Public Procurement: What Changes to Expect


Alexander Borodkin

Partner, Attorney-at-Law

Real Estate and Construction,
Trade and Commercial,
Transport and Infrastructure

On 16 October 2019, the President of Ukraine signed the Law of Ukraine on Amendments to the Law of Ukraine on Public Procurement and to Some Other Legislative Acts of Ukraine on Improving Public Procurement (the "New Law"). The New Law is designed to restart the public procurement system and aims to close all loopholes that were used in the public procurement process.

The main changes are described in plain language below.

The end of splitting

The current Law on Public Procurement (the "Current Law") established a "threshold" for the cost of goods, works and services procured, the reaching or exceeding of which required the use of the e-procurement system Prozorro. If the cost of such goods, works and services was below the threshold, customers entered into a procurement contract at their own discretion. As a general rule, the threshold was UAH 200 thousand for goods and services and UAH 5 million for works.

Considering that the below-threshold procurement procedure was not specifically regulated at the legislative level, the actual cost of goods, works or services was practically split, which enabled the customers to neglect e-procurement and enter into not contracts that were not always cost effective.

Therefore, the New Law proposes that the below-threshold public procurement must be “brought out of the shadows” and introduces a new simplified procurement procedure, which shall apply to the procurement of goods, works and services, whose cost is equal to or higher than UAH 50 thousand and is less than the threshold. The highlights of the simplified procurement include:

(а) the simplified procurement shall take place even if there is only one bidder;

(b) the most cost-effective bid shall be considered for no more than five business days after the end of an electronic auction; and

(c) a procurement contract shall be entered into within no more than twenty business days after the customer makes a decision to enter into such contract.

New is not well-forgotten old

In addition to the open tender procedure, the Current Law provides for a negotiated procurement procedure and a competitive dialogue. The Current Law, although not placing a special emphasis on, provided for a separate procedure for procurement of goods and services for an amount equivalent to EUR 133 thousand and of works for an amount equivalent to EUR 5,150 thousand. The highlights of such procedure include: (а) a procurement announcement must be additionally published in English, and (b) only those bids that have passed the qualification selection must be admitted to evaluation.

The New Law has expanded the list of procedures using the already existing procedure described above, calling it "restricted tendering." This procedure, which is much better regulated by the New Law, will also be applied where the complex or specialized nature of goods, works or services limits the competition of pre-qualified bidders and where the cost of such goods, works or services is equal to or higher than EUR 133 thousand for goods and services and EUR 5,150 thousand for works.

Evaluation in a new way

The law stipulates that bids must be evaluated on two criteria: (а) price or (b) price and other evaluation criteria, in particular, such as: payment terms and conditions, period of performance, warranty service, operating costs, technology transfer, and training of management, research and production staff.

The New Law aims to change the evaluation criteria and introduces an additional criterion – a life cycle cost. Such criterion should help customers estimate possible costs of operation of a procurement item and increase procurement efficiency. It will help determine not only the cost of a procurement item, but also the cost of its operation and maintenance.

Wider business opportunities

The Current Law provides for the procedure for challenging procurement proceedings, namely filing an appeal against tender documentation and tender results. A fixed fee was formerly charged for filing an appeal, namely: UAH 5 thousand – if challenging the procedure for procurement of goods and services and UAH 15 thousand if challenging the procedure for procurement of works.

Since the appeal fee was fixed and not refunded even if the appeal was satisfied, bidders participating in small-scale procurements often did not challenge the requirements, e.g., of the tender documentation which they considered discriminatory for them, or the tender results, as, in such case, they would lose their already small profit. Conversely, for large-scale procurements, appeals could be used as a way to delay the tender, since the procurement procedure was suspended up until an appeal was resolved.

Additionally, it was also impossible to make such payment through Prozorro, and an appeal could not be withdrawn through the e-system.

Therefore, the New Law introduces a new challenging mechanism having determined that the business should have more potentials to protect its rights. It is not the tender documentation and results alone that may be challenged soon, but the cancellation of the procedure as well – previously the buyers could cancel the procedure instead of amending terms and conditions of tender documentation after being requested to do so through the electronic system in view of their discriminatory nature, so that the bidders who started collecting certificates for such procedure had to start all over again.

The fee will be paid through the e-procurement system upon lodging an appeal. Such a novelty would make the appealing more convenient for appellants and reduce the burden on administrative panel of the Antimonopoly Committee of Ukraine, which will now automatically receive information on payments. It is interesting that such fee will be differentiated, i.e., pegged to the procurement budget and appealed matter, and set out in certain resolution of the Cabinet of Ministers of Ukraine. So, if a decision is favourable to the appellant, the money paid for filing the appeal will be refunded.

Abnormal prices

As a matter of practice, there is often a situation when a bid having the price significantly less than the one offered by the other bidders in their bids is recognized as successful based on results of the electronic auction. Subsequently, having been recognized as the successful bidder, such bidder starts increasing its price by entering into supplementary agreements to the procurement agreement already made, by reducing the scope of goods, works or services to be procured. To prevent any abuses, the Draft Law introduces a new criterion, being the notion of "abnormally low price of the bid."

So, a bidder who offered a procurement price lower by 30% and more than an average bid price offered by the other bidders must submit a reasoning for such price. If such reasoning is not sufficiently compelling or is not submitted at all, the buyer may reject such bid.

The second chance

Pursuant to the Current Law, the buyer rejects bids if they are not consistent with the tender documentation. Practically, such an inconsistency is not always material. Therefore, for the sake of justice, the New Law enables bidders to correct insignificant errors within 24 hours after the buyer gave notice urging to correct such inconsistencies through the e-procurement system.

New liability

The New Law provides the buyer director may be held liable. Thus, any failure to comply with the decision of the Antimonopoly Committee of Ukraine as appealing body, which was made based on findings of considering appeals and entering into agreements providing that the buyer must pay for goods, works and services, either before or without procurement procedures, entails a fine from UAH 34 thousand to UAH 170 thousand.

Further improvement

Notwithstanding positive changes, the New Law still ignores a number of problems. For example, it is not everything clear with procurements to be made by persons formally qualified as the buyers, but otherwise than at the expense of public funds. Neither the New Law nor the Current Law contains a rule expressly referring to no need to hold public procurements if such procurements are made at the expense of grants, international donors and even private investors, rather than the "buyers." In practice, the buyers interpret differently the procurement legislation in seemingly the same circumstances. We have not managed to receive any unambiguous interpretation from the competent procurement ministry.

Moreover, both laws do not provide for joint participation in public procurements. It is not a rare occasion that several persons may unite their efforts to perform works or provide services. However, following the legislator's logics and in view of Prozorro technical capabilities, such joint participation is impossible. A bidder must be one of them, while the others must be its contractors. This makes an uneven playing field and restricts rights of such persons during the public procurement procedure.

Both the Current Law and the New Law do not regulate in full how non-residents must participate in public procurements. Practically it is often the case that a non-resident successful bidder has to set up a subsidiary in Ukraine or obtain necessary licenses, etc. to fulfil the procurement agreement. However, it is the non-resident who is formally the successful bidder and its subsidiary may have participated in the fulfilment of the agreement under a trilateral agreement only to be made with the buyer, which issue is not clearly regulated by the law.

Therefore, we see that the legislator is still trying to fill some gaps in the Current Law. As a part of the novelties, the bid evaluation approach has been changed, a new type of liability has been introduced and light has been shed to so-called pre-threshold procurements. We hope that the other issues, including, in particular, those described above, will not be left behind.

Published: The Page, 21 October 2019 

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