White Book of Reforms 2019. Chapter III. Public Procurement

The reform started in 2015 when the Parliament approved the law “On public procurement“. The law radically changed the public procurement procedures. The most significant change brought by the law was the launch of the electronic procurement system Prozorro. No less important were introduction of public procurement professionals – people responsible for conducting procurements (in fact, since that time a procurement officer was recognized as a distinct profession) and the notion of a centralized procurement entity (such an entity can accumulate demand from several public entities and conduct the tender for them).

The Prozorro improved public procurement system via two main channels:

• digitalization of the process (this considerably simplified the tender process and reduced the room for “human factor” prone to corruption);
• data availability (anyone can analyze the Prozorro data and find out whether there was a fraud).

Although the Prozorro system doesn”t cover the whole procurement process (figure 16), it still accumulates the information from other stages and affects them.

The benefits of using electronic tools in public procurements are well known, and the Ukrainian case is no exception:

• additional saving for both procuring entities and tender participants;
• simplified participation in tenders for all companies, including small ones;
• simplification of the procurement process as well as a reduction in its duration;
• increased transparency;
• greater innovation and developing new tools.

Since the launch of the new system in 2015, 36.5 thousand public entities conducted about 3 million procurements with total initial value of about UAH 1.7 trillion. These entities were able to save almost UAH 87 billion (where savings are defined as the difference between initial/expected price and final contract price). One study shows that introduction of Prozorro resulted in additional 3.5-5.8% of savings for above-the-threshold [29] tenders compared to the previous system.

As for now, more than 200 thousand companies participated in public procurements. Of them, 87 thousand participated in competitive tenders – on average 2.3 participants per auction. Introduction of Prozorro significantly increased diversification of suppliers. Average number of suppliers per procuring entity increased from 3.4 in 2012-2015 to 5.9 in 2017-2018. All the markets analyzed by the Centre for Excellence in Procurement at KSE (e.g. fuel and medicines) became more diversified.

Electronic system changed the way of communication between procuring entities and potential tender participants. It is now much easier to submit a question on a particular tender and receive a response to it. Even though the response is mandatory only for above-the-threshold tenders, by answering questions a buyer increases her chances to successfully complete the tender.

The official motto of Prozorro team is “Everyone sees everything”. It highlights the huge amount of information that became available for anybody who is interested in it. Companies can easily analyse their markets and identify new opportunities. Procuring entities can use the data to raise their efficiency. NGOs use the data to monitor public procurers and identify potential cases of inefficiency or even corruption.

Machine readability of Prozorro data fostered creation of new electronic tools based on these data. Some of the tools help monitor public procurements, others support public entities in their procurement activity. Some of the tools available at dozorro.org/tools.

The Prozorro system already has shown significant results in public procurements. Nevertheless, it is constantly improved. The Government cooperates with experts and think tanks in developing new instruments for the system.

The second procurement revolution

In August 2019 MPs registered the draft law No. 1076, which sums up practical lessons learned during the last four years and builds on existing progress in the areas of procurement centralization, professionalization, and transparency.

Developed by the experts of the Ministry of Economic Development and Trade, the amendments aim at improvement of existing legislation by legally incorporating the procurement tools that are already functional or were recently piloted. The draft law provides several fixes for existing problems and closes some minor loopholes, while laying the ground for future advancements of the procurement system.

One of the major changes concerns below-the-threshold procurement market. The bill introduces a new option for purchasing general merchandize goods (e.g. stationery) directly via e-catalogs thus avoiding the cumbersome procurement process. At the same time, the simplified tendering procedure becomes mandatory for all purchases above UAH 50 000. Procuring entities will be able to choose between using catalogs or a tendering procedure. The intended result is both more transparent and more efficient system of below-the-threshold procurement.

E-catalogs will be administered by the new agent of the procurement process – the Centralized purchasing body (CPB). While State Agency “Professional Procurements” is functioning since 2017, the draft law formalizes its status and allows to create regional CPBs adjusted to the needs of local procuring entities. CPBs will be responsible for administering e-catalogs and framework agreements on behalf of their clients as well as for providing professional assistance and education to procuring entities.

The process of transferring procurement duties from tendering committees of public entities to authorized persons (APs) becomes irreversible. The new law makes tendering committees illegal after the since January 1, 2022. KSE analysis (forthcoming) shows that APs on average are working faster and more professionally while using fewer human resources. Besides that, unlike tendering committees, APs do not suffer from the problem of dispersed responsibility [30].

Procurement practice exposed a number of flaws in the existing legislature. First, currently it is impossible to make corrections of tender documentation after the tender (thus, if mistakes in documents are found, sometimes the tender has to be re-run, although minor mistakes are ignored). The draft law allows potential suppliers to correct the documentation in 24 hours after the procuring entity informed them about mistakes. Secondly, procuring entity gets an opportunity to punish unscrupulous suppliers by banning them from participating in its tenders for three years if a supplier failed to fulfill the previous contract. Moreover, if a supplier fails, the procurer can purchase up to 20% of the needed item without tender. This will help procurers to continue their activity which depends on the input in question while they run a new tender. In addition, the bill amends the Code of Administrative Offences to differentiate the fines into three groups according to the seriousness of violation (currently there is just one size of fine for all the cases).

The draft law addresses another important issue – that purchasing price of a product often does not provide adequate assessment of its initial value, as the costs of exploitation and technical service are not taken into account. This issue is addressed by introducing the concept of the product life cycle cost as an alternative to the price. It means that a procuring entity will be able to include associated costs such as service and utilization, energy consumption and environmental externalities into technical specifications of a contract.

The new draft law consolidates recent advancements in procurement centralization, professionalization, and transparency. If it is adopted, it will help make procurement process simpler, more efficient, competitive and secure for both suppliers and contracting authorities. However, there are still certain areas for considerable improvements. Thus, existing legal framework purposefully distinguishes price as the single most important criterion for supplier selection. This was done in order to eliminate deeply rooted corruption in public procurement (prior to the reform, “qualification conditions” for suppliers were extensively used to exclude “outsiders” from government tenders). Today, when procurers, suppliers and watchdogs are more professional, know the procedures and how to monitor procurement, one can start introducing non-price criteria into tender procedures. Usage of non-price criteria is a widely spread practice to best fit the needs of a procuring entity.

Besides, more efforts are needed to make existing technical solutions interoperable with the EU procurement networks, which would stimulate international participation in the Ukrainian procurement market and new procurement options for Ukrainian suppliers.

Medical procurement

In Ukraine, two types of entities can procure drugs for public money – hospitals procure what they locally need, and the Ministry of Health buys drugs within government programs, such as programs on containing HIV or reducing incidence of tuberculosis or hepatitis. While hospitals now use, the Prozorro system, for centralized procurement other solutions had to be found. As a temporary measure, procurement was done by international organizations. However, at the end of 2018 a centralized procurement agency was created which will gradually overtake this function.

The presence of corruption in government procurement of medicines was a well-known fact. For example, the Anti-Corruption Centre reports that in 2014 government procurement of medicines failed because of: (a) economic factors (such as rising prices for imported drugs because of Hryvnia devaluation), (b) continuation of old corruption schemes and the emergence of new ones with involvement of the Ministry of Health (MoH) and local distributors (companies that often procure drugs for public money) [31].

In particular, the report states that “the result of such failure was the lack [in 2014] of the most necessary vital drugs in many regions of Ukraine.” Thus, in 2014 there was a significant shortage and even complete absence of medicines for patients with tuberculosis, HIV/AIDS, hepatitis and cancer. At about the same time, Ukraine started to feel lack of pediatric vaccines. This is still a topical issue.

In March 2015 Parliament adopted the law allowing transfer of centralized medical procurement to international organizations. However, MoH signed agreements with international organizations six months later because of resistance of many stakeholders and lengthy political discussions. Agreements unblocked the procurement of medicines under 12 state MoH programs. However, in the procurement and supply of medicines Ukraine started to lag by one year: at the end of 2016, the programs of 2015 were almost completely fulfilled, and tenders for procurement of medicines planned for 2016 were just starting.

Ukraine still buys medicines with a considerable delay, although this year the Ministry of Health expects the situation to improve. The procurement for 2017 started in August 2018. In 2018, the Ministry of Health finally managed to balance the timeframe for the procurement process.

Procurement of medicines through international organizations saved up to 40% which allowed to earmark the saved funds for additional procurement of medicines. However, the procurement process of international organizations is not flawless – thus, the Accounting Chamber points at poor accounting of drug stocks and imperfect needs calculation in the regions.

At the end of 2018, MOH created the State Enterprise “Medical Procurement of Ukraine.” This agency should become the main procurement organization and ensure transparent, high quality and timely supply of drugs to Ukrainian patients. The Agency is currently undertaking preparatory work to fulfill its functions.

In March 2019, the first successful auctions — procurement of anti-TB drugs for the Global Fund money – were run by the Agency. The Agency procures drugs through Prozorro and manages to do that at significantly lower prices than an average ProZorro prices of comparable goods. For example, the final price of Ganciclovir at the Agency tender was UAH 500 per 500 mg vial, which is 34% lower than the minimum in ProZorro for 2018 – UAH 757.56.

In 2019, the Agency together with KSE introduced verification of the list of medicines needed for 16 state-level health programs. As a result, unjustified expenditures of UAH 102 million were avoided.

Eventually, “Medical Procurement of Ukraine” will centrally procure all medicines and medical equipment for implementation of strategic state-level programs. Also, it will work with both local and international markets to reduce prices, merge local purchases (i.e. collect orders from a number of hospitals and buy the needed drugs in bulk), carry out framework purchases, create and maintain electronic catalogs for subordinate purchases of medical supplies, and raise the level of professionalism in the procurement field.