Proposals by DOZORRO and KSE to New Draft Law on Public Procurement

This fall, the parliament is to adopt a new law on public procurement, the provisions and requirements of which must comply with European directives. This is Ukraine’s commitment to the World Bank, as well as an important step for negotiations on joining the European Union. Chapter 5 Public Procurement forms part of the first negotiation cluster Fundamentals of the EU Accession Process. Therefore, our European integration progress depends on the pace and quality of this reform.

The relevant draft law No. 11520 (hereinafter referred to as the draft law) was voted on by MPs in the first reading on September 17. After that, a working group was established under the Verkhovna Rada Committee on Economic Development, headed by MP Oleksii Movchan, which worked on amendments before the second reading. MPs, the department of public procurement of the Ministry of Economy, representatives of the public, in particular specialists of the DOZORRO project by TI Ukraine and the KSE Center for Excellence in Procurement (CEP) took part in the activities of this group. The developed changes based on the results of these activities were sent to the European Commission for approval. After that, the draft law must be considered by the Verkhovna Rada of Ukraine.

It was a month of extremely intensive work. In this text, we are going to cover 12 most important proposals provided by TI Ukraine and the CEP.

1. Establish mandatory rules for determining estimated value and applying non-price criteria.

The draft law stipulates that the Ministry of Economy develops a model methodology for determining the estimated value (EV). It is not mandatory, and procuring entities may not use it. Instead, procuring entities are obliged to develop and approve their own methodology for determining the EV. We believe that such an approach may cause risks of incorrect determination of the EV, for example, its significant overestimation. And since the participants focus on the EV when preparing a price offer, there is a high risk that the procuring entity will overpay as a result of a procurement transaction. Therefore, we proposed to approve, by the decision of the Cabinet of Ministers, a mandatory methodology for determining the estimated value of procurement transactions for planned procedures: open bidding, a negotiation procedure, and for the period of wartime, for procurement without using Prozorro, with a value above the set value thresholds. The main purpose of the methodology is to help the procuring entity choose an optimal action algorithm to determine the estimated value correctly.

Legal regulation was also lacking in the issue of tender bids award criteria. The draft law removes the restriction on the specific weight of non-price criteria. Therefore, procuring entities will set them at their own discretion, which can lead to discriminatory conditions and subjective criteria. To settle the issue of the use of non-price criteria to evaluate bids, we proposed to approve the procedure for applying criteria to evaluate tender proposals by the decision of the Cabinet of Ministers. The main purpose of the Procedure is to help procuring entities apply non-price criteria correctly. This order should also serve as a guideline for calculating the life cycle cost.

2. To provide for the appeal to the Antimonopoly Committee in regard to the qualification for the e-catalogue and the terms of announcing notices.

Electronic catalogs are developing rapidly, but suppliers do not have enough tools to protect their rights. If the qualification notice contains discriminatory terms or the supplier is unreasonably rejected, they can challenge it only in court. The draft law also establishes the authority of the Cabinet of Ministers to oblige procuring entities to purchase certain goods, works, and services using the electronic catalog. This tool may eventually become irreplaceable. Therefore, it is important to remove barriers to access to it and ensure a sufficient level of competition. In view of this, we proposed to provide for an appeal to the Antimonopoly Committee regarding the terms of notices on conducting qualifications for the electronic catalog, actions, decisions, and inaction of managers of electronic catalogs.

3. Introduce safeguards against abuse in connection with an increase in the procurement guarantee to 10%.

The draft law proposes to increase the maximum amount of contract implementation guarantee for the procurement of works from 5 to 10%. This might cause additional barriers for the participation of companies in tenders, which can potentially reduce the level of competition (for reference: this year, only 24.4% of lots for the purchase of works had two or more participants). In certain procurement transactions, the decrease in the level of competition is influenced by the requirements of procuring entities regarding the guarantee of the contract in the form of making a real monetary deposit to the procuring entity’s account. According to the Ministry of Economy, increasing the amount of the guarantee will allow procuring entities to protect themselves from dishonest contractors. At the same time, a contract guarantee is not the only way to protect the procuring entity’s interests. One way may be to impose a fine.

Since the idea of an increase in the maximum amount of the guarantee was not abandoned, we proposed to introduce several safeguards:

• if the amount of the guarantee exceeds 5% of the contract price, it can be requested only in the form of a guarantee issued by banks, other financial institutions or insurance organizations;
• no monetary payment can be requested for such a guarantee;
• documents on providing a guarantee in regard to the procurement contract must be published by the awarded participant on Prozorro.

4. Set sufficient time for submitting bids.

Compared to the current law, the draft law proposes to shorten the minimum period for submitting tender proposals from 15 to 7 days. This term is not enough for submitting proposals during the procurement of works. This was confirmed by the results of the DOZORRO study and taken into account by the introduction of appropriate changes to Resolution No. 1178. Therefore, our proposals consisted in increasing the minimum deadline for submitting a bid.

As a result, when procuring goods and services, the minimum period for submission of proposals will be 15 days; for the procurement of works, this period shall extend to 20 days, while in Eurobidding, it will reach 30 days.

5. Introduce mandatory publication of estimate documentation when procuring works in a format that will allow participants to prepare bids quickly.

Last year, tender documentation files in Excel format or special estimating programs were made public by procuring entities in only 6.7% of construction work procurement. Notably, they make it possible to optimize calculations by simplifying and speeding up the process of preparation of bids by participants, which has a positive effect on competition.

Taking this into account, we proposed to publish the estimate documentation as part of the tender documentation in two formats: one for the exchange of data of specialized software complexes to simplify the preparation of tender bids by businesses, and the other one shall be any machine-readable format so that the public and stakeholders might review them.

6. Provide for the publication of prices for material resources, as well as service acceptance certificates, cost certificates.

Recently, procuring entities were obliged to publish information about the prices of material resources in a machine-readable format along with the contract when procuring works. This adds transparency to the construction process. At the same time, our proposals regarding the obligations to publish construction service acceptance certificates and certificates on the cost of such works and costs for procurement over UAH 10 million will allow us to control the prices for the purchase of materials during construction. We proposed that the certificates be made public together with the report on the implementation of the contract. There were also other proposals, in particular to publish them immediately after signing. Because of this, the stage of contract implementation shall become more transparent for public oversight and supervisory authorities.

7. Improve the 24-hour error correction mechanism.

Today, the “24-hour rule” is an effective way to preserve the best bid during a tender. In the draft law, this mechanism had several weaknesses, namely:

• There is no list of information that should be mentioned in the request for inconsistency elimination. This might lead to procuring entities indicating incomplete, incorrect, inaccurate, unclear information in the request. Therefore, we proposed to restore the list of information provided for by the current law on public procurement, which should be contained in the requirement to eliminate
• A non-exhaustive list of inconsistencies, which are considered a change of the procurement item and which cannot be corrected (change in the name, brand or model of the product, etc.). In order to avoid different interpretations of the provision, we proposed to clearly define what shall be considered as a change of the procurement item (change in quantity, name, brand or model of the product, technical, qualitative, quantitative characteristics of the item).
• The lack of possibility to correct the guarantee of the tender bid by submitting an updated document, as the draft law limited the permissible dates for issuing documents to correct errors (they must be issued no later than the deadline for submitting the bid if they are documents from third-party organizations). We proposed to allow correction of the tender bid guarantee with the issuance of new documents (new date).

8. Provide justification for non-application of the three-round electronic auction.

The draft law, as part of the harmonization of national rules with European ones, provides for optional three-round auctions. However, contrary to Resolution No. 1178, the draft law does not entail the need for a justification for such non-application.

The DOZORRO study showed that conducting an auction in high-value tenders helps increase the level of savings. Therefore, we proposed to use regulation from Resolution No. 1178, which today prompts procuring entities to announce tenders with an auction. Namely, in the event of a tender without an auction, the procuring entity justifies their decision and publishes it together with the notice.

9. Provide safeguards for the negotiation procedure, which is carried out if the procurement procedure is cancelled due to lack of bids.

One of the reasons for conducting the negotiation procedure is that the tender was cancelled, including partially (by lot), due to the lack of any tender bid. In such cases, the procurement item, its technical and qualitative characteristics, as well as the requirements for the participant, must not differ from the requirements that the procuring entity specified in the tender documentation.

We proposed to reflect in the draft law a useful approach of applying the provisions from Resolution No. 1178. Namely, in addition to the terms of the tender, the draft procurement contract must also remain unchanged, while its price cannot exceed the estimated value of the procurement item. If the tender is cancelled by lot, the negotiation procedure can be applied only to the relevant lot.

10. Add legal certainty to what shall be considered a refusal by the awarded participant to sign the contract.

In the draft law, the grounds for rejection of the tender bid due to the awarded participant’s refusal to sign the procurement contract were formulated as follows: “refused to sign the procurement contract or did not sign the procurement contract…” But in practice, procuring entities sometimes define the concept of “refusal” at their own discretion; in particular, they set detailed requirements for providing a package of documents of the awarded participant in the tender documentation. For deficiencies in these documents, the participant will be disqualified. At this stage, the 24-hour rule no longer functions.

Therefore, we proposed to clarify that the awarded participant informs the procuring entity about the refusal to sign the contract through the electronic procurement system, uploading an electronic document about it. The lack of such a document and any actions on the part of the awarded participant regarding the signing of the contract is also considered a refusal.

11. Clarify certain provisions regarding framework agreements.

In the draft law:

• the total cost of the procurement item of selections carried out by the procuring entity under the framework agreement could differ from the estimated value of the framework agreement itself;
• there are no established requirements to publish the draft framework agreement when announcing open bidding for its conclusion;
• it is stipulated that the procuring entity must set a period sufficient for the participants to prepare the selection of bids when announcing the selection for the contract conclusion, and sufficiency is a rather vague concept.

So, we proposed:

• to determine that the total cost of selections cannot exceed the estimated value of the framework agreement;
• to provide for the requirement to publish a draft framework agreement, as the participants must be aware in advance of what transaction they will enter into;
• to set a clear minimum deadline for submitting bids, for example, 5 days.

12. To improve the mechanism of providing explanations.

In the draft law, the obligation of the procuring entity to provide an explanation by request was replaced by the obligation to provide an answer. This is a potentially negative step, since the procuring entity might fulfill their obligation only formally by providing any answer, but not communicating the information to the participant effectively.

Therefore, we proposed to restore the obligation of the procuring entity to provide the explanation. We also suggested providing an opportunity for potential participants to request additional information and/or documents regarding the procurement item to receive them if available.

In addition to these changes, DOZORRO together with KSE made a number of other proposals, both substantive and technical. There is also a list of important issues that need to be addressed further, for example, improving the work of the centralized procurement agencies and monitoring by the State Audit Service. Steps to strengthen public procurement will continue.

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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.