemptions, published a public procurement bulletin, and resolved bid complaints. The economic departmentsinoblast administrations carried out some ancillary procurement functions. The state treasury was responsible for reviewing bid evaluation reports to ensure that these provided correct and complete information before it made contractual payments. The State Statistics Committee collectedand processedpublic procurement information. 23. The three amendments described in the previous section have had the following effect: TC has become integral to the public procurementframework. The transformation of the institutional and organizational structureof public procurement (see Annex 3 and Annex 4) has fragmentedthe public procurement authority. 0 The private sector has taken over certain public functions that usually belong to the government. 24. Following the December 2005 amendment, DCSP functions were fragmented. In descendingorder of authority and influence, they were reassignedto the following entities: The Tender Chamber (an NGO) 0 The SpecialControl Commission (SCC) under the Accounting Chamber 0 The Accounting Chamber (AC) 0 Parliament(responsible also for overall supervision) 0 The Antimonopoly Committee (AMC) 0 Centralexecutive bodies, including the Cabinet of Ministers See Annex 4 for a schematic diagram showing the relationship of entities following the amendment of 2005. 25. The Antimonopoly Committee is now the nominal Authorized Agency, but its functions are limited to providing general oversight and writing reports. The AMC can authorize restrictedtendering and single-source procurementonly after the SCC or TC has signed off. The AMC role inhandling complaints has beenreducedto recording results. 26. TC appears to have taken over the key functions of the DCSP. TC can authorize restricted tendering and single-source procurement, publish a procurement bulletin, and issue opinions on disputes by aggrieved bidders. It develops methodological materials for procuring entities, proposes improvements to legislation, provides guidance on application of procedures, and issues opinions and conclusions on public procurement. 27. The PPL defines TC as a nonprofit association of NGOs that is prohibited from charging fees for services. Officially, TC's goals are to promote a transparent and efficient 15 Ukraine CPAR 2006 public procurement system. However, the representatives of TC member associations told the Bank teamthat their objective is to promotethe business interest of their membership.TC hasyet to make public a list o f its member NGOs. TC management has a close relationship with consultingfirms providingpublic procurementservices and with the only company that can serve as an Internet outlet for mandatory procurement announcements. Such relationships undermine the transparency and integrityof an "open" system. 28. The SCC is a collective body. It consists of three TC representatives, three parliamentaryrepresentatives, one representative from the Accounting Chamber (AC), one from the State Treasury, and one from the Departmentof Audit and Review. Since the Special Control Commissionon Public Procurement is under the AccountingChamber, the AC is simultaneously supervisingand executingthe state budget, which creates a conflict of interest. Other countries assignthese oversightprocurementfunctionsto a single governmentbody such as a ministryor to an independent publicprocurementagency. 29. Several state authorities supervise public procurement. These includethe Cabinet o f Ministers,the State Treasury, the State Statistics Committee, the Ministry o f AgrarianPolicy, and law enforcementauthorities. Parliamentis responsiblefor controllingAA activities. 30. The distribution of public procurement functions among TC, SCC, and AMC has created conflicts of interest. The public responsibility o f TC and its role to protect the commercial interests of its members cannot allow it to promotetransparency and fairness in the procurementprocess.The AC's responsibilityas the supreme auditor ofthe country conflictswith its new role in budget execution processes. Moreover, the parliament's hands-on involvement in the work of the executive branch contradicts the principle of separation of powers, as stated in Article 6 ofthe Constitution. Recommendation 9 Furtherto the recommendations inSection2, the Governmentshould immediatelyrevisit the institutionalarrangement for public procurement with a view to eliminatingconflicts of interest. In this regard, the institutional arrangements in several new EU member countries-for example, Estonia, Hungary, and Poland, as shown in Box l - c a n serve as good examples. 16 Ukraine CPAR 2006 Box 1.Organization of Public Procurement in Estonia, Hungary, and Poland Estonia The Public ProcurementOffice (PPO), established in March 1996, is responsiblefor all public purchasing. Since the end of 2002, PPO has been a separate governmental agencythat answers directly to the Ministry of Finance(MoF). The director generalof the office is nominated (and may be dismissed) by the minister of finance. The PPO's responsibilities are to assess system operations and prepareproposalsto improve performance; implement and maintain information systems for purchasing (a public procurement register); cooperatewith other countries through provisionof data, includingto international organizations carrying out international agreements; advise contractors and operators on procedures; review complaints by bidders; supervise public procurement procedures; terminate contracts in violation of rules and regulations; initiate disciplinary proceedingsagainst persons or public officials responsiblefor breaches inthe flaw; and levy fines against contracting entities for serious violations. The PPO has two departments,each composedoftwo divisions: the Information Department (Analysis Division and Register Division) andthe ManagementDepartment (Management Division and Supervision Division). The Analysis Division preparesresearchand evaluation studies and is responsiblefor overall monitoring of the procurement system.The Register Division is responsible for maintaining an electronic record of procurements-entering data, checkingthe accuracy of information, and so forth. The Management Division is responsiblefor reviewing complaints submitted to the PPO. The Supervision Division monitors the contracting authorities for compliance with procurement rules. This is a new task, added last September. Hungary The Public Procurement Council (PPC), established in 1995, reports directly to Parliament. It has independent managementand serves as a central budgetary body. The PPC comprisesthe Council, the Arbitration Committee, and a Secretariat. The council has a president.Council seats are apportioned equally amongthree groups with six members each-those representingthe public interest, procuringentities, and bidders. The Public ProcurementAct establishesthe framework of organizations eligible for appointing membersto the council. Members are appointed for at least two-year terms. They receive no salary. The council elects its president for a five-year term, with reelection possible to a second term. The council elects a vice president from its ranks for a two-year term of service. The council has an administrative arm to carry out its duties-the Secretariat of the Council for Public Procurement. The secretariat is headedby a secretarygeneral. Staffmembersare civil servantsunder the council. The PPC's role is spelled out in Article 15 ofthe Public ProcurementAct-to initiate amendments;express opinions on draft legislation on public purchasingmonitor and enforce the Act and and council activities; recommend steps to better execute implementation rules; monitor contract performance for compliance with the Act and define qualification criteria; be presentat the opening of tenders when the contracting authority has been subsidized from the central budget; determine the number of members on the Arbitration Committee, appoint and relieve its chair and commissioners;judge conflicts of interest involving public procurement commissioners; publish a public procurement bulletin, including announcements, resolutions of the Arbitration Committee, recommendationsfor following relevant purchasing rules, and any other notice about public procurement; promote education and training for personnel involved in procurement procedures; maintain relationships with foreign public procurement bodies and international organizations; approve its own internal regulations and prepare its annual budget report; maintain records on public procurement purchases, includingthe annual volume of public procurement procedures and prices paid; and carry out tasks specified in other pieces of legislation. Poland The Public ProcurementOffice (PPO) of Poland was created on January 1, 1995, following adoption of the Public ProcurementAct on June 10, 1994, based on a model of central offices in the Polish administration. The PPO plays a policymakingand coordinating role for the entire public procurement system. It is an independent unit within the government. The presidentof PPO is appointed for five years by Poland's prime minister, who chooses from a field selected in an open competition. A number of external bodies supplementsPPO procurement oversight and support activities. The most crucial of these are the Council for Public Procurement,arbiters, and observers. The Council for Public Procurement is a consultative and advisory body to the PPO president, who appoints its members. The key duties of PPO are to publish the official Public Procurement Bulletinin which contract notices (of value above thresholds defined in the Public ProcurementLaw) are published; to prepare legislative drafts for public procurement; to issue administrative rulings for requests to use a procedureother than open tendering or restricted tendering; to arrange appealproceedingsunder the Public Procurement Law; to check the regularity of conducted procedures; and to prepare public procurementtraining programs and organize and promote training sessions. Source: Sigma reports, June 2003. 17 UkraineCPAR2006 Acceleratedtransfer of public procurementfunctionsto privatesector 31. Following the aforementioned amendments to the PPL several private sector entities with linksto each other have assumeddominance in publicprocurement.The Center for Tender Procedure and Business Planning, nominally an NGO, is a founding entity o f the Tender Chamber and officially holds patents and copyrightsfor numerous biddingdocuments and methodologies. A registered business, the Center for Tender Procedures, is heavily involved in "advising" entities and bidders on public procurement through a network of consultants. Registrationdocuments indicate that these same officials are or were among the founders and directors o f the Tender Chamber, the Center for Tender Procedure and Business Planning (the NGO), the Center for Tender Procedures (the business), the European Consulting Agency (consultants), and other related entities. Private sector representatives in a seminar for this assessment complained about the manner in which these private sector entities were adversely affectingthe open and fair conduct of publicprocurement. 32. In 2003-04, CTP and its related NGO managed to obtain "patents" and "copyrights" for several standard bidding documents and procurement manuals. This is most irregular, since nearly every other country uses a government agency to disseminate such materials free of charge. This service is normally considered a support function to procuring entities. Indeed, a closer look at the CTP-copyrighted bidding documents shows that they are nearly identicalto the World Bank's standardbiddingdocuments-in fact, some sections seem to be direct translations. 33. With help from several high officials, CTP has apparently forced procuringentities to use its copyrighted documents for a fee. The Bank team obtained copies o f at least four letters to this effect, as well as copies o f contracts with CTP and its associatesshowingthe terms under which procurement procedures are administered. In most instances, CTP consultants help carry out the operations. CTP reportedlythreatens lawsuits ifprocuringentities make use of these standardbiddingdocuments without paying. 34. CTP or associated consultants reportedly tell potential bidders that they must use the Center's services in order to participate in tenders. Bidderswho agree to use the Center's services are billed for "legal assistance" that is not provided. In addition to paying for the copyrighted bidding documents, a successful bidder must pay the CTP a percentage of the eventual contract price. These costs add up and are passed on by bidders to the purchaser, Le., the government in this case, resultingin inefficient use o f public funds. Contractors' need for a bidsecurity-a promissorycredit backedby a liquid mortgageto the purchaser-has also become a point of leverage. When the CTP administers the bidding process for a procuring entity, it makes it difficult for a bidder to obtain a bid security from its own bank by insisting on documentationthat most lendinginstitutionsare unlikelyto release.It appearsthat contractors are then obligedto buy the needed `security' from the TK-Credit Bank, which issues unenforceable "notes" not backedby assets. 35. Biddersseeking relief from questionable procurementpractices are unlikely to find help in the new electronic filing system. Internet publication of notices is now mandatory (Article 4-1). ECA (a company associated with the CTP) owns a website where such information is posted. Procuringentities are required to sign a contract for a range of services in order to publish notices "free of charge" through a "certified" Internet system. This requirement has helpedto stall the public procurement system, because very few entities have the necessary funds to publishsuch notices. 18 Ukraine CPAR2006 36. Certain provisions in the amended PPL support these practices. Corresponding costs (without additional funds) are thus levied on procuring entities if they wish to conduct public procurement in accordance with the law. The agencies must choose between conducting procurementoutsidethe law, or not conductingprocurementat all. Recommendations 9 The takeover of public procurement by private sector interests needs to be promptly reversed. 9 Recent actions by the AMC to redress the monopolistic practices of ECA are commendable; however, the AMC needs to examine whether any other private sector entitiesare limiting competitioninpublicprocurement. 9 Procuringagencies should not use consultant companies as intermediaries.They should not promote standard procurement documents offered by commercial companies, or by entitiesaffiliated,associated, or otherwise connectedwith such companies. 9 The AA should prepare a set of frequently used standard bidding documents. These should be made available on the web free o f charge. Procuring entities should be requiredto usethese documents. 9 IfcopyrightedCTP biddingdocuments, forms and manuals are identicalto World Bank standardbiddingdocuments or to documents otherwise available inthe public domain, all associatedcopyrightsor patents in CTP's name shouldbe voided. Recent events suggest that some of the more egregious aspects of institutional structure are starting to be addressed. First, individualshaving relations with business entities (as discussed above) left the board of TC at the most recent Annual Congress of the Tender Chamber. The board of the Tender Chamber now consists only o f members o f parliament. Nevertheless, the activities o f a nominally independent NGO are still being watched over by members o f the parliament who voted to introduce this "NGO" into the public procurement system in the first place. In September 2006, the prime minister authorized and entrusted the Council o f Ministers with improvingthe public procurement system. The deputy prime minister announced that the Cabinet has agreedto a draft law on public procurementand that this draft "destroys the absolute power o fthe Tender Chamber and opaque system created by enterprisingmembers of Parliament ofthe previousconvocation." The Speaker signedan instruction(September 29,2006) to create a workinggroup to draft a Public ProcurementLaw involvingall parties interestedinthis process. Mainstreaming and integrating procurement into governance 37. Procurement planning and cost estimates are integral to budget formulation and execution.According to the Budget Code, Ukraine's budgetary system consists o f a state budget annually approved by Parliament (and updated periodically during the fiscal year) and local budgets approved annually by elected local governments. Spending units, or procurement entities, develop cost estimates for the goods, works, and services required during the coming fiscal year. Budget decisionmakers then use these projectionsto set priorities and decide on the distributionofpublic funds among spendingunits. 38. There are two types of spending units: main and lower level. A main spending unit develops an activities plan and cost projectionsfor implementation.Based on these estimates, the spending unit then submits a request for financing to the Ministry of Finance (for preparingthe central budget) or to a local financial body (for preparing local budgets). A main spending unit then receives allocations from state/local budgets approved by the respective legislative authorities.The spending unit allocates funds to meet its own requirements and those o f lower- 19 Ukraine CPAR2006 level spending units. These allocationsare based on the original activities plan.They are revised accordingto the availability o f funds. Recent amendments (2005) to the PPL have strengthened this process, requiringall spending unitsto publishan annual procurementplanwithin a monthof budget approval. 39. Public works often require multiyear procurement planning.Expenditures for goods and services are normally planned for one budget year (a calendar year), except for special government programs. This strengthens the process because procurement planningwas typically limitedto a list of contracts and estimatedbudgets.Ingeneral, little or no considerationwas given to timing, contract packaging, procurement methods, or even scheduling and interdependence between procurement actions. In order to address this problem, it will be necessary to make changes to several major regulatorydocuments governingthe budgetsystem o fUkraine. 40. Despite agreement on an annual budget and improved predictability of disbursements, gaps remain in the system.Numerous interviewsreiteratedthat releaseof funds to meet contractual obligations is still irregular. Consequently, payments for goods, works, and services are frequently delayed, suggestingthat problems with procurementplanningdiscussed in the 2001 CPARare ongoing. 41. Observations also show that spendingunitssometimesdo not receive funds until the end of the financial year in November-December. The funds must then be disbursed quickly, which strains adherenceto procedures. Choices in procurementmethod are limitedbecause of the insufficient time for open tendering. If more restrictedprocedures are not approved (shortage of time beingthe weakjustification), financialresources go unused. 42. The links between procurement planning, budget planning, allocation, and the release of funds needs strengthening. Current practices require line ministries and other procuringentitiesto submit budgetestimates andprocurementschedules inAugustlSeptember for the coming fiscal year's goods, works, and services. Detailed planning and procurement begins only after the parliament approves the national budget, in December at the earliest. Despite the perceived planning exercise performed earlier, tight revenue streams and frequently shifting priorities make it impossibleto release monthly procurement allocations in full or on time. The result is delays in the procurement schedule-and the situation referred to in the preceding paragraph. Recommendation > The government should consider a rolling three-year budget allocation plan in which the following year's allocation is approved in October/November and some tentative funds are availablefor an additionaltwo years. Procurementcouldthen be undertakenfor long- term contracts, particularly for civil works. In addition, bid invitations should cite a specific budgeted fund commitment. This would enable prospective contractors to identify the fundingsource and the relevant line-itemappropriation,thereby encouraging competition. Developing capacity within procuringinstitutions 43. The public procurementsystem is fully decentralized,and procuring entities at all governmentallevelsare responsiblefor managingexpenditures in compliancewith the law. Each procuringentity creates a tender committee of at least five members, includinga secretary. While the entity can have more than one tender committee, depending on its business needs, a single permanent tender committee of five or more members is the norm, As a rule, the head of the committee is the first deputy chief o f the procuringentity, and the other members are from 20 Ukraine CPAR 2006 legal, economic, financial, and logistics departments. The secretary o f the committee is usually from either the logistics or the finance department. Externalexperts and consultants can be used to help with sophisticated or highly specialized procurement. Each member of the tender committee is supposed to receive a two-week training course within six months of joining the committee. 44. Although nearly every large procuring entity has a logistics department, the department's role is largely limited to assigning a single representative to the tender committee. Staff assignedto tender committees performthose functions in additionto their usual duties. During interviews with private sector representatives, the Bank team was told that the existence of permanent tender committees creates the potential for collusion, corruption, illicit alliances, and conflict of interest, althoughthis was not highlightedas something that commonly materializes. Recommendations 9 Sizable procuringentities (such as ministries,municipalities, oblast administrations,and so forth) should be encouraged to reorganize their activities to develop internal procurement management capacity. This could be achieved by assigning procurement responsibility to an entity's administrative, logistical, or financial departments. The department would establish tender committees (see below), prepare procurement documents, obtain contract signature(s), and supervise implementation in cooperation with end-user departments. The department carrying out this responsibility should be staffedwith qualifiedcertifiedpersonnel. 9 Forevery procurementaction, anadhoctender committee ofupto five members(each of whom would receive mandatory training) shouldbe set up. This committee would consist o f a procurement officer, a technical specialist/engineer from the relevant discipline, a finance/economics/accounting specialist, and a representative from the end user's department. Some membersof eachcommitteewould change from one tender to another, dependingon the subject matter. 45. Fifteen institutions have licenses from the Ministry of Education for procurement training, as well as a curriculum and a list of instructors approved by the Ministry of Economy. In practice, four institutions have provided most o f the training, which has been limitedto tender committees. Six ofthe 15 certified institutionsare inKiev, and nine are inother cities. These are affiliated with either well-known universities or regional training centers for public servants and state enterprises. Trainees receive certificates and provide feedback to the ministry on course quality. Completion of the two-week regimen has grown from 86 public officials in 2002 to 3,456 in 2003, and 5,489 in 2004. Ukraine is among the few countries to introduce accreditation and certification o f trainers, but these measures are inadequate. More procurement training opportunities must be created to meet the needs of approximately 80,000 procuringentitiesnationwide,excludingstate-ownedenterprises. 46. Short briefings and seminars on PPL requirements should be offered regularly to contractors, suppliers, and consulting firms. This would help to ensure complete and responsive bidding. With greater efficiency, fewer bids would be rejected. This would also limit public officials' discretioninawardingcontracts to incompleteand nonresponsivebids. Few such interactionshavetaken place betweenthe AA and bidders. Recommendations 9 An analysis of training needs should be conducted, with basic, intermediate, and advancedcoursesto be provided. 21 Ukraine CPAR 2006 > The capacity of institutions previously accredited by the Ministry o f Economy and the Ministry o f Education should be reviewed. Additional public and private sector institutions should be accredited. Train-the-trainer courses are also needed for accredited institutions. > Short informationand training workshops should be heldfor potentialcontractors.These would cover the availability of contract opportunities,the biddingprocess, procurement legislation, and new regulations. Training would be provided on the preparation of responsive bids. 47. Systems and procedures for collecting and monitoring national procurement statistics need to be strengthened. The State Statistics Committee collects and processes procurement data from StatisticalFormNo. 1 "Tenders." Procuringentities are obligedto fillout the form and regularly submit the data and informationto the State Statistics Committee. This process does not provide a full record o f public procurement because it depends on "self reporting." A more streamlined, automatedmonitoringsystemshouldbe established. 22 Ukraine CPAR 2006 4. PROCUREMENT OPERATIONS Overview 48. The legislative regulatoryframework sets the scope of applicationand coverage for procurement. Three laws regulate public procurement in Ukraine: (a) the Law on Public Procurement, enacted on February 22, 2000 (last amended on December 15, 2005 as discussed earlier); (b) the Law on Supply of Products for State Needs, enacted on December 22, 1995 (dealing with government reserve, education, and services); and (c) the Law on Defense Contracts for Government Account (enacted on March 3, 1999) covering security and military purchases. The PPL (as amended in December 15, 2005) applies to all expenditures for goods, works, and services financed fully or partially with public funds whose value equals or exceeds HRV 30,000 (US$6,000), HRV 300,000 (U$60,000) inthe case of works. Enterprises in which the state-owned share exceeds 50 percent (postal services among others) are also subject to the PPL. The PPL does not apply to water, heat, and power supply; waste-water disposal and sewerage system maintenance; postal services such as stamps; procurement of goods, works, and services by customers locatedoutside of Ukraine; telecommunications services, including relay o f radio and television signals (except for mobile telephone and Internet services); railway transportation services; professional training, retraining, and qualification improvement of workers in state-owned technicallvocational education institutions; education of staff by higher education institutions of accreditation levels Ito IV; and procurement of goods, works, or servicesthat are state secrets for some specialreason. Recommendationsfor key elements of public procurement Procurement methods 49. The PPL provides for six internallyaccepted procurementmethods. They are: open tendering, restricted tendering, two-stage tendering, a request for price proposals (quotations), single-sourceassignment, and price reduction (negotiation) with a modified two-stage procedure. The default method is either price reduction or open tendering. The use of the other "restricted" methods is governed by floor thresholds (more than HRV 500,000, approximately US$lOO,OOO) for restricted tendering and more than HRV 30,000 (approximately US$6,000) when for goods and services; and more than HRV 300,000 (approximately US$60,000) for single source (works). Approval is required from either the Authorized Agency or the Tender Chamber. The use of quotations is governed by a ceiling threshold (under HRV 100,000, or approximately us$20,000). 50. In addition to the five PPL procurement procedures discussed in the 2001 CPAR, the June 16 amendment (Article 29-3) introduced a sixth-the Procedure of Price Reduction.This applies to goods or services for contracts above HRV 100,000 (approximately US$20,000) "for which there is a permanent operating market and which are not manufactured, performed, or provided under separatelydesignedspecifications...." Inessence, this provides for a two-stage tender procedure similar to the one described in Article 30 of the PPL, except there will be a public reverse auction at the end of the second stage. This resembles an electronic procedure of reverse auctioning, with a significant difference-that "auctioning" is public and bidder anonymity is not preserved. 23 Ukraine CPAR 2006 Recommendation P The procedure of price reduction may result in higher prices and encourage collusion among bidders. Knowingthat a reverse auction will eventuallyforce reductionof prices, bidders typically quote inflated prices. This method should be substantially revised to ensure bidderanonymity. Rulesonparticipation and qualitativeselection 51. Some PPL provisions imply nondiscrimination in treatment of bidders (for example, Article 5). However, others provide explicitly for domestic preference-particularly for agricultural produce, for which domestic producers only are eligible-and for protection o f enterprises that employ disabled people. In addition, the PPL can require foreign bidders to provide services or perform work with "national raw materials and labor." This is clearly restrictive,and deters participationby foreign competitors. Recommendation P The rules concerningparticipationandfree trade shouldbeclear inthe PPL.(This subject is further discussed insectionsbelow concerningWTO accession.) Advertisingrules and time limits 52. All procurement tenders or prequalification announcements must be advertised. Article 29.1 o f the procurement law requires detailed publication of "tender results" within 10 calendar days o fthe conclusionof contracts. Publicationin Englishis mandatory for procurement above 200,000 for goods, 300,000 for services, and4 millionfor works. 53. Most recent amendments to the PPL require that announcements should bear a code or "ID number" assigned by a certified informationsystem.Although this would appear to be the precursor o f an e-procurement system and for systematizedregistrationo f procurement, the mandatory requirement for an IDnumber should be postponed until parliamentestablishes a full legal framework for introducing e-procurement. The current legal status of a certified information system is unclear since www.zakupivli.com lost its certification. Because a printed bulletincannot be publishedwithout an electronic ID number, many spendingunits simply made up a number. Our understanding is that the control has been tightened and this practice is no longer possible. Recommendation P Although there are clear benefits from each procurement activity having its own identificationnumber, assignment of an ID should be the responsibility o f the AA, not a commercialenterprise. Publication of bidding data 54. The amended PPL provisions (2005) mandate that bidding data and results be published on the Internet. This creates a potentialbottleneckbecause postingis allowedonly on certified or authorized websites. Failure to comply with this requirement can potentially annul a procurement procedure.These provisions may appear sound in principle; however, in light o f the restrictionson acceptable sites, the requirement is misused. It is simply a way to generate income usingthe PPL. Recommendation > Advertising o f tender notices, contract awards, and other procurement data needs to be streamlined. The AA should publisha single, official online and print bulletin in which procuring entities publish their notices. In addition to mandatory use of the official 24 Ukraine CPAR 2006 bulletin, prospective bidders' access to procurement information would improve if procuring entities were allowed to freely publish notices in general-circulation newspapers and on their own websites. Tender documentationand technical specifications 55. The quality of technical specifications in tender documentation is among the weakest elements inthe present system. Although the PPL provides detailed instructions for the content of bidding documents and technical specifications, this part of the PPL was not amended in 2005, No standard bidding documents have been disseminated. Inadequate technical specification is among the most frequently cited causes of contract disputes, suspension, and cancellation of biddingprocedures. Recommendation 9 Provide a guidance note on how to prepare technical specifications and train public officials inpreparingclear, concise technical specifications. Model tender documents 56. In 2001, the Ministry of Economy publishedstandard biddingdocumentsfor goods, works, and services based on the World Bank SBDs. The DCSP prepared standard bidding documents under the PAL DutchGrant and placed these on its website for discussion. However, with the abolition of DCSP, these standard bidding documents were not finalized. As discussed, between 2002 and 2004 individuals associated with the CTP "copyrighted" and imposed documents upon procuring entities through letters and "recommendations" signed by high- ranking government officials. Currently, the Antimonopoly Committee does not have responsibility for mandatingthe use of standardbidding documents. Recommendation 9 In common international practice, public agencies are responsible for preparing and distributing SBDs to procuring entities. Assigning this responsibility to a public agency would improve the efficiency and transparency ofthe procurement system. Tender evaluation and award criteria 57. Evaluation criteria are applied according to the nature of procurement.Price is the only factor for off-the-shelf goods, works, and services. For complex and specialized procurement (including consultant services), factors such as the bidder's experience and qualifications, operatingcost, and the transfer of technology are considered. These "other" factors cannot offset more than 30 percent of the bid, and calculation of a "cost equivalent" is recommended. However, neither PPL nor secondary regulations provide full guidance on the application of criteria or cost substitution. 58. The lowest bid price is normallythe most frequently used contract award criterion. The lowest evaluated bidder is defined as the one whose bid not only complies with technical requirements in bidding documents but also offers the lowest price for the goods, works, and services to be procured. A contract based on lowest price helps procuring entities avoid adverse opinions by internal and external auditors. In addition, selection based on price simplifies the procuring entities' job, because other evaluation factors might require considerably more time and effort. 59. The lowest-price criterion may be acceptable for simple procurement of goods and services, but not necessarily for a complex plant or for equipment in which life-cycle costs 25 Ukraine CPAR 2006 are major factors. Broader evaluation of price factors takes into account, among others, delivery schedules, cost of spare parts, training, and life cycle costs. The law is sufficiently flexible to consider total cost in the evaluationprocess; however, procuring entities often ignore the broader view becausethey lack guidance on performingthe complexcalculations. Recommendation 9 Pricesofonly substantiallyresponsivebids shouldbeconsidered, andthe lowestofthose evaluated bidders should be selected. 9 Evaluationfactors used for determiningthe lowest evaluated bidder must be objective and quantifiable in monetary terms. Specific provisions should be added to the PPL for mandating the disclosure o f evaluation factors in bidding documents along with the methodsto convertnon-priceevaluationcriteriainto monetaryterms. Submission, receipt, and opening of tenders 60. Under open and restricted tenders, the minimum bid submission time should be 45 calendar days. Whenjustified, this may be reducedto 21 days (or 15 for a restrictedprocedure). The two-stage "reduction" procedure provides that the bid submission for the first and second stages should be a minimumo f 21 and 10days respectively,allowingthis procedureto be usedto reduce the total bidding time without resorting to special justification. This can result in inadequate bidder response. In the two-stage procedure, first-stage bidders should be given a minimum o f 30 days. For the second stage, which might include modified technical specifications, the PPL provides for a maximum o f 15 days. This is considered seriously inadequate.The quotationprocedurehas no prescribeddeadline. 61. The PPL has clear provisions covering submission, inadmissibility of late bids, validity of bids, preventionof changes after the deadline, and bid securities. It providesfor a public bid opening on the day the tender proposal is submitted in the presence of bidders. The time lag between the opening and formal bid submission perceived as a weakness subject to potentialabuse. The PPL does provide for electronic postingof the minutes of the bid opening. This would be best practicewere it not for the present cost implications o f usingthe Internet, as discussed above. A few cases were reported in which bidders were prevented from entering government buildingsto participateinpublicbidopenings. Complaints 62. Dispute resolution has undergone significant change from the PPL amendment of June 2005, but at best is inefficient, unclear, and distrusted by bidders (see paragraph 19. The PPL states that a bidder (or anyone else) has the right to appeal a decision, act, or failure to act by the purchaserto the purchaser or the Special Control Commission, or to a court ofjustice. However, the PPL stipulates that the complaint shouldbe filed with the purchaseror SCC, as well as with the Tender Chamber. Receipt of a complaint by the purchaser or SCC suspends the procurement procedure for up to 20 days. The purchaser and the TC are to be notified when a complaint is lodged with the SCC-an apparent redundancy because the complainant is also obligedto initially file with the TC. 63. Delaying the conclusion of a bid procedurefor at least 20 days until a complaint is resolved is quite irregular. Bidders can use this PPL provisionto gain extratime for preparing bids since the subject and nature o f the dispute does not really matter, nor is there any requirement that complaints be substantiated. A complaint serves simply to postpone an inconvenientdeadline. 26 Ukraine CPAR 2006 64. The TC has ten workingdays from the date of the complaintto issue an opinionand then one day to forward it to the SCC. Inthe June 2005 amendment, renderingopinions was addressed as a "right." Under the December 2005 amendment, TC was given the right to render opinions. However, procuring entities and the Special Control Commission are instructed to arrive at their decisions "with due regard for the Tender Chamber's opinion." The TC opinionis nominally nonbinding; however, accordingto Article 17-3 (12) of the PPL, "the activity of the Tender Chamber as well as results of such activity includingconclusionsand other documents ... may be appealed exclusivelyby judicial procedure in compliancewith the law." By implication, this makes a "nonbinding" opinion binding. The Antimonopoly Committee is not given a significantrole inbidcomplaintresolution. 65. A decision on bid complaint can be appealed to a court of law. The appeal must be filed within three days. Copies must be sent to Treasury, AA, the customer, and TC. A copy of the court decision-initiatingproceedings is to be forwardedwithin 20 days. The procuringagency must suspendthe procurementprocedure when this happens. It cannot enter into a contract until a decisionis made by the SCC. This suspension can only be lifted ifa copy o f the court decisionis not forwardedwithin 20 days. 66. In 2004, 405 complaints were lodged with the Ministry of Economy. Only 59 were resolved infavor o fthe complainants. The remainder were rejectedas unsubstantiated.Duringthe first six months o f 2005, 281 complaints were lodged, with 72 resolved in favor of the complainants. No data are available on how well the mechanism has worked since the PPL amendments; nor is it possible to determine whether the perception of the system has improved, other than that the "suspension mechanism" is widely viewed as a means to extend deadlines. Without doubt, an independent complaint resolutionmechanism administered by an independent body without vested interests would inspire more trust among bidders and result in increased competition.A sound complaint resolutionmechanismshould includethe following elements: (i) publication o f contract award details'; (ii)access by all interested parties; (iii)independent review; (iv) timely disposal o f complaints, includingreversalof contract awarddecisions; and (v) coverage of all aspectso fprocurement, includingchoice o fprocurement method. Recommendation P The current complaintresolutionmechanism needs streamliningtaking into account the five essential elements discussed above. For this purpose, the GOU might wish to consider the EURemedy Directive, which has beenadoptedby memberso fthe European Union as part of the approximation process, In considering the complaint resolution mechanism described by the EU Remedy Directive, the government should review various implementation models-for example by Slovenia, Hungary, and Poland, as shown inBox 2. These details should includethe following: (a) name of each bidder; (b) bid price as readout at bid opening; (c) name and evaluated prices of each bidthat was evaluated; (d) name of bidderswhose bid were rejectedand thereasonfor the rejection; and (e) nameofthe winning bidderandthe price offered, as well as the durationand summary scope o fthe contractthat was awarded. 27 Ukraine CPAR 2006 ~~ ~~ ~ ~ ~ ~ ~~ ~ Box 2. Bid Complaint Resolution in Slovenia, Hungary, and Poland Slovenia Remediesare regulatedby a separate law-the Act on the Review of Public ProcurementProcedures (450-02/99-10/2) of July 22, 1999.It sets up essentially a two-stagereview process.The first possibility is a complaintby a disappointedbidder to the contractingentity itself.The review expertwho hearsthe complaint must provide an opinion within eight days, after which the contractingentity has three days to decidehow to act uponthe opinion. Ifthe contractingentitydoes notamend its position, the bidder is given a further three days in which to file a claim with the second-tier review body, the NationalReview Commission(NRC). The NRC must provide itsjudgment as quickly as possible, generally within 15 days, althoughthis maybe extendedby a further 20 days ifjustified. Decisionsare final. There is no appeal. Hungary The Arbitration Committeemay open a procedureupon a claim.The claim can be submitted by a contractingentity, a bidder, or other interestedparty. Ifthe proceedingsdo not start within 15 days of learningof the legal infringementand no later than 90 days after the alleged violation, the rightto claim expires. The committeemayholda public hearing ifrequestedby any interestedparty. Decisions are deliveredbeforethe disputants, and are published inthe Public ProcurementBulletin.No direct appeal can be lodgedagainstthe committeeverdict. The courts can review a decision only if requested in a statement of claim.The court may overrule the committee's decision, andthe court's decision can be appealedwithin eight days.No further appeal is allowed. Poland Above the threshold value of30,000, the review proceduremay consist of three stages.The first stage is the filing of a protest to the contractingentity; the second stage is filingto an arbitration committee; and the third stage is appealto the court.A protest shall be filed within seven days from the day the bidders learnedof the circumstancegiving groundsto the filing and only beforethe contract award. The contractingentity must reviewthe protest within seven days of its filingand suspend the tender proceedingsduringthe review until final resolution of the complaint.The chairpersonof the Public ProcurementOftice (PPO) may permitconclusion of the contract in certain circumstances.Belowthe estimatedcontract value of 30,000, only ordinary legalremediesfor civil cases are available. Source: Basedon the Sigma reports, June 2003 Implementing regulations 67. All regulations were to have been amended for consistency with the PPL within a month of its publication on March 17, 2006. After becoming the AA, the Antimonopoly Committee posted two draft regulations on its website on March 29-the approval of forms of advertisement and the approval of forms of evaluation reports. These are identical to the Ministry of Economy Orders No. 130 and 129 respectively, except that references to the MoE were replaced with AMC. Before taking effect, the regulations will have to be approved by AMC orders andregisteredby the Ministry of Justice. Procedurefor prequalijication 68. The PPL does not identify procurementsfor which bidder prequalificationwould be suitable. The current provisions indicate which qualifications may be considered. They list requirements such as the authority or license to carry out the required works and services, the availability of equipment or staff (resources or financial standing are not mentioned other than not being bankrupt), and proof that participants have paid requisite taxes and fees. The PPL further 28 Ukraine CPAR2006 stipulates that details o f prequalification should appear in the bidding documents. Secondary legislation should be prepared to provide clear instructionsor guidance on how prequalification of contractors or suppliers should be conducted. This invitesmisapplication,because the PPL also says that bidders canbe rejectedfor failing to meet the requiredqualifications. >Recommendationcriteria n Include clear for prequalificationo f bidders in the PPL. This might consist o f experience and past performance on contracts; capabilities including personnel, equipment, constructionor manufacturingfacilities; and financial position. Also, prepare and introducea detailedimplementationregulationon prequalification. Proceduresfor contracting intellectual services 69. The PPL deals with the procurement of goods, works, and services; but it includes no provisions for intellectual services. This is a problem because the procurement methods includedin the PPL are not otherwiseappropriate for procurement o f intellectualservices. Inthe absence of explicit provisions, procuringentities use the methods intended for goods and works. This may leadto undesirablepractices-for example, usingpricetoo narrowly as the major factor o f evaluation, requirement o f bid and performancesecurities, and so forth. Recommendation > The PPL should include provisions for the procurement of intellectual services. Box 3 suggests modelclausesfor this purpose. 29 Ukraine CPAR2006 Box 3. Model Provisionsfor Procurement of Intellectual Services Article 1."Intellectual services" refers to activities of an intellectualand immaterialnature that do not lead to a measurablephysicaloutput. They includetraining, auditing, software development, and similar services. They are awarded following a competitive selection process among preselected candidates, subject to the provisions of Article 6. Article 2. A short list of preselectedcandidates is established after a public solicitation of expressions of interest has been advertised in accordancewith Articles and The candidatesare chosen by the competent Tender EvaluationCommitteefor their capacity to perform the requiredservices, as indicatedin the prequalificationdocument. Article 3. Selection of the consultant is based on the criteria disclosed inthe request for proposals. The requestfor proposals sets forth the detailed manner inwhich the selection criteria will be applied, and includes the draft contract. The request for proposals discloses the grounds for potentialdisqualificationsfrom future participationin procurement of goods, services, or constructionworks that mayresult from the assignment under consideration. Article 4. The award is basedon the technicalquality ofthe proposal-that is, the consultant's relevant experience, the expertiseof its staff, and the proposedwork methodology-as well as the price of the proposal. Alternatively, the selection may be based on the quality of the technical proposal submittedwithin a predeterminedfixed budget, or based on the best financial proposal submittedby candidates that obtained an acceptabletechnicalscore predisclosed inthe requestfor proposals. Article 5. When the services are of an exceptionallycomplex nature or have considerable impact on future projects or when they may leadto the submission of proposals that are difficult to compare, the consultant may be selectedexclusivelybased on the technicalquality ofthe proposal. Article 6. Direct contractingmay be usedwhen the services requireaparticular, uniquely qualified consultant or when continuingwith the same consultant is indispensable. Article 7. The contractmay be negotiated with the selectedcandidate. Negotiationsmay not be simultaneouslyengaged with several candidates. Article 8. Contracts referredto in Articles 5 and 6 may only be awardedto candidateswilling to be subjected to price verification duringthe performance of the services, in accordancewith the provisions of Article ...,The provisionsof Article ... apply tocontracts awarded on the basis of Articles 1and 4. User's guide or manualfor contracting entities 70. Despite detailed guidance in the PPL on conducting procurement, many items are still open to interpretation.A particular weakness is the lack o f a manual that clearly explains procedures for administering regulations and laws, particularly for bid evaluation and confirmation of qualifications. The former DCSP had actually prepared such a manual (with the assistance of Sida) in 2002, which was distributedto procuring entities. However, the provisions authorizing the AA to issue such guidance were removed from the PPL in November 2004. This function was delegated to TC, with individuals associated with TC then copyrighting the materials. Recommendation > The AA should prepare a procurement manual promptly and disseminate it to procuring entities free o f charge. 30 Ukraine CPAR 2006 Safekeeping of procurement records and documents 71. Written records for all stages of procurement are maintained for three years. Records are available to the public, except for disclosure that would harm the state and information relating to examination, evaluation, and comparison of bids. Purchases of less than 10,000 need not be documented. Documents relating to a bidding process are normally kept in locked boxes (safes) since this information is consideredconfidential. The risks of adverse procurement practices 72. The efficiency of the public procurementsystem was examined critically, including the risks of adverse practices. Between November 2005 and February 2006, interviews were held with several procuring entities, consultants, contractors and suppliers, associations of contractors, entrepreneurs, pharmaceutical wholesalers, and manufacturers. Findings in this section are basedon those interviews. 73. Several undesirable practices that are listed in Table 1 have resulted from the perceived deficiencies inthe PPL.Other undesirablepractices stem from insufficienttraining in public procurement, inadequate understanding o f PPL provisions, and weak oversight and supervision of the system. These practices affect systemic efficiency, and they waste public expenditure. The risks and steps to mitigate such risks are discussedbelow. Some ofthe practices listed below have already been discussed in some detail in preceding paragraphs, but are summarizedhere for ready reference. 0 31 Ukraine CPAR 2006 Table 1. Summary of ProcurementRisk Factorsand RecommendedRemedies Risk What can happen Remedialactions (Recommendations) Generalrisk Inadequateinteractionand absence of Noncompliancewith the AA to proactivelyincrease regular dialogue betweenthe AA and procurement law and interactionwith procuring procuring entities, onthe one hand, and regulations,resulting in loss of entities and to interactwith the private sector, on the other; weak benefits from economicand private sector more actively. oversight and supervisionof the public efficient procurement. procurementprocess. Procuringentities sometimesreceive Because ofthe time constraint Revisitthe budgetcode to budgetaryfunds at the end of the financial (funds must be spent before the improvethe budgetcycle, year (November-December). fiscal year ends), hasty includingprocurementplanning procurementactions, including to ensure timely flow of funds to use of inappropriateprocurement procuringentities. methods, results inhigher prices. Oftenprocuringentities issuetender Paymentdelays leadto lack of Createcloserties betweenthe notices, receive, and evaluate bids and trust by potential bidderswho do actualneeds ofprocuringentities awardcontractswithout ensuringwhether business with the state, causing andthe availabilityo f funds in or not funds are actually available for lack of competition. the Treasuryto meetthese contractualpayments. obligations, that is, ensure that the Treasurytransfers funds accordingto actual needs (based on contracts signed) and not on plannedbudgets. Biddingopportunities are not advertised Informationon tenders likely Inadditionto procurement in a nationalnewspaper of general does not reachall potential bulletins, tenders and contract circulation, only in procurementbulletins. biddersthroughoutthe country, awards should also be published resulting in inadequate in at least one national competition. newspaper. Requiredformal documentsto participate Lack of competition. Establisha simplifiedprocedure in tendering are hardto obtain. For to facilitatethe task of obtaining example, bidders must apply for the note and submittingthe required from the tax authority on absence of debts documents by potentialbidders. three weeks in advance. Technical specifications are ambiguous; Bids are basedon poor quality; Prepare a detailed guidance note requirementsare unclearand unrealistic- and cheap goods, works, and on preparation of technical such as requirementof workmanship are offered by specifications.Train staff in deliverykompletiontime that bidders unqualifiedand inexperienced preparingclear technical cannot meet and frequently absence of bidders. specifications.Create and qualificationand experience requirements. maintaina database of sample specifications and prepare standardtechnical specifications for items procured frequently. 32 Ukraine CPAR2006 Risk What can happen Remedialactions (Recommendations) Frequentlybidders have very short bid Limited participationof potential Requireprocuringentitiesto preparationtime because some procuring bidders, leadingto higher prices start the bid submission period entitiesprovidetender documentation and loss of economies. on the date when the bidding longafter the bidding announcement is documents are actually made published. Sometimesbid preparation availableto bidders.Strengthen time is only four days. AA control to declare tenders null and void when bidders are not allowedthe bid preparation time stipulatedin the PPL. Legalpossibility of payment for the bid This does not secure procuring Abolish such possibility. securityby an entity other than the entities' interests and leadsto Requirebid and performance concernedbidder. unnecessarycomplicationofthe securities only for large procurementprocedure. contracts. Furthermore, requirementof bid securityfor all contracts puts excessiveburden on bidders and restrictscompetition. Some procuringentitiescreate conditions Lack of competitionand Requireprocuringentitiesto on the date of bid opening that do not transparency since this take the necessarysteps to avoid allow all bidders to submit their bids seemingly deliberate attempt any obstacles hinderingbidder personally beforethe deadline and to may exclude bidders andtheir participationin a public bid participatein the bid opening. Such bids from the process. opening. conditionsinclude lack of arrangements for bidders to enter government buildings hostingabid opening, arbitrary postponementof a bid opening time and date. Insufficient and unrealistictime for Bidderssubmit bids based on Allow adequatedelivery time biddersto deliver complex goods and unrealisticdelivery and and specifythese clearly in works. For example, sometimes contract completiontimes to be selected, bidding documents. conditionsin bidding documents specify and ifselected, fail to perform or no deliveryor completion period. performpoorly. Procuringentitiescanceltenders without Bidders lose trust in government Establishclear rules for informing bidders ofthe reasonwhy. This businessand withdraw from cancellationof atender process. possibility is providedby Article 27 (2) of participationin public tenders. the PPL. This helps explainthe low average number (3) of bids per tender in Ukraine. Contracts are awardedsolely basedon the Poor quality of goods, works, Prohibit procuringentitiesfrom lowest bid price without taking into and services procured for public accepting bids that do not meet account other commercialand technical projects. the technicalspecification factors.. Oftenbids do not comply with requirements. Lowestevaluated the requirements of bidding documents. price, rather than the lowest price, should be amajor selection criterion. 33 Ukraine CPAR 2006 Risk What can happen Remedialactions (Recommendations) Contracting Standardpublic procurementcontract for Poor and imbalancedcontractual Preparestandardcontract goods, works, and services does notexist. conditions result in inefficient conditionsfor goods, works, and Eachprocuringentityuses a different procurementbecauseof potential services, and includethese inthe contract form. contractualdisputes. SBDs. Procuringentitiessometimescancel Cancellationof a contract Introduceproceduresthat require contractswithoutjustification. withoutjustificationpoints to a procuringentitiesto fullyjustify lack of seriousnessinthe way cancellationof contracts. governmentdoes business. Functionality of thepublic procurement market 74. The current institutional framework does not provide a mechanism for effective partnership between public and private sectors. Neither the previous AA nor those involved in the current institutional framework have shown willingness, much less developed a mechanism, for such interaction. The exception is that the former AA conducted periodic roundtablesandthe Tender Chamber has offereda series ofpaidseminars on publicprocurement. Recommendation 9 The Antimonopoly Committee should develop and implement an ongoing partnership program with privatesector. 75. A firm's commercial procurementand purchasing practices tend to be determined by its business activity, size, and contractvalues. For the most part, the companies interviewed for this assessmentembracedprocurementstructures and procedures alignedto good international practice.Most large companies have dedicated procurementor purchasingdepartments-some of which are subdivided along product lines (raw materials, components, and so forth); fixed assets (buildings, manufacturing facilities, and so forth); and logisticshonsumables. An increasing number of companies are obtaining I S 0 9000 certification and implementing sound quality- managementsystems. Most firms use purchasingpractices with the following characteristics: A set o f corporate ethics, policies, and procedures, including published internal purchasingguidelinesor rulesfor purchasingby employees Computerizedpurchasingmanagementsystems in some cases Award of contracts through a quasi-competitive tender, typically inviting three to five firms (more for higher-value contracts), based on a combination of price, quality, performance, delivery, and commercialconditions Post-quotationnegotiationswith two or more firms Use ofstandard contract conditions 34 Ukraine CPAR2006 76. Companies source most new suppliers primarily through trade journals, visits to specialist exhibitions or trade fairs, and the Internet. Many large companies periodically advertise new tender opportunities in national newspapers. Smaller companies often favor awardingcontractsby directnegotiations. 77. The consulting industry comprises mostly small firms with less than 10 professional staff and freelancing individuals. The lack o f specific procedures for procurement of consultancy services and the resort to open tenderinghas hurt the consultingindustry, since price tends to be favored over quality. Furthermore, restricted (sole source) procedures tend to be appliedwhen hiringconsultants. 78. Several constraints systematically hinder the private sector's capacity to access the procurement market. Foreign Investment Advisory Service (FIAS) statistics on "Doing Business in Ukraine" pointto significant challenges in startinga business. According to the 2005 information, it takes 15 steps and at least 34 days to start a business. It may take up to 18 steps and 265 days to obtaina license or permit. 79. The FIAS also found significantbarriers in registeringproperty(10 procedures and 93 days). Securing connections to utility services was also found to be highly problematic and required "facilitation payments." An estimated 22 days were needed to obtain an electricity connection, and 19 days for a telephone connection. Furthermore, there are relatively few business associations, andtheir membershipis small. 80. In general, firms interviewed understand the principles and practices that should govern public procurement,and they are well aware of shortcomings in the present system. The problem is that the legal framework is still incomplete-for example, the absence of freely available standard bidding documents. A common perception is that the public sector has not adopted a unified approach to procurement. This results in lack of competition. Evidence suggests that competitiveness is rather low. In 2004 and 2005, the average number o f received bids per tender was 3, only marginally better than the 2.3 recorded in 2003. Five bidders submittingbids in atenderingprocessare consideredsatisfactorycompetition.(See Annex 2). 81. Firms consulted indicate that they regularly follow up on public procurement opportunities. However, they typically voice the following concerns: 0 The poor quality o f technical specifications in bidding documents. (This is the most frequent complaint.) 0 The use of subjective requirements for prequalification and subjective criteria in the evaluationof bids basedon point systems. 0 Smaller firms cannot participate in public tenders because of their ability to obtain requiredbank securities. The tender documents often impose unrealistic requirements for documents to be presentedby banks. 0 Exorbitant charges for bidding documents along with unwanted and unsolicited involvementof "consulting companies" inthe biddingprocess. e An apparently arbitrary process for award of contracts, sometimes even including post- tender bargaining for price reduction. (This has now been allowed legally through a procedure describedas "Price Reduction.") 0 Delays inpayment in breachof contract payment terms. 35 Ukraine CPAR 2006 Contract administration and dispute resolutionprovisions 82. Once a contract is signed, it must be registered by the local treasury department. This is the responsibilityaccountingdepartment of the procuringentity, which is also responsible for processingpayments.The receiptand acceptance of goods/works/services is the responsibility of either the logisticsdepartment or the unitthat is the end user of the contracted goods, works, or services. 83. There is no standard contract form with clauses to help resolve contractual disputes. Disputes among domestic suppliers, contractors, and consultants are usually resolved accordingto national legislation. UNCITRAL arbitration rules are applied for foreign suppliers, contractors, and consultants. 36 Ukraine CPAR2006 5. INTEGRITY AND TRANSPARENCY OF THE PUBLIC PROCUREMENT SYSTEM Control and audit systems 84. Ukraine has internal and external controls as well as audit systems for public procurement. Theoretically, the full range of procurement implementation is covered. These mechanismsinclude prior review, review of ongoing procedures, and ex post examination (by far the most common mechanism). Government agencies responsible for internal and external audits are as follow: 0 The Department of Audit and Review (KRU) of the Cabinet of Ministers is responsible for internal audits. There are 27 branches at the regional (oblast) level and 588 units in regions and cities. The Accounting Chamber is the supreme audit institution (SAI) of Ukraine. It reports to Parliament and is responsible for external audits, including monitoring for compliance with the PPL. The Treasury of Ukraine performs some audit functions during contract disbursements in accordance with Treasury Order No. 89. The Treasury has 129 local branches at the regional (oblast) level and 27 units inregions and cities. The December 2005 amendment to the PPL further enhanced the Treasury's role in procurement. Prior to the December 2005 amendment, the Ministry of Economy (DCSP) acted as the authorized government agency in public procurement, in accordance with MoE Order No. 238. 0 Internal review departments in each procuring entity are mainly responsible for financial controls and audits. 85. Prior to its dissolutionin December 2005, DCSPwas responsible for prior reviews of procurement. These reviews focused mainly on proposals for sole sourcing and restricted tendering. These reviews ceased with the abolition of the DCSP. The Treasury audits the procurementprocess before making payments under signed contracts. Order 89 (Item 12.3) of the State Treasury requires officials who process transactions ,to check the following documents: evaluation reports, contracts, acceptance certificates, approval by the AA of single-source and limited bidding, invoices, and so forth. 86. The Treasury generally provides effective audits when processing contract payments. The country's internal and external auditors (KRU and AC) are strengthening their capacities by adopting international auditing standards, training their staff, and introducing modern techniques. Adoption of risk-based methodology will ensure that auditors focus on the areas with most likely problems rather than simply conducting routine checks for compliance with regulations. Procurement will receive targeted attention because it is currently an area of high risk. 87. Discussionwith KRUand the AC report indicatethat the two organizations overlap functionally. Both conduct ex post audits that are primarily limited to compliance checks. Targeted procurement audits are rare. Procurement is audited as part of the general entity audit. KRU carries these out on a schedule. AC usually conducts them as part oftargeted investigations. 37 Ukraine CPAR2006 88. Enforcement of recommendations is weak because of poor guidance and limited follow-up. KRU and AC provided the Bank team with information on the most common violationsfound duringrecent routine controls. Analysis indicates that many problems couldhave been avoided if procuring entities knew more about the PPL and if the AA provided better implementation guidance. AC does not disclose information on enforcement; and KRU rarely follows up with enforcement unless sanctions are actually recommended(this requires reportsto legalauthorities). Treasury reports that refusalto make payment is its most effective and frequent sanction. It is clear payments are not made in some cases; however, Treasury data do not show how oftenapplicationswere resubmittedbefore payment was made. 89. The December 2005 amendment reorganizedthe procurementcontrol and auditing structure. In general, the amendment diluted significant oversight, supervisory, and control functions by distributing procurement responsibilities across several government bodies. The following analysisexamines the practicalimplicationsofthis distributionof functions. 90. Although the Antimonopoly Committee is the Authorized Agency, it is only responsible for coordination and monitoring. Its supervision is limited to (a) approval of single-source and restrictedtender procedures (and then only with the prior opinionof the SCC) and (b) review of procuring entity's compliance with the PPL. KRU is now responsible for procuringentities' compliance with the PPL, with other agencies also playing supervisoryroles. The State Treasury exercises budget control. The State Statistics Committee collects and maintains procurement figures. The Ministry of Agrarian Policy supports protection of national agriculturalproducers through interactionwith the AA, other public authorities, and customers. Law enforcement agencies are responsible for monitoring illegal procurement. The SCC issues opinions to the AMC and the procuring entity on restricted tendering and single-source procurement. SCC considers complaints of violations. The Tender Chamber has been assigned the most importantfunctions that usually otherwise belongto the AA-methodological guidance, authorizationof restrictedtendering, andthe key role incomplaintresolution. 91. The Treasury needs further strengthening and integration with public financial management system. Databases of the entities responsible for public finances should be integrated. For example, Treasury should be able confirm the existence of tender notices online and then query basic contextualdata. Ifso, decisions about limitedtenderingcould be registered at the AA. Treasury could confirm information automatically. Once published, Treasury could access information about contract values. With contracts registered by Treasury, procuring entitiescouldreceive resources in a far moretimely fashion. Recommendation Strengthen Treasury by introducing an integratedpublic financial management system. Treasury and others government agencies should implement a module to interact with existinginformationsystems. Ease of information access 92. Legalinstrumentsdealingwith citizen rights, freedoms, and responsibilities must be published officially. Unless otherwise stipulatedby statute, a law comes into force 10 days after its publication. The government's disclosure policy requires all legislationand regulationsto be disseminated in the media. Several publications contain the new laws, decrees, and other legal normative acts. The Law on InternationalAgreements of Ukraine (L1906-IV o f June 29, 2004; 38 Ukraine CPAR 2006 Article 21, Paragraph 1) mandates that all laws and international treaties be published in publications specializing inthe relevant topic. 93. The PPL requires publication of information on procurement in official journals and on the Internet. However, no media initiative has informed citizens and businesses of the benefits and implications of public procurement reforms. To build broader awareness, the AA needs to carry out outreach campaigns through improved newspapers, television, radio, and other media. Recommendations 9 Improve capacity and communications skills in the AA for effective educational outreach. 9 Implement a countrywide public awareness campaign that uses radio, television, the Internet, and print media. This would include regular information briefings, seminars, and forums. Ethicsand anticorruptionmeasures 94. Several laws containscattered referencesto corruption, includingthe following: 0 The Criminal Code of Ukraine penalizesboth the taking (Article 368) and giving (Article 369) of bribes. 0 Article 7.2 of the PPL specifies that a bid must be rejected if the bidder has offered a bribe (there is no provision for blacklisting of bidders). 0 The 1995 Law of Ukraine on Combating Corruption (not mentioned in the 2001 CPAR) penalizes corrupt activities by public officials, but it is silent on corrupt activities by bidders. 95. A Dresidential decree dated November 18, 2005 on Priority Measures for De- Shadowingthe Economyand CounteractingCorruption mandates the Cabinet of Ministers to submit "urgent draft laws" to the president on such matters as: (a) defining corruption and types for state officials to declare income and property; and (6) "ensuring provision o f state services . .. of corrupt practices; (b) defining conflicts of interest for state officials; (c) improving procedures with electronic informational systems to individuals and legal entities." This decree (paragraph 2.4) also calls for the involvement of, among others, international organizations in preparing the necessary legislation. Implementation and enforcement of anticorruption measures is an area for assistance that the Bank might wish to pursue. Recommendations 9 Formulateclearer policy on procurement violation. This would include(a) definition of specific abuses (such as collusion, misrepresentingpast experience); (b) differentiation among legal instruments (criminal code, statute of civil servants, procurement law); (c) better definition of related sanctions (for example, blacklisting); (d) due process in imposing sanctions; and (e) even-handedness in enforcemento f sanctions. 9 Strengthen deterrence by publication of all violation cases in the electronic and paper versions ofthe Public Procurement Bulletin. Iffeasible, this would include publication of violators' names andthe penalties. 39 Ukraine CPAR 2006 In a recent television program on corruption in the context of the Ukraine-EU project, Yuriy Lutsenko, Minister of the Interior, pointedto public procurement as classic example of how high officials protect their shadow business interests. He described one experience in which he received allegations of the Tender Chamber collecting and channelling money through quasi- firms. According to his account, he sent officers to withdraw documents to be passed to the Office o f the Public Prosecutor. Unfortunately, he was told, MPs had already withdrawn these documents to be examined by the special control commission. When he inquired about this commissionto the Speaker of the parliament, he was told that the commissionhadceasedto exist before the documents disappeared. 40 Ukraine CPAR 2006 6. E-PROCUREMENT 96. Promising steps have been taken toward rollout of electronic government procurement (e-GP) in Ukraine. This assessment focused on the following components: government leadership, policy and legal framework, buyer and supplier activation, infrastructure and standards, and systems and procedures.6 97. Considerableevidence points to strong government leadership as the key to e-GP. Cabinet of Ministers Resolution No. 1469 defined the former DCSP as the lead agency. It endorsed the leadership of the Ministry of Economy in modernizing the public procurement system, including e-GP. The draft strategy for Public Procurement Reform additionally assigned responsibility for information technology to the DCSP. All government institutions that were interviewed for this assessment acknowledged the DCSP lead in electronic public purchasing. In the aftermath of the December 2005 amendment, it is unclear which agency, if any, is now spearheadinge-GP. Recommendation 9 The mandateofthe Authorized Agency (or whichever agency isselectedto takethe lead) should be strengthened in adopting e-GP. All relevant stakeholdersshould be involved in the strategic planning process. 98. The present policy and legal framework provides a solid foundation for broad adoption of informationtechnology. The government's "Action Program Toward the People" highlights the integrated Electronic Ukraine program. More specifically, the draft strategy for Public Procurement Reform suggests an e-GP implementation strategy and single online procurement portal. The current PPL refers directly to electronic venues for disclosing information for public procurement and e-Procurement for transactions. However, the legal requirement of promoting competition among multiple information systems for e-GP does not conform to best practice. Potentially, more confusion, administrative costs, duplication of effort, and inconvenience could be generated. Additional legislation in this area-such as the electronic document law or the electronic signature law, which would benefit from clarification on the use of electronic versus digital signatures-addresses the legal validity of electronic procurement documents. Recommendations 9 Develop an e-GP implementationstrategy, including a phasedaction plan; and organize an e-GP learning workshop with international participation before the strategy is finalized. 9 Revisethe relevante-GP text ofthe PPL. Detailedreference to the conditions for using information systems inpublic procurementcould be included in secondary legislation 9 Considerthe useofasinglee-GP portalfor mandatorypublications andtransactions. 9 Inreviewing the PPL andthe electronic signature law, take into account the relevant e- GP legislation o fthe EuropeanCommission. 99. e-GP systems and procedures need to be improved. The PPL requires contracting agencies to advertise "at least in one of the Internet network information systems" under 6The assessment was basedon an e-GP readiness evaluationtooljointly developedby a workinggroup of multilateraldevelopment banks (httD://www.mdb-egu.orn/data/docs/Ouestionnaire.Dd~. 41 Ukraine CPAR 2006 procedures specified by those systems. Further, the law (Article 4-2, through an amendment introduced in November 2004) stipulates that an information system must be certified in conformance to comprehensive safeguards designed by the Department of Special Telecommunications Systems and InformationProtectionunder the Security Service o f Ukraine. However, the Security Service of Ukraine (in a letter dated December 28, 2005) states that no current Ukrainiansites (two are named: www.zakupivli.comof the EuropeanConsultingAgency, and www.tender.net.ua o fthe Visnyk DzierzawnychZakupiviel) meet the requirements ofArticle 4-1, Clause 2; or Article 4-2, Clause 1. Another website, www.e-tenders.kiev.ua, has merged with www.zakuPivli.com. Considering that other portals are also posting procurement notices, the situationis understandably confusingfor bothbuyers and suppliers. Recommendations > The AA should reduce the multiple public procurement websites to a single, official, user-friendlye-GPportal. > The AA should incrementally add more options, such as e-Tendering, e-Catalogue, e- Reverse Auction, e-Ordering, and e-Payment transactions, in line with the strategy for rolling out a full e-GPsystem. 42 Ukraine CPAR 2006 7. PUBLICPROCUREMENTCONTRACT PERFORMANCE 100. The numberand value of open (competitive)tenders hassteadily increased. In2002, only 7 percent oftenders (just under 50 percent interms of value) were awarded on an open basis. By 2005, this number had increased to 26 percent (69 percent by value). Correspondingly, the percentage of sole-source contracts fell from 21 percent to 10 percent between 2000 and 2005 (from 24 percent to 15 percent by value). The same level of reduction occurred in price quotations and restricted tendering. These figures, however, do not include the sole-source contracts of state-owned enterprises or procurement exempted under Article 2 (3) of the Public ProcurementLaw. 101. Table 2 shows the changes and trends in use of the five tendering methods. An important caveat is that data from the State Statistical Office may not include comprehensive information for all procuring entities. Table 2. Trends inTenderingMethods,2002-05 (in percent) 2002 2003 2004 2005 By number By value By number By value By number By value By number By value Opentender 7.1 49.7 11.2 56.0 11.9 50.4 25.8 68.9 Restrictedtender 1.6 6.7 1.1 4.9 2.3 5.3 2.5 3.4 Two-stage bidding 0.1 0.5 0.1 0.5 0.1 2.0 0.1 1.3 Pricequotations 70.5 18.7 71.1 14.8 74.0 15.9 63.1 11.4 Sole source 20.8 23.3 16.5 23.9 11.7 26.3 8.5 15.3 Source: State Statistical Office. 102. Table 2 shows a positive trend toward more competitive methods. Nevertheless, the use of the sole-source method of procurement is relatively high-15.3 percent o f the total 2005 volume (estimated at US$4.1 billion). These data do not include exempted items listed in Article 2, Clause 3 of the PPL. The figures also do not include the large volume of procurement through state-ownedenterprises, which for one reasonor another do not always apply the PPL rules. Were the state-ownedsector fully taken into account, the percentageof sole-sourcingin Ukraine would almost certainly look unacceptablyhigh. 103. Annex 2 lists the performance indicators against which the efficiency of the public procurementsystem has been measured. These indicators cover important factors such as the procurement cycle, use of procurement methods, direct contracting, bid protest resolution, late payments, price increases, and selection methods for consultants. Comparing actual levels of achievement in Ukraine with satisfactory benchmark thresholds shows that the country needs to improve its proceduresand practices. 104. In a transparent and open procurement system, at least 95 percent or more of tender notices and contract awards should be published. In2004, Ukraine published notices 43 Ukraine CPAR2006 for 70 percent o f tenders and contract awards. A minimumof 21 days shouldbe allowed between the invitation to bid and the bid opening. The PPL stipulates 45 calendar days, which may be reduced to 21 calendar days (or, up to 10 calendar days when using the limited participation biddingprocedure). Recommendation 9 TheAA shouldestablishadatacollectionandmaintenancesystemusingtheperformance indicators in Annex 2. These indicators should be used to assess how well the system is working and correctivemeasuresshould be taken periodically. 44 Ukraine CPAR 2006 8. APPROXIMATIONWITH EUPROCUREMENT DIRECTIVES AND ACCESSION TO WTO EUProcurementPractices 105. Ukraine is making efforts to align its public procurement legislation with European practicesas part of its desire for closer integration.As shown by the recent experience, approximation in procurement with the European practices normally takes several years before the candidate country enjoys reciprocity with other EU countries. While the EU directives are binding for objectives and time limits, national authorities can determine the form andmeans of fulfilling the requirements. 106. Countries such as Hungary, Poland, and Slovakia enacted their public procurement laws inthe early 1990sbasedon the UNCITRAL modelpublic procurement law and EU directives. They gradually brought themselves into alignment. They each amended their respective PPLs several times before they were able to become full membersofthe EuropeanUnion. Recommendation 9 Undertake a study on the approximation process followed by recently admitted EU countries, includingHungary, Slovakia, andPoland. Accession to WTO, free trade, and state-ownedenterprises 107. Ukraine applied for membership in the World Trade Organization (WTO) on November 30, 1993. By 2006, Ukraine had almost completed its negotiations on becoming a member. However, several items in the amended PPL could interfere with its' membership commitments, in particularnegotiationo fthe GPA. 108. First, the preference margins provided under Article 6, particularly the provision affecting the agricultural sector, may be viewed as unduly restrictive. As noted earlier, the provision empowering procuring entities to mandate use of local goods and labor for works carried out inUkrainemay not be acceptable to GPA members. 109. The provision expanding the scope of the PPL to state-owned, non-corporate communal enterprises, and businesses in which the government ownership exceeds 50 percent is potentiallymore significant. WTO memberscouldbe concernedthat subjectingthese enterprises to normal government procurement practices might restrict their purchases largely or only to domestic goods, services, and works. These enterprises normally procure for commercial ratherthan public policy purposes.This issue might be resolvedby an amendmentstipulatingthat the law applies only to procurementfor state needs. 110. The inclusion of all SOEs under the PPL could adversely affect their efficiency and damage the national economy. Over time, state-owned enterprises have adapted to normal commercial procedures for obtaining essential raw materials. If PPL requirements force greater domestic preference, inflationcould be driven upward. This would place upwardpressure on the cost of raw materials and the final price o f produced goods. In addition, following the law's procedural requirements could snag production since "adequate" time for bidders to respond 45 Ukraine CPAR 2006 could be set aside. Further delays might be caused by the increasingly common forced 20-day suspensionsstemmingfrom complaints. 111. The government plans to begin negotiations to join the Government Procurement Agreement (GPA) after Ukraine accedes to the WTO. Before completing the basic WTO accession negotiations, Ukraine is expected to submit a factual report called the Checklist of Issues. This checklist includes data on government procurement for the past three years and descriptionsofall current laws and regulations. 112. The USAID WTO accession project is helping the Government produce the "Checklist of Issues" and a final draft is expected in 2006. The Government is unlikely to finalize the report until the end of accession negotiations. Potentially, several areas couldprove troublesome-for example, the fine tuning of legalterminology in order to ensure transparency, discriminatory provisionsconcerningpreference, time periods for submission of tenders (which are not in line with GPA), and that the current law forbids administrative challenges once a contract is signed. 113. Other GPA members will have the right to submit questions to Ukraine on its factual report, just as they do on general trade-related laws. The Bank team was informed, however, that GPA is not a top government priority. The GPA is voluntary and subject to post- accession agreement and negotiation. The process is expected to be time consuming and may requiresignificant effort. 46 Ukraine CPAR2006 9. RISK ANALYSIS AND THE CPAR 2006 ACTION PLAN Riskanalysis 114. Analyses in the precedingsections of this report all point to the same bottom line: The public procurementenvironment in Ukraine is now at high risk. Despitepositive effort by the Government o f Ukraine following the 2001 CPAR, the process was set back with the structure that emerged in the aftermatho fthe 2005 and 2006 amendments. Inshort, the emerging systemdoes not allow efficient andeconomic use of public resources. 115. The recent fragmentation of government authority-with corresponding loss of oversight and support-is a direct consequence of the 2005 amendments to the PPL. Some privatesector entities now have the public procurementauthority and responsibilitiesthat usually belongto a government entity. A nongovernmental agency has become the de facto Authorized Agency, inappropriately inheritingstatus, functions, and authority from the DCSP in the Ministry of Economy, which was responsible for these functions. This reorganization has cost Ukraine years o f procurementexpertise and experience inthe DCSPthat ceasedto exist as the Authorized Agency. Furthermore, allocationof certainoversightprocurement functions to the Department o f Audit andReview(KRU) andto the AccountingChamber has createdclear conflictsof interest in which these bodies now audit the procuring entities that they also supervise. This unacceptable situationrequires immediate correction. Action plan 116. The government needs to put the public procurement system back on track. This report includes a detailed implementation plan (Annex 1) that combines the unimplemented recommendations of the 2001 CPAR with new recommendations from this assessment.As a first step, measures are called for to repair the current legal and regulatory framework. This would require correctionof the problematic provisions in the PPL and its amendments, and then proper reorganization of the public procurement function. To achieve this objective, this assessment recommends two sets o f government actions-priority recommendations to repair the legal, regulatory, and institutional framework, and secondary recommendations to strengthen the system. 117. Primary Recommendations-Repairing the Legal, Regulatory, and Institutional Framework P Revoke or substantially rework the December 2005 Amendment of the PPL. This might best be achieved by enactinga new law entirely, thereby endingthe undesirable practice of constantlyamendingthe PPL and its associatedsecondary legislation. Inparticular,the role of the Tender Chamber should be reconsidered.Becausea privately runNGO should not be accorded the responsibilities of a fully accountable public body, Articles 17.1 through 17.5 of the PPL (as amended June 16 and December 15, 2005) should be rescinded, as well as the provisionsthat give power and responsibilitiesto the TC in its presentform. P Reorganizethe institutionalstructure for public procurement. Followingthe amendments in the PPL, establish a sound, credible institutional structure that meets international 47 Ukraine CPAR 2006 standards in procurement practice, eliminates dilution and fragmentation of responsibilities,andrespectsthe principleof separation of powers. 9 Establish an independent mechanism to review complaints. When amending the PPL, include suitable provisions establishing a clear, effective, impartial, and trustworthy complaintresolutionmechanism.This should be separate from the AuthorizedAgency. 9 Establish a central Authorized Agency. The new AA should be independent and accorded all rights and functions customarily granted to such a body. These include policymaking, the authority to draft primary and secondary legislation, preparationand updatingof standard bidding documents, provisionof free legal and professionaladvice, publicationo f tender opportunitiesand of contract awards, and monitoringand oversight of the procurement process. This body would report directly to the Cabinet of Ministers; or alternatively, it would be part of another government body (as when the Authorized Agency was locatedwithin the Ministry of Economy). 9 Finalize the standard bidding documents (SBDs) prepared by the former Authorized Agency in the Ministry of Economy. Make these documents available without charge to all procuringentitiesthrough a website andrequirethat they be used. 9 Create conditions favorable to a competitive market for procurement advisory services. The market for procurement advisory services-which public entities do not provideand should therefore be provided by private firms-should be subject to competition in accordance with the PPL. 118. Secondary Recommendations-Strengthening Public ProcurementSystem 9 Enhancethe AuthorizedAgency's capacity and skills to undertake a countrywidepublic awareness campaign. This would make both the public at large and private enterprises aware ofthe contents, implications,and benefitsof public procurement legislation. 9 Installpermanentprocurementcapacity within the structure of procuringentitiesthrough provisionsinthe new or amendedlaw, includingthe use of ad hoc tender committees. 9 Consolidate the different pieces of legislation and regulations on anticorruption. Enforcement of anticorruption measures throughout legislation would also strengthen procurement throughgreater overallaccountabilityby public officials. 9 Strengthen ex-post controls. The Department of Audit and Review (KRU), the Accounting Chamber, and the Treasury each play important roles to ensure the accountability o f public officials. Strengthen these institutions within the framework of international and bilateral donors' public financial management activities in Ukraine, includingactivities of the World Bank. 9 Implement a strategy for electronic government procurement (e-GP). Introductionof e- procurement would further ensure transparency and would lead to savings in public expenditure. 9 Establisha single, official, free e-GP portal and a correspondinghard-copypublication. The AuthorizedAgency shouldmanagethis e-GPportal. 48 Ukraine CPAR 2006 119. Implementation of these major recommendations and the implementationplan in Annex A should reestablish a sound public procurement organization in Ukraine. An Authorized Agency could be either an independent body reporting directly to the Cabinet o f Ministers, as in several European countries, or it could be attached to another government body. Implementationo f the measures to reorganize procuring entities would develop their internal capacity to make efficient, timely purchases in compliance with procurement law. Implementing the recommendation for e-procurement would ensure greater transparency and would lead to savings in public expenditure. 120. Internal and external controls (KRU, the Accounting Chamber, and the Treasury) play important and effective roles in keeping public procurement officials accountable. Plans to strengthen these institutions are part o f the World Bank's public financial management activities in Ukraine. Consolidatingand enforcing the piecemeal legislation and regulations on anticorruptionwould strengthen publicprocurementperformance. 121. Finally, strengthening the Authorized Agency to design and manage a national public awareness campaignwould make citizens and private sector enterprises aware of the contents, implications, and benefits of public procurement legislation. Ultimately, an informed and interestedpublicthat demands highstandards o fperformanceis the best way ensure efficiency inthe publicprocurementsystem. 49 Ukraine CPAR -Annex 1 Annex 1. DetailedImplementationPlan(Based on 2001and 2006 Recommendations) Legislativeand RegulatoryFrameworkActions Amend the PPL as follows: Removeany referencesto the TC and its bulletinfrom the PPL (without substitution). Streamline advertisementof tender notices, contract awards, and other data. Require their publicationina publicprocurementbulletinonline and inprint; allow procuringentities to publishthese notices inat least one newspaperof generalcirculation. Removeprior approvalobligationfor single source, restrictedtendering, and allow procuringentitiesto select their own selectionmost suitableprocurementmethod, andthen be fully accountable for that selection. Requireprocuringentitiesto installprocurementcapacity in one oftheir departments. Strengthenthe mandateofthe AA. Delete the provisiononthe pricereductionmethod of procurement. Use a single e-GP portal for mandatory online public procurement publications and transactions. Includeclear criteriafor prequalificationof bidders. Includemethodsfor selectionof consultants (2001 CPAR). Introducea complaintresolutionmechanismthat is administered by an independentneutral body of prominentmemberswithout vested interests. Reducethe restrictionthresholds for participationof foreign firms (2001 CPAR). Modify the "restricted tendering" procurement method by adding language that all known specialized firms shall be invitedto participate in the "restricted tendering" process (2001 CPAR). Provide a clearer, more precise definition for restrictedtenderingand two-stage tendering (2001 CPAR). Add the need for prior AA approvalwhen contracts for works are extendedby 50 percent o f the initial contract value without competition(2001 CPAR). Establishlonger periodfor preparationof prequalificationapplication(2001 CPAR). Define the evaluation system and confine criteria only to monetarily convertible factors, with no considerationfor subjectiveprovisions(2001 CPAR). Extendthe mandatory bid submission periodwhen amendments to the biddingdocuments are introducedby the procuringentity (2001 CPAR). Delete provisions(2001 CPAR) on the following: Optionalrequirements for use of local materials and laborby foreign firms Evaluationcriteria that procuringentitiescannot apply objectively Submissionofthe bidsecurity by another entity on behalfof abidder Provisionsthat makebusinesslicense/permit/registrationa conditionof biddinginsteado f contracting. Ukraine CPAR-Annex I The AA is to do the following: 0 Finalize standardbidding documentswith sample contract provisions. 0 Develop and introduce a set of clear transparent rules and regulations for applying the Public ProcurementLaw (2001 CPAR). 0 Provide guidance on bid evaluation. Assemble and disseminate a procurementmanual. . Provide guidance on eligibility and application procedures for domestic preference under the PPL (2001 CPAR). Devisea clear guidance note for preparationoftechnical specifications. 0 Develop an e-GP implementationstrategy. Develop an e-GP programfor raising awareness and buildingcapacity. Explore possible partnershipsto set up a network of businesscenters in remote locations to EnsureInternet access, particularly for SMEs. InstitutionalFramework and ManagementCapacity Actions Develop a rolling three-year budget allocation plan (2001 CPAR) to allocate available funds to procuring entities in a timely manner; this should include revisiting the budget cycle, including procurementplanning to ensuretimely flow of funds to procuring entities. Introduce an integrated public financial management system that would interconnect the major players in management of public finances, including improvement inthe Treasury to control procurement. Create closer ties between the actual needs of procuring entities (based on contracts signed) and the availability of Treasury funds to meet these obligations. StrengthenAccounting Chamber activities inprocurement auditing (2001 CPAR). Train Accounting Chamber staff in international practices, auditing standards, audit methodology, and application ofPPL (2001 CPAR). Formulate a clear policy on handling offences, including (a) definition of specific procurement offences, such as collusion, misrepresentation of past experience; (b) differentiation of available instruments, including the criminal code, statute of civil servants, procurement law; (c) definition and application of related sanctions, including blacklisting; (4fair enforcementof sanctions; and (e) due process in imposing sanctions. Assign the AA with all appropriatefunctions, including: 0 The right to run a publishing enterprise to place required procurement data in one mandatory place (both hardcopy and online) 0 The right and responsibility to provide advice on procurement methodology and how to apply relevant legal provisions 0 The right and obligation to elaborate bidding documents (2001 CPAR) 0 Staff training to prepare clear technical specifications, to create and maintain a database of sample specifications, and to prepare standard technical specifications for items procured frequently 0 Implementation of a needs analysis for fulfilling the country's procurementtraining needs, including training of private sector firms 0 A review of accredited institutions' capacity to carry out training, and accreditationof more public bodies and private sector firms to add capacity 51 Ukraine CPAR-Annex I Procurement Operation and Market PracticeActions The AA is to do the following: 0 Proactivelyincrease collaborationwith procuringentitiesthroughoutthe country. 0 Hold regular seminars for private sector firms and acquire the required communications skills to design and conduct information campaigns on public procurement system performance. 0 Ensurethat tenders and,contract awards are publishedin at least one nationalnewspaper in additionto official procurementbulletins. 0 Prohibit procuring entities from accepting bids that do not meet the required technical specifications. Procuringentities areto do the following: 0 Take the necessary steps to remove obstacles limiting bidders' participation in public bid openings. 0 Be fully responsible and accountable for selection of the procurement method (including restrictedtendering) 0 Check the submittedsecurities. 0 Evaluatebids basedon lowest-evaluated-pricecriteria, rather than the lowestprice. 0 Fullyjustify cancellationof contracts. 0 Allow adequate delivery/completiontime inbiddingdocuments. Bidsubmission proceduresare to ensurethe following: 0 Provide for the bid submission period to start on the date when bidding documents are actuallymade availableto bidders. 0 Establish 30 days as the minimum bid submission time, except in extraordinary circumstances. 0 Declare the process null and void if the AA determines that bidders were not allowedthe bidpreparationtime stipulatedinthe PPL. 52 Ukraine CPAR -Annex 2 Annex 2. PerformanceIndicators Indicator name Indicates Measured by Actual in2005 Advertisementof bids Transparency and Number oftenders (%) for Approximately 70% and publicationof openness of which bid invitation and awards system contract award results are publicly advertised (Satisfactory: 95% or more) Time for preparation of Real opportunity Number of days between Generally21 days (can be bids for bidders to invitation to bid and bid less). According to the PPL, submitbids opening this period is 45 calendar days (Satisfactory: 21 days or but it may be reducedto 21 more) days (up to 15 calendar days in case of limited participation bidding procedure) Time for bid evaluation Efficiency of Number of days between The law does not establish a bidding process bid opening and publication periodof time during which of award the bid evaluationmust be (Satisfactory: 90% or less) finalized. Bidder participation Level of Number of bidders On average, 3 bids (in 2003: confidence by submittingbids in each 2.3 bids) private sector in tenderingprocess the process (Satisfactory: 5 bids or more) Methodof procurement Level of Number of bidding None used competition processes usinga method less competitivethan the process recommendedfor the estimated contract amount. Direct contracting Transparency and Percent of contracts (by 8.4% of contracts and 21% levelof number and value) awarded of total value of contracts. competition on asole-source basis (Satisfactory: 10% or less of number of contracts and 5% or less oftotal value of contracts) Ukraine CPAR-Annex 2 Processescancelled Quality of bidding Number (%) of bid 5% (because of unreliable process processes declarednull data, this percentagemay be before contract signature higher) (Satisfactory: 5% or less) ' Numberof protests Qualityand Ratio(%) betweenthe No available data fairness ofprocess number of protestsposted and the numberof bids submitted (Satisfactory: Not less than 10% and not morethan 50%) Time to answer Efficiency and Numberof days between Dataunavailableor protests fairness of protest submissionand final unreliable. The periodmay system response to protests be longbecause of the (Satisfacrory: 21 days) multiple adjudicatingparties createdby the 2005 amendmentto the PPL. Protestresults Effectivenessof Number(%) ofcontracts No data protest system with award recommendation modifiedbecauseof a protest (Satisfactory: 5% or less) Late payments Qualityand Number(%) of payments No data. But bidders did not consistencyof made morethan 45 days late complain, implying payment process (Satisfactory: 10%or less) generally on-time payments. Price increase Qualityof bidding Percentageincreaseof final Accordingto the law, the and contract contract amount due to terms and conditions of the management changes and amendments procurement contract must (Satisfactory: 15% or less) not be changed after it is signed, other than legally stipulatedexceptions. Restricted Qualityof advice Number (%) of processes PPLdoes not include competition for for selection of consultants suitable provisionsfor consultants using open competition selection of consultants, insteadofa shortlist whoseservices are procured methodology in the same manner as (Satisfactory: 5% or less) goods and works. Selectionmethodfor Weight o f quality Number (%) of processes See above. consultants to priceratioused for selection of consultants inselection havingpriceweighted more than 20% of the total scoringDoints 54 I I I