Mission Impossible: Can One Issue 300,000 Certificates on Average Prices in a Year without Taking a Bribe?

MPs have initiated draft law No. 9172, which proposes to amend the Law on Public Procurement and supplement it with provisions on the average market price. The amendments are intended to change the approach to calculating the expected cost of procurement: to link it to price certificates from the Ministry of Economy.

One of the problems in public procurement is the overestimation of the expected value. The calculation of the price at which a tender is announced is not covered by the Prozorro system and therefore remains behind the scenes. This creates room for manipulation.

To overcome the problem, MPs submitted the draft law No. 9172 with a number of proposals to the Verkhovna Rada. It partially duplicates the text of its predecessor, draft law No. 8041, which TI Ukraine urged not to support. The main idea is to base the expected value of procurement on the average market price of goods, works, and services. The Ministry of Economy or an enterprise that it designated will issue certificates on the average price level for each procurement, and the relevant information will be included in the content of procurement announcements.

We have analyzed whether these ideas are feasible in reality and what corruption risks the draft law poses.

How to calculate the expected value of the procurement item today

Currently, the Law on Public Procurement (the “Law”) does not provide a clear answer to the question of how the procuring entity should calculate the tender’s expected value and does not even define this concept. However, it does authorize the Ministry of Economy to approve an approximate methodology for this process.

This methodology recommends the following:

comparing market prices;

analyzing prices of previous procurements;

taking into account the peculiarities of goods and services whose tariffs are regulated by the state;

applying the relevant state standards to calculate the expected cost of works.

In the explanatory note to the draft law No. 9172, its authors state that “authorized persons of the customers deliberately ignore the above methodology.” As an illustration, the authors cite statistics showing that in the State Audit Service’s 2019-2022 monitoring, out of 34.2 thousand monitors, 82% found violations. At the same time, approximately 65-70% of typical violations are related to the overestimation of the expected value of the procurement item. The initiators of the draft law declare their goal to minimize the number of such violations.

What exactly does draft law No. 9172 propose?

First of all, the authors plan to define the term “expected value” as follows:

“the expected value is the estimated value of the procurement item on specific delivery terms, based on the average market price of the procurement item on the day of calculation. It provides information on the inclusion/non-inclusion of value added tax (VAT) and other taxes and fees.”

In other words, the key factor for determining the expected value should be the average market price on the day of settlement.

The announcements on most types of procurement should include up-to-date information on the average price level for the specified procurement item on the Ukrainian market in the form of an uploaded certificate issued by the Ministry of Economy.

This requirement is planned to be introduced for announcements of open tenders, tenders with limited participation, competitive dialogue, simplified procurement, and framework agreements. Interestingly, it is not proposed to publish a certificate on the average price level for the negotiation procedure, regardless of the grounds for its conduct.

Defining the concept of a certificate on the average market price, the authors indicate that it will be a standardized document developed and approved by the Ministry of Economy containing information on the average price for goods, works and services in the Ukrainian market.

To implement the idea, the authors of the draft law propose to give the Ministry of Economy the following powers:

• to organize and ensure issuing certificates on the average price for goods, works and services on the Ukrainian market;
• to develop and approve an exemplary methodology for determining the average price level and the expected cost of the procurement item;
• to develop and approve a form of an exemplary certificate on the average market price.

The Ministry of Economy is planning to designate a management enterprise as responsible for issuing certificateson the average price. Since the new definition requires the expected value to consider the average price level on the day of calculation, it seems that the authorized company will have to issue certificates for each procurement separately.

The second problem that the authors of draft law No. 9172 seek to solve is the absence of a technical specification to the procurement contract in the electronic procurement system, or cases where “the content of such specification does not fully disclose all the necessary technical, functional and quality characteristics of the goods, works or services to be procured.” Insufficient accuracy in the description of goods, works, and services allows procuring them at a lower quality level at inflated prices.

To overcome the problem, the MPs propose:

1. Provide that a procurement contract is null and void if there is no technical specification to the contract and/or its content does not disclose an exhaustive description of all necessary technical, functional, and quality characteristics of the goods, works or services to be procured.
2. To add the relevant technical specification to the procurement contract, along with the contract itself and other annexes thereto, to the scope of information that the procuring entity must disclose upon entering into the contract, as provided for in Article 10 of the Law.
3. To oblige the treasury authorities to check not only the availability of the annual plan, procurement contract, etc., but also the availability of the technical specification to the procurement contract and its compliance with the requirements of part one of Article 23 of the Law before making payment under the contract. At the same time, Article 23 of the Law itself remains unchanged.

Thus, the main vectors of the draft law No. 9172 are the linking of the expected value to average market prices, as well as certain steps to ensure that procuring entities properly disclose technical specifications to procurement contracts.

What are the risks and disadvantages of this initiative?

We share the goals declared by the draft law No. 9172, to avoid abuse and increase transparency of procurement. Nevertheless, we must warn against the significant risks, including corruption, that it poses.

Manual control

First of all, the idea of authorizing one company to issue certificates on the average price level looks extremely dangerous in terms of possible corruption. In fact, the draft law proposes to give manual control over the issue of whether to issue such a certificate and what price to indicate in it.

We have already mentioned this risk in our position paper on the draft law No. 8041, which contained similar proposals. We would also like to note that while the company is granted a monopoly position in issuing certificates, without which procuring entities will not be able to legally announce procurement, the draft law does not contain any rules on publicity and automation of its work.

Scope of work

As always, we consulted statistics to find out how many procurements could be affected by the innovation. We looked in the BI Prozorro analytics module to see how many procurements were announced by methods requiring mandatory certificates of average prices.

It turned out that in 2022, even despite the full-scale invasion and procurement of significant volumes under direct contracts, more than 149 thousand open tenders (including those with special features and eurotenders) and more than 146 thousand simplified procurements were announced. In 2021, 300 thousand open tenders were announced, including those with English-language publication, and 333 thousand simplified procurements. In the first 3 months of 2023 alone, about 80 thousand open tenders and 4.5 thousand simplified procurements were announced.

This means that at least 300 thousand procurements will be announced during the year, for which procuring entities will have to obtain certificates of average price level. In terms of months, it looks like the authorized enterprise will have to issue more than 25,000 certificates per month for open tenders alone.

Such statistics raise serious doubts about the reality of the draft law’s intentions, as well as about the proper quality of market research that should form the basis of the certificates.

Since some procurement items are complex, researching the average price level for them can take a long time, during which the customer’s needs will not be met.

For example, how long would it take to get an average price quote for “(Left) Inner Tube Clamp 60.93mm (2.399″) P/N: GRS-27-2-LH; F3009-LH; 1230-LH or equivalent”, “Multipetal collimator for Terabalt radiotherapy cobalt emitter type 100 model ACS”, “ Honghua ropes for lifting towers and bases” or “Transistor-pulse control system for traction motor, to be installed during the overhaul and refurbishment of Tatra T3 tramcars by replacing the rheostat-contactor control system with a transistor-pulse control system (TPCS)”?

Moreover, what if the subject of procurement consists of several dozen nomenclature items, each of which has its own average market price?

No exceptions

The proposed legislative definition of expected value does not contain any exceptions for complex works and services. And this is a cause for concern.

After all, it is possible to determine the average price level on the market for, say, potatoes. But how to determine the average price level if the subject of the procurement is the reconstruction of a particular customer’s stadium? Or services to develop modifications to a specific software? What about services for holding a specific festival, traditional for a certain community?

We are talking about procurement items that are not necessarily tied to a particular contractor. We assume that they can be performed by different contractors and are subject to procurement through open tenders. However, due to the presence of many components and/or the specifics of the procurement subject, the question arises: what average prices will the certificates research and prove?

For example, what certificate will justify the expected cost of such procurements as “Overhaul of the first stage of the linear part of the Brody – State Border oil pipeline with replacement of the pipe” or “Services for wells fixing by means of suspension of the filter shank” or “Services for welding elements of the sidewall of the beam of the spine platform car from tolling raw materials”?

It seems that for construction works (and construction works traditionally make up the lion’s share of procurement in terms of value) the average price level for construction materials can be taken into account. But how will this work in practice if a construction project involves the use of several dozen types of materials?

For software development services, marketing services, event organization services, and legal services, it is theoretically possible to consider the average price per hour of work of the relevant specialists. But this approach does not take into account the specifics and complexity of the services in each case.

In addition, the definition of what constitutes the market in each case may become a problematic issue in practice. For example, in a remote community, one supplier usually submits a proposal for a catering tender, while others do not see work in this community as profitable. This can happen not because of discriminatory conditions, but purely due to natural and economic conditions. The customer should determine the expected cost based on the average price level in the market. But what will be considered the market in this case? A community, a district, a region, or the entire territory of Ukraine?

Returning to the issue of complex services, even catering services are not so simple. To announce a tender for catering services, will you need to obtain a certificate of the average price level for each product? Or the average price for one day of meals?

Since the draft law does not contain answers to these questions, it is unlikely to be applicable to some procurement items. Perhaps the Ministry of Economy will have to provide answers to these questions in the relevant methodology. However, the methodology will not be able to correct the outline laid down by the draft law: namely, to determine the expected value differently for certain procurement items than on the basis of average market prices for the procurement item (even if such a level cannot be determined in some cases).

Completeness of the technical specification

The proposal to oblige procuring entities to publish technical specifications to procurement contracts is also problematic.

Thus, the draft law proposes to provide that the procurement contract is void if the technical specification does not disclose an exhaustive description of all necessary technical, functional, and quality characteristics of the goods, works or services to be procured.

Also, before making a payment under the contract, the treasury authorities will have to check whether the technical specification to the contract meets the requirements of Article 23(1) of the Law. Does it contain a description of all the necessary characteristics of the goods, works or services to be procured, including their technical, functional, and quality characteristics?

The exhaustiveness of the description is an evaluative concept. Therefore, we see the risks of the practice going to two extremes:

1. The formal check of the technical specification availability, as well as whether it contains the relevant headings (technical characteristics, quality characteristics, functional characteristics).
2. The contract check before payment will create new corruption risks, as well as risks of double interpretation of the words “comprehensive description”. This will result into Treasury officials blocking payments because they do not consider the description to be comprehensive enough or are simply afraid of making a mistake. Since this problem will arise at the stage of payment, procuring entities will be stuck in a dead end, as they will not be able to change the terms of the contract.

The same issue arises with regard to complex procurement items: what is considered an exhaustive description of them? How exactly should a Treasury employee make sure that the description of all the characteristics of such procurement items as, for example, “Repair of the hydraulic jack of the 1KD90.28.02.000 mobile vehicle” or “Radio-controlled target installation (RMU-L) for displaying light targets”, “Flight test of ground-based radio and light-signal equipment”, “Spring centerpieces for casing” is exhaustive?

And by the way, how will the authorized company determine the average price level for such items?

In some cases, it will be necessary to order an expert opinion for a final answer. Since the failure to disclose an exhaustive description of all characteristics is proposed as a ground for nullity of the contract, there is a risk of challenging contracts due to insufficient description of characteristics.

To summarize, the Draft Law No. 9172 seems to be risky and somewhat distant from procurement realities.

What we suggest

TI Ukraine urges not to support the draft law No. 9172.

Instead, in order to overcome the problem of overestimation of the expected value, we suggest considering the following steps:

1. Creating a system for publishing and automating the process of determining the expected value as a separate block in Prozorro. Such a system would make the process of determining the expected value public. Any user would be able to see to whom and what kind of requests for proposals the procuring entity sent, what responses it received, and how the calculation was made. The functionality would help to identify cases of avoidance of more favorable offers by the procuring entity, and suppliers would be able to respond to the request publicly and report cases of abuse.
2. Average market prices can be researched for certain categories of goods, works, and services. It is possible to introduce a legislative provision stating that procuring entities must take such indicators into account (with an acceptable percentage of deviation). But these should not be individual certificates, only public benchmarks, limits available for review by all customers and participants.
3. Regarding technical specifications in contracts, it seems advisable to additionally oblige contracting authorities to include in the draft contract a technical specification in accordance with the tender documentation and the winner’s tender offer.

This publication has been produced with the financial assistance of the European Union. Its contents are the sole responsibility of Transparency International Ukraine and do not necessarily reflect the views of the European Union.

Author: Anna Kuts