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