How to Make Public Procurement Less Attractive for Businesses

Public procurement monitoring is traditionally a problematic area. Perhaps everyone agrees that it needs reformation. However, what changes are needed is a debatable question.

For years, the auditors have been actively pursuing prompting the Treasury to suspend payments on contracts based on their findings. This is one way to give auditors stronger leverage. Now, the mere fact of detected violation does not necessarily mean that the violation will be corrected, and all responsible will be punished. This idea was implemented in draft law No. 10089, registered at the end of September.

Before making a payment under a procurement contract, the Treasury authorities must make sure that the relevant procurement has been made. To do this, they check respective information on Prozorro. The Treasury does not allow payments in several cases, if a procurement was cancelled, being appealed to the AMCU, or its results/contract awarded are declared null and void by court.

Draft law No. 10089 suggests adding one more thing to these conditions: the auditors found a significant violation in a procurement and ordered it to be eliminated in their monitoring report.

However, theoretically a procuring entity may promptly appeal auditors’ decision if they disagree with it. The draft law provides for changes in deadlines for consideration of such appeals in court. Now it can last for years but the draft law suggests fitting that whole process in two weeks: appeal and escalated appeal. They offer to cancel cassation appeals for those cases.

Why is this a very risky decision?

Some procuring entities do abuse procurements and that problem is serious. However, it is radical and risky to suspend payments, especially for ongoing contracts.

If they do introduce that, procurements will become unpredictable for both procuring entities and bidders. Auditors can monitor procurements not only during implementation, but also during the execution of contracts — until the procuring entity publishes a contract performance report. Accordingly, it may happen that:

A procuring entity held a tender, awarded and concluded a contract, and a contractor proceeded with it… At that stage, auditors come and say that the winner was selected illegally so the contract must be terminated. A half-completed contract.

What is the probability of that situation? Now more than 70% of monitoring begins after the conclusion of a contract.

For businesses, this means that when they want to become a contractor or supplier to the state, they must accept the absolute unpredictability of such cooperation. Even if you win a tender, get a contract, and start fulfilling your obligations, no payment is guaranteed. Because auditors can come. Do you like that prospect?

Another part of the problem is drawbacks in auditors’ work which we found during the research of their monitoring. For example, they are not always consistent about the method of elimination of similar violations. That is, in one case when a procuring entity unreasonably rejected the most cost-effective proposal, auditors oblige them to terminate an awarded contract. However, in the similar situation they just ask to avoid the same situations in the future.

Also, the idea of appealing monitoring conclusions just in two weeks seems unrealistic. Mere adoption of that norm by lawmakers does not make it realistic for courts.

Moreover, we have been studying court appeals against monitoring in for years. For example, over the past two years, procuring entities have challenged almost 11% of the conclusions based on monitoring results. In almost 69% of cases, courts of first instance sided with them. In 2020, our big research showed that courts of first instance sided with procuring entities in 67% of cases, courts of appeal in 64% of cases, and cassation courts in 75% of cases.

In general, that means that letting payments be suspended means giving too much leverage to the authority with questionable efficiency.

Alternative solution

Now more than 70% of monitoring begins after the conclusion of a contract. In other words, monitoring, which should be a preventive control measure, is a post-control in most cases.

If auditors check procurements more often while they are ongoing, violations can be eliminated before the contract is awarded. To implement that in practice, procurements might be suspended automatically for the time of monitoring and if auditors find any violation, a procuring entity shall be obliged to eliminate it.

This will prevent losses because procuring entities will simply not be able to finalize procurements before correcting violations. That means fewer and less significant risks since auditors will have levers of control at the procurement process step.

This is a compromise option of giving more powers to the State Audit Service and not making public procurement absolutely useless and risky for businesses. To learn more about legal details of that decision please read the legal analysis of draft law No. 10089 by DOZORRO team.

However, simply giving auditors more authority will not make public procurement control truly effective. That needs system changes, especially in monitoring and auditor KPIs approaches. Things that need to be done first:

1. Shift the focus from post-control to prevention of violations: monitor procurement before awarding contracts.
2. Update and categorize procurement violations, provide clear definitions of major and minor ones.
3. Clearly distinguish and standardize ways to eliminate different types of violations.
4. Select procurement cases for monitoring based on objective factors: expected value and risk indicators that need to be improved.
5. Limit the focus of monitoring to significant violations.
6. Resolve the issue of auditors’ access to personal data of violators, now preventing the auditors from bringing responsible to justice.

Given all the aforementioned factors, suspending procurements when violations are detected through monitoring will enhance procurement efficiency. After all, control is not only about the money saved. This is a question of the overall efficiency of procurement process.

If we cancel all procurements, we will save all the money for the budget. Does that sound like absurd? But it looks like now the auditors’ KPIs are exactly the money saved and returned to the budget. Changing this paradigm should be the first step towards effective control of public procurement.

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