Procurement Fever 2023: Where It Came From and Can We Expect Change Next Year

Drones Instead of Paving Stones is one of the slogans with which citizens have been coming to local councils in the last month. Rallies on the priority of budget expenditures were held in Kyiv, Odesa, Dnipro, and Cherkasy; online ones seem to have affected the whole country. 

This wave of indignation arose back in June, when the procurement of vegetable slicers and drums for shelters in Kyiv schools appeared on Prozorro. Then there were TV shows, tenders for stadiums for tens of millions of hryvnias, and orders for the reconstruction of a biathlon shooting range in Lviv Oblast. What could be done with it? Will anything change in 2024?

Why so many tenders

After the public disclosure of tenders worth millions and billions, it could seem as if this year the local authorities have gotten their hands on the money and started spending it on all their whims. However, this is not entirely the case.

The DOZORRO team has been professionally working with public procurement for seven years, so we can confidently say that there have been many large tenders before. In the Prozorro system, the total amount corresponding to the contracts concluded, which are financed exclusively by the local budget, has not changed much. If before the full-scale war it was UAH 130-140 bln for the first nine months of the year, now we are talking about UAH 180 bln for the same period. Roughly speaking, it’s +35%. Add inflation, which last year alone was 26.6%, and this difference no longer looks so big. Neither did the distribution of procurement transactions by category change significantly. 

Of course, this does not mean that all communities still have the same opportunities to purchase something. Someone’s income decreased, and someone’s income, on the contrary, increased due to the personal income tax of servicemen. 

However, everyone faces the question of how to prioritize costs. It’s just that the more money there is and the bigger the difference with the incomes of past years, the wider the choice is as to where to invest it.

Which expenditures are appropriate?

Actually, the procurement item is selected not before the announcement of the tender but at the stage of budget planning. That is, at the end of the previous year. Here we need to move away from the usual pattern, when the needs and priorities were about the same every year, and critically evaluate them. It is necessary to draw a line between what is really essential and what can be done without.

First of all, we need to cover basic and urgent needs; the lack of their funding will worsen the life in the community. For example, this will include the operation of utility services, maintaining critical infrastructure in good condition, providing basic services to the population, and financing schools and kindergartens. 

Further, development costs can be justified, for example, the development of accessibility of administrative institutions and, in general, infrastructure for people with low mobility. It may include the preservation of historical heritage and concern about the environment. In this case, it is crucial how local authorities communicate with people and whether they explain why a certain project is necessary right now. Without healthy communication between the authorities and the community, such procurement may seem confusing and unnecessary, even when it is really appropriate. 

There are projects that can wait. If we compare them with the support of the army during the full-scale war, they are definitely inferior in terms of priority.

How can local authorities help the Armed Forces of Ukraine?

Defense is a function of the state. Therefore, it is financed from the national budget; local authorities are not allowed to buy weapons. Therefore, even if the city really wants to, it will not purchase air defense complex or a tank. But there are other ways to help, such as:

1. Transferring money to the national budget or to specific newly created units.
2. Acquiring military government bonds, that is, lending money to the state for military purposes. The difference with the first option is that if that assistance is irrevocable, then the money spent on government bonds will return to the local budget with interest.
3. Buying cars, drones, and other goods — except for weapons — for territorial defense and military units registered in the community.
4. Supporting the military and their families with payments.

These are several straightforward options on how to support the army.

To what extent do local authorities use these opportunities? According to the information provided to us at our request by 21 regional centers of Ukraine (all except Kyiv and the centers of Donetsk and Luhansk oblasts), this year they have spent UAH 7 bln on defense. For example, in Lviv, UAH 1 bln was provided for defense this year. Some of this money is transferred to the military through a subvention; the rest is used to purchase UAVS, cars, Starlinks, and other goods. In Cherkasy, UAH 381 mln was spent to support the military, which is 8.2% of the city budget.

In addition, at the expense of the local budget, new equipment can be purchased for a hospital where the military are undergoing rehabilitation or for the development of a local veterans support program.

Money from local budgets is also used to eliminate the consequences of Russian shelling, for example, by providing assistance to residents whose windows were destroyed or patching up the road if it has been hit.

What will change next year?

So far, the main plan is to take away the personal income tax of servicemen from the communities, thanks to which there has been a sharp increase in the incomes of individual communities. The Ministry of Finance proposes to credit this part of the tax to the national budget. But this draft law has not yet been adopted by MPs. 

There are a few more alternative ideas. In particular, to direct the personal income tax to where the military live and not where their military unit is registered, or to combine several approaches. There were also proposals to simply not charge personal income tax on the income of the military.

We support the view that the situation with personal income tax of the military cannot be left unchanged, and these funds should be redistributed to defense needs. Those communities that do not have sufficient other incomes, for example, in the de-occupied and frontline territories, should be supported with subsidies. Yes, this will shake the independence of local budgets, but now it is necessary to ensure vital defense needs. 

But no matter how the finances are distributed, the costs need to be reconsidered and clearly prioritized, both at the local and national levels, at the stage of budgeting, and not when tenders are announced.

Subsequently, it is necessary to ensure that the funds are spent fairly, including on public procurement. Here we hope for changes in the operation of control bodies, in particular the State Audit Service. According to our study, currently, when monitoring procurement, auditors mostly focus on small mistakes, and procuring entities often win in court. Therefore, it is difficult to talk about effective control. The recent scandals with audits of defense orders neither add to the optimism.

How can residents influence it?

Currently, the level of engagement of citizens in the distribution of local money is exceptional. It is difficult for me to recall when people were so massively interested in what was ordered on Prozorro in their city or village and what money was allocated for. This is a great opportunity to engage citizens in the budget process, for real, not just on paper. 

The Ministry of Finance approved recommendations on how to do this in 2020. In particular, public consultations can be held through various public hearings, surveys, and roundtables; public councils can be created; participatory budget can be conducted, and so on. 

At the end of the year, special attention should be paid to procurement on Prozorro. At the end of the budget year, institutions will try to use the money. And since time is short, the risk of violations increases. We used to call these weeks the December Harvest.

In the new year, we should not lose our vigilance, either. Thus, public monitoring will help not only find violations but also prevent new ones because potential violators will know that they are being watched. To help citizens, DOZORRO plans to develop a series of texts with tips for successful monitoring on Prozorro. So, write to us if you have any questions or suggestions; we will be happy to supplement the guides with your requests.