SELDI

THE WAY FORWARD: CONCLUSIONS AND POLICY RECOMMENDATIONS

The comparative analysis of SEE-9 public procurement and energy SOEs management practices reveals continuing corruption and state capture risks, despite overall improvement in governance and the emergence of good practices.

Public procurement integrity risks in the region stem largely from favouritism and clientelism, i.e. the preference of a group of companies due to their owners’ political connections. In addition, the common practice of contract overpricing and tailored tender specifications leads to inefficient tendering and thus to considerable losses to both the national budget and the society as a whole. Inefficient bureaucratic practices and often-unclear hierarchy of ac- tors involved in procurement processes regularly lead to conflict of interests. Furthermore, the high share of non-open procedures curtails overall transparency and limits the usability of public procurement databases. Finally, the malicious practice of ex-post contract modifications indicates the presence  of corruption. The pandemic has only added fuel to the fire by increasing the number of inherently restricted “urgent” procedures that circumvent the usual procurement legislation. The overuse of less transparent urgent procedures has led to more abuses and the unclear regulations made ex-post account- ability of contractors and suppliers more difficult. The quantitative assessment of the procurement market shows that the pandemic caused overall integrity to decline, especially in the most affected – healthcare and other COVID-re- lated product – markets. There are also some positive public procurement trends in the region, such as the implementation of new procurement laws, the launch of better functioning electronic procurement systems and to some extent – the improvement of the transparency in the procurement review processes. However, the most deeply rooted issues remain.

A number of common regulatory and governance deficits that have also undermined the management of energy state-owned  enterprises  (SOEs) and contributed to the increase of state capture risks in Southeast Europe. The lack of transparency and public accountability are at the heart of the problem. This affects the appointment of SOE board members, the financial and operational reporting and the companies’ investment decisions. Insufficient transparency can be attributed to the lack of appropriate monitoring mechanisms and a strategic vision for improving the governance of SOEs. The available (although sometimes incomplete) financial data about the companies reveals their overall poor performance and considerable debt and liquidity issues, especially among coal-based power generation plants. The financial mismanagement cases reveal common path dependencies, where political influence on the SOEs’ management and regulatory authorities breed financial mismanagement practices (e.g. weak financial  discipline) and harmful regulatory decisions (e.g. prices artificially-held below market level). The resulting financial instability in turn eats into the profitability of SOEs and their ability to invest in the maintenance of their assets and in  new projects. In a number of cases, the financial mismanagement of SOEs remains unsanctioned and is even facilitated by direct or indirect state aid  for struggling SOEs, which perpetuates existing governance risks. Ultimately, these bad practices weigh on the state budget and taxpayers. In addition, there is a tendency to award energy sector public procurement contracts via non-transparent procedures, with a high share of single bidding. Contractors can sometimes use consultants close to the winning organization to “tailor” the documentation and technical specifications for a specific company. In some cases, procurement procedures are avoided altogether via direct-negotiation agreements or by using emergency procedures. Companies, which have not been pre-selected by the contracting authority are disqualified on dubious grounds, or the whole tenders are cancelled. Amendments to the procurement contracts through annexes, including such that increase the price or lower the quality requirements are also increasing corruption risks and undermine the efficiency of public procurement procedures.

Based on the in-depth review of the public procurement systems and the management of energy SOEs, several key policy recommendations could be outlined (see Table 3). These need to be urgently taken into consideration and implemented to reduce their negative  effect  on  market  competition and democratic integrity in Southeast Europe. Closing these outstanding governance gaps has become particularly important with the rise of global power competition and the increase of pressure from authoritarian regimes on the region, most notably Russia and China.

The Kremlin’s war in Ukraine, which has triggered successive rounds of G7 economic sanctions on Russia are likely to increase significantly the geoeconomics governance risks for the SEE-9 countries. Russian and Chinese capital flows in the region, in particular such related to large-scale energy projects are likely to be further concealed and to seek non-competitive access to regional markets.248 The Kremlin is also likely to increase its pressure on SEE-9 countries to defy their EU bids and adopt bilateral-deal- based contracts, rather than rely on rule-based public procurement systems. Hence, while embarking on specific reforms outlined below, this calls on the EU, its member states and the SEE-9 countries to act together to reinforce the EU-integration path of the region, guaranteeing its democratic and rule  of law-based development. Good governance reforms in SEE-9 require both strong political action as well as continuing technical capacity building to close governance vulnerabilities in public procurement and the energy sector SOEs.

Table 3. Policy recommendations

Identified problem

Recommended actions, measures and solutions

Safeguarding public procurement integrity

There is overwhelming evidence on the presence of particularistic (informal) ties between contracting authorities and politically favored suppliers. The resulting inefficiencies caused by tender overpricing and tailored tender specifications can lead to severe losses for the budget and the society.

Strengthen procurement monitoring

Policymakers should increase the efficiency and frequency of audits and monitor- ing visits. A higher risk of punishment, in turn, could contribute to higher levels of compliance with rules and lower levels of corruption249. However, as frequent audits could demotivate companies to use of more complex open procedures,250 it is important to implement targeted audits based on thorough risk analysis. This requires:

  • the development and maintenance of appropriate, publicly available procure- ment datasets;
  • thedevelopmentofefficient,dynamic,riskmodels (e.g.,timeandpracticesen- sitive “red-flag” identification);
  • therecurringtrainingofthemonitoringagencies’staff,with potential CSOsupport.

The unclear hierarchy and conflict of interest in public procurement governance increases the risk of systemic corruption.

Increase institutional efficiency

Policymakers should separate different government functions related to public pro- curement by clarifying roles and reducing ambiguity and overlap between institu- tional mandates. Furthermore, the implementation of a procurement code of con- duct or code of ethics could provide much needed guidance in situations of conflicts of interest or corruption.251 In particular, SEE-9 need to strengthen the capacity of public prosecutor offices and courts to investigate and adjudicate on more complex public procurement procedures. In this respect, the European Public Prosecutor’s Office, EU anti-fraud service OLAF, as well as Europol and the European Court of Auditors could provide valuable guidance, best practice examples, and support to national efforts to improve institutional efficiency.

The overuse of non-open procedures is a severe problem in many countries in the region. Restricted and closed procedures can in- crease corruption risk and procurement prices while decreasing the transparency and accountability of the procurement market.

Decrease the share of non-open procedures

Policymakers should promote the use of open procedure types (as opposed to non- open procedures) by modifying legislation accordingly. This could be achieved for example, by decreasing the value threshold below which procedures can be directly awards. Decision-makers could also influence the number of non-open procedures indirectly by educating contracting authorities on the importance of transparency and accountability.

The possibility for discriminating tenderers based on technical specifications as well as the overly de- tailed characteristics of the subject of public procurement discourages competition and increases corruption risk.

Improve contract awarding mechanisms

Contracting authorities should strive to draft inclusive tender specifications, without overburdening the decision process. Meanwhile policymakers should set clear rec- ommendations and straightforward regulations on when more restrictive specifica- tions are acceptable. Finally, independent monitoring agencies should closely follow compliance with these regulations.

Discontinuing Covid-19 emergency procurement rules

The emergency regulatory chang- es have significantly affected the integrity of the procurement markets in SEE-9. Although the strictest restrictions have been lifted by the end of the summer of 2020, there are still a few pandemic specific regulations that remain at the beginning of 2022. In addition, governments are not transparent about their “returning to normal” plans, and hence loopholes for the excessive use of urgent procedures persist.

Reverse temporary changes to emergency procurement rules

Any remaining public procurement related regulatory changes should be withdrawn, such as the simplified use of urgent procedures during the pandemic. The with- drawal should be appropriately communicated by the relevant governmental or- ganizations. Furthermore, indepth guidance should be given both to contracting authorities and suppliers on how to return to their normal procurement practices.
The pandemic has highlighted the need for more transparent public procurement policy making processes. Specific details on newly introduced regulations were often vague or not properly reported. This significantly reduced transparency and the ex-post accountability of contractors and suppliers. The limited reporting requirements of specific procurements, such as urgent procedures have increased the risk of corruption.

Increase the transparency of the public procurement system

Greater transparency can be achieved by informing citizens adequately and promptly about changes in public procurement legislation. Furthermore, transparency should be promoted by the procurement authorities, including increase of data availability about all types of procedures on e-procurement websites (i.e., urgent procedures should have stricter ex-post reporting requirements).
Additionally, policymakers should rely more on the resources and capabilities of anti-corruption agencies, civil society organizations and their watchdog portals. These organizations could provide novel indicators and red-flags to help make sense of the diverse and often hard-to-interpret data, as well as ideas on how to improve the government public procurement portals with new functionalities.252
Public procurement practices during the Covid-19 emergency periods in SEE-9 should be inspected specifically for any irregularities and fraud.

The dependence of contracting authorities on specific suppliers is hindering competition. Procurement data shows that these tendencies have been amplified by the pandemic in SEE-9.

Decrease buyers’ dependence by increasing the fair competition

Policymakers should foster fair competition by breaking down market entry bar- riers. Empirical evidence suggests that the more favorable treatment of specific underrepresented bidder and product classes, such as SMEs, could successfully reduce procurement prices.253,254 Competition could be promoted by aiding smaller enterprises – often with insufficient administrative and human resources – to enter the procurement market. This can be done, for example, through:

  • reserving contracts to be awarded solely to SMEs;
  • carrying out trainings and workshops for SMEs;
  • making documentation or guidance focused on SMEs available online;
  • simplifying administrative procedures.

Improving the energy sector management of SOEs

Currently the management of the energy SOEs from the region is not in line with the best international practices and standards. There is a lack of transparency and clear rationale regarding the energy SOEs’ investment, management, staff appointment and price-setting decisions. Moreover, legal changes and strategic decisions in the energy sector in SEE-9 are often taken behind closed doors in high political offices, without wide public debate or expert consultation.

Apply the best international standards on corporate governance of state-owned enterprises

  • Counter corruption and state capture risks in the energy sectors of the countries in the region through cancelling market-distorting energy subsidies, separating political parties from the management of state-owned companies, and improving the staffing procedures in SOEs in order to professionalize the management of the energy sector;
  • Interparty committees in the SEE parliaments should commission external independent annual energy policy reviews, which could include: a) an assessment of energy policy performance vis-a-vis the stated priorities for the year, the programming budget, and the strategic goals; b) an evaluation of the financial state of state-owned energy enterprises and an identification of the risks to the sector’s development, including required state guarantees and risks of hidden privatization; c) an outline of the priority areas of development of the energy policy for the next year.
  • Improve the independence of national energy and competition regulators by increasing their administrative and financial capacity, and removing political appointments that do not comply with the highest conflict of interests and technical qualification standards;
  • Make the legal base and the practices applied in energy SOEs fully compliant with the OECD Guidelines on Corporate Governance of State-Owned Enterprises;255 Crucially, this includes clear rules and mainstreaming of practices that ensure:
    – The operational autonomy of SOEs, the independence of their boards from political influence, and merit-based appointments.
    – Full transparency and disclosure of relevant financial and non-financial in- formation, including but not limited to timely, regular publication of detailed financial reports, disclosure of the governance structure of SOEs, company objectives and the plan for their implementation.

  • The use of national, EU, or other forms of public funds in large-scale projects should be tied to a clear strategy with well-defined targets and key performance indicators (KPIs) that are the result of open public discussion. There should also be full public accountability regarding the actual spending of the funds.
  • Detailed information regarding large-scale energy infrastructure projects, including cost-benefit analysis, should be made public in a timely manner;
  • Reconsider involvement in large-scale energy projects pursued by non-democratic states, such as the TurkStream gas pipeline, in light of the risks they pose to energy security and their role in reinforcing Kremlin-backed state capture net- works. In light of the war in Ukraine, Bulgaria, Serbia and Hungary need to re- examine the terms of the pipeline’s utilization, so as to ensure bigger third-party access to the infrastructure to diversify the gas supply in the region.
Integrity rules and due diligence are largely missing in the public procurement practices of energy sector SOEs in SEE-9.

Establish integrity checks and stronger due diligence specifically for the procurement procedures in the energy sector SOEs:

  • The integrity of the evaluation committees and any external experts or consultants should be guaranteed and constantly checked, thus excluding any possibility for conflict of interest or political influence;
  • Framework contracts and restrictive procedures should be used only in exceptional circumstances, and these should be carefully reviewed and submitted to a selective external audit on an annual basis;
  • Deadlines for tender submission should be sufficient and proportional to the complexity of the offer;
  • Strict internal procedures should be put in place to detect fake competition practices; Recently created companies with no experience in the procurement area should either be excluded from certain competitions or included with great caution;
  • Large procurement contracts, with strategic importance to the sector and the society in general, should not be evaluated solely based on the lowest price, but also include qualitative, technical and environmental assessment criteria;
  • Annulling of tenders as well as any changes of the contract through annexes (including increase of the price or lowering of the requirements) should be rare and duly justified;
  • Special attention should be placed on monitoring the integrity risks of listing specific projects as pre-determined for funding under national investment strategies such as National Recovery and Resilience Plans, Territorial Just Transition Plans and national-based operational programs for the EU Regional Development Funds;
  • Past concession agreements in the energy sector could also benefit from reviews and integrity checks;
  • Information on public procurement should ideally be available in machine-read- able format within a database allowing search by multiple criteria and filters.

Source: R2G4P, 2022.