PUBLIC PROCUREMENT IRREGULARITIES – HIDDEN RISKS FOR THE POST-COVID ECONOMIC RECOVERY
Irregularities in the procurement market
Public procurement constitutes a substantial portion of GDP in both high- and low-income economies. Across the globe it represents 15% to 30% of the GDP of many countries. This huge volume of public spending could play a crucial role in economic and social progress if allocated efficiently. However, it is also one of the government activities most vulnerable to corruption.28,29 According to the United Nations Office on Drugs and Crime, 10% to 25% of a public contract’s overall value may be lost due to shady practices.30
While corruption in public procurement can take many forms, there is a clearly definable set of corrupt techniques that are actively used in SEE‑9 to siphon out public money for private gain. This chapter introduces evidence on the most common irregularities in the procurement markets of the region. These irregularities are not mutually exclusive, and one may even stem from another, but they largely explain different practices and require the corruption of different parts of the public procurement process.
It is important to note that there are also positive public procurement trends in the region. As highlighted by SIGMA (Support for Improvement in Governance and Management) several Western Balkans countries have recently adopted new public procurement laws implementing provisions of 2014 EU public procurement directives (namely Albania, Montenegro, North Macedonia, and Serbia). Furthermore, the transparency and functionality of some electronic procurement systems have improved and the independence of procurement review bodies responsible for appraisal of appeals submitted by aggrieved economic operators have also increased.31 However, the case studies and other qualitative evidence assembled for this report suggest that the region is grappling not simply with a high amount of corruption transactions but with systemic corruption, which often amounts to state capture. State capture networks can blunt any too specific, too technical or poorly designed policy solutions attempting to increase procurement system integrity. State capture issues require a broader set of responses on political and technical level, and if left unresolved – these more system-wide problems can undermine the above achievements.
Favoritism & Clientelism
One of the most common forms of procurement irregularities in the region is favoritism, the preferential treatment of a group of companies due to the good political connections of their owners. As this is the broadest category, many of the subsequent irregularities are more specific forms of favoritism. In Croatia, a significant part (around a half) of the total contract value is won by bidders which are not private entities, but companies partially or fully owned by the state.32 Furthermore, many private companies whose owners are closely linked with high-ranking politicians are winning public procurements that are almost exclusively tailored for their profiles (see Box 1). In Hungary during the last 11 years, with the help of a two-third majority in the parliament, the ruling Fidesz party has created a new economic elite that is fully loyal to the incumbent government. In return, their corporations receive large subsidies in sectors such as tourism33 and they are also very successful in the broader procurement market. An example that has become popular is Lőrinc Mészáros, who is close to the prime minister, and whose companies and consortium partners won 5.4% of the total contract value of public procurements in 2017 and 3.7% in 2018.34 Clientelism is also a large issue in Montenegro where, in recent years, specific companies owned by well-connected families received almost a third of the procurements in their corresponding markets.35 These businesspersons have family ties with actors involved in major public corruption scandals36, but no abuse has been proven in court in securing public procurement deals.
The other sign of favoritism in the region is the de facto legal immunity enjoyed by large procurement providers and recipients. Prosecutions, court cases and verdicts are very rare despite many public corruption allegations and scandals. In Montenegro, there have been no known cases of someone being arrested or convicted for rigging a tender. Yet, there are cases each year where the Administrative Court annuls public procurement proceedings, indicating the existence of irregularities.37 In Bosnia and Herzegovina, the problem of impunity of those responsible for manipulations in the public procurement process has been widely discussed in the media. However according to legal experts, the share of obsolete cases which are dismissed due to inaction is very high, indicating a serious problem with impunity in the country.38 In Hungary, the Prosecutor’s office has suspended several investigations where politicians or politically connected individuals were involved.39 In Romania, even though fraudulent companies are being brought to justice, they continue to be awarded public procurement contracts.40
The Mayor of the City of Zagreb is authorized to tender the allocation of public areas in the city for commercial use by business entities. A criminal investigation of the Office for Suppression of Corruption and Organised Crime (USKOK) established that, in the period from 2016 to 2020, the now deceased previous Mayor of Zagreb had allegedly colluded with friends to provide their companies with licenses to do business at the city’s most attractive locations at various events. Allegedly, in exchange the said businesses provided the mayor with part of the generated profits. The mayor ordered a member of the Commission for Leasing Public Spaces to take actions to prevent other interested applicants from participating in the public tenders.
The newly elected mayor of the City of Zagreb is now looking to recuperate the public revenue lost due to the scheme under investigation. The city administration is said to adhere to those indictments of the Office for Suppression of Corruption and Organised Crime (USKOK) that the court has confirmed so far and suspend the respective companies from further bidding. This includes the owners of companies that benefited from said criminal activities, as well as some experts and lawyers who have enabled them. The city administration demands the return of more than HRK 227 million (EUR 30 million). The aforementioned case and some other cases related to misuse of public tenders by the former mayor are still in court.41
Overpricing of contracts
Overpricing of contracts is another prevailing form of procurement fraud. While it is often connected to favoritism, it is a more specific corruption technique that involves a broader spectrum of contracting authorities and suppliers.
In Romania, many of the investigations concerning public procurement irregularities show that public authorities sign and pay for overpriced products and services. Low quality goods and services are being supplied at very high prices and some goods and services exist only on paper. Furthermore, these cases can often be connected to fraud or money laundering.42 In Hungary, some findings show that 90% of public procurement projects are overpriced by 25% on average.43 In North Macedonia, investigative reports found large differences between market and contract prices of some products with identical specifications suggesting that public money is lost due to the overreliance on specific suppliers.44 The necessity of improvement of the risk management systems used in all governmental agencies of North Macedonia has also been noted by the UNODC.45 These problems have been amplified by the ongoing COVID-19 pandemic.
The State Audit Office and the Center for Civil Communications, a nongovernmental organisation, each in their separate monitoring of urgent procurement of personal protective equipment for the police and communal workers, confirmed significant price differences for the same items between different contracts and with the prevailing market prices. Such differences were not characteristic solely for the Ministry of Interior and the communal public enterprises, which were provided only as examples of the wider problem of overpricing of public contracts throughout the public administration. According to the findings, often contracting authorities invited one bidder and did little to research the market prices (despite the volatile markets and the possibility for substantial price arbitrage). This drove very different outcomes, in terms of price, for similar or the same products procured from different administrations at different points in time. Differences in prices were also thought to be the result of vague technical specifications in the affected tenders, which permitted products with different specifications to compete in a single tender (e.g., one use suits vs multiple use protective suits).46
Tailored tender specifications
The investigative portal Pištaljka, which follows public procurement procedures in Serbia and exposes suspicious activities, has recognized the 2016 tender for the New Year’s decoration in Belgrade as shady.50 An inspection of the tender documentation, revealed that the included pictures of ornaments, lightning, and other decoration elements were copied from the catalogue of the only company that has this kind of decoration – Keep Light d.o.o.51 In particular, photos were copied from the Fotodiastasi company from Greece. The official importer of the goods and services of the Green company for Serbia is Keep Light d.o.o. The tender also demanded samples of all pieces of decoration to be submitted together with the offer.52 Presumably, that stipulation excluded all companies except the Keep Light d.o.o. from competing. Eventually, only two companies applied in the tender announced by the JKP “Javno osvetljenje“ (Public Communal Company “Public Lightning”).
The Public Procurement Directorate (today’s Public Procurement Office) initiated proceedings to determine the regularity of this tender.53 After two months of proceedings, the Directorate determined that the aforementioned tender did not violate the law.54 According to the Directorate’s explanation, aesthetic criteria required that JKP “Javno osvetljenje” uses catalogue pictures in the tender documentation.
In the following year, 2017, another public tender that Keep Light d.o.o. won regarding the New Year’s tree, drew the attention of investigative journalists. As the only bidder, the company offered a price that was only 0,3% lower than the estimated value in the public procurement tender.55 Additionally, the tree was assembled and set up three days before the announcing of the tender winner and the signing of the contract with Keep Light d.o.o. After the “Ne da(vi)mo Beograd” movement filed criminal charges against Keep Light’s director and accountable officials for rigging the public procurement tender, the Belgrade mayor Siniša Mali announced that the contract would be terminated.56 However, it cannot be verified whether the contract has actually been terminated, as no information on the contract termination has ever appeared on the Public Procurement Portal, while the Prosecutor’s Office has rejected all criminal charges.
Conflict of interest in the tendering process
The conflict of interest in public procurement indicates that the financial and political interests of actors involved in the tendering process overlap. Overlapping interests can materialize between the contracting authority and the supplier if there is aparticularistic relationship between the leadership of the two organizations. In other cases, the conflict of interest occurs between the monitoring agency and the supplier or between the monitoring authority and the contractor. Such is the case inHungary, for example, where the governmental organization deciding on the beneficiaries of EU funded projects and the organization that is tasked to monitor these projects are subordinates of the same authority.57
In Serbia, conflict of interest has often allegedly taken another form. While procurers are obliged by law58 to prevent conflict of interest within their orga- nizations, the law does not regulate the potential conflict of interest in other situations where those who are able to affect the purchase agreement by vir- tue of their public prominence couldhave economic, financial, or other private interests. The cases of “high-level” conflict of interest, where prominent political figures and their family members got involved, were not rare in the past years butthey became more frequent after the COVID-19 pandemic started.59
The Romanian PREVENT system presents a good example for an established mechanism, detecting conflicts of interest particularly in public procurement.60
High share of non-open procedures
There are a few credible reasons for using closed or restricted procurement procedures61, for example if revealing the content of the tender would pose a risk to the national security or if the value of the tender is small enough not to pose significant corruption risks. Nonetheless, contracting authorities often overuse restricted procedures in cases where they would not be necessary. These practices can cause corruption risk and can considerably decrease the transparency of the procurement system.
In Albania, until 2017, a high share of procurements was done by direct negotiation without announcement, as also noted by the World Bank.62 The law stipulates that this process takes place in emergency situations and that they are justified by the institution that is carrying it out. Since 2018, the number of direct negotiation procedures has decreased significantly.63 In North Macedonia, urgent procedures can be used to purchase goods and services that have low value and are requiredwith little prior notice. However, the North Macedonian State Audit Office review of public procurement practices during the pandemics, as well as external monitoring bycivil society organizations, identified that urgent procedures were very often inadequately implemented, allowing for procurements which are not necessarily urgent to be processed as such.64
In Croatia, the present practice of direct contracting leaves plenty of room for improvement. The Public Procurement Act65 enables the implementation of simple procurements (without announcing a public tender) for goods and services and implementation of project tenders with an estimated value of less than HRK 200,000 (EUR 26,000), or for the procurement of works with an estimated value of less than HRK 500,000 (EUR 65,000). In such cases, the Public Procurement Law does not apply, and the procurement is carried out in accordance with the adopted internal acts which describe the rules, conditions, and procedures of simple procurement. However, contracting organizations often do not adequately regulate low value procurements, particularly the tasks and responsibilities of participants in these procedures. The lack of regulation ultimately leads to a lot of low transparency direct contracts.66 In Serbia, changes in procurement law due to the COVID-19 situationhave also increased fears regarding the misuse of urgent and closed procedures67.
In Bulgaria, a specific abuse of non-open tendering has become popular in recent year, in-house contracting. This procedure is designed for situations where a contracting authority performs certain activities internally, without using external resources or services. In such instances, the state authority provides the supplies, services, or works that it requires.68 However, in the case of Bulgaria this practice seems to have been overused and abused, reaching BGN 8.6 billion (EUR 4.4 billion) or over 42% of all government contracts in 2020, according to the Bulgarian Minister of Finance.69 The principles of in-house procurements stipulate that the supplier of the contract must conduct the procurement without involving any third parties. However, in many cases in Bulgaria, the suppliers compensated for their insufficient resourcesby directly contracting multiple private companies for the execution of the procurementwithout any notice to the state institution initiating the initial in-house procurement. Thus, they have provided to a network of companies direct access to publicprocurements without participation in open competition related specifically to the in-house public procurement.
On 13 July 2018 the State Consolidation Company EAD conducted an in- house contract with its subsidiary company Montagi EAD for the inspection, repair and restoration of 196 water dams at the price of EUR 250 million with an additional EUR 75 million loaned by the Bulgarian Development Bank. Although Montagi EAD was assigned to solely conduct the tasked repairs and restorations on the water dams, the company, contrary to in-house procurement rules, subcontracted private companies without procurement procedure related to the specific in-house contract to complete the works. Furthermore, none of the subcontracted private companies had certifications for assuring the quality of the repairs. As a result, by 2021 only 10 water dam repairs have been completed. In addition, an on-site investigation by the Directorate for National Construction Supervision found illegal construction on all 10 repaired water dams. None of the sites has been approved for construction, and none had any construction documents nor guarantees for the quality of the materials. This investigation has also found that the subcontracted companies have been paid twice as high prices for the concrete used in the repairs and five times higher for the transportation of the materials. A particular issue of corruption risk related to this case is the fact that the in-house procurement has been assigned for repairs of 51 well- functioning dams, that had already been repaired before the procedure. Yet, the irregularly contracted private companies have received a 50% advance payment also on these 51 well-functioning dams.70
Contract modification in the implementation phase
Several CSOs from the region have reported the malicious practice of unjustified ex-post contract modifications. In many of these procedures the supplier wins the contract with a competitive price which is then modified making the procedure significantly more expensive than the initial tender. These modifications are also hard to track due to the limited or no information about them on most of the official procurement websites.71 In Montenegro, it is a common practice that after the award decision has been made the contract is supplemented by additional annexesincorporating extra costs and respectively payments for the contractor. The mostrecent example is the case of the reconstruction of the Pljevlja Thermal Power Plant, where an annex was added to the contract immediately after the award decision wasmade at the end of 2021. The annex stipulated a EUR 15 million cost increase.72 In Serbia, the new procurement law simplifies the modification of the contracts during their implementation phase. It is not only true regarding prices, but the change of entities involved, as well.73 Additionally, ex-post monitoring and evaluation of the quality of contract implementation and subsequent changes occurs very rarely.
COVID-19 induced changes in public procurement
Timeline and description of policy changes
The changes in public procurement have been implemented at the beginning of the emergency periods in each country. Theemergency periods began around mid-March 2020 and the strictest restrictions remained in place until mid-May or mid-June the same year, with the notable exception of Montenegro where a state of emergency was never formally declared. While the most prominent regulatory changes had been lifted with the end of the emergency periods in 2021, weaker forms of state of emergency were still in place in Hungary, Croatia, Serbia, North Macedonia, Albania and in Bosnia and Herzegovinaas of December 2021. Similarly, the state of emergency was replaced by a “State of Alert” in Romania and by an “Emergency Epidemic Situation” in Bulgaria. Although most of the temporary changes made in procurement legislations have been lifted by the summer of 2020, the integrity of the procurement systems has been negatively affected in the longer term as indicated by data-driven trends outlined in this report.
On 1 April 2020, the European Commission published a guideline on the use of the public procurement framework in theemergency related to the COVID-19 crisis.76 These guidelines offer the possibility for the public procurement frameworks of the Member States to be more flexible and adaptable to the pandemic situation. EU Directive 2014/24/EU77 provides clear deadlines which are adaptable to emergency situations similar to that of the COVID-19 pandemic78 (according to Art.27 and Art. 28 of Directive 2014/24/EU, a state of emergency may reduce the time limit for the receipt of tenders from 35 days to 15 days in open procedures, and from 30 to 10 days in restricted procedures). Thus, the Public Procurement Law and EU Directive 2014/24/ EU provided a suitable legal basis (both for EU and Non-EU member states) for speeding up public procurements in cases of emergency.
Nonetheless, some of the countries considered in this report have adopted additionalmeasures, over and above the ones provided by the EU, to regulate their corresponding procurement markets. Conversely, some countries have used clauses in their existing public procurement legislation to deal with the changes brought by thepandemic.
Countries with changes to public procurement legislation
In Romania several exceptions to the Public Procurement Law 98/2016 were made through emergency ordinances and Presidential Decrees 195/202079 and 240/202080 to speed up the emergency procurement of medical and other relevant supplies. For these types of procedures there were no publication requirements, no time limits, no minimum number of candidates to be consulted, or other procedural requirements. In Croatia, goods that the government determines as necessary to fight the pandemic can still be purchased by direct agreement without public procurement. Additionally, between March and May 2020, due to social distancing, contracting authority representatives and bidders could only discuss procurement related matters through phone and without the presence of any advisors. Similarly, in Hungary for procedures related to the COVID-19 pandemic, the contracting authority could use direct negotiation without publication (with the invitation of three potential suppliers). Additionally, in cases of utmost urgency goods could be purchased as outright awards. The ban on the acquisition of assets for the budgetary bodies under the control or supervision of the Government was also temporarily suspended.81 InAlbania, through two Decisions of the Council of Ministers (DCM), procedures and contracting related to Covid-19 were considered “Classified Contracts”82, indicating that public information regarding these contracts would be restricted.83 The above-mentioned Decisions of the Council ofMinisters led to situations, where contractors were selected without any published calls for expression of interest.
With the start of the COVID-19 pandemic the Bulgarian parliament declared a situation of emergency on 13 March 2020. Then on 14 May 2020 the parliament enacted emergency legislation impacting the application of the Public Procurement Law. The new legislation established that the Public Procurement Law is not to be applied in the case of the purchase of hygienic materials, disinfectants, medical devices and personal protective equipment, necessary for securing the anti-epidemic measures; and the purchase of medical devices, the provision of services for sampling and reporting of the results, purchase of medical and laboratory equipment, necessary for diagnosis and treatment of infected patients, their consumables, as well as activities related to their implementation and warranty maintenance.84
Countries without changes to procurement legislation
Other countries in the region have not changed their procurement regulations but havepromoted the use of existing rules on urgent contracting. On 17 March 2020 the PublicProcurement Agency of Bosnia and Herzegovina issued an of- ficial notice stating thatin situations of extreme emergency, when it is not pos- sible to apply regular public procurement procedures but still there is enough time, it is possible to apply anegotiated procedure without prior publication. It is further stipulated that contracting authorities are, exceptionally, allowed to grant contracts based on negotiated procedure without prior publication, when due to reasons of extreme emergency, caused by unpredictable events for certain contracting authority, minimal deadlines prescribed for regular procedures cannot be respected.85 Similarly, the Montenegringovernment has encouraged the use of preexisting rules regarding “urgent” procedures in case of emergency contracting. Such rules allow contractingauthorities to procure urgently with almost no restrictions in terms of providingtransparency and competition. On 24 March 2020, the Public Procurement Administration of the Republic of Serbia published a notice on its official website stating that even during the state of emergency, contracting authorities are obliged to act in accordance with the provisions of the Public Procurement Law.86 It has also encouraged the temporary suspension of procurements in the event of objectiveinability of continuing an already initiated public tendering due to pandemiccircumstances. Nonetheless, similarly to the other countries in the region, Serbian authorities used urgent procedures frequently (that require significantly less preparation and transparency) for the purchase of medical equipment and materials.
Most of the measures that were taken in the realm of public procurement to fight the pandemic were truly necessary. It is unquestionable that hospitals, schools, retirement homes and other governmental organizations promptly needed medical equipment to slow the spread of the virus and to prevent the death of many at risk.Yet, some new rules and guidelines introduced with the inception of the pandemicwere poorly designed and implemented, creating a procurement environment ripe for abuse and corruption. The following irregularities could have been prevented by better planning and a more efficient resource allocation or by following the above-mentioned guidelines proposed by the European Commission.
Overuse of urgent procedures
The main tool for the emergency purchase of medical equipment was the use of “urgent” or “extremely urgent” procurements. While the exact definition of thisprocedure type may vary by country, it has similar features across SEE-9 allowing thequick purchase of essential goods and services. It requires a significantly shorter advertisement and decision periods and simpler technical and administrative requirements. Most importantly, urgent tendering allows the use of outright (direct) awards and non-published negotiated procedures. Any form of competition restriction increases corruption risk, hence it should only to be used under very specific circumstances or in a limited timeframe.
In Romania, the new regulations have led to a considerable rise in the use of negotiated procedures without publication. According to the National Public Procurement Agency (ANAP), this type of procedures made up 40% of the total procurement procedures used in 2020 (EUR 35 billion in value, a 30% increase from 2019). Out of these 58% were justified by “extreme emergency”.87 The National Council for the Settlement of Appeals (CNSC) estimates that the cost of procurement irregularities amounted to EUR
4.9 billion in 2020.88 In Montenegro, the Public Procurement Law enabled the frequent use of direct contracting due to the public health emergency. In 2020, the urgent procurement spending tripled compared to 2018 and 2019 and reached close to EUR 55 million, 10% of the overall annual public procurement budget.89 Similarly, in Bosnia and Herzegovina contracting authorities increased the use of restricted procedures. During the State of Emergency more than 416 public procurements were conducted through a negotiated procedure without a notice. Media reports in the country provided information on a large number of abuses of this type of public procurement. Many lawsuits were initiated in 2020 and 2021, suspecting the legitimacy of conducting such public procurements (see Box 5). In Hungary, while there is no exact information on the share of implemented urgent procedures during the pandemic, the Corruption Research Center, Budapest showed that the share of non-competitive procedures has slightly increased during the emergency period. More importantly, in the first four months of 2020, the share of non-competitive contracts from among all contracts won by “crony companies”90 rose from the already high level of 51% to 68%.91
During March and April 2020, the Government of the Federation BiH – in accordance with the request from the Federal Administration of Civil Protection – decided on the urgent procurement of ventilators for patients with severe symptoms of COVID-19 infection. In a record time of only 30 days, the government selected a supplier (who is not registered for import, transport, and procurement of medical devices), accredited the supplier for such procurement, registered the subject of procurement with the Agency for Medicines and Medical Devices ofBosnia and Herzegovina (because this type of ventilator was not registered), and imported it from China. Based on experts’ assessment, the purchased ventilators were exceedingly more expensive than their estimated market price. After the medical accreditation of the devices, it was uncovered that the ventilators were not suitable for use on patients in intensive care. All hospitals refused to use the devices.
In relation to the procurement, Fadil Novalic the Prime Minister of the Federation of Bosnia and Herzegovina, Fahrudin Solak the director of the Federal Civil Protection Administration and Fikret Hodzic the owner of the agricultural company “Srebrena Malina” (the winner of the procurement) have been charged with conspiracy to commit criminal offenses related to acts of abuse of position or authority, receiving a reward or other form of use for trading in influence, money laundering, etc. Jelka Milicevic, Minister of Finance of the Federation of BiH has been charged with work negligence.92
Lack of transparency
The other procurement irregularity that has been amplified by the pandemic is the lack of transparency. On the one hand, the emergency government decrees, most probably intentionally at least in some cases, gave unclear details ofthe temporary regulatory changes. On the other hand, the publication requirements fordirect and negotiated awards are by default significantly less strict, hence they are lacking the satisfactory level of transparency.
In Croatia, the list of goods and services for which direct procurement agreements could be used was kept confidential until December 2020. The list was only publisheddue to significant pressure from the general public.93 In Hungary, during the state of emergency the Prime Minister had the power to decide which procedures are related to the COVID-19 pandemic hence could be purchased through direct awards94. Additionally, often no satisfactory justifications were released about the underlying reasons for some of these purchases or about the supplier selection for these purchases. Information about these procurements is not available on the official e-procurement website. A large-scale respirator purchase by the Ministry of Foreign Affairs and Trade of Hungary created the biggest public outcry. In April 2020 the Ministry bought 16,000 heavily overpriced and redundant ventilators for HUF 300 billion (EUR 812 million) mostly from Chinese firms, with no significant track record or reputation in the specific domain. The machines have later been announced for re-sale on a discount to foreign governments due to underutilization.95 In Albania, the use of “Classified Contracting”96 has made it impossible to obtain information on large scale purchases related to the pandemic. The Balkan Investigative Reporting Network (BRIN) found that between March and May in 2020 at least 15 public tenders were purchased through secret contracts. The tenders were closed, which is actually part of the definition of “classified contracting”; hence it is not known how many companies participated and what conditions or criteria were applied during the awarding of these tenders.97
During the period of March to April 2020, the Ministry of Health and Social Protection proceeded with the purchase of 54 respirators. It was reported in the media that during the procedures performed by the Ministry of Health and Social Protection, actions were taken in violation of the law and bylaws, claiming that the purchase price of respirators used during the COVID-19 pandemic was several times higher than the market price.
By order no. 200, dated 24 March 2020 the Secretary General established the evaluation commission for receiving, reviewing and evaluating the bids. The working group received bids from several economic operators. After receiving the submitted bids, it determined the value of ALL129.8 million (EUR 1.07 million) (excluding VAT) for the purchase of 54 respirators, which corresponds to the value of ALL 2.4 million (EUR 20,000) per respirator. The economic operator that was chosen as the winner was “Axent medical”, based in Germany.
The Special Prosecution Office against Corruption and Organized Crime (SPAK) has been conducting criminal investigations into the procurements conducted in emergency conditions of the COVID-19 pandemic by the Ministry of Health under the ″classified tendering″ procedure98. According to SPAK, in the specific case of the purchase of ventilators, the price was determined without a market study, but by making an average of the offers made by the companies. Even though SPAK found violations in this case, it excused itself from the case, delegating the file to the Tirana Prosecutor’s Office, as according to SPAK it only amounted to “abuse of office”, which was not in SPAK’s authority. According to the SPAK prosecutors no elements of the criminal offense corruption, were found in the case.99
Finally, opaque regulations and recommendations have significantly limited the possibility of prosecution of suspicious pubic procurement cases in SEE-9. In Romania, while some of the new regulations introduced during the pandemic were inline with EU recommendations, the additional decrees were too vague, makingcontracting authorities fully immune to legal consequences of breaching the procurement regulations.100 In Bosnia and Herzegovina, Montenegro, and Serbia the lack of changes to the procurement legislation during the first months of the pandemicled to the overuse of urgent procedures. In Bosnia and Herzegovina, there were no specifications about what goods and services can be purchased via urgent procedures; contracting authorities were only required to explain why a particular procedure was urgent.
The COVID-19 induced policy changes have considerably reduced the integrity of the often already troubled procurement systems in the SEE-9 countries. The current report outlines additional public procurement trends and risks by using big data analytics of public procurement datasets of the Open Tender platform and a deep quantitative methodology developed by the Government Transparency Institute (GTI).
GTI collects, cleans, and maintains public procurement data from e-procure- ment websites in several countries101. Currently, SEE-9 regional lot level data is available for Croatia, Hungary, Romania, and Bulgaria (TED data only102), and North Macedonia. The report analyses procurement market data from these countries to give a more holistic picture about the changes in public pro- curement risk caused by the pandemic. The main limitation of the data driven approach is the general lack of transparency of major purchases made during the state of emergency. Information on some large value procurements is not published on the official e-procurement websites of the respective countries and is therefore not included in the datasets. An appropriate example is the large-scale respirator purchase of the Hungarian Ministry of Foreign Affairs and Trade introduced above. It’s EUR 812 million value is larger than the total tender value spent on COVID relatedpublic purchases between 2017 and 2021 (see Figure 1). According to calculations by investigative journalists this would have covered roughly two months of costs of the entire Hungarian healthcare system.103 Despite this limitation, the analysis provides a useful general insight into changes in the integrity of the most exposed sectors.
The methodology uses “red flags” to identify public procurement risks.104 Several indicators are tested and validated using rigorous statistical methods to create the composite Corruption Risk Index (CRI) that measures the overall corruption risk of each procurement contract.105 The indicators used in this report to create the CRI are provided in Table 1 below. Each indicator can take a value of between 0 and 1, where 1 indicates high corruption risk. The CRI is the simple arithmetic average of the seven risk indicators. For each country level dataset, the same indicators were used to maintain comparability.
Table 1. Potential integrity indicators
Risk indicator name
Tenders/contracts receiving only one bid
Buyer Dependence on Supplier
By winner-year-supplier: share of supplier in total annual awarded contract value by the same contracting authority
Tenders/contracts receiving only one bid
Period between call for tender publishing date and submission deadline
No Call for Tender
Contract published without call for tender
Period between call for tender submission deadline and award decision date
Procurement’s procedure type (open, urgent, negotiated etc.)
Source: Government Transparency Institute (GTI).
Corruption risk in the healthcare sector107
As the first wave of the pandemic hit Europe during the spring of 2020, demand for masks, oxygen, sterilizers, respiratory monitors, and other COVID-related products skyrocketed. The data indicates that all observed countries have seen a considerable uptake in the value of COVID-related product purchases (see Figure 1). In North Macedonia, Croatia, and Hungary, the total value of COVID-related purchases between 2020Q1 and 2021Q2 was about the same as between 2017Q1 and 2019Q4, with the aggregate value being respectively around 1.6, 2.4, and 2.7 times the aggregate value a year and a half before the pandemic. The value growth was the largest in Romania as the total value was 4 times higher after 2019Q4 than between 2017Q1 and 2019Q4 and 4.1 times higher than the aggregate value a year and a half before the pandemic. The only country where COVID related expensedhave not increased was Bulgaria, nonetheless this most likely was due to the incom- plete procurement data available on the TED portal.108 Therefore, results con- firm the increasing importance of the healthcare sector during the pandemic.
Emergency changes in the procurement regulation affected the integrity of the procurement markets. The CRI data indicates that in each country either the healthcare, the COVID or both markets were visibly affected by the pandemic (see Figure 2). As the COVID-related market is very small compared to the healthcare, or any other conventional sector, the CRI composite index’s variance is significantly larger in this group leading to somewhat less consistent results.
Figure 1. Total quarterly contract value of COVID-19 related goods procured between 2017Q1 and 2021Q2
Source: GTI calculation based on e-procurement data from Bulgaria (TED), Croatia, Hungary, North Macedonia and Romania.
Source: GTI calculation based on e-procurement data from Bulgaria (TED), Croatia, Hungary, North Macedonia and Romania.
In Romania, the COVID market CRI has increased by around 10 percentage points. The increase was temporary and was followed by a slow but steady decline. In North Macedonia both the COVID-related product market and the broader healthcaremarket was affected, however the CRI growth had already begun a quarter before the pandemic, therefore it is hard to separate the effects of the pandemic from other policy changes. In Croatia the CRI of the healthcare market temporarily increased byaround 10 percentage points and decreased to its original value by 2021Q2. In Hungary the effect of the pandemic on the CRI is less straightforward as both the COVID product market and healthcare market related indices have significant variances. Nonetheless, a considerable healthcare market CRI uptake is observable after 2020Q3 (after most of the regulations were revoked). Additionally, TED data might not fully grasp the CRI trends in Bulgaria as many, lower value and potentially riskier contracts are not included.
Overall, while the effects are not completely uniform, due to different regulatory measures, somewhat different procurement publication policies and distinct publicprocurement data quality, the results clearly indicate that the temporary regulatory changes have negatively affected regional procurement market integrity.
Increased buyer dependence on specific suppliers
The broader public procurement healthcare market (including COVID and non-COVID products) has been affected in different ways by the pandemic (see Figure 3). Contracting authorities’ dependence on contractors changed due to the changes in the procurement market. As explained above, the buyer’s dependence measures the total contract share that a contracting authority allocates to the same supplier provided that the authority purchases at least four procurements in a given year. Intuitively, if a contracting authority grants most of its procurements to the same supplier it may imply corruption. The data shows that in Hungary the healthcare sectors’ average buyer dependence grew significantly in the last one and a half years compared to the 2017-2020 period. Average buyer dependence also grewslightly in Croatia. Additionally, average contract values have also increased in these two countries indicating that captured contracting authorities have not only provided a higher share, but also a higher value of public funds to their favored suppliers. The Bulgarian procurement data from TED indicates that, while buyers’ dependence has not changed significantly, average contract values in the healthcare market have increased considerably during the pandemic. Meanwhile, Romania and North Macedonia fared considerably better in this aspect as indicated by a slight decreasein buyer’s dependence in the health- care sector.
Figure 3. Average buyer dependence and contract value change during the pandemic in the healthcare sector
(2020Q1-2021Q2 compared to 2017Q1-2019Q4)
Source: GTI calculation based on e-procurement data from Bulgaria, Croatia, Hungary, and Romania.
Lack of competition for extra healthcare funds
According to publicly available procurement data from the healthcare sector in thecountries under review, some suppliers have benefited greatly from the pandemic.110 In North Macedonia the top five companies together received EUR 404.7 million more, in Romania EUR 273.7 million more, in Hungary EUR 256.8 million more, in Bulgaria EUR 166.2 million more and in Croatia EUR 73 million more. In each country the biggest 25% of the winners received 88% to 96% of the additional funds distributed between 2020Q1 and 2021Q2 compared to 2018Q3 and 2019Q4 (see Figure 4). This indicates that a select few companies have skimmed the vast majority of the extra funding in the healthcare sector. It could also support the findings of the qualitativeresearch that favoritism and clientelism are a serious problem in the region.
Figure 4. Distribution of additional funds received by companies in the healthcare sector by quantile
(2020Q1-2021Q2 compared to 2018Q3-2019Q4)
Source: GTI calculation based on e-procurement data from Bulgaria, Croatia, Hungary, and Romania.