Deputy Econ­omy Min­is­ter Max Ne­fy­o­dov wants to end $2.3 bil­lion yearly in cor­rupt state pur­chases

Kyiv Post Legal Quarterly - - Contents - By Mariana Antonovych and Olena Gordiienko

Ev­ery year, Hr 50 bil­lion – about $2.3 bil­lion – dis­ap­pears into the big, black, cor­rupt hole of Ukraine’s pub­lic pro­cure­ment sys­tem. That’s 20 per­cent of tax­pay­ers’ money that the gov­ern­ment al­lo­cates to buy­ing goods, la­bor and ser­vices for pub­lic needs. Deputy Econ­omy Min­is­ter Max Ne­fy­o­dov wants to plug that hole for good. In Fe­bru­ary, he gave up his man­ageri

al post at Icon Pri­vate Eq­uity fund to take on the chal­lenge of fix­ing the state’s bro­ken pub­lic pro­cure­ment ma­chine with the re­formist team of Econ­omy Min­is­ter Ai­varas Abro­mavi­cius.

“Losses through the pub­lic pro­cure­ment sec­tor are one of the main chan­nels through which black cash gets into the econ­omy,” Ne­fy­o­dov said in an in­ter­view with the Kyiv Post.

Al­most ev­ery state-owned com­pany in the coun­try takes part in cor­rupt ten­ders, he said, cre­at­ing built-in re­sis­tance to steer­ing the sys­tem away from “pre­ferred” sup­pli­ers who have set up well-oiled schemes to siphon off pub­lic cash into pri­vate pock­ets.

“In the end, it’s the tax­payer who loses out,” Ne­fy­o­dov said.

As you might ex­pect from some­one com­ing from the pri­vate sec­tor, Ne­fy­o­dov has taken a busi­nesslike ap­proach to the prob­lem. His team has achieved the kind of re­sults that few other min­istries can boast of in the year-anda-half since the Euromaidan Rev­o­lu­tion. So far, the team has: • Cre­ated Pro­zorro, a full-ser­vice elec­tronic pub­lic pro­cure­ment sys­tem, which started op­er­at­ing in pi­lot mode on Feb. 12; • Held 12,260 elec­tronic ten­ders worth Hr 3.72 bil­lion as of Oct. 2; • Saved the state Hr 306.4 mil­lion on pro­cure­ment as of Oct.2; • Had pub­lic pro­cure­ment leg­is­la­tion passed in par­lia­ment, and signed by the pres­i­dent on Sept. 25; • Pre­pared a bill on elec­tronic pro­cure­ment for ap­proval in par­lia­ment; and

medium-sized Ukrainian busi­nesses will gain ac­cess to state pro­cure­ment ten­ders held in all WTO mem­ber coun­tries, open­ing up a mas­sive new mar­ket to them.

More­over, the e-pro­cure­ment bill that Ne­fy­o­dov is now shep­herd­ing through par­lia­ment will com­plete the trans­fer from pa­per to elec­tronic pro­cure­ment pur­chases, and al­low Pro­zorro, cur­rently op­er­at­ing in pi­lot mode, to go into more gen­eral use by the state.

At the mo­ment Pro­zorro only cov­ers deals that don’t ex­ceed a thresh­old of Hr 200,000 ($9,070) for goods and ser­vices, or Hr 1.5 mil­lion ($68,028) for la­bor.

If the elec­tronic pro­cure­ment bill is ap­proved in Novem­ber, Ne­fy­o­dov expects the first set of procur­ing en­ti­ties – min­istries, re­gional ad­min­is­tra­tions and the largest state com­pa­nies – to be able to move to the new elec­tronic sys­tem in full start­ing in Jan­uary, when Pro­zorro’s soft­ware will be fully im­ple­mented. Within nine months af­ter­wards, all pro­cure­ment in the coun­try will be moved to the elec­tronic for­mat, the deputy min­is­ter hopes. But the changes won’t stop there. “Elec­tronic pro­cure­ment is only a tool, and ac­tu­ally putting all pro­cure­ment into elec­tronic for­mat is only 50 per­cent of the job,” Ne­fy­o­dov said. “That’s be­cause the in­ter­est­ing things - like mon­i­tor­ing and risk man­age­ment sys­tems - they only start af­ter that.”

De­spite the lack of fund­ing, re­sis­tance from vested in­ter­ests, the un­tan­gling of red tape and need to lobby par­lia­ment to adopt in­no­va­tive leg­is­la­tion, the tremen­dous ef­fort has been well worth it, Ne­fy­o­dov said.

“I think it was the right de­ci­sion … I do think that be­ing in the … pub­lic sec­tor in Ukraine is cur­rently the most chal­leng­ing job you can have, and here you re­ally can change some­thing,” he said. “I also un­der­stand that un­less we build the coun­try our­selves, un­less we re­form the econ­omy, there just won’t be any place for com­plex busi­ness, for in­vest­ment funds, for in­vest­ment banks, and for pro­fes­sion­als in gen­eral.”

Pub­lic pro­cure­ment has be­come a lot more trans­par­ent with e-pro­cure­ment.

Pro­zorro, an on­line plat­form, was launched in Fe­bru­ary to shift state pur­chares on­line, with the aim of in­creas­ing trans­parency, sav­ing money and re­duc­ing that cor­rup­tion that costs the state $2.3 bil­lion in an­nual losses.

Pro­zorro was de­vel­oped by ac­tivists, said Deputy Econ­omy Min­is­ter Maxym Ne­fy­o­dov. “It was de­signed in the fourth quar­ter of 2014 by Alexan­der Star­o­dubt­sev and An­driy Kucherenko and many other peo­ple,” he said.

More than 800 state agen­cies are al­ready us­ing the sys­tem.

While the Kyiv City State Ad­min­is­tra­tion and two min­istries – in­fras­truc­ture and en­ergy – use it the most, the De­fense Min­istry has held the most ex­pen­sive ten­ders by far. Its share is Hr 2.73 bil­lion, or 74 per­cent, of the to­tal amount.

A sim­i­lar sys­tem in Georgia spurred the de­vel­op­ment of Pro­zorro in Ukraine.

In com­par­i­son to closed-door pa­per ten­ders, where ad­min­is­tra­tors see all bid­ders and can ad­just terms to ma­nip­u­late who wins, ad­min­is­tra­tors of the ten­der can­not see ap­pli­cants in Pro­zorro.

In ad­di­tion, the plat­form opens up data on the ten­der to any­one, not only to po­ten­tial bid­ders. The terms of the ten­der and the bids are also vis­i­ble to any­one, while com­pet­ing bid­ders can­not see each other in the sys­tem.

The Pro­zorro sys­tem re­views the cheap­est of­fer and, if it fits re­quire­ments, is au­to­mat­i­cally ac­cepted.

The new way has worked well enough to save more than Hr 306.4 mil­lion, or $14.4 mil­lion as of Oct. 2.

“In elec­tronic for­mat you can see every­thing,” says Natalia Abe­sadze, who is in charge of le­gal co­or­di­na­tion at Pro­zorro.

Most state agen­cies can cur­rently place ten­ders for goods and ser­vices worth up to Hr 200,000 and ten­ders for la­bor worth up to Hr 1.5 mil­lion. How­ever, state en­ter­prises that are mo­nop­o­lists – like Ukr­poshta, Ukrza­l­iznyt­sya, En­er­goatom and oth­ers – are al­lowed to hold ten­ders that ex­ceed th­ese thresh­olds.

With adop­tion of the e-pro­cure­ment bill, there will be no re­stric­tions on ten­der amounts,

Pro­zorro is op­er­ated by Trans­parency In­ter­na­tional Ukraine. But by the end of the year, its data­bases will be trans­ferred to a state en­ter­prise man­aged by the Econ­omy Min­istry, while bid­ding plat­forms will re­main in pri­vate own­er­ship.

The team work­ing on Pro­zorro con­sists of more than 100 peo­ple, in­clud­ing spe­cial­ists in tech, sup­port ser­vices and those who at­tract new sup­pli­ers for par­tic­i­pa­tion. Some are be­ing paid for their work by Trans­parency In­ter­na­tional and oth­ers are be­ing paid by providers that work with Pro­zorro. The Econ­omy Min­istry’s em­ploy­ees are also in­volved in Pro­zorro, but don't get paid for the work by the gov­ern­ment.

An­driy Kucherenko, who is in charge of IT sys­tem co­or­di­na­tion at Pro­zorro, says state of­fi­cials' re­ac­tion to Pro­zorro varies.

“There are those who have a pos­i­tive at­ti­tude to­wards the plat­form and be­come lead­ers in us­ing it. For ex­am­ple, De­fense Min­istry, In­fras­truc­ture Min­istry, Kyiv State City Ad­min­is­tra­tion, En­er­goatom and oth­ers,” ac­cord­ing to Kucherenko. Other agen­cies are not as ac­cept­ing and leg­is­la­tion will be needed to get them to use Pro­zorro.

Olek­siy Soloviov from Gide Loyrette Nouel said Pro­zorro is still a work in progress.

“The full in­te­gra­tion of Pro­zorro into the leg­is­la­tion on pub­lic pro­cure­ment will re­quire as­sur­ance from its de­vel­op­ers for its re­li­a­bil­ity and, most im­por­tantly, pre­dictabil­ity,” says Soloviov. “Who will be the sys­tem’s ad­min­is­tra­tor? Who will do the tech­ni­cal ex­per­tise and au­dit?”

On Sept. 11, deputy Econ­omy Min­is­ter Max Ne­fy­o­dov talks with the Kyiv Post about elim­i­nat­ing cor­rup­tion in pub­lic pro­cure­ment in Ukraine. (Volodymyr Petrov)

NEWS ITEM: On Sept. 27, ad­viser to the head of Dnipropetro­vsk Oblast ad­min­is­tra­tion Yuriy Golyk and depart­ment head of Cherkasy Oblast ad­min­is­tra­tion Ro­man Kar­man­nik de­bated on Face­book about who is switch­ing to elec­tronic pro­cure­ment more quickly.

Natalia Abe­sadze, a mem­ber of Pro­zorro team re­spon­si­ble for le­gal co­or­di­na­tion, looks through a re­port on the elec­tronic pub­lic pro­cure­ment sys­tem on Sept. 29 in Kyiv. (Volodymyr Petrov)

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