Overhauling Ukraine’s corrupt contracting sector
When Yuriy Bugay, a Maidan revolutionary, showed up for work at Kiev’s public procurement office for the first time, it wasn’t the most uplifting sight. The 27-year-old had left his job in the private sector after joining a group of activists during the protests in Kiev’s main square, with dreams of reforming Ukraine’s dysfunctional public institutions. They chose one of the country’s most broken sectors, public procurement, as their starting point, and within a year, their project had been adopted by Ukraine’s economy ministry, Bugay’s new employer.
“Imagine 2015 when we came into the government, and we were staying at the time in this awful Soviet building where you didn’t have proper air conditioning, you didn’t have proper equipment, you didn’t have Wi-Fi. It was dark, dull and disgusting,” Bugay said.
That gloomy, ageing building, which in Soviet times served as Ukraine’s planning department (then the state’s biggest agency), aptly characterized the wider problems afflicting public procurement in Ukraine.
The system was overly bureaucratic, impervious to many potential suppliers, and rotten to the core thanks to oligarchs who were using government contracts as a means to enrich themselves. Ukrainian media often told scandalous tales of extravagant public purchases, from multimillion-dollar kickbacks on huge infrastructure contracts to inflated prices on day-to-day deals — fruit and vegetables allegedly bought for around US$75 per kilo by the State Administration of Affairs; benches erected in the city of Kharkiv’s metro station worth the same amount as a Ukrainian car; and roads that cost the equivalent of US$3.75 million for each kilometer constructed, to name a few.
“By our very low estimate, 20% of spending in public procurement was lost due to corruption and limited competition,” said Bugay. “There were plenty of problems but the key one was corruption, and the key solution to corruption is transparency.”
The initial team behind the reform was made up of an eclectic bunch of several hundreds volunteers that included NGO workers, tech experts, businesspeople and civil servants. They decided the best way to make government deals more open was to create an e-procurement system, which they called ProZorro (meaning “transparent” in Ukrainian). Built on open source software, the system has been designed to make it possible for government bodies to conduct procurement deals electronically, in a transparent manner, while also making the state’s information about public contracts easily accessible online for anyone to see. Although it was initially conceived as a tool for fighting corruption, the potential benefits of the system are much broader — increasing competition, reducing the time and money spent on contracting processes, helping buyers make better decisions and making procurement fairer for suppliers.
“Our dream was to show that changes are possible, to become a unique example of cooperation between government, business and civil society, and to build the most transparent and efficient public procurement system in the world,” said Bugay.
In its pilot phase, ProZorro saved over UAH 1.5 billion (US$55 million) for more than 3,900 government agencies and state-owned enterprises across Ukraine. This pilot, which won a prestigious World Procurement Award in 2016, was so successful that Ukraine’s parliament passed a new public procurement law requiring all government contracting to be carried out via ProZorro from 1 August 2016. Since then, potential savings to the procurement budget have snowballed. As of November 2016, they stand at an estimated UAH 5.97 billion (US$233 million), with more than 15,000 buyers and 47,000 commercial suppliers using the new system.
At the same time, the team behind the project has evolved and professionalized. A key representative of the initial volunteer group, Olexandr Starodubstev, is now head of the government’s public procurement regulation department, while another, Oleksandr Nakhod, leads the state enterprise that oversees the e-procurement procedures. The central database through which contracts are awarded is financially self-reliant, and additional funding has been secured from international donors, such as USAID, who hired Yuriy Bugay in September to lead the team supporting the Ukraine government’s efforts to make public services more transparent and efficient.
The system works by storing all the information on all parts of the contracting process — from planning through to payments made after the contract work is completed — in a central database. The information from the database is displayed on a searchable, government-run web portal, prozorro.gov.ua, where procuring authorities can also publish their tender announcements and procurement plans. The actual tendering process is carried out separately, on a series of commercial web marketplaces, such as smarttender.biz, zakupki.com.ua, and e-tender.biz, that are tailored towards the needs of buyers and suppliers, and are also linked to the central database. All the information found in the database, the government-run portal and the commercial platforms is automatically synchronized in real time.
ProZorro’s design is deliberately geared towards minimizing corruption and collusion risks. It also includes a powerful business intelligence tool for analysing tender data, a complaints mechanism for bidders (with the outcome of appeals published online), an information portal with training guides on procurement basics and relevant laws, and a monitoring platform that acts like a cross between Bookings.com and an electronic neighborhood watch programme, allowing procurers and suppliers to rate their experiences with one another while giving the general public a way to report suspicious deals to authorities.
Similar innovations have arisen in other countries in recent years, although Prozorro is perhaps the boldest expression of them. This approach is known as open contracting. It seeks to make the data and documents that governments collect throughout the contracting process available in a way that’s useful to people who want to help fix public problems, analyze contracting and improve the way contracts are made and delivered. The Open Contracting Partnership (OCP) is a global initiative that connects governments, business and civil society that supports open contracting projects around the world, and created the technical schema — the Open Contracting Data Standard — on which many open contracting systems, including ProZorro, are modelled. Many open contracting projects are just starting out, but early evidence suggests that this approach can cut government spending, make contracting fairer for businesses and empower citizens to more easily track how public funds are spent.
For taxpayers, the benefits of these savings to public spending are more obvious in some sectors than others. In the health sector, it can be lifesaving. In the city of Poltava in central Ukraine, the Regional Clinical Oncology Dispensary — a specialist cancer clinic with 380 beds — used ProZorro to purchase the chemotherapy drug, Cisplastin. They paid two-thirds of the amount expected, which allowed them to administer chemotherapy treatment to patients free-of-charge for an additional month. The clinic has used the e-procurement system to buy other medicines, as well as medical supplies, dressings and fuel, which has cut procurement times and saved UAH 176,000 that was then spent on urgent medicines, so that patients received treatment faster.
Nationwide, Prozorro has reduced spending on healthcare by UAH 85 million — more than 18 per cent of the planned budget — on items that include medical equipment, pharmaceuticals, food, and office supplies. This compares to average savings of up to 14 per cent for the entire government procurement budget, according to Transparency International Ukraine, the nonprofit organization that hosted the ProZorro system during its pilot phase.
ProZorro celebrates the tenders with the biggest savings and reprimands irregular deals in a regular blog post, “Victory and Betrayal of the Week”.
For businesses, a major advantage of the ProZorro system is that it simplifies the contracting process, making it less expensive and less time-consuming to participate in tenders. The number of companies using the system to bid on public tenders has tripled since the new procurement law came into effect (there are now more than 47,000 bidders registered compared to around 14,000 in April 2016), with suppliers ranging from local businesses to multinational corporations.
ProZorro also makes procurement more reliable and predictable. A USAID survey conducted with more than 300 entrepreneurs in May 2016 found that business confidence in Ukraine’s public procurement has increased — the majority of respondents believed ProZorro reduces corruption partially (53%) or significantly (25%). Conversely, reported incidents of corruption have dropped — some 54% of respondents said they encountered corruption using the traditional procurement system, compared to 29% when using ProZorro.
One of the biggest suppliers using the system is the global retailer Metro Cash & Carry (MCC). Without ProZorro, the company wouldn’t do business with Ukraine’s public sector, explains Galyna Candan, MCC Ukraine’s Head of Field Force and Delivery.
“Some years ago, before this political turnaround in Ukraine, MCC was interested in having some business with governmental institutions, though we faced a situation where the business at that time was not transparent. Due to this, as an international company, we were not able to participate in this piece of the market,” Candan said.
After unsuccessfully bidding for a defence ministry contract in May 2015, MCC began actively taking part in tenders five months later, in October. The corporation now uses the system so much that they’ve set up a department entirely dedicated to participating in tenders published via ProZorro. Their projects are mostly related to supplying foodstuff to public institutions that include the defence ministry, hospitals, kindergartens and nursing homes. The majority of the projects are carried out in Ukraine’s Southeast region (because government institutions in the region are very active users of the ProZorro system, Candan says), followed by Kiev.
For suppliers who have experience working within the old paper-based procurement system, ProZorro has increased their business opportunities. Ukravtozapchastyna is Ukraine’s leading supplier of agricultural vehicles and parts, selling over 40,000 products ranging from tractors to tires and batteries to government institutions. With the old procurement system the company managed to submit three to five tender proposals in paper form per day, and for longer proposals of around 500 pages, they only had enough time to submit one. That number has increased to an average of eight per day since they began using ProZorro, the head of the company’s tender procedures division, Elena Severenchuk, said in a recent interview for ProZorro’s blog (Ukrainian).
Severenchuk has also noticed a drop in corrupt behavior by procurers. Although there are still cases of agencies rejecting the best offer even when the bidder has included all the correct paperwork, she says, such instances occur much less frequently and suppliers have an opportunity to submit a complaint.
Another important feature of ProZorro is its business intelligence module, bi.prozorro.org. This powerful analytics tool is used by buyers and suppliers for research and evaluation purposes and is also designed to help citizens, journalists and activists track the procurement activities of public bodies.
MCC uses the business intelligence tool for strategic planning, Candan explains.
“We compare the tender volume by region to understand where the potential is (…) and this is how we allocate the resources in our team in the office,” she said.
The system also allows the company to identify its main competitors: “we can track how they are doing, what their volume is, in which regions they’re more active or more successful than us, and it helps us to build our plans further,” Candan said.
Watchdog groups like Transparency International and Eidos Center use bi.prozorro.org to spot suspicious contracts.The organizations told the news site Ukrayinska Pravda earlier this year that some healthcare facilities in Kiev were attempting to circumvent the e-procurement system by including unclear terms of reference for tenders or tailoring them to advantage certain suppliers. In particular, they found that one oncology center purchased cleaning mops using the vague description “a device with a nozzle and a holder.” Only one bidder applied and 50 mops were procured for the equivalent of around US$100 each.
Ukraine’s journalists, who have long played an important role in exposing wrongdoing by authorities, are getting training on how to effectively use ProZorro and its business intelligence tool. One of these is Natalie Sedletska, who hosts an investigative TV show about political corruption called “Schemes” for RFE/RL. Previously, Sedletska also produced and anchored “Tender News”, a program entirely dedicated to uncovering dirty procurement deals, including a $150 million kickback pocketed on the purchase of an oil rig, that Sedletska describes as one of the biggest fraud cases involving a member of ex-President Yanukovych’s inner political circle. Implementing ProZorro has revolutionized tender procedures, Sedletska says.
“It can give you such a big amount of data that you can search for evidence that will prove that some companies are engaging in collusion. They come to the tender as competitors, but ProZorro gives you instruments to easily analyze if companies are connected to each other.”
E-procurement is not as captivating as high-profile corruption probes and investigative journalism, but it is vital to gathering the evidence that supports these activities. In fact, its technical, boring appearance might just be one of the reasons it works. By overhauling the entire system, the ProZorro team weren’t targeting any single individual over suspected corruption. According to Bugay, this meant the reforms were passed before those with vested interests in procurement realized what the implications of the system would be.
“If you change the overall playing field without going directly to fight with someone, they don’t take you seriously, and that’s what helped.” Bugay said. “Now it is very difficult for anyone to say they are against our team because the reform is working.”
“At first they didn’t believe, then they laughed, then they started putting obstacles in our way, and then we won. It was too late.” — Yuriy Bugay
The ProZorro team is realistic about the capabilities of the system. ProZorro alone won’t stop corruption in procurement, explains Max Nefyodov, who helped bring the project into the government and oversees the work of the public procurement department in his role as deputy minister of economic development and trade.
“Corruption involves an unethical choice of a person who works in the tender committee. No I.T. program in the world can completely save this situation. What we’re doing is actually giving more instruments to [monitor] these people, we’re giving less subjectivity to the decisions, we’re encouraging more bidders to decrease the risk of collusion, we’re making the complaints process easier, we’re training people, we’re making central purchasing bodies, we’re making typical specifications of what is being acquired, we’re building risk management systems, and so on.”
“The more people see success stories, the more eager they are to participate and fight for honest decisions,” Nefyodov adds.
And while ProZorro is one of Ukraine’s post-Maidan success stories, other reforms have been frustratingly slow for supporters of the revolution, explains Sedletska, who helped to recover thousands of potentially damning documents from a lake on the sprawling grounds of Yanukovych’s property after he fled to Russia.
“We all thought that, in general, we would have major changes in our society, and that all this evidence would lead to criminal cases that would end up in the court. I have to admit, that, in general, we have been disappointed. The reforms are not going as fast as society wanted because the people of the old system are still in government. But there is new blood in the government. Because there are new people who want to change the rules, such as the ProZorro team, we have a few examples of successful reforms,” she said.
As the conflict in the east continues, so does the struggle for power in Ukraine’s government. But the ProZorro team has shown they’re not afraid to face obstacles and open resistance head on. Two economy ministers resigned during the pilot phase of the project, and some politicians and state procurers have attempted to sabotage their progress with negative PR campaigns or by manipulating the system.
The minuscule salaries of ProZorro staff and volunteers remains another unresolved issue. With the average public servant in Ukraine earning a monthly salary of less than US$200, some of the reformers who joined the economy ministry have been living off their savings. Without subsidies from international donors, they couldn’t afford to keep working in the public sector. Similarly, Nefyodov describes his shift into the job of deputy economy minister as “taking a sabbatical” from being an investment banker.
“Ukrainian public administration service is, by far, not the best thing to work at,” Nefyodov said. “But I felt that I have to contribute something to my country. I’m not a soldier. I’m not trained to fight on the front, but what I can do, I can try to help the economy and try to fight corruption here.”
In spite of these challenges, the ProZorro team are already hard at work applying their unique model of cooperation between government, civil society, and the private sector to other reform projects, such as a system for selling the assets of insolvent banks and other state institutions, with the first auction set to take place at the end of 2016.
“It’s a constant fighting process,” said Nefyodov. “But the metrics show that, generally speaking, we are winning. It’s not a full victory — in the end, you can’t reform your own small part of the economy with all the rest just staying the same — but we are moving in the right direction.”
Story written by Sophie Brown. Sophie is a freelance journalist based in Berlin, covering topics that include news, politics, business, human rights, and corruption. She previously worked for CNN International, TIME and Transparency International.