Restoration of Auctions, Monitoring of Direct Contracts: What’s New in Procurement Rules?

In May 2023, the Government adopted two resolutions, No. 471 and No. 491, which slightly changed the rules of public procurement during martial law. To present and explain them to the professional community, representatives of the Ministry of Economy, together with Prozorro, held a webinar and answered frequently asked questions from procuring entities.

What are the most significant changes? How will they affect procurement?

Restoration of auctions

The most high-profile event in the procurement sector in May was the restoration of three-round auctions to open bidding with special features. The Cabinet of Ministers removed them from tenders in early 2023, citing problems with electricity and communication due to russian attacks on infrastructure, and therefore with participants’ access to the system. Instead of holding an auction, the system evaluated bids at the prices at which they were submitted. This decision sparked heated debate and discussion.

Volodymyr Datsenko studied the impact of auctions on procurement savings and came to the conclusion that the abolition of multi-round auctions reduced the savings rate, most significantly for expensive tenders. “The state could have additionally saved at least one billion hryvnias over the three months we studied if multi-round auctions had not been canceled. At the same time, the analysis shows that there was no negative impact on procurements for smaller amounts: up to UAH 500,000 and especially up to UAH 200,000. On the contrary, for smaller procurement transactions, the blind auction proved to be more effective in terms of savings.”

Thanks to the changes introduced by Government Resolution 471, bids announced on May 19, 2023, and later, will again be held with three-round auctions. As before, if there is only one bid, it is automatically determined to be the most cost-effective and is submitted to the procuring entity for consideration.

However, there is one nuance. When justified, the procuring entity may decide to hold a tender without an auction. To do this, the procuring entity must select the appropriate function in the electronic cabinet and upload a justification for why they consider skipping an auction is appropriate.

Thus, three-round auctions became optional. This decision raised a lot of questions from procuring entities, who expect clear formal guidelines for their work: on what grounds can an auction be skipped? What is the justification? Where should it be uploaded?

As explained by the representatives of the Ministry of Economy during the webinar, the resolution does not contain exhaustive formalized answers to these questions but provides the procuring entity with the opportunity to make a balanced decision based on their situation. The justification can be indicated in the notes to the announcement or uploaded as a separate file.

We assume that procuring entities will choose open bidding with an auction in most cases, since making their own decision carries the risk of having to answer for it before the supervisory bodies. For example, if the decision looks insufficiently justified in the eyes of auditors.

Monitoring of direct contracts

From now on, the State Audit Service and its regional offices will be able to monitor direct contracts. This means that they can monitor them directly in Prozorro, also publishing all stages of monitoring and written conclusions on the procurement page. Based on the results of the monitoring, auditors can, for example, oblige the procuring entity to terminate the contract if it is concluded in violation of the law.

Previously, such a possibility existed only for “procedures within the meaning of the Law,” i.e., for open bidding. Direct contracts were not among them. But thanks to recent changes, auditors have been empowered to monitor not only procedures but also direct contracts, which is a welcome development.

Why is it important? Currently, there is a fairly wide range of grounds for entering into a direct contract for an above-threshold amount. According to the Prozorro system, in 2023, procuring entities concluded more than 63,000 direct contracts for the purchase of goods and services for above-threshold (over UAH 100,000) amounts, totaling UAH 97 bln. Of these, contracts for over UAH 1 mln total to UAH 81 bln. Another UAH 9 bln worth of works were purchased under direct contracts.

The legality of these procurement transactions requires careful attention and verification. Therefore, we hope that employees of the State Audit Service will detect as many abuses in above-threshold direct contracts as possible and demand that violations be eliminated in a timely manner.

Are there pitfalls?

• From a legal perspective it is debatable whether the monitoring covers contracts concluded before the amendments came into force, i.e., before May 19, 2023. The Ministry of Economy is of the opinion that there is no retroactive effect of the rules. This is explained by the fact that the principle of its prevention applies primarily to actions that began under a certain legal regulation and should be completed under it. Monitoring of direct contracts is not the case. The grounds and procedure for the procuring entity’s actions have not changed, nor have its relations and responsibilities. Instead, auditors have been authorized to check these actions for legality and validity through monitoring. Moreover, the auditors will monitor direct contracts for compliance with the legislation in force on the date of their conclusion. However, it is possible that the courts will take a different position on this issue.
• The question remains whether it is possible to monitor contracts that have already been executed. According to the general rule of Article 8 of the Law of Ukraine “On Public Procurement,” which regulates the monitoring of procedures, no. However, the Ministry of Economy is likely to provide a final clarification for the situation with direct contracts.
• Another frequently asked question by procuring entities is whether contracts for small amounts will be monitored. Here, we would like to point out that monitoring has been extended to “procurement transactions for which a report on a procurement contract concluded without the use of the electronic procurement system is published in the electronic procurement system.” That is, there are no restrictions on the amount, but first, reports for less than UAH 50,000 should not be published at all; second, the Ministry of Economy conceptually expects state auditors to identify significant violations involving significant amounts of money.

“Rain on one’s parade”

The February amendments to Government Resolution No. 1178 made a significant step towards transparency and accountability of direct contracts. Thus, the Cabinet of Ministers obliged procuring entities to publish “the procurement contract and all annexes thereto, as well as the justification for the use of the procurement grounds under subclauses 5-11, 14 of clause 13 of the Specifics, in case of concluding direct contracts for above-threshold amounts.”

What is the current state? The subclauses have remained unchanged, as have the report, contract, and annexes. But instead of “justification of the procuring entity’s use of the procurement grounds,” the procuring entity now only indicates “the grounds for procurement in accordance with this clause.”

This seems to be a step back because if the term “justification of the use” prompted procuring entities to describe some factual circumstances that led to the existence of the grounds, then “indicate the grounds” may be equal to a reference to the relevant subclause. With no specifications of how it happened that a direct contract was concluded instead of a tender. That is, there is a fear that the procuring entity will “indicate the grounds” only on the legal basis, but not on the actual one.

For example?

Previously, the procuring entity had to explain (provide justification) why there was no competition “for technical reasons” or why it used the ground “the need to protect intellectual property rights,” etc. Now, instead, it is enough to state in these cases that there is no competition or that there is a need to protect intellectual property rights, indicating the number of the subclause.

Why is it important?

The absence of a justification of why the procuring entity used a certain ground and entered into a direct contract will complicate public monitoring of direct contracts. After all, the public will not see a description of the situation itself, but only references to certain legal provisions. Moreover, it will not be easy to request a justification under the Law of Ukraine “On Access to Public Information.” In order for a citizen to receive it, such a justification must exist in advance in a documented form. The previous version of the Resolution required such information be documented. Now, when asked why there is no competition for technical reasons, the procuring entity can confidently answer that it does not have such information in a documented form.

We hope that in the future, the provision on justification of direct contracts will require both legal and factual grounds to be publicly available.

Mandatory procurement through centralized procurement organizations

According to the Government Resolution No. 491, a number of central executive authorities are now obliged to purchase goods under codes 09130000-9 Oil and distillates and 09310000-5 Electricity for above-threshold amounts through a centralized procurement organization, i.e., Professional Procurement state institution. These will be open bidding and framework procurement.

The full list of procuring entities is in Annex 5 to Government Resolution No. 846. In order to organize the procurement of fuel and electricity in the interests of these procuring entities, Professional Procurement will have to approve the rules of its interaction with procuring entities within 30 days and agree them with the Ministry of Economy.

As explained by the Ministry of Economy at the webinar, the services of the CPO for procuring entities in cases where the use of the CPO is mandatory will be free of charge.

The Ministry of Economy is motivated by the following goals: increasing savings through procurement aggregation, reducing administrative costs for procuring entities, and standardizing approaches to similar procurement transactions. The Ministry of Economy is also looking for ways to popularize CPOs among procuring entities, as this tool is not yet widespread.

Other changes: a few emphases

The new edition of the Procurement Specifics for the period of martial law contains a number of other updates, which are less high-profile but may become significant in certain situations. Here are some of them:

1. The authors of the amendments have added situations where a participant “falls under the grounds established by clause 47 of the Specifics” as independent grounds for rejecting a tender bid, i.e., the lack of integrity.
2. Instead, a participant’s ties to russia or the belarus will not be grounds for rejecting its bid if the assets are transferred to the ARMA.
3. The winner of the procurement procedure will still have to provide information about the right to sign the procurement contract at the time of its conclusion, but now they are exempt from the obligation to provide a copy of the license or permit.
4. Procurement transactions for donor funds from international organizations, which are carried out according to donor procedures, will be able to be carried out in accordance with national features, but considering additional requirements and conditions of the donor (creditor).
5. The technical amendment stipulates that in case of a threat to the security of an individual supplier, their place of residence can be hidden in the electronic procurement system.
6. Procurement specifics for the State Penitentiary Service have been regulated.

What is the conclusion and what will happen next?

We support the restoration of auctions and favor the monitoring of direct contracts even more. The resumption of auctions will save billions of hryvnias of taxpayers’ money. Moreover, monitoring of direct contracts will help effectively combat and prevent abuses.

The next step in improving procurement legislation is likely to be an updated “24-hour rule.” After all, the question of what can and cannot be corrected in a submitted tender proposal has long been a concern for participants and procuring entities. It has become a point of divergence in the practice of the State Audit Service and the Antimonopoly Committee.

During the webinar, representatives of the Ministry of Economy explained that everything could be corrected in a bank guarantee, except for its complete absence. In the technical part, documents can be corrected (except for their absence) if it does not change the subject of procurement. However, the issues remain, and further changes are likely to try to resolve them.

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

Author: Anna Kuts, legal advisor at Transparency International Ukraine