The seventh issue is about the peculiarities of public procurement. What should be done to make procurement faster and more efficient? Why is it important to involve Prozorro in tenders of international donors? How have procurements for the army changed with the emergence of the State Logistics Operator? Why does the EU oppose the mandatory requirement of two bidders? In the new episode of the podcast “Budget Talks” you will find answers to these and other topical questions. Viktor Maziarchuk, Head of the Center for Fiscal Policy Research, Roman Slobodyan, public finance expert, and Nadiya Bihun, Deputy Minister of Economy, discuss the peculiarities of procurement in wartime and the changes that have taken place in this area.
MAN
Good afternoon, dear listeners. I am glad to welcome you to our podcast “Budget Talks”, which is produced with the support of the International Renaissance Foundation. Today we are going to talk about public procurement. Victor Maziarchuk, the head of the Center for Fiscal Policy Studies, will help me to deal with this issue.
VIKTOR
Good afternoon, Roman!
ROMAN
And the Deputy Minister of Economy, Ms. Nadiia Bihun.
NADIYA
Good afternoon!
On the peculiarities of procurement during a pandemic and full-scale war
ROMAN
Now most of the questions we have for you date back to February 24, 2022, after the start of the full-scale war, but we also had a difficult period before that. In particular, covid. As a ministry in the midst of a pandemic, it is clear that a lot of new processes, not only in Ukraine but also in the world, are being introduced for the first time, how was the system itself built to speed up procurement in such a critical situation? And if you can recall how you acted at that moment, what solutions did you have?
NADIYA
I was not in the ministry at the time. At that time, I was acting as a procurement officer. I was actually working with procurement at the time. But I know the story, albeit from the other side, but I nevertheless saw what was happening there. In fact, everything is very simple. There are two approaches in the world. One is to apply procedures, and the other is to have regulated procedures. The larger the procurement – in European and other legislation – the more complicated the procedure. The smaller the procurement, the easier the procedure. And when something unforeseen happens, “emergency procurement” so to speak, everyone says to cancel the procedures and runs to buy without procedures, under direct contracts. When the covid started, there was nothing new. It was the same logic. It was the same logic all over the world. We simply define certain limits when this can be done, in which cases, we do not cancel all procurement, but those that relate to the covid, and we adopted a regulation that allowed us to buy without tenders under the covid and simply submit reports in order to remain accountable. That is, to be able to see and analyze the results. But the tenders themselves did not take place. And I’ll tell you, running a little bit ahead of time, about the war. When the full-scale invasion began, we followed the same path. But if there was a history of the Covid issue, the needs related to Covid were considered “emergency”, urgent, and all the rest remained in regular legislation. When the war broke out, because all needs became urgent, all procedures were canceled in principle. And starting in March 2022, a regulation was in place throughout Ukraine that allowed procurement without procedures. Someone did the procedures in a small percentage of cases, those who could did so, it was just their initiative. But more than 90% of everything was purchased without procedures. And we lived like that until the end of June. At the end of June, we gradually started thinking about returning the procurement. Because we understand that just seeing a report on the results of an already concluded contract is good, of course, but it is definitely not enough if we want our supplier selection process to be effective.
First of all, it should be efficient, and then transparent, with reduced corruption risks. And in June, the first resolution was passed, which was a little bit there… and then step by step, the procedure was returned. And here we (this is actually our life hack, which we did, which we did not do in Covid when we started returning procurement) did not return the standard heavy procedures at first. We would not have been able to reach the level of procurement that we have now. We now have more than 70% of all budgets, except for arms and military equipment, everything we call public, through competitive procedures. In principle, this is about the same percentage as before the war. In other words, we managed to bring our procurement system back to the model it was operating under before the war. We would not have been able to do this if we had left the old procedures in place, because the old heavy procedures were based on war, blackouts, damaged businesses, and a very different situation in Lviv, Kharkiv, or Kherson regions.
The procedure is difficult because it requires a lot of resources from all sides… When the war started, it became clear that we needed to cut the paperwork. What is the goal? We want businesses to continue to come to the auction and participate. So we need to make it easier for business, much easier. And somewhere we are ready to give up even the bureaucracy that seemed useful. So we said: okay, that’s it, we don’t require any papers at all, from now on, just ticks in the system.
ROMAN
Digitalization?
NADIYA
Yes. Then, for example, there was an obligation that there should be at least two bidders in the auction. It was a complicated story, and there was a lot of discussion around it all the time. What does two bidders mean? This stimulates competition, which means that it will somehow force the customer to do a proper market analysis.
VIKTOR
Bring a friend, right? Invite a colleague?
NADIYA
Yes, invite a competitor. Many of those who work in the procurement system from the inside know very well that in fact the customer who was aimed at closing the tender the first time told the supplier he expected to bring someone. Indeed, to stand. And it’s very difficult to calculate this, it’s hard to see this connection.
VIKTOR
It’s very easy. I’m sorry for interrupting. It’s just a quick interruption. We work closely with the Ukrainian Catholic University. I study there. And we provided procurement data to Data Scientist students. We downloaded the entire Prozorro 2022-2023 dataset, gave them the entire dataset, and they did their own research, chose their own hypotheses, tested them, and so on. And one of the teams was just looking for a narrower dataset on the restoration, for these pairwise connections.
NADIYA
There are no more paired relationships in 2022-2023.
VIKTOR
Є! They walk together.
NADIYA
Out of habit, or for what reason?
VIKTOR
I don’t know. And this is an interesting story, because indeed one team has written algorithms that allow us to identify companies that go to different tenders with each other and may be related.
NADIYA
Or competitors, and they just coincide. Since 2022, we have just removed the need for two participants. What did we see? The task was to ensure participation, on the one hand, so that participants would come. And on the other hand, to ensure that the bidding took place on the first try. We understand that we have an urgent need everywhere, or almost everywhere, and we are still “fluffing” customers who, in fact, have already gotten used to buying without tenders in the first few months, and no longer want the tenders to be returned, they will sabotage. That’s what happened. So we are “fluffing” them up, we need to make sure that the tender is held the first time. Then we removed this obligation for a second participant. And in 2022 and 2023, we watched what was happening with the competition. We have now reached an average number of offers in tenders of 2.03. This is actually almost the pre-war level.
VIKTOR
Is 2.03 two bidders per tender? This is a fairly high level.
Why is the EU against the mandatory two-bid condition?
ADIYA
This is not a bad level, considering that one is enough for us. Now we should have collapsed. But in fact, we have pulled ourselves up. It is difficult to compare the situation before the war and now. And a lot has changed for business. There are fewer opportunities, markets are falling. So in this sense, the public procurement market has become more interesting for many businessmen, because it is an opportunity that someone has not considered before. And now there are no other opportunities. Therefore, the situation has changed comprehensively, but nevertheless, we see that we have managed to make this innovation. And what is interesting. By the way, we had a lot of discussions with Europeans about this. Because the European Union does not have such a requirement of two participants. They say that one is enough. They have been giving us this remark for a long time, saying: make changes to the legislation. And we could not make these changes because we had a community of people who believed that we should not do this. There must be two, it’s almost an anti-corruption measure. If we take it away, corruption in procurement will be everywhere. We did it, we showed that the situation works. Previously, if there was a tender and a business decided whether or not to participate in it, it still had to decide with whom to participate. Now they realize that they have just passed the tender, even if they are the only one, they have won fairly. And there is no need to push business to make dishonest decisions. On the contrary, it has a favorable effect. They are now more likely to decide to enter a tender, because they don’t need to burden themselves with such conditions.
What else we have done. This is our know-how. The European Union doesn’t have this, but it works very well, and we will definitely bring it into regular legislation – error correction. Even before the war, we had a rule that allowed a participant to correct mistakes, but only in terms of qualifications and the right to sign documents. Two types of mistakes could be corrected. Everything else could not be corrected. Accordingly, if you made a mistake in the documents, we know that historically all commas should be where they should be, numbering should be where it should be, and if there are mistakes, we reject them. That’s what we said during the full-scale invasion: we need the lowest price so badly, we allow you to correct all the mistakes that exist. The main thing is that the participant who is really responsible should be able to correct these mistakes. We set a deadline of 24 hours for them to do so. It is a short period, but it is there. We saw that this practice works very well. We had some misunderstandings with the Antimonopoly Committee. Their position was that mistakes cannot be corrected in the technical part. That is, it is possible everywhere else, but not in the technical part. We talked to them for a long time about the fact that they had their own position, that there could be fraud, that a participant would come to offer one thing, and then look at the tender results and say: “I want something else here”.
VIKTOR
You meant something else, didn’t you?
NADIYA
Yes, and will change the subject that he proposed in his proposal. We say that this is virtual, theoretically it can be. But in practice, I think it’s not really possible. As a result, we are postponing this now, and we will develop this rule to make it work better, along with digitalization, tender documentation in general, tender offer, electronic contract. I think we will come to the point where there will be fewer mistakes, because most of the information will be in the digital system.
VIKTOR
So a person doesn’t have to do all this with pens?
NADIYA
Yes, yes. But we are still trying to solve it from the other side. To say that okay, while we still require these pdfs, you can still correct them if you made a mistake somewhere.
VIKTOR
Oh, that’s a stab in the heart, unreadable pdfs that you can’t work with.
ROMAN
But you can work with pens.
VIKTOR
It’s really a horror. But I understand perfectly well that we are moving in a certain direction, and we can’t do everything at once.
Can I make a personal request? This is my data pain. Well, not only mine, but our team’s. Over the past six months, it has been very difficult to correctly identify, almost impossible, a construction project and its location. Because it is constantly either in different places or somewhere else. If you were to create a clear hierarchy when it comes to construction: region, district, territorial community, settlement, street, house number, I think a lot of people would thank you very much.
NADIYA
Let’s talk about it.
VIKTOR
Let’s do it.
ROMAN
Recommendations, request for official mail. Unfortunately, our podcast is a bit for a different audience.
What changes are needed in public procurement?
NADIYA
The whole world and we will move more towards greater complexity. We will make procurement more complex. And the fact that we have already started this movement during the war and are showing many interesting results is very, very important. And we will continue to move there in the future. I am sure that procurement as a profession, as the value that a procurement officer can create for his or her organization, is very important. Accordingly, the procurement policy should move towards giving the procurement officer more tools that he or she can apply better to a particular situation. We will always be afraid that if you give an additional tool to a procurer, he will not be able to use it. I just heard a lot when I was a procurer, there was a popular opinion that all procurers are a priori somehow bad and short-sighted, and therefore they should be given one open tender and let them all work with it.
ROMAN
Do your international partners help you? Or do they only criticize you?
VIKTOR
They criticize, saying that everything is “lost”.
NADIYA
No one helped us. There is no one to help us. First of all, no one has ever been in our situation. We can’t take someone else’s experience and apply it to us, because when we tell everyone that we continue to buy through Prozorro during the war, their eyes go square. They think it can’t be possible. And we say: look, it’s not just Lviv, okay, I understand, but Kherson is buying through Prozorro.
VIKTOR
Mykolaiv.
NADIYA
To be honest, no one even offered to help. Maybe somehow it happened that we ran to do everything, even ran ahead of ourselves a little bit. We didn’t need any help. Why? Because, in principle, the Prozorro team is quite skilled in the sense that I was lucky. This team is an environment. We say that Prozorro is an ecosystem, and there are many actors in this ecosystem. And in this sense, due to the existence of this ecosystem, it is a system where you can take energy, take people who allow you to make changes. So now we are definitely in a position where no one can help us, especially with what to do during the war. We can already help anyone with this.
VIKTOR
The main rule is not to interfere.
ROMAN
But as I understand it, you have these steering committees, there are many donors, and I know the World Bank and others are there…
NADIYA
It is true. We meet with all the donors every month.
ROMAN
Do you communicate with them?
NADIYA
We communicate more. I started these monthly meetings to show them what was going on. Because they didn’t have enough information about what was happening here, and therefore any manipulations were possible. You remember that Russia tried to manipulate this in the beginning. They said that we were stealing, that everything was so bad, highlighting some high-profile scandals that obviously exist. Of course, if you open up procurement, you can see that the procurement process is completely transparent, and from time to time there are problems with these procurements, which is normal. Unfortunately, we don’t live in a perfect world, but this is the way it is. At first, I made monthly reports where we showed key KPIs. We even made a separate dashboard for them so that they could go in and see what key indicators we had set, and the key indicators included competition, the share of competitive procedures in relation to everything else. The only thing we removed was the savings, to be honest. Why? Because….
VIKTOR
This is a bit of a manipulative story.
NADIYA
First of all. And, secondly, when we focus on savings, it is this paradigm of price only approach, that is, our goal is not to save money in tenders in reality. Let’s think a little more consciously. The task is to meet the needs of the state in the best possible way. And the best way is a good price compared to quality, compared to delivery time. And the net savings between the expected cost and the bid price tells us nothing. That is, there may be poor quality, there may be…
VIKTOR
…a long delivery.
NADIYA
Yes. And so on. So, in order to just knock down this focus that has been holding everyone for a long time, we just removed it. Accordingly, now the KPI is more about going to a competitive tender – you are good, not going to a competitive tender – you are not good. If you have complaints to the Antimonopoly Committee about your procurement, where the Antimonopoly Committee scolds you, you are not good. If you have no complaints, you are doing well. The State Audit Service is the same way. If you have monitoring with violations, you are not good. These are the KPIs. And as for the donors. Six months later, they realized what was happening. At first, they tried a little bit, as you say, not to interfere. They said that you change the legislation very often. And now we have a specific procurement procedure – a resolution of the Cabinet of Ministers, which actually returned procurement to Prozorro step by step. In other words, at first there were a lot of exceptions, there were many opportunities to make direct contracts without procedures, and then there were fewer of them. Why couldn’t we cut this off right away? Because the decision is still made collectively by the government. Someone shouts that we are going to stop everything with our procedures, that it’s not right, that they need this and that, but this is a discussion, including the communications we have been conducting all along, highlighting that we need to return to Prozorro, that it’s right, that those who return are good. Public opinion started to get involved, and active society started to talk about it. And it helped.
What did we want from donors? We wanted the World Bank and the European Bank for Reconstruction and Development, as well as others, to start purchasing from Prozorro.
Why is it important to involve Prozorro in international donor tenders?
VIKTOR
Tell us about your success. It’s a great case study.
NADIYA
I can’t say that it was completely successful. We made a separate module for them in Prozorro. Here, by the way, are the things we did to amend the Resolution. Here are the simplifications. It helped that we dived deep into the procedures of international donors, looked at how they buy, and adopted some of this practice. We saw, for example, that when donors announce a tender, in some cases they simply do not say the expected cost. They say, ‘Just give us your proposals, we won’t tell you the budget. And this practice has become widespread. In principle, for some cases, it definitely makes sense. For some, I think they are doing it in vain. But this is how it works. Then, with regard to non-price criteria, they have a widely used practice of evaluating the offer according to a number of criteria. And the price is only one of the criteria, and it’s not even the most important one, and there are others. The logic here is actually very simple. Procurement for the money of international partners is now a big market for us, Ukrainian companies. And in the future, when we start talking about a more active recovery, we understand that a lot of money will enter the country through such channels. Right now, their tenders are held on paper. Nobody sees or understands anything. Of course, everyone hopes that everything is 100% clear and good, but it is advisable to check it.
VIKTOR
That is, there is a lot of work for the expert community, for active citizens.
NADIYA
I’ll tell you, it’s huge, not big, but huge.
VIKTOR
In order to drive our international partners into the Prozorro.
"Ukraine is neither Afghanistan nor Africa"
ADIYA
Yes, because, on the one hand, it’s market access, and I think that the thesis, we repeated it many times in meetings with them, and at some point, I think we managed to break down this glass wall with them a little bit. That Ukraine is not Afghanistan, not Africa. We are a developed country with developed markets. So, if you expect us to rebuild with the resources of companies, i.e. foreign ones, this is not the case. Moreover, the experience of Afghanistan has already shown what happens when you pump a country with a lot of money, but do not develop the local market. And when you have all the construction, someone came, built and left, and there was still a desert, and the economy did not develop. And then, as soon as you said, “We’re shutting down here,” that was it. The whole situation has shown how quickly this situation can deteriorate without an economy, without small and medium-sized businesses, without a population that is self-sufficient, capable, and so on. That is why we need companies to rebuild Ukraine, which will shape our markets and, consequently, the economy here. And, accordingly, value added will be created and remain here. This means that the tenders that will be held should be such that Ukrainian companies have access to them. We are not sure that if these are the tenders they are currently holding under the World Bank procedures, they will have the same access as through Prozorro. We think that through Prozorro we provide better access to such procurement and needs for our market.
And the second thing is still the mechanism, the procedure. Our market is used to seeing all the information, to having it available to it. A competitor sees a competitor, understands how decisions are made. Even if the decision is biased, there is room for appeal, and all this requires a certain level of transparency. This is not the case in donor procedures, where more resources are obviously devoted to the qualifications of procurers. Of course, they work better with procurers, invest in their capacities. And it would be great if we could take advantage of this and extend it to those procurers who make purchases for budgetary funds. Because this is lacking there, but nevertheless, the transparency of the process adds a lot of positive things in terms of the market, analysis and access to data. So in this sense, I think that our entire ecosystem is transparent, and the civil society that we have should be more actively involved in this conversation. Because if we start rebuilding Ukraine and it happens through the World Bank mechanism, you will not see anything in the data.
VIKTOR
It’s true, you won’t even see payments in the Treasury.
NADIYA
Yes, and it will be bad from all sides.
ROMAN
This is just a dream of the public sector and experts, that we would not be told what to reform, but we would finally share our access, our background and reform other institutions. So thank you for sharing this experience. I have one last question, I can’t help but ask.
VIKTOR
Don’t. You can’t ask, I didn’t ask.
On the high-profile scandals around the procurement of the Ministry of Defense
ROMAN
About scandals, I love them.
VIKTOR
Oh, you love them, that’s right.
ROMAN
You remember in our media there were many investigative articles about winter uniforms that tripled in price during delivery. Then there was also a scandal about the purchase of food for the Armed Forces. Although these issues are unpleasant for us, I would like to ask why this happens during the war, when most of the population helps and donates as much as they can, but here the question is more likely to be about law enforcement agencies and their activities. But I will ask you a question: how can the procurement system be restructured to perhaps avoid such things? A state agency, the State Logistics Operator, has already been created and is working successfully, or perhaps you can refute this? What other plans do you have to improve the quality of procurement, including for the Armed Forces? This is the main thing for us now.
NADIYA
We have already talked about this a little bit. Still, the big problem is that procurement as a function, as a profession, needs to be developed. And there are not so many professional people in this field. We need to do this systematically. In principle, there are initiatives. The School of Purchasing at the Kyiv School of Economics has been developing for many years, and they have made many graduates. And it works well. But this is not enough for a country like Ukraine. Before the war, we had 33,000 customers as organizations in the system. That is, each customer had one person or several. Back then, we estimated that we had 150,000 authorized procurement officers. It’s super difficult to train that many people to do procurement professionally.
Back to the Defense Ministry. The problem in the Defense Ministry is why people steal. I don’t know how to answer this question. Like, why don’t they have a conscience? Maybe the person’s conscience was not installed. The second question is whether people have enough professionalism to build an effective procurement system. And this is a problem. It’s good that Arsen, for example, agreed to become the head of the State Logistics Operator, because they are really making a lot of positive changes, we can see them. And they really demonstrate a lot of leadership in change. It is difficult for them because the system is not effective.
VIKTOR
He resists a lot.
NADIYA
Yes, it is. This way of creating such agencies… in this case, they are not even a central procurement organization, although we already have a number of central procurement organizations in the legislation. They are more like a procurement agency because they receive the budget directly. But I think that in the future, when they are pumped up, when they have enough capacity to make these purchases for the budget of the Ministry of Defense, they will start looking deeper into military units and will take away small purchases from military units that they make there. Because right now, how does it work? There is a large budget for the Defense Ministry, which is organized into large categories. But there is a lot of procurement by military units. If you look at the vacancies announced in military units for procurement officers, we have already brought back some regulation there. Because we understand that something is possible, something is not. Something has to be returned to public procurement. I think they would start to take over the work from there as well.
How can we speed up this process? To make our procurement faster and more efficient? Probably by creating such centralized teams, more under the main institution. The Defense Ministry was a big pain for all of us. Now, I see that there is progress there. They definitely need support, the DOT team and the team of the second defense procurement agency.
VIKTOR
And Hlib’s team directly at the Ministry of Defense.
NADIYA
It’s hard to say about the department. I just don’t see what’s going on there lately. They do not make purchases directly with their hands. That’s why it’s not very clear. These are more hidden processes. But what is happening directly in terms of procurement is visible, because they write about it, they talk about it, and you can see what they are doing on Prozorro. But they need to at least clean up the sanitary level now. Just divide this catalog of 409 items into fewer items. We, as the Ministry of Economy, gave recommendations, even before the DOT, we had a working group, and it all was written down. Nobody did it just like that. Then there is logistics. What should we do with logistics? Separate logistics from food, define it in more detail. It’s clear what needs to be done, so that they just stop putting a spoke in their wheels and start doing it. They are gaining capacity, they are gaining weight. They are having a very hard time now because they went to break the market, a corrupt market that….
VIKTOR
…huge
NADIYA
In terms of budget, yes. And who is used to working in the way he used to work. I read that the deputy minister in charge of logistics was recently fired. I hope that now it will be easier for them to break this market. They are at risk of having new suppliers, and these suppliers may not be able to cope. And this is a huge risk, because we are talking about feeding the guys who are fighting, and we cannot leave them without food. So there will be a big problem here. They have already solved most of the problems with uniforms. At the beginning of the war, they used to accept uniforms based on a sample, but now they have returned the technical specifications. And now the quality standards are better, there is definitely progress. We will also look at other things. You just need to understand how difficult it is inside in order to appreciate the changes that are taking place. The changes are tectonic.
ROMAN
Not for another podcast episode.
NADIYA
Definitely not.
ROMAN
Thank you very much for this discussion. Communication is very important. Explaining things to people who are not even in this expert bubble in simple language. Today we realized that a lot of changes have taken place. And we are running at high speed and changing on the fly in such conditions. So I am very grateful that we found the opportunity to talk. Also, Viktor, thank you as always for supporting the discussion and providing your expert opinion. And I can’t mention the Armed Forces of Ukraine, because without them, this podcast would definitely not have happened. Watch and listen to our podcast on all platforms. Glory to Ukraine!
VIKTOR
Glory to the heroes! I would like to thank you, Nadia, you, Roman, all the defenders and defenders for the opportunity to breathe in a free country.
NADIYA
Glory to the heroes! Thank you for the invitation. Of course, our guys and girls who are protecting us need to feel that these changes are being made, among other things, so that they can return to the country they want to live in. And we have not wasted this time. That is why I believe that we really cannot stop. We need to accelerate even more, because we need to do more things while we have a window of opportunity. It will not be endless. We need to try to do the maximum.