Blacklisting Bad Contractors

Companies that provide substandard goods or services after closing a government contract are to be barred from bidding for future contracts. This will be the case once the latest bill on public procurement being drawn up by the Finance Ministry becomes law.

"We expect the cabinet to endorse the bill by the end of October, with passage in Parliament due to take place by the end of November. The law would then take effect within two months," Slobodan Ilic, a secretary of state in the Finance Ministry, tells Argus.

The first Public Procurement Law took effect in mid 2002. Changes were introduced in 2004. The previous legislation had many shortcomings in regard to contracts and contractors who fell short of expectations in arrangements. The latest version of the law will now include a blacklist to make sure that no longer happens.

"Many officials have been asking for protection from bad contractors and the solution is that each contractor's performance will be public information. Therefore, state bodies will have justification to reject offers from companies that could leave them with unfinished work or shoddy products," Ilic says.

Predrag Jovanovic, director of the Public Procurement Office, says that this is a good approach and is common in many countries.

"The experience of other countries shows that this is justified as a measure to prevent contractors from abusing their position. The Slovenian law on public procurement states that a contractor who fails to perform his contractual duties can be suspended from competitions for three years. There also need to be strict rules on what can be used as grounds for rejection to prevent state bodies from discriminating against bidders for no good reason," Jovanovic adds.

This and other improvements to the law will eliminate weaknesses in the existing version, while also ensuring compliance with EU standards and directives.

Serbia has approximately 12,000 state bodies at various levels that issue contracts, about 250,000 each year worth a combined EUR1.7 billion. Enforcement of the Public Procurement Law is believed to have cut costs by EUR300 million to date, and the latest adjustments are expected to produce even better results.

"By systematically regulating public contracts, the state will not only be enforcing the law in public procurement, but also improving various economic, demographic, social, and environmental issues, which is particularly emphasized in the EU directives. That's why this area needs a broader approach than just sticking to the letter of the law. The approach must ensure that the result is economy, competition at the local level, the prevention of discrimination, and a high level of integrity as the opposite of corruptibility, bias, and lack of ethics," says Jovanovic.

A Free Bulletin Board

"One thing that is as important as a good law is the institutions and people in charge of enforcing it. If the institutions are weak and people unmotivated to pay due attention to the efficiency in the issue of public contracts, the situation will be that even though things are formally proper and up to European standards, the results will be missing. The European institutions tasked with evaluating whether a country has met the conditions for EU membership pay close attention to the level of expertise among that country's institutions and officials who are in charge of implementing and evaluating the effects. Therefore, Serbia's progress en route to European integration will to a large degree depend on whether there is any real change, along with a clear expression of determination on the part of the state to provide conditions conducive to that change happening," Jovanovic stresses.

Another novelty that has been proposed to improve public procurement is that adds for every bidding be listed on the website of the Public Procurement Office. According to Ilic, this will ensure that all institutions draw up their purchasing plans and make them available to the public.

"The aim is to reduce the possibility of abuse in the issue of public contracts by enhancing transparency, especially in cases where transparency is already limited. This can be achieved through special websites run by the Public Procurement Office that would carry free of charge ads and news related to the issue of public contracts," Jovanovic says.

In addition to providing better transparency, the proposal to make all information available on the Internet would also be much more cost effective. It has been estimated that various state institutions spend over 190 million dinars per year on ads in daily newspapers. This obviously has an effect on the cost of the procurement process and needs to be streamlined if costs are to be kept to a minimum.

"Many European countries have set up specialized public procurement websites to ensure full transparency and reduce expenses. Also available are purchase plans, which allow potential bidders to prepare in advance. A special website run by the Public Procurement office would provide institutions and bidders with a free bulletin board, while also giving them access to other important information such as reports sent to the Public Procurement Office or the Commission for the Protection of Bidders' Rights," Jovanovic said.

Training Officials

The Finance Ministry's Ilic confirms that efforts to reduce expenses and expedite the contracting prices will also focus on ensuring that each state purchaser has one official tasked specifically with procurement.

"As a rule, when officials consider procurement an extra job the outcome is excessive bureaucracy and lack of awareness of the system's provisions for efficiency, economy, and the successful management of public funding," he adds.

"Events in many European countries have demonstrated the need to pay special attention to the officials in charge of spending public money through the public procurement system because the results of that process are in their hands. In that regard the Group of Countries Against Corruption (GRECO) has given Serbia 25 recommendations for 2007, and the first of them is to professionalize public procurement as a basic precondition for improving the process. Compliance with this recommendation, which has happen by the end of 2007, will later be evaluated by a team from GRECO and is meant to be put into effect by the new Public Procurement Law, which introduces procurement officials and addresses their certification," says Jovanovic.

Another planned change is in cases where an institution has a need to purchase goods or services from a specific contractor and has a good reason. Institutions would be required to provide justification for such purchases in advance, as well as notify the public of the contractor of their choice.

"That would give other potential contractors an opportunity to react and file a complaint with the Rights Commission if the institution's justification is groundless. The preventive effect of this would be immense, because all institutions would know that their justifications would be subject to public scrutiny and they would know that if their reasons are inadequate, their plans could be questioned and overturned effectively," Jovanovic adds, stressing that a similar approach has produced excellent results in Croatia.

It has been proposed that all institutions that issue contracts be required to report to the Public Procurement Office on a quarterly basis as opposed annually as is presently the case.

"As a result, these reports would, instead of registering events of a year or more earlier, be usable as an effective instrument for evaluating compliance with the law in the previous quarter, also serving as an important source of information for the supervisory bodies. At the same time, the Public Procurement Office would have ample time to notify the supervisory bodies, especially the State Auditing Institution, of suspicious activities," Jovanovic says.

Limits on Foreign Competition

The draft version of the next procurement law retains provisions granting priority to local bidders if their products or services are up to 20 percent more expensive than those provided by a foreign competitor. According to Ilic, this would stay in effect until the signing of a Stabilization and Association Agreement with the EU.

Initially, local companies had sought even more leeway, or permission to seek up to 50 percent more than foreign companies for the same job or product.

Nemanja Nenadic, executive director of Transparency Serbia, is doubtful that this is good from the standpoint of public spending.

"The main goal of public procurement laws isn't and shouldn't be to encourage the local economy. The aim is to make sure that taxpayers' money is spent as efficiently as possible, which means getting the most value for the state's money," Nenadic tells us.

Changes would also be made to the Commission for the Protection of Bidders' Rights, which instead of being appointed by the cabinet, would be appointed by Parliament, and appeals would be allowed, which currently is not the case.