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 managerial 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-and-a-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
• Reached the final stage of negotiations on Ukraine’s accession to the Government Procurement Agreement, which will open access to the World Trade Organization’s $1.7 trillion public procurement market for Ukrainian companies.
“It’s really like you are a start-up founder and then you see people flocking to it … and numbers growing… We’re almost doubling every month,” Nefyodov said proudly.
While managing the public procurement reform project as if it was a private entity, Nefyodov admits that when it comes to funding, the resemblance to the business sphere ends.
“Anyone could do it with money, but try to do it for free…” Nefyodov said, noting that “even with public procurement reform, the budget for it was zero.”
While there are some things that can be certainly done for free initially, there comes a time when money is needed for the ProZorro electronic public procurement system developed by his team.
“It means that things that were done by volunteers, for example IT support, now have to be done by professional companies,” Nefyodov said.
The price tag for developing the ProZorro software over the 18 months is $1 million.
ProZorro has so far received funds from partners, who donated $10,000 each to develop the system, along with $50,000 from the Western NIS Enterprise Fund and $17,000 from European Bank for Reconstruction and Development. The project is close to receiving $60,000 from the Germany’s GIZ state fund, Nefyodov said.
The new software was designed to tackle some of the key problems of the old state procurement system – low transparency, rigid barriers against free participation of business, and the low professionalism of procurement officers.
“The more we put procurement into an electronic format, the easier it is for everyone to work with it – including procurement officers, suppliers, regulators … police, prosecutors, ministers, anti-corruption activists, journalists and others,” Nefyodov told the Kyiv Post.
IT support isn’t the only thing ProZorro needs to function properly, however. The system is now backed up with supporting legislation.
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.
The new law on public procurement, which covers both paper and electronic procedures, adds transparency to tenders by making tender committee protocols and financial proposals publicly accessible, as well as introducing a transparent appeals system and demanding the disclosure of the bidder’s final beneficiary.
Increased competition, which is also seen as crucial by Nefyodov, is encouraged through the “post-qualification clause” in the bill. The clause requires bidders to prove their eligibility to bid only if they win a tender.
“We want six, seven, 10 companies to participate in each tender, which would make it close to impossible for them to collude in the bidding process,” Nefyodov said. “Even if something wrong happened, there would be lots of competitors that would have a clear incentive to file a complaint.”
Apart from saving the state money, the new law improves Ukraine’s chance of signing up to the WTO’s procurement agreement. If the country accedes to the agreement in November as planned, small- 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.”
Kyiv Post staff writer Olena Gordiienko can be reached at [email protected]. Kyiv Post legal affairs reporter Mariana Antonovych can be reached at [email protected].
