Ukraine needs to demonstrate to the world that it is willing to spend money honestly and without corruption on reconstruction needs. The best way to prove this is to show the result in the domestic programs and projects.

For 2023, the government approved funding for 424 reconstruction projects, totaling more than UAH 28 bln. One of the main questions was how and on which projects limited public resources would be spent. We already had the experience of covid procurement, when money was allocated for the wrong needs and the amounts of procurement were often sky-high.

Although the Cabinet of Ministers recently approved a methodology for prioritizing reconstruction projects, the issue of the effectiveness of selecting restoration projects has not yet been resolved. 

The long way of prioritization methodology

The mechanism for prioritizing projects is the main safeguard against possible abuses that arise when such a decision is adopted by an official. The lack of political and subjective influence ensures that projects be selected according to objective criteria.

The methodology for prioritizing reconstruction projects in Ukraine began to be discussed about a year ago. But the Cabinet resolution approved in April stated that the prioritization methodology was rather advisory in nature and that the selection of projects should take place “considering” a certain methodology. 

Next, the Ministry for Restoration was given six months to develop this methodology. 

This task is quite difficult because the priority of projects should be based on the defined priorities, and they, in turn, should be based on the reconstruction strategy, which is still not adopted. The government has not yet decided what, how, and in what sequence it should be rebuilt. This leads to conflicting issues constantly arising around the reconstruction:

• can reconstruction funds be spent on objects that have not been damaged? 
• should libraries and culture centers be rebuilt when not all residential buildings have been rebuilt yet? 
• is it worth investing hundreds of millions in the repair of old buildings, or is it better to build new ones? 

During the first round of selection of reconstruction projects from the state fund, the Interdepartmental Government Working Group decided to apply the draft methodology for prioritizing reconstruction, developed by TI Ukraine together with the RISE Ukraine Coalition of civil society organizations. It was based on the principle of prioritizing the needs of communities ensured by the project. The most essential projects are those that provide the basic needs of the population: access to housing, electricity, heating, water supply, etc. Further, the projects are distributed depending on the level of needs of the population they provide: emergency services, schools, hospitals, public transport, utilities, administrative buildings, culture, leisure, and sports. 

But during the first meeting, the methodology effectively had no impact on the selection of projects. They were selected regardless of the priority score, in manual mode, in fact. As a result, the government approved many controversial projects that had nothing to do with damaged or destroyed facilities. For example, UAH 700 mln was allocated for two pre-war projects to repair hospitals in Zhytomyr; UAH 400 mln for the construction of a kindergarten and a water pipeline in Odesa, and these projects were approved in 2021. 

The main argument for this choice was that these facilities were used in particular by internally displaced persons, which meant that the project was related to the needs of reconstruction. 

During the second meeting of the Interagency Working Group, the prioritization methodology was indeed used to select projects; they were selected considering the score. As a result, 93% of the funding went to the restoration of housing, water supply, heat supply, schools, and shelters. All these projects directly concerned the restoration of damaged or destroyed facilities. 

Subsequently, the government adopted several more decisions on the allocation of funds for projects on the proposal of ministries and within the framework of pilot projects without any prioritization. 

The Ministry for Restoration worked on its version of the prioritization methodology at the same time, which was developed by World Bank experts. The government approved it in October. But this is unlikely to significantly change the situation in the future. After all, the methodology is still advisory, which means that part of the funding may pass by it. This is not its only drawback.

Theory of relative priority

The final version of the methodology was based on the structure of the World Bank’s approaches to the selection of infrastructure projects. Therefore, it turned out to be quite complicated. The methodology includes 44 project assessment indicators, in particular regarding compliance with the requirements of the Paris Climate Agreement and the UN Framework Convention on Climate Change. However, compliance/non-compliance with such indicators is to be determined by the applicants themselves (i.e., communities). 

When infrastructure projects are selected by the World Bank, the number of indicators is not a significant problem. The institution has enough qualified experts for assessment, and there are not so many projects. For example, in 2023, the World Bank launched 381 projects around the world. Of these, 24 are in Europe and Central Asia (this region includes Ukraine).

On the scale of Ukraine and the needs of reconstruction, we are talking about a much larger number of projects — thousands per year. Difficulties might also arise in terms of experts, especially at the level of small communities.

Accordingly, the quality of filling in information about the project may differ significantly. Thus, the overall results of prioritization will have a significant error. 

The methodology also assumes that projects will be assessed in groups. The best project from the group with the highest percentage under 44 assessment indicators will score 100 points. The scores of the rest will be formed depending on the ratio to the indicators of the best. 

The problem is that such a rating system is quite relative. If you assess only bad projects in one group, then one of them will still receive the highest score, and all the others will be evaluated relative to its indicator. Therefore, today one project can score 100 points and tomorrow 10, depending on which list it is put on for assessment.

Provisions of the methodology regarding the given assessment result

The original version proposed by the World Bank focused more on large infrastructure projects related to water, roads, and energy than on social infrastructure (which is normal for an international financial institution but not for a state fund). The factor of whether the object is related to the consequences of hostilities or missile attacks had almost no impact on the results of the assessment. 

Transparency International Ukraine participated in the discussion of this version of the methodology and insisted on its finalization. This problem has been reduced. The weight of indicators as to whether the project is associated with the consequences of the destruction has increased. Not all infrastructure objects will receive additional points, but only those related to overcoming the consequences of armed aggression. Within the framework of cooperation between experts from the World Bank, the Ministry for Restoration, and representatives of RISE Ukraine, it was possible to agree on increasing the weight of the criteria for projects related to housing reconstruction and housing for internally displaced persons. 

Consequently, the final version of the methodology is more balanced and focuses on different types of reconstruction needs. But the problems of complexity and relativity have not yet been solved. TI Ukraine will monitor the experience of its application and the extent to which it will have an impact on the results of the assessment.

Blind prioritization

Another big issue with reconstruction is that there are actually no formalized requirements for the quality of projects. Prioritization takes place at the level of project indicators — the number of users, the type of object, etc., but not at the level of how well the project is designed, whether the cheapest way of implementation has been chosen, or whether there is a need for this project at all.

In practice, the project initiator decides:

• whether it is necessary to analyze the changes that have occurred since the beginning of the full-scale war and adjust the need to new conditions (for example, it is better to build a school not on the site of the destroyed one but a few blocks away);
• how to consider new security conditions when rebuilding old facilities;
• whether it is worth rebuilding facilities that are beyond the standard period of operation and have no architectural value, or whether it is better to build new ones;
• whether it is worth selecting the most optimal reconstruction option, considering its cost and effect on the population, or whether it is possible to select the most expensive one.

These and many other issues are left to the discretion of the communities, which have to determine what and how to rebuild. But we have already witnessed local authorities picking the most expensive and least effective option. For example, they restore old panel high-rise buildings at a cost exceeding the price of building new, modern housing.
In conditions of limited resources and enormous reconstruction needs, this can lead to most of the required projects not getting funding, and the funds will be used to finance other projects.

However, we hope to avoid this when the state defines clear and mandatory approaches to the formation of reconstruction projects based on a single strategy. 

So, what else needs to be done

The experience of the first year of distributing funding for reconstruction projects only emphasized that this should be done according to a single methodology. It is good that it was finally approved, but it should be mandatory. Part of the funding can really be allocated for urgent projects arising because of the war, for example, overcoming environmental disasters such as the destruction of the Kakhovka HPP dam. But most financial resources should be allocated according to clear rules. 

In order for the best and most urgent projects to receive funding, it is necessary to:

• approve a reconstruction strategy that will determine the approaches to restoration (which facilities are being restored primarily within the framework of rapid reconstruction and which facilities should not be restored before major reconstruction begins);
• determine the requirements for the development of reconstruction projects, in particular, whether facilities older than 40–50 years need to be rebuilt, how to determine a more effective method of reconstruction (whether a facility needs restoring if the cost of building a new one is lower), and which steps should be taken to update the need and adjust the characteristics of the facility;
• introduce monitoring of the quality and effectiveness of the proposed projects so that the prioritization and implementation of the quality requirements of the projects are not formal.

The publication was prepared with the support of USAID / UK aid project Transparency and Accountability in Public Administration and Services / TAPAS

The post Quality Prioritization of Reconstruction Projects Is Still a Challenge. Why? first appeared on Transparency International Ukraine.

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However, this is not a complete return to the previous approach because now, procuring entities have the right to conduct procurement in the same way without reducing the price if they justify the need for it. The Ministry of Economy explains this optionality by the fact that in the future, they would like to provide an opportunity to flexibly respond to the situation with energy supply or other force majeure events that may be caused by war. However, in January, the introduction of such a mechanism caused quite a heated discussion about the feasibility and effectiveness of such a step.

In particular, Transparency International Ukraine warned that it was not sufficiently justified and contained some risks. The auction is a guarantee of active competition of participants and allows achieving maximum savings. Abandoning it can potentially reduce the savings on procurement, which is unacceptable during the war and with limited funding.

Those who were neutral or positive about such an idea said that procurement without an auction was widely applied in the West, and it had its advantages.

Many studies are devoted to the question of the advantages of tenders with and without auctions, but most of them are quite theoretical. After all, these approaches are difficult to compare in terms of their effectiveness in laboratory conditions. After the cancellation of auctions, Ukraine was able to determine the practical effect of different approaches to procurement.

Bidding with and without an auction: the main differences

The main difficulty in comparing various procurement methods is that the logic of the participant’s behavior in them is fundamentally different.

In bidding with a multi-round auction, the participant can submit an initial bid close to the expected value and continue to build their strategy already depending on how the auction will go. If the activity of competitors is low, they can win with a high price. If the activity is high — the participant will have to lower their bid or lose.

However, to say that the participant is interested in giving the highest possible starting price is also wrong. After all, the size of the initial proposal determines the sequence of steps of participants in the auction. The one who gave the lowest price has an advantage over competitors — taking the step last.

Procurement with a blind auction implies that participants have only one attempt to submit their proposal and get it right. If the price is too low, the entrepreneur will receive less profit than they could have. If it is too high, they can lose the tender to a competitor. This seems to stimulate them to provide a lower proposal from the start.

Research on the practice of applying auctions comes to the conclusion that procurement with multi-round auctions is more priority if the procurement item is sufficiently competitive and there are three or more bids on the market that meet the requirements of the procuring entity.

For procurement in a market with low competition and a limited range of potential suppliers, a one-round auction can produce a better effect. Moreover, this method is faster and can be used for less important categories of procurement.

In many countries, the procuring entity themselves can determine whether to apply a multi-round auction or not in specific cases. This approach is called an optional auction.

There are also some transitional procurement models, in which the auction is appointed after the submission of bids by the participants if there are at least three of them, or when the difference between the lowest starting bid and the next one is less than 10%. Such intermediate rules theoretically have the advantages of both approaches: the participant does not know whether their initial bid is final, and if the bidding is competitive, the auction allows for maximum savings. But so far, such methods of procurement are not very popular due to the complexity of technical implementation. And their advantages are mostly theoretical, they are difficult to test.

Hypothesis testing

We put forward a number of different hypotheses based on theoretical studies of the effectiveness of procurement with and without an auction.

Two periods were chosen for comparison:

• from October 19 to December 31, 2022;
• and after cancellation — from January 3 to April 1, 2023.

Of course, this is not a perfect sample, as one period was at the end of the budget year and the other at the beginning. Moreover, during these periods, there were different conditions with the supply of electricity, which could affect the course of procurement, in particular, the prices of the participants. However, back then, approximately the same rules were in force, and the main difference was precisely the presence/absence of a mandatory auction.

We downloaded the sample on May 5. It included only successfully completed lots as of that date. Savings in calculations are defined as the ratio of the amount of savings to the expected cost of the procurement transaction. We also discarded the data with abnormal savings from the sample: 1% of lots with the largest and lowest (negative) savings.

1. Cancellation of multi-round auctions will reduce savings

The main advantage of procurement with auctions is the possibility to achieve better economic efficiency of procurement. This statement is cited by most studies on the practice of using auctions. Theoretically, the effect of the auction reaches the optimal value when three or more participants take part in the procurement transaction.

A comparison of procurement transactions before and after the cancellation of auctions generally confirms this hypothesis. 

During the period under review, prior to the cancellation of auctions, lots worth almost UAH 95 bln were successfully completed. The amount of savings is UAH 7.63 bln. That is, the savings in these tenders amounted to 8.03% of the expected value.

After the cancellation of auctions, lots worth more than UAH 88 bln were successfully completed. The amount of savings in them is only UAH 6.06 bln. Thus, the share of savings in the completed bidding decreased from 8.03% to 6.83% — by 1.2%.

If you look at procurement in terms of the number of participants, the difference in savings between bidding with and without an auction is minimal in procedures with 1–3 participants and grows significantly with the increase in the number of participants. In tenders where 4-5 or more participants took part, the difference in the savings indicator is already 3-4%, depending on whether the auction was applied or not.

At the same time, bidding without an auction gives an even better indicator of savings in lots with an expected cost of less than UAH 200,000. If we analyze the percentage of savings in different ranges of the amounts of expected value, it turns out that in the smallest tenders after the cancellation of the auction, the indicator of savings even increased. Obviously, the rule of the change in the behavior of the participant really works here. In small tenders, there is a high probability that competition will be low, and therefore the “blind auction” encourages the participant to give a slightly lower price than in lots with an auction. But with the increase in the expected cost of procurement, the advantage of bidding with an auction increases. In tenders, worth from UAH 200,000 to UAH 500,000, tenders with and without an auction showed almost the same result. And in the bidding for the amount more than UAH 1 mln, the auction provides much bigger savings. Since it is these tenders that form the majority of the savings in the Prozorro system, this is reflected in the overall result, which is provided below (an overall savings reduction by 1.2%).

Considering this, it can be concluded that in general, the cancellation of the auction affected the savings of tenders in the system. This is especially true for expensive procurement. Potentially, this 1% reduction in savings is a loss of more than a billion hryvnias in savings for only three months under study.

However, in tenders with an expected cost of less than UAH 200,000, after the auction was canceled, the savings indicator even improved. Accordingly, for procurement with a lower expected cost, several options can be considered:

1. to keep blind auctions;
2. to implement optional ones: so that the procuring entity decides to buy with an auction or without it;
3. or raise the threshold altogether (but this issue needs additional study).

For procurement of more than UAH 500,000, it is advisable to apply a mandatory three-round auction.

2. Bidding without an auction will produce higher savings in procurement with a minimum number of participants

Before switching to a blind auction, 65% of open tenders with features that had enough bids were held with one participant. In such cases, a three-round auction did not take place and the participant’s initial bid became final. Since the participant could previously reduce their price during the auction, a more winning strategy was to put a higher bid and lower it if you have competitors. Accordingly, if only one participant took part in the tender, this increased the risk that the procuring entity would receive a higher price than the one that the entrepreneur was actually ready to give (if they had competitors).

In a blind auction, participants cannot reduce their bids after they see the bids of competitors. In theory, this was to encourage them to provide lower prices at once to increase their chance of winning.

The practice of applying bidding without an auction in Prozorro does not confirm this hypothesis.

If we compare procurement before and after the cancellation of auctions, the indicator of the amount of savings in tenders with one participant has not changed.

Prior to the cancellation of auctions, successful competitive tenders with one participant were announced for UAH 52.1 bln. The amount of savings in them was UAH 2.15 bln. After the cancellation of auctions, the amount of such bidding is UAH 53 bln, and the amount of savings is UAH 1.96 bln.

In percentage terms, the savings rate even decreased — from 4.15% to 3.7%.

Consequently, the cancellation of the auction did not contribute to a decrease in the cost of bids in the bidding with one participant (with low competitive activity). The hypothesis that in auction, participants can give a higher starting bid, leaving a margin for bidding, does not find confirmation in the analysis results.

Obviously, this is due to the fact that participants tend to predict low competition only in small tenders. If the expected value increases, the presence or absence of an auction significantly affects the strategy for determining the initial cost.

3. Cancellation of auctions will reduce the time of procurement

The cancellation of the three-round auction deprived the procurement of two stages that influenced its duration:

• waiting for the auction: after the end of the period of bid submission, the auction does not take place immediately, but on the day and time appointed by the system;
• the actual stage of the auction, where participants can alternately reduce their prices.

Thus, the average duration of tenders decreased from 24.3 days to 23.3. This allows the procuring entity to save an average of 4% of the time spent on one tender. The share of tenders with a duration of less than 30 days increased from 51.3% before the auction was canceled to 59.8% after — from the total number of the lots announced in this period.

However, the reduction in the duration of procurement within these limits is not always important, especially when it comes to large and important tenders. After all, changing the duration of procurement by 1–3 days significantly affects only fast tenders. That is, those that provide for the supply of goods in a short period of time. These are usually small amounts and fairly simple goods.

If we discuss large contracts and the supply of significant volumes, then their duration is measured in months, and sometimes years. And in the general procurement cycle from the formation of a need to the supply of goods/performance of works, such a short period of time does not have a qualitative impact. In addition, the procuring entity can also reduce the delivery time of the goods by the same value of 1–3 days, which in most cases has no critical impact and will achieve the same result as in the case of cancellation of the auction.

In view of this, it is worth considering the reduction of the procurement duration as a positive factor only for a small category of tenders, in which the period from the announcement of the procurement to the delivery of goods/performance of services is shorter, for example, 30 days. Only then does it give a potentially high enough time saving (10%).

4. Cancellation of auctions will have a negative impact on competition

One of the fears the skeptics of the cancellation of multi-round auctions had was that it would lead to a significant increase in procurement with a minimum number of participants and, in general, to a decrease in competition. Allegedly, procuring entities will not have an incentive to work with the market because there is no auction now as an indicator of procurement activity, and only one bid is enough to conclude a contract.

But this hypothesis is not confirmed. The share of lots for which no bids were submitted even decreased after the auction was canceled.

Neither is there a decrease in the average number of bids in the auction. This figure even increased slightly after the cancellation of multi-round auctions. If earlier 1.13 participants came to open bidding with features on average, after the changes this figure was 1.38.

Consequently, the presence/absence of a multi-round auction does not have a direct positive impact on the number of participants, and the cancellation of auctions did not lead to a decrease in competition.

Conclusions

Even though our study did not confirm most of the hypotheses about the impact of the cancellation of multi-round auctions, the most important one came true. Switching to a blind auction reduced the savings rate. And the most important thing is that it concerned expensive tenders. Potentially, the state could have saved at least a billion extra hryvnias in the three months we studied if multi-round auctions had not been canceled.

At the same time, the analysis shows that for procurement for smaller amounts — up to UAH 500,000 and especially up to UAH 200,000 — there was no negative impact. On the contrary — for procurement for smaller amounts, a blind auction turned out to be more effective in terms of savings.

Accordingly, returning to mandatory multi-round auctions for procurement for amounts over UAH 500,000 is the right decision. After all, during the war, the state cannot afford to overpay on procurement, when all possible funds need to be spent on defense.

However, for bidding for up to UAH 500,000, blind auctions should be preserved.

At the same time, it is possible to consider raising the thresholds for open auctions. They have hardly been reviewed since the inception of Prozorro. Considering inflation, this step is deemed logical, in particular, to partially relieve procuring entities.

The material was prepared within the framework of the USAID/UK aid TAPAS Project/Transparency and Accountability in Public Administration and Services and European Union. . Its contents are the sole responsibility of Transparency International Ukraine. 

The post Does Prozorro Need Three-Round Auctions? first appeared on Transparency International Ukraine.

Weapons and military equipment

Let’s start with the most secret procurement. Procurement of weapons and military equipment in Ukraine has traditionally been a closely guarded secret. The state defense order (SDO) has always been classified. Any information about weapons-related procurement was considered sensitive.

You could probably agree that secrecy is important in this category of procurement, but in fact this is not always the case.

The fact is that in the modern world, there is no point in concealing the very fact of the development, production, or use of certain weapons. Either way, this information becomes public.

For example, it was no secret that Ukraine was developing the Neptune anti-ship system. Moreover, the information about the stages of development and adoption of this complex is public.

There are separate specialized publications that publish information about the number of weapons in each country, the latest developments and trends in technological development.

The United States has already realized that the approach of complete secrecy of defense procurement makes no sense. It is essential to keep the characteristics of the weapon secret, not its quantity. 

Unlike the Ukrainian SDO, anyone can freely go to the page of the US defense budget and see what weapons the Pentagon purchases: how many and at what price. For example, we can see that in 2023, the United States plans to purchase 4,764 GMLRS missiles for HIMARS complexes at a price of USD 165,600 apiece. These are the missiles that the Armed Forces of Ukraine use to destroy ammunition depots and enemy headquarters.

You can even see information about the number and price of taxpayer-funded rounds in the US defense budget reports.

In addition, the results of defense procurement audits are public.

This contributes to forming the trust of taxpayers. They know that their money is spent efficiently.

Of course, in the conditions of a large-scale war, most procurement of weapons and military equipment must be concealed. After all, this can create a certain tactical advantage and allow accumulating reserves that the enemy does not expect.

Therefore, the reform of publicity in the field of weapon procurement should probably be postponed until the end of the war. But what about everything else?

Procurement not related to weapons

The structures of the Ministry of Defense of Ukraine spend tens of billions on procurement of military clothing, footwear, food, fuel, and hundreds of different household products and systems. From generators and sleeping bags to trucks.

These procurement transactions raised many questions before 2022 as well.

• For example, in 2021, the SBI served the advisor to the Minister of Defense with charges of lobbying the interests of one of the food suppliers and accused him of causing damage to the state for UAH 720 mln.
• In 2018, during the inspection, 180 tons of low-quality canned food purchased for the army were found.
• For several years, the Ministry of Defense has been accused of lobbying for the procurement of lubricants from the company of MP Ponomariov.

And this list of dubious procurement transactions is very long.

It would be good if during the war, corruption disappeared from the defense departments altogether, but it is difficult to believe that this is possible.

Many people still play by the old rules — when the fate of contracts was decided by the Ministry of Defense not by the principle of competition between participants and the best price, but by agreements behind closed doors, lobbying, and orders from above.

Since in 2022 all procurement transactions of the Ministry of Defense were hidden from the public, it was only a matter of time when the first corruption scandal would emerge.

Therefore, without publicity, it is impossible to build confidence in the effectiveness of the use of taxpayers’ funds. And the system itself is unlikely to change quickly if it is not publicly overseen.

What information about Ministry of Defense contracts may contain sensitive information?

Here, we should understand when and what information can really play into the hands of the enemy, and how dangerous its disclosure can be. We should note that this is not about the procurement of weapons and military equipment — only about civilian products.

To summarize, only information about the manufacturer and the place of delivery can be truly sensitive. And only in exceptional cases.

After all, it is clear that russians will not target the producers of chicken eggs and canned fish with missiles to disrupt the contract of the Ministry of Defense. These products are not critical for the front, and alternatives can be quickly found on the market.

Such a risk is possible for manufacturers of more critical products, and in the case when there are not so many manufacturers on the market. For example, it can be vehicles for transporting personnel or military equipment, or in the case when there are only 1–2 manufacturers and there can be real negative consequences for the Armed Forces in case of an attack on production.

The place of delivery also causes a lot of discussion. But it can always be indicated not completely, so as not to expose a specific storage point for the enemy. For example, specify only an oblast, district, or city.

As for the number of servicemen, the total number of the Armed Forces is not classified information. The Minister of Defense himself openly speaks about this. But information about the number of troops in a particular region can be sensitive. And if we talk about the number of canned food and eggs, then such information can hardly be used by the enemy. However, for example, the number of grocery sets, sleeping bags, or sleeping mats may indicate the number of recipients of these goods.

Therefore, it is worth maintaining a certain information balance as far as the procurement of the Ministry of Defense is concerned. But in most cases, data on civilian procurement of the MoD will not help the enemy in any way.

At the same time, there are no objective reasons to hide information about prices and payment terms (the latter is also important as it allows manipulating the price) at all. The cost of eggs, shoes, and canned food interests only those who pay for them. That is, the citizens of Ukraine. The enemy has no benefit from this.

What do MPs and the government offer?

After the scandal around the procurement of the Ministry of Defense, draft law 8381 appeared in the Verkhovna Rada.

According to it, MPs plan to introduce mandatory reporting within 10 days from the conclusion of the contract by the Ministry of Defense (for procurement worth more than UAH 200,000). The report will indicate the name of the procuring entity, the name of the procurement item, the price per unit of goods.

In this way, the public will be able to find out information only about the prices for the goods. But this does not make it clear. After all, the price depends quite strongly on the terms of payment, the order of its revision, the terms of delivery.

The Ministry of Defense, rejecting allegations of corruption, in particular, referred to the fact that the contract has certain conditions for revising prices (saying that the price specified in the contract is maximum, not actual) and that the terms of supply are quite peculiar. In the end, society never saw evidence of either the first or the second. But it is quite obvious that the publication of the price alone will not remove all the issues. 

In addition, the fact of reporting does not tell us anything about how and why a particular supplier was selected. An opaque way of selecting suppliers will affect the trust of market participants, and such procurement will never become effective.

The Ministry of Economy proposes to expand the scope of application of Resolution No. 1175 on conducting framework agreements for the procurement of military clothing. But this will cover only part of procurement of civilian products by units of the Ministry of Defense.

In addition, the framework agreement is better suited for systemic procurement, which is carried out with a certain frequency. It is not quite effective for one-time or non-systemic procurement.

Why can’t all MoD procurement transactions that are not related to weapons be transferred to Prozorro?

Quite often, we hear that Prozorro is not suitable for certain procurement transactions. But this is a manipulation. After all, Prozorro is only an electronic platform that implements the protocol of the procurement procedure, which was laid in it by law and government resolutions.

Any procurement procedure looks one way or another because this is how it is described in a certain regulatory act.

And in fact, nothing prevents the Ministry of Defense from procuring through procedures in the Prozorro system. For the most part, they do not contain sensitive information. And even if it exists, there are mechanisms and ways of conducting such procurement. In particular, bidding with the NDA agreement. Then some data are not published, but anyone can see the tender, enter into a non-disclosure agreement (NDA) with the procuring entity, and learn the sensitive details of the contract.

In any case, it’s a matter of desire, not ability. And the Ministry of Defense of Ukraine should be a leader in transparency and integrity because the defense capability of our armed forces most of all depends on the effectiveness of procurement of this particular procuring entity.

This publication was prepared with the financial support of the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.

The post What Info Is Secret in Defense Procurement not Related to Weapons? first appeared on Transparency International Ukraine.

The world publicly spoke about the “Marshall Plan” for Ukraine at the very beginning of the war. But it has still not been formulated. The subject of political debate for now concerns who will decide which projects to finance and how much money we need.

The Verkhovna Rada is currently discussing draft law 7198 on the procedure for compensation for damaged and destroyed property. Recently, the Presidential Office has also presented the concept of the Reconstruction Fund of Ukraine and announced the submission of a draft law on its activity to the Parliament. However, so far, initiatives from the authorities have several unresolved issues. And this does not look like a “Ukrainian Marshall Plan” — because it contains neither a general concept nor a plan itself.

Question One: Where Are Compensations, and Where Is Rebuilding?

The primary task of the state is to assess and record all damaged and destroyed objects. But what to do next is not clear.

Some part of objects will be rebuilt — instead of the destroyed buildings, a new, possibly more modern ones will be erected. Another part should be included in the compensation procedure, that is, the owner should receive compensation for the destruction.

MPs have already proposed several draft laws to determine the procedure for compensation for destroyed property. Currently, the main one is No. 7198. It provides for a procedure for the payment of compensation only for individuals. For apartment buildings, it is planned to rebuild housing on the site of the destroyed building.

However, many issues remain outside the law for the moment. Namely, the property of legal entities, destroyed movable property of individuals (for example, cars), non-property damage (loss of health).

In addition, it is not known how to deal with objects that have already been restored or partially restored using one’s own resources.

On the other hand, according to the concept of the Reconstruction Fund of Ukraine, which is currently under preliminary discussion, the Cabinet of Ministers will determine the list of all reconstruction objects that will be financed with international funds on the request of the central executive authorities or regional state administrations.

Probably, not all destroyed objects will be included in this list of reconstruction. Accordingly, there will be a large gray area of objects that will potentially not be included either in the compensation procedure or the reconstruction procedure. 

Question Two: Regional or Centralized Rebuilding Model?

Already two mainstreams are developing in parallel:

1. regional partnership, when different regions cooperate with different countries and funds (regional mentoring);
2. a centralized institution (fund or agency) that will coordinate the entire rebuilding.

Back at the Lugano conference, individual countries showed a desire to take the patronage over the rebuilding of certain oblasts or cities. In some regions, this process has already been partially launched. For example, Denmark is beginning to help rebuild the Mykolaiv oblast.

On the other hand, the concept of the Reconstruction Fund of Ukraine refers to a centralized process subordinate to the Cabinet of Ministers.

Each of these options has its drawbacks.

The decentralized process model was applied during the implementation of post-war reconstruction projects in Bosnia and Herzegovina in 1996-2004. This has generally led to negative experiences and poor reconstruction performance due to several problems:

• lack of strategic vision of long-term ways of economic development;
• duplication of efforts of different donors and their weak communications;
• low management potential of national bodies.

Moreover, when different countries fund projects in different oblasts/cities, the issue of the scale of reconstruction depends solely on the desire/capacity of the donor country. In practice, this may mean that one city/region will receive a lot of money and a powerful recovery. Others — much fewer. In the future, this will prompt the internal migration of the population to more developed cities/regions.

The model of a single Reconstruction Fund of Ukraine with an independent supervisory board also has many issues. Firstly, these are political risks of influencing the choice of restoration projects. Secondly, independent supervisory boards do not ensure the efficiency of the institution.

The United States faced such problems during the implementation of reconstruction projects in Afghanistan and Iraq. Many projects were not completed there, and the invested funds did not produce the expected result for economic development and improving the standard of living of the population, despite independent supervisory boards and international control.

Some projects did not meet priorities and national interests, but were driven by the corruption motivation of the authorities. A striking example is the construction of a hotel in Kabul, worth USD 85 mln, which has not been completed. As a result, US taxpayers lost money and Afghanistan residents did not benefit from multimillion-dollar investments.

The instability of the political system and the low development of state institutions, such as courts, anti-monopoly bodies, institutions of investigation of economic crimes, lead to high risks of corruption abuse and many unfinished projects. In terms of reconstruction efficiency, it is the worst-case scenario.

To minimize the risks, the centralized coordination of the reconstruction process must be as independent of the political system as possible. When most decisions are made based on objective processes rather than political preferences.

The center of this process may be a politically independent institution (agency/fund), which is responsible for the quality of the process: maintaining the development of quality projects, assessing them, ensuring a transparent way of determining the contractors and cost of work, monitoring the efficiency of use of funds, aggregation of information, and notifying the society.

In fact, such an institution should connect all aspects of the reconstruction process:

1. donors and investors;
2. the state;
3. performers of projects (balance holders of objects);
4. society and communities (ultimate beneficiaries).

It should also have high level of confidence among the international society and the population of Ukraine.

Question Three: State or International Reconstruction Institution?

There are also two opposite points of view on what the institution should be: Ukrainian or international (foreign). And here, too, there is no obvious choice. In both cases, there are shortcomings.

The state institution, even if it is separated from the state by all sorts of independent bodies like supervisory boards, will still be in the field of action of the regulatory framework of the Cabinet of Ministers and the Verkhovna Rada.

We have repeatedly seen attempts to change NABU and SAPO legislation to minimize the political independence of these bodies. We also saw how the competitions in these bodies took place. It is difficult to believe that in the case of reconstruction agency/fund, the Ukrainian political establishment will behave differently.

On the other hand, the purely international body is very far from the real needs of Ukraine. It will be interested in the implementation of projects that are easier to control and where the contractors will most likely be western companies. And they are unlikely to build small objects in remote communities.

In Afghanistan, the Office of the Special Inspector General and the Reconstruction Trust did not ensure the efficient use of funds and quality implementation of projects. After all, the effectiveness of the projects depends on the performance and requires not only procedural but also operational control of processes.

The international institution will not be influenced by a lever of Ukrainian society, which will demand not only large-scale investment projects, but also more mundane squares, gardens, bus stops, etc.

Therefore, such an institution should be Ukrainian, but separated as much possible from the body of state power. 

So far, the concept of the Ukrainian Restoration Fund provides that the Cabinet will determine what and how it will do. To buy off the international community, they only plan to give the majority of votes in the supervisory board, which has very limited powers.

Question Four: Who and How Will Select Projects for Reconstruction?

If you analyze the current situation, it seems that at the local level, international donors and local councils will select the reconstruction projects. At least, the draft laws and proposal of the authorities neither deny it nor clarify it.

Large projects at the level of oblasts and the state will be determined by the Cabinet of Ministers. How it will do it, and based on what principles — is still unknown.  It is only noted that such approval will be submitted by the relevant request of state administration and ministries.

At the same time, the issue of selection of reconstruction projects contains perhaps the highest number of corruption risks. The distribution of funds is, at the very least, the issue of political corruption, when money is channelled primarily to projects that can be used as a base for future political campaigns. Secondly, certain companies in the market may lobby for the financing of projects in a particular sphere.

As a result, we will see an imbalance in funding needs and limited competition in some markets that will absorb the majority of funds. Where there is limited competition and a lot of money, there are inflated prices, corruption, and kickbacks.

To avoid these risks, the process of distributing funding between projects should be as objective as possible and consider not only the wishes of officials, but also the society. It is also necessary to assess projects for risks and compliance with reconstruction needs.

Roughly, funding should be distributed among the “baskets” of needs according to a fair principle. And each of the “baskets” should include only effective projects with low risks.

Ensuring a separate distribution of funding within regional, sectoral, and national projects should allow the realization of a fair principle in which there are no risks of disproportionate meeting the needs of a particular sphere/region.

Question Five: Who and How Will Control the Funds?

So far, the issue of controlling the effectiveness of the use of funds is almost not raised. It’s not good since this is the main question. We have extensive experience in dozens of programs, projects, and initiatives that have absorbed billions of funds and culminated in long-term constructions or corruption stories and investigations.

Obviously, the country requires a new mechanism. Such a function can be performed by the same centralized institution if it is independent and has sufficient competence not only to administer the process, but also to analyze it. For example, to conduct an examination of the project implementation, assess the integrity of procurement, determine risks not at the stage when the money has already been paid and transferred to Panamanian offshore, but also at the stage of project preparation.

If Ukraine fails to ensure the efficient use of funds, the issue of reconstruction will fail.

Ukraine has the State Audit Service, the Accounting Chamber as public procurement control institutions. But this is mostly not about efficiency, but about whether the funds have been spent correctly from the perspective of the law. In addition, public control and supervision is a statement of an event that has already taken place. The effectiveness of the use of funds depends mostly on how transparent and honest the process is until the moment of payment.

For reconstruction, an expert function is important, which will be able to evaluate the quality of the project, its prospects, alternatives, and risks, whether the project is duplicated with other programs, and whether it meets the goals of reconstruction, whether the project developer has studied alternatives, and whether the right approach has been chosen.

In a rather limited field of institutions in the field of project and investment evaluation, it is likely that without an institution that will accompany the reconstruction process, it will be difficult to achieve a positive result.

The material was prepared within the framework of the USAID/UK aid TAPAS Project/Transparency and Accountability in Public Administration and Services.

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