HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS

Transcription

1 HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS REPORT ON THE INTERIM ASSESSMENT OF THE PILOT CENTRALISED PROCUREMENT BODY UNDER THE MINISTRY OF ECONOMIC DEVELOPMENT AND TRADE Dana Mitea (with additional inputs from Dr Eugene Stuart and Olexandr Shatkoviskiy) October 2017 A Project funded by the European Union and implemented by a Consortium led by Crown Agents Ltd

2 The contents of this Report are the sole responsibility of the Crown Agents and its Consortium partners and the opinions expressed in this Report are not to be understood as in any way reflecting an official opinion of EUROPEAID, the European Union or any of its constituent or connected organisations. 2

3 ABBREVIATIONS AMCU Anti-Monopoly Committee of Ukraine CPB Centralised Purchasing Body CRM Customer Relations Management DMS Data Management Systems DPS Dynamic Purchasing Systems EU European Union EUPT EU Procurement Trainee Programme ICT Information and Communications Technology LCC Life-Cycle Cost MEDT Ministry of Economic Development and Trade PPL Law of Ukraine on Public Procurement (December 2015) SME Small and Medium-sized Enterprise USAID United States Agency for International Development 3

4 TABLE OF CONTENTS 1. Introduction 5 2. Development of centralised procurement in Ukraine 7 Page 3. Strengths and weaknesses of the pilot project Evaluation of legal environment with regard to centralised procurement Conclusions, Recommendations and Next Steps 25 4

5 1. INTRODUCTION The EU funded Project HARMONISATION OF PUBLIC PROCUREMENT SYSTEM IN UKRAINE WITH EU STANDARDS commenced work in Kiev on 11 November The Project is being implemented by a Consortium led by CROWN AGENTS Ltd and will operate until November The Project is working to contribute to the development of a solid and consistent public finance management through the establishment of a comprehensive and transparent regulatory framework for public procurement, an efficient public procurement institutional infrastructure, the accountability and integrity of public authorities in regard to public procurement and the development of the Ukrainian State aid system. The main beneficiaries of the Project are the Ministry of Economic Development and Trade (MEDT) and the Anti-Monopoly Committee of Ukraine (AMCU). At the same time, the scope of work of the Project anticipates collaboration with a wider range of stakeholders including the Cabinet of Ministers, the Parliament (Verkhovna Rada), the Ministry of Finance, the Ministry of Justice, the Accounting Chamber, the State Financial Inspection and other organisations involved and with an interest in the public procurement and state aid sectors. Prior to 2017, the Project prepared a Report on policy recommendations concerning the establishment of centralised public procurement organisations in Ukraine (Dana Mitea, November 2015). This offered concrete recommendations on the establishment and functioning of a CPB as well as on the legal framework which needed to be put in place. These recommendations were presented to the main stakeholders via different workshops and meetings organised within the Project. The work on the development of knowledge and understanding of best practice of CPBs in Europe was further supported by a study visit to the UK (November 2014). Since end-2016, a mechanism of centralised procurements through piloting of a newly established CPB was introduced in Ukraine via the creation of the State Agency Professional Procurement (further called the Agency). This initiative was included in the Public Procurement Reform Strategy/Road-Map (approved by the Ukrainian Government in February 2016) and the pilot is due to complete by end The CPB pilot initiative was substantially supported by the Project first in regard to changes to the Law on Public Procurement (PPL) and then in respect of Decree No.928 of the Cabinet of Ministers of 23 November 2016 and MEDT Order No.20 of 12 January In the context of the Project s assistance to the Ukrainian authorities in regard to Public Procurement institutional development under the approved 2016/2017 Work Programme (CP 3.5.E), a specific activity of the Project was dedicated to support for establishing the CPB. The type Project priority assistance required by the Agency and the MEDT in regard to the CPB pilot was agreed with the MEDT in November Accordingly, as the CPB pilot developed in 2017, the Project provided dedicated expert support to the Agency in regard to the development of a single integrated CPB catalogue, the development of a database and buyers profiles for the CPB pilot and the development of tender documentation, framework agreements and model contracts within framework agreements and specific recommendations to improve the regulatory framework for the functioning of central procurement bodies in Ukraine. 1 Moreover, further study visits to Austria were organised (February 2016 and 2017) and a staff support programme operated from February to October 2017 (the EUPT Programme). 1 The respective reports can be found here: 5

6 Against the background of the development of the newly established first Ukrainian CPB and in the context of the previous recommendations of the Project regarding the introduction of centralised procurement, the specific aim of this Report is to provide an interim evaluation of the progress achieved in the piloting phase of the CPB. This evaluation is interim because the term of the CPB pilot has not yet completed. Accordingly, this Report is intended, in particular, to assist the final evaluation of the CPB pilot by the MEDT and the Agency at the end of the pilot project (end-2017). In accordance with the Terms of Reference for this assignment, the assignment had a specific focus on: Identifying the potential strengths and weaknesses of the pilot CPB; Evaluating the existing CPB model (in terms of structure, processes, vision); Overviewing the contracts concluded, cost savings achieved and the business processes used; Reviewing competitive impact and the market efforts undertaken by the Agency; Assessing the legal environment of the CPB pilot and the potential to expand the CPB model at regional level together with other scaling up considerations; and Providing recommendations for the improvement of the legal framework, organisational structure and the introduction of CPB-based e-facilities as well as possible directions for further EU support. In Chapter 2, this Report gives a general overview of the latest development of the most relevant aspects concerning the establishment of a CPB in Ukraine. Chapter 3 concentrates on the identification of concrete strengths and weaknesses of the pilot CPB, an evaluation of its organisational and operational model (structure, processes, vision, cost savings achieved and business process used, competitive and market efforts undertaken, etc.). Chapter 4 is dedicated to an evaluation of the legal environment and includes concrete recommendations on amendments to the PPL and the legal act establishing the CPB. The recommendations for improvement of the organisational structure, the introduction of certain e- procurement tools within the CPB as well as possible directions of further EU support are set out in Chapter 5 of the Report. 6

7 2. DEVELOPMENT OF CENTRALISED PROCUREMENT IN UKRAINE Ukraine s public procurement landscape is characterised by a highly decentralised system which gives rise to quite inefficient procurement of widely used and similar goods and services available on the market (e.g. IT hardware and software, office equipment, fuel, cleaning services, etc.) and which are purchased on an individual basis by numerous contracting entities, including central and municipal authorities, different departments of the same municipality and neighbouring municipalities. This situation is inefficient and ineffective for several reasons: it reduces the possibilities for efficiencies arising from economies of scale in public purchasing, it is not timely efficient, it is not effective from the point of view of the high number of involved staff and it is more likely to encourage corruption. Given this situation, the Ukrainian Government has been gradually developing the centralised purchasing system within the framework of the process of harmonisation of Ukraine s procurement legislation with EU standards and the implementation of the Action Plan for the implementation of the Public Procurement Reform Strategy/Road-Map approved by the Ordinance of the Cabinet of Ministers of Ukraine No. 175-p of 24 February From a general strategic point of view, the Public Procurement Reform Strategy/Road-Map offers some broad guidelines on steps towards centralisation. In particular, it foresees several measures to be implemented gradually until 2020: Setting up (creation of a concept) of a centralised procurement organisation(s) to implement a pilot project introducing the mechanism of centralised procurement and legal regulation of centralised procurements - to be implemented until 2016; Organisation of centralised procurement in compliance with international best practices as regards structure, financing, functions and activities in procurement process - to be implemented until 2018; Introduction of compulsory procurement via centralised purchasing organisations (under framework agreements and based on e-platforms) - to be implemented until In addition, the Government is committed to the provisions in the Strategy and the most relevant legal provisions which constitute the base for the setting-up of a CPB have been adopted. The new Law on Public Procurement (adopted in December 2015 and which entered into force in 2016) introduced an important pre-condition for the identification of a CPB - the definition of the term contracting entity has also been included. It should be noted that the Cabinet of Ministers of Ukraine, the Council of Ministers of the Autonomous Republic of Crimea and self-governing authorities have been authorised to designate CPBs as contracting entities. According to Article 1(1)(36) of the PPL, centralised purchasing bodies are legal entities responsible for organising and implementing procurement procedures under framework agreements on behalf of contracting entities in accordance with the Law on Public Procurement. As CPBs acquire all rights and obligations of contracting entities, they bear responsibility for the conducted procedures under the laws of Ukraine. According to the Strategy, the Ukrainian Government has conducted first steps towards centralised procurement in Pursuant to the Association Agreement between Ukraine and the European 7

8 Union, European Atomic Energy Community and their Member States, p. 7 of the Action Plan for the implementation of the Public Procurement Reform Strategy/Road-Map and p. 4, Chapter 6, Section II of the Ordinance of the Cabinet of Ministers of Ukraine No. 418-p of 27 May 2016 On approval of the 2016 Government Priority Action Plan, the MEDT launched a pilot project on CPB. In terms of legal approximation, the progress made is significant. The PPL 2016 includes some improvements towards greater alignment with EU standards, notably concerning centralised procurement bodies. Nevertheless, in the wider context of applying the public procurement rules in Ukraine, the most acute problem of the existing system still relates to inconsistent and constantly changing legislation, which does not allow public authorities and market operators to accumulate much needed expertise. Moreover, there is an important and continuing lack of professional capacity at all levels in the public procurement system. Accordingly, there is a particular need for institutional development within public authorities, the judiciary, controlling bodies and contracting entities, as well as suppliers. The further development of framework agreements also advanced considerably on the basis of Project support concerning the amendment of Article 13 of the PPL and a Draft MEDT Order on Framework Agreements. The new legislation has not yet been implemented, however, due to IT difficulties in integrating framework agreements into the ProZorro e-procurement system. THE CPB PILOT AND RELATED INITIATIVES The procedure of implementation for the pilot project was approved by the Resolution of the Cabinet of Ministers of Ukraine On the implementation of a pilot project of arranging activities of a centralised purchasing organisation No. 928 of 23 November 2016 (hereinafter the Resolution ), and the Ministry of Economic Development and Trade of Ukraine was designated as the authorised agency to manage activities of the centralised purchasing organisation within the framework of the pilot project. The socalled State Agency Professional Procurements (hereinafter the Pilot CPB ) was created in the capacity of a centralised purchasing organisation by the Order of the MEDT No of 31 November The Pilot CPB was incorporated to organise and hold procurement procedures for the benefit of the Secretariat of the Cabinet of Ministers of Ukraine and central executive bodies. The purpose of the pilot project was to introduce an efficient market-based and professional purchasing instrument in Ukraine. The key objectives of the pilot project include: Undertaking professional and efficient procurements; Increasing the efficiency of procurements through their aggregation; Creating an e-catalogue and standard specifications; Creating favourable conditions for both contracting entities and tenderers; Conducingt market research; and Introducing efficient contract management. By end-june 2017, three major tenders had been completed by the Agency with significant savings of up to 20% indicated. These included contracts for the purchase of computer paper and for computer equipment for the Ministry of Youth and Sport. Widening the CPB pilot exercise, on 14 June 2017, the Cabinet of Ministers adopted a Resolution "On the experiment with the organisation of a centralised procurement body in the Donetsk region". This is 8

9 intended to ensure and maximise the efficiency of procurement operations in the Donetsk region, as required for the purposes of regional recovery, by piloting a Centralised Procurement Body project in the region. The resolution repeats the logic and approach already used in launching the Agency Professional Procurement. In the Health sector, a parallel initiative was envisaged for the Ministry of Health. Substantial work to date has focussed on the development of a draft concept for a Centralised Purchasing Body in the Health Sector. The draft concept was initially prepared by a USAID project, which drew substantially from earlier work of the Project s experts. The proposed CPB Model for the Health Sector and a related Action Plan were intended to be prepared by end However, a meeting of the working group on 28 December 2016, which further discussed the Statute of the future CPB, noted that the process of the creation of this body was proceeding quite slowly as a result of institutional cooperation problems, including delayed responses from the Ministry of Finance on key issues. On 23 August 2017, the Cabinet of Ministers adopted the Resolution on the Concept of Centralised Procurement in the Healthcare Sector that envisages the gradual establishment of a dedicated CPB specialised in the procurement of medical goods, equipment and services in the coming months. According to the Ukrainian Government, the successful completion of the pilot project is expected to result in spreading the CPB experience at the regional level. In any case, the switch to centralised procurement, even for certain categories of contracting entities, is a positive achievement in the process of the public procurement reform in Ukraine. It is expected that by the end of 2017, apart from piloting procurement procedures for the benefit of several voluntary contracting entities, the project will test the mechanism of procurements of certain supplies and services under framework agreements for the Secretariat of the Cabinet of Ministers of Ukraine and central executive bodies on a free-of-charge basis. Builiding on these experiences, the pilot project is also expected to assess the capacity and readiness of Ukraine to introduce centralised procurements and identify challenges faced by the centralised procurement in the public sector under conditions of fair market relations. 9

10 3. STRENGTHS AND WEAKNESSES OF THE PILOT PROJECT General considerations In 2015, the Project offered recommendations on the establishment of a CPB 2 which, so far, have been partially taken into consideration. They focused on four main levels of action needed for the successful implementation this complex endeavour: the political, the strategic, the operational and the legal levels. In order to deal with the challenges identified in the earlier Report, it was recommended to move to a centralised purchasing system where a CPB dealing with clearly defined standard goods and services is being set-up. This CPB could function at the national administrative level and could take the form of a State Enterprise under the auspices of one of the relevant Ministries. In order to obtain the expected benefits of centralisation, for certain contracting authorities it should be compulsory to use the centralised system. The following steps were strongly recommended in order to ensure a sound and well-structured transition from a decentralised to a centralised purchasing system and for the establishment of a CPB: 1. Drafting of a Strategy on Centralised Procurement clearly stating the reason why the Government decided to set up a CPB and which goals it aimed to achieve through centralisation. It should include a clear distribution of the responsibilities of relevant stakeholders and indicate the level on which centralisation is expected to take place. This Strategy should be in addition to the more general Public Procurement Reform Strategy (Road-Map) and should only address the issue of centralisation. This document should represent a clear commitment by the Government towards cooperative procurement. 2. Conducting a feasibility study including an analysis of saving potentials, purchasing volume and benchmarking. Based on this study, the development of a concept for the establishment of a CPB should emerge and include: the definition of processes, resources needed, organisational aspects, evaluation of the impact on stakeholders, the concept of purchasing control; operationalisation of the new organisation, provisions on change management. 3. Legislative changes - The introduction of the definition of a Centralised Procurement Body, centralised purchasing activities and a safe harbour clause in the Law on Public Procurement. 4. Specific CPB secondary legislation - Drafting of secondary legislation dealing with the establishment and functioning of a specific CPB. One of the main findings illustrated in the 2015 Report was that there was a general lack of strategic coordination for the establishment of a CPB in Ukraine. While the Action Plan under the Public Procurement Reform Strategy/Road-Map foresees a gradual development of centralised procurement until 2020, no concrete strategy on how the requirements will be met has been drafted so far. Currently, the Kiev School of Economics is conducting a Study to assess the appropriate level of centralisation in Ukraine where certain strategic questions are also being addressed - such as the possible effects of centralisation at different administrative levels. Although the Ukrainian Government started the introduction of centralised procurement through the Pilot CPB, a strategic approach in this respect is still absolutely necessary in order to give coherence and to be able 2 Report on policy recommendations concerning the establishment of centralised public procurement bodies in Ukraine, Dana Mitea, September 2015 (hereinafter called the 2015 Report). 10

11 to better coordinate the change from a highly decentralised to a centralised system. The main driver for implementing a CPB seems to be of economic nature (savings to the budget). However, the reduction of corruption and the professionalisation of staff are also important expected results. Although the Pilot CPB has reported over 20% savings in product prices after conducting a certain number of procedures so far, there is no concrete evidence on the effects which centralisation is expected to have on the entire system. The motivation for the introduction of a centralised system mainly relies on the results of the first procedures at central level. However, in order to understand the full potentials of savings, both in product prices and in administrative costs, it is still important to conduct a spend analysis at the level of Ministries. In terms of legal approximation, the progress made so far is very important. The PPL 2016 includes some improvements towards greater alignment with EU standards, notably concerning the definition of the centralised procurement bodies. Nevertheless, the framework agreement which is an essential tool in centralised procurement, still needs to be legally consolidated. The legal act establishing the CPB determines certain procedural aspects in the procurement process and defines some of the main tasks of contracting authorities and of the CPB in this process. However, it lacks clarity in regard to essential aspects such as: the scope of the CPB, mandatory or voluntary use of the CPB, aspects concerning financing, the role of the CPB, its relation to its owner etc. Recommendations on the content of the legal act establishing the CPB were made in the 2015 Report and are still valid. The political will, which is essential in the transition from a decentralised to a centralised public procurement system, was expressed on several occasions by representatives of the Government and it seems that the Ukrainian Government is convinced that centralisation has high potential for improving efficiency in the overall procurement system, as there is a common understanding and will to continue the work conducted in the piloting phase of the CPB. Considerations of strengths and weaknesses identified in relation to the Pilot CPB In regard to the implementation of a CPB, it is important to take a step-by-step approach with realistic objectives and concrete plans. Usually, two major steps need to be considered: the setting of the goal and the definition of the CPB model to be used. Setting the goal The most important and initial step is the setting of the goal. This goal should be the main reason why the CPB was created and it normally is set to meet political expectations (e.g. savings to the budget). The reason behind the establishment of such an institution is already a clear indicator towards the design of the CPB s structure and of its mission. The Ukrainian Government clearly indicated the main goals of the Pilot CPB: To implement professional and efficient procurements; To increase the efficiency of procurements through their aggregation; To create an e-catalogue and standard specifications; To create favourable conditions for both contracting entities and tenderers; To conduct market research; and To introduce efficient contract management. These goals are considered to be reasonable and in line with the objectives of other CPBs in the EU. It is important to emphasise when setting the goals, and deciding on the model or structure chosen for the CPB, that the transition period is very critical and might need some additional laws, support and a strong 11

12 position from the Government. Level of centralisation and mandatory use Another important step is to define the level of centralisation and the mandatory and voluntary users i.e. the contracting authorities which have to use the services offered by the CPB or which could join it on a voluntary basis. From various examples in the EU it is clear that national CPBs can have a wider range of users: central administrations but also regional authorities. Even though there is a general understanding that the Pilot CPB is operating at the level of national administration (for the benefit of the Cabinet of Ministers of Ukraine and central executive bodies), there is still an open question regarding the optimal degree of centralisation at the national level which will apply after the pilot phase and the mandatory or voluntary users of the CPB at central level. These questions are dealt with in a study being conducted by the Kiev School of Economics (the study is planned to be completed by end-november 2017) and the results should be taken into consideration for the future development of the CPB. The Pilot CPB builds on the model of voluntary delegation of the procurement function from contracting authorities to the CPB. This is a principle used in different EU Member States where contracting authorities pay a certain fee for receiving the procurement services from the CPB. Nevertheless, in most EU Member States, certain defined contracting authorities are required to use a CPB on a mandatory basis, being obliged to purchase through the CPB in defined areas of procurements. Accordingly, there is an issue of voluntary and independent identification of the need for the procurement of supplies and services to be delegated to CPB. As identified also in the 2017 Project Report on Centralised purchasing organisations in Ukraine: expectations, risks, state of affairs and prospects 3, the problem here is not whether the CPB is voluntary, but that the procedure of delegation of the procurement function has not been regulated. In particular, the issue concerns whether partial delegation of the procurement function to a purchasing organisation can become an attempt to divide the procurement item. This issue has not yet been settled in the law and needs to be solved in future as, according to the PPL, contracting entities include not only institutions funded from the State budget their range is quite wide and is likely to become even wider as many of those that now do not fall under the definition of the term contracting entity but can and must use the ProZorro system express their interest in participation in the procurement process, and it is not unlikely that these institutions will become active users of CPB services. In this sense it is recommended to move to a centralised purchasing system where a CPB dealing with clearly defined standard goods and services is established. This CPB could function at the national administrative level and could take the form of a State Enterprise under the auspices of one of the relevant Ministries. In order to obtain the expected benefits of centralisation, for certain contracting authorities it should be compulsory to use the centralised system in defined areas of procurement. According to the provisions of the Resolution, the CPB is acting as an intermediary and not as a wholesaler who buys on its own behalf. This requirement is in line with previous recommendations and the CPB should continue its work on this basis. It is important that the effects resulting from the role of the CPB as intermediary are clearly analysed as certain rights and obligations, including liability derive from this aspect. It should be noted that the contracting authority within a procurement procedure is the relevant Ministry, Agency etc. represented by the CPB. Accordingly, the CPB does not buy on its own behalf. 3 Report on Centralised purchasing organisations in Ukraine: expectations, risks, state of affairs and prospects, Anna Povolokina, May

13 Thus, if the Ministry of Health, the Ministry of Finance and the Ministry of Labour bundle their demand for paper, the CPB will award the framework agreement intended for the three ministries, but the contracting authorities will continue to be the three Ministries. The Resolution does not clearly state the role of the CPB and, in the practical implementation of the procedures, the Pilot CPB was not able to conclude contracts on behalf of its customers. Nevertheless, this was not only due to the missing understanding of the role of the CPB as intermediary but also due to the fact that the procedures resulted in the award of a contract and not a framework agreement, which has different legal implications 4. Business and financing model Another important step in the establishment of a CPB is to define the CPB model in terms of business and financial models as well as its administrative set-up. These mostly depend on the national legal provisions (constitutional, administrative, company law, etc.). These aspects are not reflected in the Resolution establishing the CPB and should be taken into consideration in the future development of the CPB as choosing a business and financing model is one of the core decisions which needs to be taken in order to make the CPB operational. The benefits and disadvantages of each model need to be carefully analysed 5. Regarding the ownership of the Pilot CPB, the Resolution provides for the CPB to function within the Ministry of Economic Development and Trade. However, on account of the regulatory function that the MEDT performs in regard to the public procurement system as a whole, it is not advisable to establish a CPB under this Ministry. For the proper functioning of the CPB, it is extremely important that it is granted a separate and distinctive role from that of the public procurement policy maker and regulator. The financing model is of course influenced by the previous choice on the business model. Generally speaking, the options for financing a CPB are: Public funds deriving from the government budget; Service fees on public entities and/or bidders and/or winners (framework agreement awarded participants) A mix of the two or more financing models. The choice may depend on political/government decisions and on the potential reactions of contracting authorities. In a start-up phase, public funds are generally more suitable. Currently, the CPB model chosen by Ukraine is still unclear and its funding model has actually not been identified. The pilot CPB is considered to be a non-profit organisation according to its charter. The Pilot CPB provides services to contracting entities free of charge and tenderers pay participation fees to e- platforms under the Law on Public Procurement which, in their turn, do not go to the CPB s accounts as this is not provided for by the legislation. Moreover, the lack of any financing caused the need to seek alternative sources of funding which, due to the legal status of the CPB, are still uncertain. In addition, the lack of clear funding scheme prevents the CPB from hiring highly-qualified procurement specialists. 4 The barriers to the use of framework agreements are discussed further in Chapter 4. 5 The different models existing at EU level are presented in the document Centralised procurement in the EU at Annex 1 to the 2015 Report. 13

14 Areas of procurement Usually, a CPB covers the procurement of goods and services which were identified as the most suitable for aggregation and standardisation. At the beginning, a CPB may be entrusted with the procurement of very few items and, after a period of time, when positive results are achieved, the portfolio can be increased. When setting up the CPB, it is important to have some products and services with mandatory use of the CPB services. This enables contracting authorities to establish a first contact with the CPB and to familiarise with the use of its services. Whether taking a voluntary or mandatory approach, this should be decided by law. It is also advisable to adopt a progressive approach, by starting with simple and highly standardised products and by using framework agreements, in order to achieve quick wins. The areas of procurement in which the Pilot CPB is allowed to purchase is defined in a list approved by the Ministry of Economic Development and Trade. This list includes the following goods: Paper, stationery, computers and stationery and portable computer equipment (printers, scanners, multifunctional devices), storage devices (flash drives, magnetic storage drives). It can be observed that the defined goods are suitable for centralised procurement as they can be bundled and standardised and they can be found in similar lists of goods and services of other CPBs in Europe. As described by the Pilot CPB, in the course of the implementation of the pilot project, contracting authorities sent many requests for procedures for the procurement of supplies and services that were not included in the list of procurements that could be made via the Pilot CPB. For example, contracting entities showed some interest in the centralisation of such procurements as ticket booking and delivery services for all kinds of long-distance communication, accommodation booking services etc. The CPB analysed those proposals, held negotiations with the participants in the pilot project and concluded that centralisation of such procurements was possible. However, as those services were not on the list of supplies and serviced approved by the Order of the MEDT of 12 January 2017 (No. 20 On the organisation of activities of a centralised purchasing organisation within the framework of a pilot project ), the CPB could not proceed with organising such procurements. In this respect, it is important to clearly identify a list of areas in which the CPB is offering its services. This list should be the result of an analysis indicating their suitability for aggregation and standardisation as well as on savings potential. Use of e-procurement tools The use of e-procurement tools from e-notification to e-payment is another important step which needs to be carefully analysed. The most important question in this respect is not if e-procurement tools should be put in place 6, but which tools can be implemented (pre-award, post-award) and if they should be out-sourced or operated within the CPB. When designing a new CPB, it is important to think of what ICT tools are needed, e.g. databases of purchasers, companies, products, a web portal and ICT management applications (purchase orders, reports, etc.) and, of course, an e-procurement platform to be used. Useful tools can include CRM (customer relations management), a contract management system, a project and resource management tool, DMS (data management systems) for designing standard tender documents and managing them. 6 The obligation in connection with CPBs derives from the new EU Public Procurement Directive of 2014 and its benefits are well known: All procurement procedures conducted by a central purchasing body shall be performed using electronic means of communication, in accordance with the requirements set out in Article 22 of Directive 2014/24/EU. 14

15 In this regard, it is recommended that special attention is given to interface issues between these tools and the existing interfaces used by contracting authorities in Ukraine. For the post award phase, it is highly recommended to use a tool similar to the e-shop of the Austrian BBG as this would allow for a central web based information and purchasing portal which is used as the single point of entry for all buying related activities. Beside the savings derived from bundling and standardising needs, the CPB can also achieve tremendous savings in processing costs by automating procurement processes or supporting them by electronic post award means. In this respect, the Pilot CPB did not use any post award tools but the interest in implementing such a system seems to be very high and a welcome priority in the further development of centralised procurement in the Ukraine. Organisational aspects, Staff and Skills When setting up a CPB it is extremely important to analyse existing options and effects of organisational structures as well as needed staff in each department. In Ukraine, one of the most important targets set by the pilot CPB is to achieve professionalisation of staff with deep knowledge of legal and procedural aspects, of specific markets as well as of the needs of contracting authorities. When purchasing through a CPB, contracting authorities can concentrate on their main business and do not have to deal with the procurement process. Highly specialised staff is one of the main values of a CPB as they directly contribute to higher legal and contractual certainty as well as to an improved service offered to the contracting authorities. The results of the first completed procurement procedures conducted by the pilot CPB show that specialised staff can contribute significantly towards increasing the efficiency of procurement. Currently, the Pilot CPB employs eight full-time specialists. The institution is led by one Director who is assisted by one lawyer, two procurement specialists, two market researchers, an accountant and an anti-corruption assignee. An increase of staff is planned through hiring, not only additional procurement specialists, but also specialists in organising activities of a training centre. Given the low number of staff, there are no specialised departments in place yet. It is important to mention the fact that the Pilot CPB succeeded in implementing 8 procurement procedures in one year with only three procurement specialists. This is a significant achievement for the institution. However, as an increased number of procedures is envisaged, the number of staff should be adapted accordingly. The fact that the concluded procedures did not face any complaints (reviews) is also a strong indicator of the quality of the expertise of the current staff of the Agency. At the same time, the current low number of procurement specialists within the Pilot CPB does not allow specialisation in a certain field of procurement. It is important, therefore, to have designated staff for each area as these experts will have to understand the specifics of the sectors they are purchasing in. The PPL 2016 introduced the concept of authorised persons or professional procurement specialists as an alternative to the Tender Committee approach and this reinforces the need for more advanced training and quality assurance management of the procurement process. Throughout the year, the CPB staff has been trained in the field of public procurement, they have learned from the experience of other EU CPBs, participated in team building events and actively participated in setting the mission and strategy of the organisation. Each staff member participated in not less than 12 days of training during the year. It is particularly important to offer constant training to staff members, especially at the beginning of the functioning of the CPB. 15

16 It is also essential to design a personnel strategy which enables both the recruitment of staff and the continuous development of their level of knowledge. Especially in the early stages, it is important to rely on motivated staff with a certain experience and a willingness and capability to learn new procurement methods. In this respect, concrete profiles of the available positions need to be drafted. The hiring of specialised staff from the private sector should be also considered in order to have the right balance as between administrative procedures and product specific knowledge. Developing training methods and the implementation of training programmes for the hired personnel is of the utmost importance at the beginning of the functioning of the CPB. It is recommended to involve external experts from other CPBs operating in the EU in the training process in order to guarantee the building up of relevant knowledge. Operational aspects The Government Resolution gives some indications of the division of tasks between the contracting authorities and the Pilot CPB such as: The pilot CPB, on behalf of its customers publishes procurement information defines the procurement procedure, examines and decides on complaints of entities challenging the procurement procedure provides clarification on tender documentation, examines tenderers offers, determines the economic operator to be awarded and prepares the necessary steps for the conclusion of the contract. In practice, it is absolutely necessary to have such provisions; but they need to be further developed in order to determine the concrete tasks of the involved stakeholders in each of the procurement phases. The lack of a clear distribution of roles and responsibilities can lead to misunderstandings and generate mistrust on the side of contracting authorities. The fact that the assessment of needs is not conducted by the Pilot CPB, but by the contracting authorities, leaves some open questions on the accuracy of such assessments. The Pilot CPB needs to rely on the data received from the contracting authorities and bundle these requirements in order to achieve a certain level of standardisation - both in terms of contract terms and conditions and in terms of product technical specifications. This can be difficult if the CPB has not been involved in the assessment and if it does not support the contracting authorities to clearly specify their needs. It is important that the CPB first analyses the demand in order to understand if it is feasible to procure the respective good or service. When conducting a needs analysis, it is advisable to address the end users and therefore to conduct it in a very detailed manner and to integrate the know-how of all the stakeholders in the tender. It is equally important that the CPB conducts an in-depth market analysis before engaging in the procurement process. The Pilot CPB has dedicated 2 staff members to conduct this activity which is an added value to the quality of the procedure. The Pilot CPB indicated that the average time spent on preparing a procedure is 30 days or less if the procedure is a follow-up. This relatively short time dedicated to preparation could be an indicator of a rather high-time investment in the procurement process itself with only a low-time investment dedicated to the phase before going to market and for contract and supplier management. This means that time resources were not optimally allocated and mostly devoted to operational procurement. Best practice examples from CPBs in EU Member States shows generally that a high-time investment is needed in developing requirements that shape markets and the supply base to the government (i.e. on strategic procurement-related decisions) and in improving contract and supplier management capability through the application of new standards (i.e. strategic procurement-related contract management and negotiation). This focus on strategy optimises the process and allows resources in the execution of the 16

17 procurement process itself (operative procurement) to be saved, which turns simplifies the process itself and reduces turnaround times and supplier bid costs. So far, the pilot CPB has implemented 8 procurement procedures. Four tender procedures have been conducted for the procurement of paper and stationery and four for computers, computer equipment and storage devices. They have all been conducted in an open procedure and the contract was divided into lots which corresponded to the number of contracting authorities participating in the procurement procedure. Given the fact that the specific legislation on framework agreements is not finally approved and that the related technical solution is not yet available, framework agreements cannot be used by the pilot CPB. The solution chosen to conclude separate contracts for each lot is not considered to be an optimal one. Even though the contract conditions are standardised and used in each lot, this method does not allow the aggregation of demand in one single contract, thus it is questionable if the appropriate economy of scale could be achieved. Even without using the potential of framework agreements, the procurement experts of the Pilot CPB indicated overall savings of over 20%. These savings were calculated by comparing prices achieved by the CPB customers in former procedures and by analysing the preliminary expected costs. This method of calculating savings is a valid one but further research on saving potentials through the aggregation of demand and standardisation of the products needs to be conducted. It is equally important to consider administrative costs which were saved by using a centralised procedure. All contracts concluded are valid until the end of 2017 when it is foreseen that the pilot CPB will conclude its activity. None of the procedures concluded by the Pilot CPB were reviewed. This fact can be an indicator both of the quality of the procedures concluded by the Pilot CPB and of the acceptance of the centralised procurement techniques by the economic operators. On the other hand, the fact that demand was not aggregated and each lot resulted in the conclusion of a separate contract did not affect the behaviour of the economic operators who bid for the lots they were interested in in the same way as they would have done in the normal decentralised system. The Pilot CPB reported three to eight participating economic operators per lot with an average of 3.6 economic operators per lot. This significantly exceeds the average number of tenderers in procurement procedures conducted by individual contracting authorities in Ukraine and is considered to be a positive development. Nevertheless, the figures are more relevant if assessed in each procurement area separately. Even if the procurement procedures conducted so far did not succeed in aggregating the demand into one single contract, the real gain from the work undertaken is the achievement of unified technical specifications in the field of procurement as well as the standardisation of contract terms and conditions. In addition to this, the administrative workload was reduced significantly for the participating contracting authorities. The Pilot CPB reported thirty days of preparation of the very first procurement procedure and only 5 days for follow up procedures. Even if these numbers seem to be relatively low compared with the throughput time of other CPBs in the EU, one can easily understand the saving generated in terms of administrative efforts. The Pilot CPB conducted procedures for thirty-seven participants, of which eighteen became actual purchasers (including the Secretariat of the Cabinet of Ministers of Ukraine, the Ministry of Foreign Affairs, the Ministry of Health and others). Through centralised procurement, the number of procedures previously conducted previously was reduced to 1. Therefore, the costs of both contracting authorities for the organisation of procurement procedures, and tenderers for the preparation of documents have been reduced. 17

18 Main strengths and weaknesses The main strengths and weaknesses of the present CPB pilot in regard to its design and operations are summarised below. Strengths Eight centralised procurement procedures have been implemented without receiving complaints (no review procedures). Savings in terms of product prices and administrative efforts and time spent were achieved Standardised terms and conditions for contracts to be used by contracting authorities were developed. Standardisation of technical requirements was achieved. A steep learning curve for CPB staff on procedures and products was successfully accomplished. Relevant procurement professionals were trained. Weaknesses No bundling effects due to the use of contracts with different lots for each contracting authority. No usage of Framework Agreements. No quality criteria used in the tenders. No obligation on contracting authorities to use the services of the CPB. The Pilot CPB was established under the MEDT - too many powers are concentrated under the same institution that is policy-maker and e- procurement system administrator. 18

19 4. EVALUATION OF THE LEGAL ENVIRONMENT FOR CENTRALISED PROCUREMENT AND ADDITIONAL RECOMMENDATIONS In evaluating the legal environment, two main legal acts are relevant to the functioning of a CPB in Ukraine: the current PPL and Government Resolution No. 928 of 23 November 2016, which sets the basis for the functioning of the Pilot CPB. Because of the amendments introduced into the PPL, including the introduction of the definition of a CPB, the Government of Ukraine was able to launch the CPB pilot project. In that regard, the recommendations formulated in the 2015 Report were only partly implemented so far. While the definition of a CPB was taken into consideration, another important provision concerning the possibility of the contracting authority purchasing via the CPB, without applying the PPL, is not to be found in the current PPL. Generally it can be said that it is important not to overload the PPL with too many provisions on centralisation. As in the legislation of most EU Member States, it is enough to provide for the definition of a CPB and of central procurement activities as well as for the possibility of procuring through a CPB (the safe harbour clause ). In a separate legal act (e.g. secondary legislation like the Government Act) special provisions for the establishment and functioning of a CPB can be included. In Ukraine, Central purchasing organisations currently refer to legal entities designated by the Cabinet of Ministers of Ukraine, the Council of Ministers of the Autonomous Republic of Crimea, local selfgoverning authorities as contracting authorities responsible for organising and holding procurement procedures and procurements under framework agreements on behalf of contracting authorities in accordance with the PPL. Centralised purchasing organisations are required to acquire all rights and obligations of contracting authorities as provided for by the PPL and to bear responsibility under the laws of Ukraine. Specific aspects of the establishment and functioning of central purchasing organisations are to be specified by the Cabinet of Ministers of Ukraine. The legislator has chosen to allow the CPBs to take the form of an intermediary and not a wholesaler and has limited its action to the implementation of procurement procedures and frameworks. The possibility to run a dynamic purchasing system and also to carry out ancillary activities, as defined in the EU Directive, have not been considered. It is equally important to have a clear definition of the CPB and, at the same time, specify that contracting authorities may acquire works, supplies and services by using contracts awarded by a central purchasing body, by using a framework agreement concluded by a central purchasing body. Certain procurements are to be made by having recourse to central purchasing bodies or to one or more specific central purchasing bodies. This can be taken into consideration in case the legislator provides for the possibility of establishing several CPBs. In order to enhance the basis for cooperation between a contracting authority and a CPB, it is important to include a provision which provides that a contracting authority fulfils its obligations pursuant to the PPL where it acquires works, supplies or services by using contracts awarded by the central purchasing body, or, by using a framework agreement concluded by the central purchasing body. However, the contracting authority concerned shall be responsible for fulfilling the obligations pursuant to the PPL in respect of the parts it conducts itself. Where the central purchasing body has sole 19