Second Procurement Revolution: Analysis of the Draft Law

On 29 August, member of the Parliament Roksolana Pidlasa and other MPs have filed draft law No. 1076 “On Amendments to the Law of Ukraine ‘On Public Procurement’ and Certain Other Legislative Acts of Ukraine to Upgrade Public Procurement.”

What does the updated system bring to the procuring entity?

• Protection against dumping. The system will automatically detect anomalously low price proposals that differ by 40% or more from the average tender proposal value at the initial stage of the auction, and/or by 30% or more — from the price of the next lowest tender proposal. The procuring entity will be able to verify such offers additionally, for instance, request the participant to provide documents which would prove the ability to fulfill the terms of the agreement at that price.

• More professional procurement by introducing “authorized procurement officials” instead of “tender committees”;

• Rejection of participants who have previously failed to comply with the terms of the agreement;

• Protection against “tender trolls” — it will be impossible to withdraw a complaint + it is planned to introduce the option of differentiated fee for disputing a tender with the AMCU by the Government directive;

• Non-price criteria for assessment of proposals — because the price is not the only important factor. The procuring entity can estimate the life cost of the tender, which, apart from the price, includes expenses for consumption of energy and other resources, maintenance, disposal, ecological factors, etc.;
• Procuring goods quickly and sensibly by implementing electronic catalogs — online stores (Prozorro Market) for state-owned entities.

The participants will be able to:

• Participate in a greater number of procurement — because now all procurement above UAH 50,000 will be mandatory to hold in ProZorro (through a new simplified procedure);

• Recover the fee for disputing a tender if the AMCU confirms the violation or does not review it because the procuring entity has eliminated the identified violations;

• Dispute cancellation of the procedure and rejection of all proposals;

• Fix errors in the documentation within 24 hours;

• Form associations with other participants to participate in tenders;
• Feel more protected because the heads of procuring entities are personally responsible for violating public procurement law (a fine from 2 to 10 minimum incomes pretax — UAH 34,000-170,000).

Analysis of the draft law

• Where are we now?

Currently, the public procurement sector is governed by the current Law of Ukraine “On Public Procurement” of 25 December 2015. The law establishes legal and economic fundamentals of efficient and transparent procurement to provide for the needs of the government and communities, create a competitive environment in the sphere of public procurement, prevent corruption in this sector and foster fair competition. However, a number of practical problems emerged in the course of implementation of this law by parties of the public procurement sector. With regard to that, it is necessary to improve the current law.

2. Key aspects of the proposed changes

The electronic system has been in use for three years and requires some improvement. Besides, this draft law is one of the requirements as part of the Association Agreement with the EU, approved by the Cabinet of Ministers of Ukraine (No. 1106, 25 October 2017).

Companies will be able to fix errors in their proposals within 24 hours, recover the fee paid for a complaint that was granted or left without review, and participate in a tender on behalf of the association of enterprises. Procuring entities will purchase goods faster, they will have the right to reject the proposals of participants with a questionable track record, and heads of procuring entities will be fined for violating the law.

The following key changes are proposed:

І. Making procurement more efficient

1. To plan procurement better and prepare for procurement procedures, the procuring entity will have the right to consult market representatives beforehand to conduct market analysis, which includes requesting and receiving recommendations and information from market representatives.
2. The procuring entity will have the opportunity to close one procurement agreement with the winner of several (all) lots within one procurement procedure.
3. The procuring entity will have the right to reject a tender proposal of the participant who has previously failed to meet the obligations under a previous procurement agreement. At the same time, if the supplier can provide reasonable proof of reliability and refund the damage inflicted, they can have a second chance to participate in the procurement.
4. The procuring entity will be able to reject proposals with an anomalously low price offer thanks to the mechanism of the same name (ALP). ALP is the price of the cheapest tender proposal, which differs from the average value of price offers at the initial stage of the auction by 40% or more. The electronic public procurement system will automatically detect an ALP if there are at least two participants in the auction. The procuring entity will be able to address the supplier requesting the rationale behind the low price, since sometimes there are objective reasons for this.
5. The notion of simplified procurement procedure is introduced: procurement of goods, works or services with the expected cost equal to or greater than UAH 50,000 and lower than the threshold for procurement procedures established by the Law.
6. The negotiation procedure is modified; namely, the negotiations process is specified and the reasons for its application are reviewed.
7. The list of entities that can participate in public procurement is extended. In line with the international experience, tenders are now available to associations of enterprises or consortiums. These unions can include resident and non-resident legal entities and take place with or without creation of a separate legal entity. This innovation should significantly boost competition. Compliance with the qualification criteria will be established by the procuring entity based on the generalized combined characteristics of union participants.
8. A procurement participant will have the right to fix the errors in the tender proposal within 24 hours as identified by the procuring entity after disclosure of the tender proposal.
9. The draft law introduces the authorized procurement official by creating a separate position of a procurement officer. Since 1 January 2022, procuring entities are obliged to dismiss tender committees and switch to the authorized official model.

ІІ. Improvement of the tender disputing procedure

1. 1. Public procurement participants will pay for filing a complaint with the AMCU only through the electronic system. If they fail to pay the fee established by the law, the complaint will not be registered.
   2. The fee is established by the CMU. The algorithm switches from a set fee (currently, UAH 5000 for goods and services and UAH 15000 for works) to a “differentiated” approach depending on the cost of the procurement. The draft law establishes the fee as a certain percentage of the expected cost of the procurement.
   3. Recovery of the fee if the complaint is granted or if the AMCU does not review it because the procuring entity has eliminated the violations. If the claimant’s points turn out reasonable, the fee is refunded, if they are not, the payment goes to the respective budget or to the account of the procuring entity.
   4. The draft law prohibits to withdraw the complaint. This is introduced due to numerous unreasonable complaints that are currently slowing down procurement processes.
   5. The draft law regulates the problem of numerous cases of unsuccessful procurement due to one of multiple lots being disputed. The draft law enables the procuring entity to complete the procurement procedure for the lots which are not being disputed, and the participant — to dispute an individual lot within the tender.
   6. The draft law enables participants to dispute cancellation of the procedure and rejection of all proposals.
   7. It will be prohibited to cancel the tender during the complaint period.
   8. There will be liability for failure to comply with the decision of the AMCU.

ІІІ. Liability for violating the procurement legislation

1. There will be individual responsibility for the head of the procuring entity for procurement of goods, works and services before/without the proper procurement procedure established by the law; entering into agreements that oblige the procuring entity to pay for goods, works or services before/without the proper procurement procedure established by the law; failure to comply with the decision of the disputing agency.
2. The list of reasons for bringing individuals to responsibility for violating the law is extended. Namely, administrative liability occurs in connection with the following violations:

• Holding the procurement not in accordance with the annual plan;
• Failure of the procuring entity to provide explanations concerning the content of the tender documentation in a timely manner or in general;
• Tender documentation being not consistent with legislative requirements;
• The amount of tender security established in the tender documentation exceeding the limits established by the law;
• Failure to publish information on procurement in accordance with legislative requirements;
• Violation of the time limit for review of the tender proposal;
• Procurement of goods, works and services before/without holding the procurement procedure, regular or simplified, as established by the law;
• Application of the negotiation procedure other than in cases specified by the law;
• Failure to reject tender proposals that had to be rejected under the law;
• Rejection of tender proposals for reasons not prescribed by the law or inconsistently with legislative requirements (groundless rejection);
• Entering into procurement agreement with the winning participant on terms that are not consistent with the requirements of the tender documentation and the tender proposal of the winner;
• Introducing changes to significant term of the procurement agreement in cases not specified by the law;
• Entering untruthful personal information into the electronic procurement system and failure to update it if it changes;
• Violation of the deadline for publication of the tender documentation.

3. New amounts of fines are proposed for violations in the procurement sphere. Failure to comply with the decision of the disputing agency, for instance, entails an administrative fine imposed on the head of the procuring entity in the amount of up to five thousand pretax minimum incomes. Avoidance of procurement procedures and entering into agreements which require payment before/without proper legislative procedures entail a fine of two to ten thousand pretax minimum incomes.

Conclusion

The draft law is consistent with the plan of measures under the Association Agreement with the EU and harmonizes national legislation on procurement with the EU standards. Overall, the draft law is designed to improve the electronic procurement system and increase liability for violations in this sphere.