Reforming public procurement crucial for fighting corruption in the Western Balkans

Public procurement system in the Western Balkans is one of the critical corruption zones – as the government mechanism for buying everything “from a needle to a locomotive” it has been for a long time considered as such by the European Commission, and with a good reason.

In the region with a common communist past, stuck in the transition towards functional market economy, the public procurement system serves not just for procuring goods, services and and works by respecting market criteria, but often to transfer public funds into private pockets in a crony-capitalist manner.

As public procurement, now in Chapter 5 of the accession negotiations process, is about to be officially recognized as a part of the “Fundamentals” and placed in a cluster alongside Chapters 23 and 24 according to the new enlargement methodology proposal of the European Commission, European Western Balkans discussed with the experts from the region what is the state of play in this area and how some of the challenges could be addressed.

Problems exist in the entire procurement cycle

For the European Union it is important that future members respect and implement rules that ensure that public procurement of goods, services and works is transparent and open to all EU companies on the basis of non-discrimination and equal treatment.

According to German Filkov, President of the Center for Civil Communications from Skopje and member of the Balkan Tender Watch network, we are not close to fulfilling these criteria, as the inefficiency in the entire public procurement cycle is a common denominator across the Western Balkans.

„We have problems in every step – starting from weak need assessment and planning of procurement, to setting tender requirements to fit favourable bidder, to poor and uncontrolled contract execution“, said Filkov and added that very low level of competition in public tenders, very high percentage of direct contracts (negotiating procedure) and a big number of tenders with only one bidder also represent significant issues.

Filkov also said that EU integration can serve as a transformative agenda for public procurement, but there is a problem of political will for honest reforms.

„The EU directives are the only framework for a certain area or process. It is on each country individually to decide how deep and honest will it regulate them while transposing into domestic legislation“, Filkov concluded.

No trust in the public procurement system in Serbia among businesses

According to the Public Procurement Office report, in 2018 Serbia has procured goods, services and works in value of around 3,5 billion euros or roughly 8% of the GDP.

Although the value of public procurement is increasing, the process is getting shorter and there are less cancellations of procedures. What is worrying trend is that the number of bidders, which is main indicator of competitiveness of the process, is decreasing.

In 2018 there were 2,5 bidders per public procurement, which is the lowest number of bidders since 2013.

According to Nemanja Nenadić, Program Director of Transparency Serbia, there are several reasons why the level of competition is very low in Serbia, which could be summarized into three categories – difficult formal requirements for participation, lack of trust that the game is not “rigged” and the existence of small number of possible providers on the market.

“There are formal requirements that are difficult to be met, especially by the small and medium enterprises, such as obtaining certificates or owing taxes, and there are also irrelevant additional conditions in terms of previous experience or capacity that artificially reduce competition”, said Nenadić.

He also pointed out at the low level of trust in the public procurement system, caused by the potential bidders’ bad experience or indirect knowledge that it is not possible to get a contract with the Government unless the deal is previously reached.

“While there is a legal possibility to challenge irrelevant tender conditions, bidders are reluctant to do so, because they want to avoid retaliation of the contracting authority (i.e. the Government), and there is no guarantee that they will get the contract if they succeed in appeal, but they certainly have to pay a high fee”, he explained.

Nenadić also said that it should be remembered that a large part of procurement, especially infrastructure, is excluded from these statistics, where Law on Public Procurement is not applying but specific procedures or intergovernmental agreements.

Big infrastructural projects – outside the Law on Public Procurement

The practise of conclusion of contracts on infrastructural projects based on loan agreement which contains an obligation of the country to hire a particular contractor or bypassing the Law on Public Procurement by the so-called “lex specialis” laws is commonly seen throughout the region.

This is often the case with investments from China, which are sometimes labelled as “corrosive” because of their undermining influence on the legal system, but it does not apply only to China.

“The ones who are responsible for such practices are not the money lenders, such as China in this case, but the ones responsible for spending our money – governments. This practise can be easily found in all countries, including my country – North Macedonia” Filkov explained.

He said that these projects need to be a part of the public procurement because public money is being spent and there is no reason for special treatment of any kind.

“If any other investor is that competitive as they are proclaimed to be with justification of these projects, then that is one more reason to go and compete in an open market”, he concluded.

For Nenadić the legal solutions for this kind of problem could be only found in the constitutional changes, because inter-governmental agreements have higher power than the laws.

„This is mostly the question of political will and the pressure that could be exerted from the partners of the Government, which was not the case so far“, concluded Nenadić.

Montenegro: Big problems with the “small” procurements

Similar to the rest of the Western Balkans, in 2018, public procurement value in Montenegro was around 9,7% of the GDP or 450 million euros. In its report from 2015 the Institut Alternativa from Podgorica stated that there is not enough transparency and reliability in the Governments reporting on public procurement, especially in terms of contract amending after it was concluded, which leaves open space for corruption, lack of capacities in the public administration, and imprecise legal stipulations. What has changed almost 5 years later?

“Not so much”, said Ana Đurnić, public policy reasercher at the Institut Alternativa and added that lack of inclusiveness in the process of transforming the public procurement system could be added to the list.

“Ministry of Finance did not organize a public discussion on the Law on Public Procurement adopted in October 2019. Similar happened in 2017 when amendments to the law came overnight and brought very problematic solutions under the excuse that it is going to be only a temporary solution”, said Đurnić and concluded that when the new law comes into force in July 2020 it will be three years since the application of the temporary and transitional solutions from 2017.

It should be noted that EU Commission in the 2018 Report on Montenegro had concluded backsliding because of the amendments introduced in the previous year.

“Small value procurements under these amendments became very non-transparent, discretional and with the least competition, because they were not regulated by the law, but by the internal act of contracting authorities, without any law restriction”, Đurnić said.

The biggest problem was that legal protection in form of appealing to the Commission for Control of the Public Procurement Procedures, guaranteed by the law, could not be applied on the bidders in a small value procurement process.

In the meantime, Public Procurement Office of Montenegro, as an independent state authority from the beginning of 2019, became a unit within the Ministry of Finance.

“Our key observation was that this decision was never justified”, said Đurnić.

She explained that the impact of this decision is already visible, especially in terms of transparency and reporting.

“The first annual report prepared by this Directorate for Public Procurement within the Ministry of Finance on public procurement had significantly less information than the one prepared by the Public Procurement Office”, she pointed out.

New laws, new hope?

Both Serbia and Montenegro have adopted new laws on Public Procurement in the end of 2019 in order to align with the 2014 EU Procurement Directive and both laws will come into force in July 2020.

But there is always a doubt in the Western Balkans whether good legal solutions will become a reality for the citizens and the economy.

Nenadić explained that in Serbian case, the new law brings harmonization with EU standards but also the norms that do not correspond to Serbian reality.

“The new law will reduce formal requirements to prove compliance with the mandatory conditions. Also, more procurement by the lots will have positive impact on the competition”, he said and pointed out that electronic procedure will consume less time and that more foreign companies may be incentivized to submit offers.

“It remains to be seen whether there is going to be a measure to increase confidence of the economy in the public procurement system, but so far there are no such indicators, having in mind that control mechanisms in the public procurement have been weakened”, Nenadić said and added that the thresholds have been drastically increased, so now a large number of procurements will fall under the threshold.

“Law on Public procurement in Montenegro has envisaged by-laws in order to regulate areas such as procurement in the field of defence and security, low value procurement and centralized procurement, and it is too early to speak about its possible impact”, said Đurnić.

She also explained to us that general tendency that could be observed is that more and more procurements are outside the law, especially those that would fall within the category of open procedures.

“The new law has raised the threshold for the so-called “simplified procurements” on which this law won’t be applicable”, Đurnić explained and said that the positive thing is that now these procurements will be regulated by the act of the Government, and not separately by the contracting authorities.

Public procurement ≠ tendering

As problems with public procurement in the Western Balkans could be found in the entire procurement cycle then the approach to the problem should not be partial, focusing on one stage only.

“Public procurement process is not just buying goods, services and works, but also planning, tendering, contract execution and evaluation whether the goods, service and works obtained fully match the contract and satisfy the needs of the public institution”, Filkov explained and added that prosecution and judiciary need to be more efficient in this regard.

Filkov said that looking at the corruption through the entire cycle could also help detecting corruption risks, because corruption is usually agreed in the first, pre-tendering phase, and it is finally realized in the last, post-tendering phase while the mid-tendering phase serves as a bridge phase that enables corruption.

“Increasing transparency can help in this regard, to narrow the room for corruption in public tenders, but it does not solve all the problems. It must go hand-in-hand with improved integrity of people and institutions that spend public money in order to be fully effective”, Filkov concluded.

European Western Balkans, Nikola Cuckić