The Verkhovna Rada plans to consider draft law 3739 on localization in public procurement in the second reading. The draft law was registered more than a year ago. We repeatedly spoke about its dangers and warned against the adoption of such a law.
MPs propose to buy goods of the mechanical engineering industry defined by them in the next 10 years only if they are sufficiently Ukrainian. The required percentage of localization will constantly grow, and the Cabinet of Ministers should establish a mechanism for confirming it. Thus, MPs plan to promote the development of domestic mechanical engineering.
Before the second reading, an amendment was added to the draft law, according to which the localization clause will not apply to procurement that falls under international agreements that Ukraine has ratified. At the same time, the WTO Agreement on Government Procurement and the Association Agreement with the EU cover almost all public procurement with the expected cost more than EUR 133,000. Accordingly, localization will apply only to lower-cost procurement. Despite this restriction, other harmful ideas remain part of the draft law.
First, the draft law violates the basic principles of public procurement: fair competition, non-discrimination, objectivity and impartiality, maximum economy and efficiency. Only those companies that confirm a certain percentage of product localization will be able to participate in tenders. It is also not yet clear exactly how the authorities will issue such confirmations. This creates grounds for corruption.
Thus, MPs will artificially restrict competition at the auction. Because of this, the supply in the public procurement market will decrease, and therefore, prices will rise. It will also be easier for businesses offering Ukrainian goods to get contracts. For manufacturers of such products there will be less incentive to develop — their products will be purchased anyway simply because they are Ukrainian. There may be situations when procuring entities will have to buy less high-quality products due to the lack of localized alternatives.
Not only we warned about the dangers of localization, but also the Anti-Monopoly Committee, the National Agency on Corruption Prevention, Kyiv School of Economics, the Main Legal Department of the Verkhovna Rada, a number of civil society organizations and others. In the end, according to KSE calculations, the introduction of localization in the previous version of the draft law could result in the drop of the GDP from 0.5% to 4.6%.
Therefore, we once again call on MPs not to support draft law 3739. Instead, it is better to focus on finding real effective ways to support the domestic economy.
