Procurement during the full-scale war

After the Revolution of Dignity, the reform of Ukraine’s public procurement system was one of the most successful; it received international recognition. Procurement information became transparent and publicly available in real time. However, the start of an active phase of Russia’s military aggression in late February 2022 and the introduction of martial law in Ukraine forced a change of approach to public procurement. To speed up purchases, the government had to bypass the procedures that made them open and transparent and guaranteed participants equal access to bidding.

In the seven months of martial law, over 20 public procurement regulations were adopted. The main document describing the procurement process in wartime is CMU Resolution No.169 of February 28, 2022 titled “Some issues of defense and public procurement of goods, works, and services under martial law.”

At the time of writing, the Resolution was amended nine times since adoption. In February, it allowed for the procurement of defense and other public goods, works, and services bypassing the procedures (including the simplified rules) prescribed by the laws of Ukraine On Public Procurement and On Defense Procurement. The lists and amounts of goods, works, and services were determined by the decisions of state defense customers to meet the needs of Ukraine’s security and defense sector and by the decisions of other public agencies (i.e., the Cabinet of Ministers of Ukraine, the State Property Fund of Ukraine, other central and local government agencies specified in the law of Ukraine On Management of State-Owned Property) to procure non-defense items.

The customers were obliged to publish all contracts in the electronic procurement system within five working days after signing them (except for contracts containing classified information). Deals that were not published in the electronic procurement system within the prescribed period were considered null and void.

Due to the need to work in new wartime realities and quickly change the defense and public procurement conditions, five changes were made to the Resolution already in March. On March 2, several more entities were added to the list of agencies authorized to approve procurement lists and volumes. On March 5 all the public purchasers were allowed  to make these decisions. Simultaneously the deadline for publishing procurement reports was extended to 20 days after lifting or revoking martial law in Ukraine or some of its regions.

Several more changes to Resolution No.169 (Resolution No.195 of March 4, 2022, Resolution No.290 of March 16, 2022, and Resolution No.335 of March 20, 2022) aimed to improve the payment procedures for defense procurement. In particular, they allowed state defense customers (and military administrations procuring personal protective equipment) to draft the terms and amounts of advance payments for goods, works, and services in contracts.

Other changes of defense procurement during martial law were as follows:

• the contract price is set based on the cost calculations by implementers of public contracts. When calculating and setting prices, it is allowed not to use the CMU Procedure for developing and adjusting the estimated cost of defense goods, works, and services procured according to a competitive procedure;
• the agreed contract price cannot be changed,  except for import contracts;
• it is forbidden to sign offset contracts (an offset contract is an obligation of a foreign legal entity to fully or partially compensate to the state of Ukraine its expenditures on the import of defense products costing over EUR 5 million)*.

Until mid-April, defense and other public goods, works, and services were procured bypassing the procedures set by the laws of Ukraine On Public Procurement and On Defense Procurement. Since April 12, the government allowed procurement for up to UAH 50 thousand via the electronic procurement system, including electronic catalogs.

On June 28, 2022, the government reinstated mandatory procurement in the Prozorro system. However, there remains a possibility of direct procurement when it is critically important. This applies to procuring goods, works, and services by Ukraine’s Ministry of Defense, Foreign Intelligence Service, Ministry of Internal Affairs, Security Service, State Special Communications Service, State Emergency Service, other law enforcement agencies, and Ukrzaliznytsia.

In addition, procurement can be done without the simplified procedure and/or the electronic catalog when:

• the information to be disclosed is classified or its disclosure would harm national security;
• customers are in the combat zone;
• it is technically impossible to use the electronic procurement system;
• purchases have to be made urgently;
• works, goods, or services can be implemented, delivered, or provided exclusively by a particular business entity in specific cases;
• the simplified procedure is canceled due to the absence of participants, including by lot;
• legal services are procured, including legal services related to protecting Ukraine’s rights and interests;
• goods, works, and services are procured to ensure the functioning of critical infrastructure facilities.

In July, the government allowed not to draft a consolidated three-year plan for procuring defense goods, works, and services that used to be approved by the Cabinet of Ministers. The plan will be drafted within three months after lifting of martial law.

In August, the government allowed to procure outside Prozorro for:

• mobilization and civil defense activities;
• construction, reconstruction, capital renovation, and equipping housing for internally displaced and evacuated persons;
• construction, reconstruction, capital renovation, and equipping protective civil defense facilities, including dual-purpose, basic facilities and shelters ;
• preparations for the heating season.

CMU Resolution No.169 became a salvation for state customers during wartime. The Cabinet of Ministers could promptly update the Resolution to meet urgent needs of public customers and simplify the public procurement process to do procurement quickly and secretly. Today, 24 regulations refer to Resolution No.169.

However, the Resolution does not specify goods or services that can be purchased under this mechanism nor a procedure to specify them. Therefore, customers can independently decide which purchases to carry out under the current public procurement law and which under the Resolution.

In addition, on July 14, 2022, a law on localization in public procurement entered into force. Since a law has a higher legal status than the Resolution, one must comply with its provisions while conducting procurement under Resolution No.169.

In August 2022, Ukraine’s parliament partially solved the problem of parallel operation of the Law On Public Procurement and Resolution No.169 by adopting amendments to the law On Public Procurement and establishing that the Cabinet of Ministers defines the specifics of procurement during martial law and within 90 days after it. Resolution No.169 was thus “legitimized.” In addition, these legislative changes oblige customers to publish reports on procurement made outside Prozorro no later than ten working days from the contractual date, enabling more effective control of public spending. At the same time customers are allowed to hide sensitive information during wartime.

Several MPs registered draft law No.7164 proposing to suspend the law On Public Procurement during martial law and 90 days after it. Essentially the draft law suggests that the Cabinet of Ministers conduct all procurement, which contradicts the Constitution. Taking into account the corruption levels in Ukraine, it would open a “Klondike” for not-so-honest government officials.

Conclusions and recommendations

After the start of the full-scale invasion, the government responded to the need to quickly purchase specific goods or services. During the spring and summer, the government partially returned usual procurement procedures. Parliament eventually resolved the conflict in legislation by allowing the government to regulate procurement under martial law. It is essential to maintain at least partial transparency in this area to efficiently spend public funds.

The risks of doing procurement outside Prozorro are clear – it is possible that old practices, such as procuring from one’s “friends” (or even from sanctioned persons) or at higher prices, will return.

To minimize the risks of corruption, it is necessary to:

• specify goods (services) and instances in which they can be procured through direct contracts, without leaving this decision to the discretion of officials. Goods and services can be categorized based on the following characteristics: military/civilian, essential goods and those required for long-term projects; procurement in regions close to the front line or far from it;
• provide a separate regulation for public procurement of construction and repair of roads, housing and other infrastructure objects because the risk of inefficient use of funds in this area is especially high;
• publish generalized or depersonalized data on procurement via direct contracts (e.g. average contract prices by product groups).

Destroyed or damaged enterprises and infrastructure are already gradually being restored. After Ukraine’s victory, the large-scale reconstruction will boost public purchases tremendously. Since Ukraine will rely mainly on donor funds during the reconstruction, keeping the procurement system as transparent as possible is crucial to demonstrate the efficiency and integrity in public funds use.