Argument (#01-02 January-February 2011)

New Public Procurement Act of Ukraine through the Lens of International Standards

Olexander P. Shatkovskyy, Peter E. Gjortler

On 31 July 2010 the new On Public Procurement Act of Ukraine (hereinafter — the Act) came into force. The Act was adopted as a result of its revision based on the comments of Ukrainian President Viktor Yanukovych and with the assistance of international experts from the World Bank and the EU (including EU funded Project where authors of this article work). Proposals by international experts were mainly related to provisions of the Act referred to in Articles 8 and 18 — new mechanism of appeals on public procurement procedures.

It should be noted that the World Bank and the EU Delegation in Ukraine noted, in a joint letter of 16 October 2010, significant progress in the regulation of public procurement by the new Act. However, at the same time it cited about 50 questions, comments and suggestions to improve the Act for better compliance with international standards.

In addition to the comments in this letter, there are a number of other important aspects of non-compliance of the new Act with special EU legislation on public procurement.

Thus, in assessing the level of compliance of the new Act with international standards, the aspects of its compliance with WTO and EU standards should be highlighted.

Compliance with WTO rules

Most experts believe that the new Act has more than an adequate level of compliance with requirements of the World Trade Organization, which allows Ukraine to safely proceed with accession to the WTO Agreement on Government Procurement. The WTO Agreement on Government Procurement (General Procurement Agreement — GPA), adopted in April 1994, applies to any law, rule or practice related to public procurement, including government procurement in services, but is not required as obligatory for WTO membership. Today, the GPA encompasses 43 countries, including EU countries.

The mandatory part of the Government Procurement Agreement is non-discrimination of suppliers regardless of their status and nationality, procurement on a competitive basis and ensure transparency at each stage of the tender procedure.

This agreement essentially opens the procurement market of member countries in many sectors for international competition and effectively makes public procurements a sector of the global economy. The GPA came into force on 1 January 1996.

GPA principles and rules are not essentially different from the principles and rules laid down in EU procurement Directives.

The GPA provides existing of separate regulating body for coordination of government procurement.

The rules on public procurement, specified in the GPA, are similar in many areas of the new Act, for example:

— algorithms of procurement procedures;

— similar cases of exclusion from competition in case of urgency or national security;

— require that the criteria on which the award will take place is to be announced in advance;

— require in case of request from bidders that they should be informed about the reasons for certain decisions during the procurement procedure.

The scope of regulation under the rules of the WTO Agreement GPA also covers preparation of tender documents and recommendations for qualification and technical requirements and regulations on pre-qualification.

Therefore, carefully reading the Act, it is easy to agree with the conclusions of the experts that the new Act complies fully with WTO rules on public procurement, especially GPA, because it contains all the key provisions of it.

Compliance with EU standards

It should be noted that in comparison with the previous government procurement Regulations (Decree of Cabinet of Ministers of 17 October 2008, No.921), the new Act is more harmonized with EU standards at the level of basic principles, namely due to:

— removal of the provision granting benefits to domestic producers (it was in the Decree);

— providing better access to complaints (unlike the situation in which complaints may be submitted only by bidders);

— the absence of direct involvement by Parliament and its committees in the regulation and appeal process (as was the case in previous legislation);

— recognition of the need to protect the commercial information of bidders;

— reducing weight for price in complex evaluation criteria (most advantageous bid approach) from 80% to the more adequate level of 50% (although in the EU in general there is no such limit for the criterion of “most advantageous bid”).

Let’s recall briefly the legal framework regulating public procurement in the EU. Public procurement in the EU common market is governed by four key Directives:

— Directive 18/2004 regulates the so-called “classic sector procurement”, meaning the vast majority of purchases of goods, services and constructions of public institutions;

— Directive 17/2004 regulates the procurement made by the specific category of procuring entities operating in the transport, communications, utilities, energy, exploration and mining sectors. Non-exclusive list of such enterprises from each EU country is presented in the annexes to this Directive;

— Directive 665/1989 and Directive 13/1992 (appeal on the procurement in the public utilities and natural monopolies sectors), as amended by Directive 66/2007 — regulate complaints and appeal for public procurement procedures.

The negotiations on the Free Trade Agreement between EU and Ukraine, that are now actively in progress, provides that after this Agreement is ratified and comes into force, Ukraine will have to maximally adapt national legislation with EU legislation during a period of 3-8 years.

The Free Trade Agreement has a separate “Public procurement” chapter that provides a variety of adapting steps for harmonization of national law to the above-mentioned EU directives on public procurement. It should be noted that according to the views of experts, the new Act has a high degree of compliance with Directive 665/1989 on appeals, though Directive No.17/2004 is the most difficult and timely for adaptation, because its scope extends even to some private companies (such as power distributing companies, transport companies, etc.), which require that Ukraine make major changes to legislation.

Therefore, assessment of compliance of the new Act with EU legislation should be carried out in view of Directive No.18/2004 (hereinafter — the Directive), which is the main legislative act regulating public procurement in the EU. It should be emphasized that the Directive regulates only those purchases exceeding a certain limit value (EUR 300,000 for goods and services and around EUR 5 million for works (constructions)). The same approach will be used for the application of a Public Procurement Chapter Agreement of the Free Trade Agreement between the EU and Ukraine.

So, let’s consider the main differences between the Act and the Directive.

The first difference is the concept of defining the “procuring entity” (or “public contractor”) that is the subject of execution of public procurement rules.

The Act traditionally for Ukraine defines the term “procuring entity” through the prism of source of funding — the so-called concept of “public funds”, while part of the enterprises covered by the Act — also over the terms of ownership (state, communal). The Directive approach for the scope of persons to whom it applies establishes a much broader approach. It means the procuring entity as a legal body established for ensuring the public interest and its activity has no commercial purpose.

Secondly, it should also be noted that the Act, unlike the Directive, does not allow an association of members without the status of a legal body (consortia, general contractor and subcontractors, etc) to submit a bid.

The lack of norms in the Act is also evidential, as opposed to the norms of the Directive on the procurement mechanisms using framework agreements, concession contracts and electronic procurement. The mechanism for making concessions on the results of the special competitive procedures (concession tender) is specified in the On Concessions Act of Ukraine, and certain features are provided in the new On Public-Private Partnership Act. Thus, the approximation of national legislation to European standards in the procurement of concession will need unification of the On Public Procurement Act and these specific laws on concessions and public-private partnership.

On the other hand, the problems of implementation of e-procurement is more complex as it concerns not only the regulative basis but also still weak technical capabilities and even computer literacy of public contractors and even bidders.

The new Act does not contain a single word about the possibility of e-procurement, although the norms of the existing regulations in 2005-2008 on the possibility of e-procurement had been only paper norms which were far from reality. Therefore, the introduction of such procurement methods will take a lot of hard work and it will take time to prepare appropriate amendments to the Act on public procurement as well as special legislation on electronic document management, to improve technical capacity of public contractors and, finally, the Government will be required to provide active educational and explanatory activities.

The Directive, as opposed to the Act, describes more deeply qualification requirements and conditions to establish whether these requirements are satisfactory. The Directive operates with three groups of qualification requirements (general requirements, economic and technical capacity) and defines in detail the types of documents that have to verify such qualifications.

Rather contradictory in terms of EU legislation, the new Act has very extensive requirements for publication of procurement information (Article 10). This primarily concerns the overly burdensome list of information for publication, while the Directive requires publication only in an official source of the announcement of the procurements planned for the year (something similar to our annual procurement plan), the announcement of a particular tender procedure and the announcement of the contract’s award. The Act requires the publishing of much more information that is repeated often substantially. Excessive publication risks causing more confusion than bringing about planned transparency.

The Act also provides overly broad (compared with the Directive) means for rejecting participation in the tender procedure (Article 17 and 29) and cancellation of the tender procedure.

For example, the rejection of bids that do not comply with the tender dossier does not define the degree of inconsistency and is actually equal to technical errors, design flaws which, in accordance with EU rules, do not cause the rejection of bids.

Finally, unlike the Directive, Article 40 of the Act prohibits amendments to the procurement contract, which also contradicts the Civil and Commercial Codes as well as practical implementation of contracts and the need for contract amendment, which is contractual practice of business at both national and international level. It is obvious that the current restrictive provision of Article 40 of the Act will cause a lot of comments and complaints from public contractors and bidders, and so we can predict that this article will be reviewed in the first echelon of changes to the Act.

Conclusion

Existing observations and recommendations to the new Act in terms of its compliance with international standards for public procurement, the main part of which are described in this article, are a good source for improving national legislation on public procurement, bearing in mind that Ukraine is a member of the World Trade Organization and has announced its intention to liberalize trade conditions with the EU (at least this is clearly stated in the new On Domestic and Foreign Policy of Ukraine Act of Ukraine and has been stressed repeatedly by both the President of Ukraine and the Prime Minister). So in this area the Government of Ukraine, supported by a EU funded Project expert, is finalizing draft amendments to an Act, whose approval by Parliament is expected at the start of 2011.

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