Report No. 26660-GE Georgia Country Procurement Assessment Report June 2002 Operations Policy and Services Unit Europe and Central Asia Region Document of the World Bank CURRENCY CurrencyUnit =GEL US$ 1=2.05 GEL (February2001) ACRONYMS & ABBREVIATIONS AoI Agreementof Intention ASYCUDA Automated Systemsfor CustomsData BER Bid EvaluationReport CAS CountryAssistance Strategy CIS Commonwealthof Independent States COC Chamberof Control CPAR CountryProcurement AssessmentReport DP DirectProcurement DLC Distance Learning Center EBRD EuropeanBank forReconstruction and Development ECA Europe and CentralAsia Region EU EuropeanUnion EU-TACIS EuropeanUnionTechnical Assistance for CIS countries GATT GeneralAgreement on Tariffsand Trade GCC GeneralConditions of Contract GEL GeorgianLari GOG Governmentof Georgia GPA GovernmentProcurementAgreement of the WTO IAPSO Inter-AgencyProcurement ServicesOffice IAS International Accounting Standards ICB International CompetitiveBidding ICC International Chamber of Commerce IDF InternationalDevelopmentFund IF1 InternationalFinancialInstitution IMF InternationalMonetary Fund IR Regulationson Implementation of StateProcurements ISA International StandardsonAuditing IS0 International StandardsOrganization ISP Internet Service Provider ITB Instructionsto Bidders L/C Letter of Credit LSP Law on StateProcurement MEIT Ministry of Economy, Industry and Trade MOE Ministry of Economy MOD Ministry of Defense MOF Ministry of Finance MOIA Ministry of Internal Affairs MOSS Ministry of State Security NACP National Anti-CorruptionProgram NCB National CompetitiveBidding NGO Non-GovernmentalOrganization OECD Organizationfor Economic Cooperationand Development OT Open tendering PRSP PovertyReduction StrategyPaper RT RestrictedTendering SAC StructuralAdjustment Credit SBD StandardBidding Documents SCC SpecialConditionsof Contract SOE StateOwned Enterprise SPA State Procurement Agency SPD State Procurement Department SRS ss Structural Reform Support Single Source selection TA Technical Assistance TACIS Technical Assistance to the Commonwealth o f Independent States UNCITRAL United Nations Commission for International Trade L a w WTO World Trade Organization RegionalVice-president: Johannes F. Linn, ECAW. Acing Country Director Peter Nicholas, ECC03. Acting Sector Director: RichardB.Westin, ECSCS. Task Team Leader: Els Hinderdael, ECSCS. GEORGIA COUNTRYPROCUREMENTASSESSMENT REPORT Table of Contents Preface Executive Summary ...i 111 PARTA : SUMMARY OF FINDINGS Pag;e PublicSector: The Public ProcurementRegime 1 1 Legal. Regulatory and Institutional Framework ........................................................ 1 1.1 Economic andPoliticalBackground ................................................................... 1 1.2 Government Structure .................................................................................. 2 1.3 Public Procurement Policy ............................................................................. 2 1.4 The Law on StateProcurement ....................................................................... 3 1.5 Scope and Applicability o f LSP ...................................................................... 3 1.6 Slow Pace and Lack o f Enforcement ................................................................. 4 1.7 Recommendations for Adjusting the Legal Framework .............................................. 5 2 Organization and Resources ................................................................................ 5 2.1 Procurement and Contracting Authority .............................................................. 5 2.2 5 Recommendations on Proposed State Procurement Agency ......................................... Role o fthe State Procurement Agency ................................................................ 2.3 6 2.4 Technical andFinancial Planning ..................................................................... 7 2.5 Recommendations on Procurement Planning and Organization .................................... 8 2.6 8 Training and Professional Development .............................................................. Dissemination o f Procurement Knowledge ........................................................... 2.7 9 2.8 Information Technology and E-Procurement ......................................................... 10 2.9 Recommendations for Training and Information Technology ....................................... 10 3 Procedures and Practices ................................................................................... 11 3.1 Domestic Preference andForeign Bidders ........................................................... 11 3.2 Conduct o fProcurement Proceedings ................................................................ 12 3.2.1 Methods o f Procurement ...................................................................... 12 3.2.2 Tender Committees ............................................................................ 13 3.2.3 Bidding Documentation ....................................................................... 14 3.2.4 Notification and Advertising .................................................................. 14 3.2.5 Qualification o f Bidders ....................................................................... 15 3.2.6 Cancellationo f Tenders ....................................................................... 15 3.2.7 Agreement on Intention ....................................................................... 15 3.2.8 Tender and Performance Securities ........................................................... 15 3.2.9 Submission and Opening o f Bids .............................................................. 16 3.2.10 Evaluation of Bids ............................................................................. 16 3.2.11 Award and Contract Effectiveness ............................................................ 17 17 Contract Implementation .............................................................................. 3.2.12 Record Keepingand Monitoring .............................................................. 3.3 18 3.3.1 Contract Administration ....................................................................... 18 3.3.2 Administrative Review ........................................................................ 18 3.3.3 Payment ........................................................................................ 19 3.3.4 Price Adjustment ............................................................................... 19 3.4 RecommendationsonProceduresandPractices ...................................................... 20 3.4.1 Domestic Preference and ForeignBidders .................................................... 20 3.4.2 Methods ofProcurement ....................................................................... 20 3.4.3 Tender Committees ............................................................................ 21 3.4.4 Bidding Documents ............................................................................ 21 3.4.5 Notification .................................................................................... 21 3.4.6 Prequalification andUse ofRegistry .......................................................... 22 3.4.7 Cancellation ofTenders ....................................................................... 22 3.4.8 Use ofAoI andPerformance Securities ........................................................ 22 3.4.9 BidOpening andEvaluation 22 3.4.10 Administrative Review ........................................................................ .................................................................. 23 3.4.11 Price Adjustment ............................................................................... 23 4 Audit and Anti-Corruption Measures .................................................................... 24 4.1 Auditing Performance ................................................................................. 24 4.1.1 Auditing ofPublic Expenditures .............................................................. 24 4.1.2 Auditing of PrivateExpenditures .............................................................. 24 4.2 Recommendationsfor Reforming Audit .............................................................. 24 4.3 TheNational Anti-Corruption Program 25 4.3.1 Survey on Corruption .......................................................................... .............................................................. 25 4.3.2 Working Group andProgramLaunch ........................................................ 25 4.4 Recommendationsfor Reforming Anti-Corruption Measures ........................................ 26 5 Public Sector Management Performance ................................................................ 26 5.1 Extent and Composition of ProcurementunderLSP ......................................... 26 5.2 CompetitivenessofPublic Procurement ...................................................... 28 5.3 Impact ofBudgetaryConstraints .............................................................. 28 5.4 SPA DatabaseandRegistry ................................................................... 29 6 Performance on Bank-assistedProjects .................................................................. 29 6.1 Nature of the Portfolio ................................................................................ 29 6.2 Performanceof the Bank-assistedPortfolio .......................................................... 30 6.3 ProcurementPerformance ............................................................................. 30 6.3.1 ProcurementStrengths ......................................................................... 30 6.3.2 ProcurementWeaknesses ...................................................................... 30 Private Sector 31 7 CommercialRegulation .................................................................................... 31 7.1 Law on Entrepreneurs ................................................................................. 32 7.2 Law on Supporting Small Enterprises ................................................................ 32 7.3 Law onPromoting Investmentsand Guarantees ..................................................... 32 7.4 Law on Licensing EntrepreneurialActivities ......................................................... 32 7.5 Civil Code and Civil ProceduralCode ................................................................ 32 7.6 PrivateArbitration Law ............................................................................... 33 7.7 Tax Code .............................................................................................. 33 8 CommercialPractices ...................................................................................... 33 8.1 Private Sector Development .......................................................................... 33 8.2 ForeignTrade andWTO .............................................................................. 34 8.3 Constraintsand Opportunities ......................................................................... 34 8.4 Privatization ............................................................................................ 35 8.5 CommercialProcurement ............................................................................. 36 8.6 Customs ................................................................................................ 37 PART B : STRATEGIC MEASURESAND ACTION PLAN 9 General RiskAssessment ................................................................................... 37 9.1 The Letter vs the Spirit ofthe Law: Early Days ...................................................... 37 9.2 ProcurementReformTiedto largerAnti-Corruption Efforts ......................................... 38 9.3 HighRisk ............................................................................................... 39 10 Strategic Workshop of June 2002 ......................................................................... 39 11 Strategic Measures .......................................................................................... 40 11.1 Objectives ...................................................................................................... 40 11.2 ComplementaryCPAR and SPA Action Plans ............................................................. 41 11.3 Sequencinginthe Short- andMediumTerm ............................................................... 41 12 RecommendedBank Approach for Supervision ........................................................ 42 12.1 ThresholdsandNCB ........................................................................................... 42 12.2 Prior andPostReview ......................................................................................... 42 12.3 Strategy for Fiduciary Safeguards- Action Plan ........................................................... 42 13 Action Plan ................................................................................................... 43 Annexes 1 Timetable for Conducting StateProcurement. 1 ......................................................... Annex 44 2 CPAR Action Plan. 2 ......................................................................................... Annex 45 3 SPA Action Plan. 3 ................................................................................... 47 SPA Working Programfor 2002 -Annex 3A ..................................................................... Annex 3A 49 4 NCB -Annex 4 ............................................................................................... 52 5 ListofPeopleMet . 5 Annex ................................................................................. 53 Georgia CPAR Page io f vi PREFACE Basis of Report This report was prepared on the basis o f the findings o f a World Bank mission to Georgia from February 20 to March 2, 2001 by a Task Team comprised o f Ms. Els Hinderdael, Team Leader and Mr. Denis Robitaille, Senior Procurement Specialist, and Elene Imnadze, Public Sector Specialist. It also takes account o f developments up to June 2002 when the SPA, with the support of the Bank, organized a workshop in Tbilisi to discuss the draft CPAR and develop a targeted action plan based on its findings. The Bank team represented at this workshop comprised Els Hinderdael, Pamela Bigart, Elene Imnadze and Peter Trepte (consultant). The report i s based on the results o f interviews with more than 30 public and private institutions (see Annex 5), at the central and municipal levels o f the Georgian public procurement system, as well as on detailedanalysis o f the laws, documents and other information collected. On the part o f the Government o f Georgia (GOG), the Ministry o f Economy, Industryand Trade (MOEIT) dedicated a high-level team to work alongside the Bank`s mission on this assessment, headed by Mr. Temur Khomeriki, Head o f the State Procurement Department and also comprising Mr. Giorgi Tvalavadze, Deputy Head, Legal Division o f the State Procurement Department. The GOG counterpart team lent their full and proactive support to the CPAR mission and engaged with the Bank's team in a comprehensive dialogue about the issues identified by the assessment. The Bank i s grateful to the Government o f Georgia for this cooperation. There has been strong support o f the CPAR team's work, demonstrated by collaborative involvement duringthe preparation o f this CPAR from the government, Parliament, the business community, and civil society. The CPAR findings and recommendations will also feed into the ongoing preparation o f Georgia's Poverty Reduction Strategy Paper (PRSP), and thereby into the Country Assistance Strategy that i s now being finalized. Purpose of the Report The Task Team focused on procurement systems at the Central and to a lesser extent at the Local Government level. The primary objectives o f the CPAR are: to provide a comprehensive analysis o f the country's public sector procurement structure, including the existing legal framework, organizational responsibilities and capabilities, and present procedures and practices, including how these may differ from the formal rules and procedures; to undertake a general assessment o f the institutional, organizational and other risks associated with the procurement process; to establish the basis for dialogue between the country and donors on how to streamline and improve the economy, efficiency and transparency o fpublic sector procurement; to develop a detailed action plan for reform to achieve institutional improvements, including interimmodifications to existing practices in the country, so that contracts financed under current projects will meet the Bank's procurement standards, pending completion of the broader reform program; and to encourage better commercial practices inthe private sector. Georgia CPAR Page iiof vi Acknowledgements The mission members wish to acknowledge the extensive cooperation and assistance received from officials and staff o f the public organizations, state agencies and private companies interviewed. Ms. Cheryl Martin, Country Officer o f the Bank's Country Director's office for Georgia and Mr.Tevfik Yaprak, Chief o f the Bank's Tbilisi office offered the mission invaluable assistance. The mission would also like to extend its thanks to Mr.Joel Turkewitz (Senior Public Sector Specialist,. WBIGF) for his extensive assistance in the preparation o f the strategic workshop held in Tbilisi in June 2002. Ms. Teona Yanghvelatze, Team Assistant in the Bank's Tbilisi Office, assisted with arrangements for the mission. Ms. Suzanne Snell (Consultant) assisted with the editing and formatting o f the report. Ana Cristina Hirata also assisted in the formatting o fthe report. Georgia CPAR Page iiiofvi Executive Summary 1. Inlight o f its strategy for an accelerated transition to a market economy, Georgia has made tremendous efforts to provide a legal base for the requiredchanges and has adopted a multitude o f laws at a rapid pace, starting in 1993. In fact, Georgia's long-term visions and ambitions to integrate into European economic and political structures and the wider world economy provide a clear direction to its foreign policy. 2. With the notable exception o f enforcement provisions, the scope o f existing Georgian legal instruments would be adequate to control the procurement process in Georgia, if they were widely followed. The main issue i s not the lack o f legislation but rather the effective application o f the legislation that i s already in place. Part o f the delay in implementing r e f o m has been due to a radical reorganization involving the dissolution o f the Ministries o f Economy, Industry, Trade, and Foreign Economic Relations, and their consolidation into a single Ministry o f Economy, Industryand Trade. Ministerial interference inprocurement agency's decision-making, inadequate procurement agency budgets, and low levels o f awareness o f legal and regulatory provisions have slowed the reformprocess, despite strong top-level commitment. Butpossibly the most important underlying force that is slowing effective implementation i s the persistence o f traditional pattems o f patronage that are nourished by and perpetuate non-competitive procurement procedures and practices. Achievementsto Date 3. As a result o f the Government's determination and technical assistance provided under a World Bank Institutional Development Fund , public procurement i s now guided by a single overarching law. The Law on State Procurement (LSP) was adopted in December 1998, enacted by Parliament in July 1999, and amended in March 2001. The LSP is modeled on the UNCITRAL Model Law and although it lacks enforcement clauses and a few other improvements are possible, by and large it forms a good basis for increased efficiency and transparency in public expenditures. An assessment o f the LSP confirms that progress has been made inassimilating intemational standards and best practices. The Needto BroadenApplicationand Scope of LSP 4. Despite an acceleration in establishing a sound legal framework, backed by donor funding and political will, the procurement reform agenda has not yet been completed, and procurement reform i s going very slowly. Although in 2000, some 20 percent of the State budget o f Georgia, representing 2.5 percent o f GDP, was spent to procure goods, works and services, two years after the enactment o f the Law, only 12 percent of public procurement has been conducted competitively inaccordance with the LSP. 5. For one thing, a substantial volume o f procurement using extra-budgetary funds was conducted beyond the reach o f the LSP. For another, procurement by State Owned Enterprises (SOEs) was not subject to the LSP. Inaddition, procurement related to state security i s excluded from the LSP and the largest procurers- Power Bodies in charge o f defense and security-avoid application o f the LSP by presenting general procurement as procurement related to state security. The March 2001 amendments to the LSP have now stipulated that off-budget funds and funds ffom SOEs shall be brought into the State budget and LSP, and this i s a major step in the right direction. The CPAR recommends that the list o f procurement identified as relating to national security be cleared by the SPA to ensure that Power Bodies procure general items in accordance with the LSP (section 1.7). 6. The regulations that implement the LSP also unnecessarily restrict competition in two respects. The CPAR recommends that foreign bidders be allowed greater access and that open and restrictedbiddingbe more broadly applied (section 3.4.1, 3.4.2). The Needfor anIndependentStateProcurementAgency 7. An adequate governance structure is key to successful implementationo f public procurement reform, and this requires that an independent and autonomous agency be created that reports to a level higher than ministerial level. While the origmal designation o f the Ministryo f Economy as the entity responsible for state procurement has been modified and a state procurement agency created, the Ministry still basically controls the agency. Whilst the creation o f the State Procurement Agency (as opposed to the Department that it was) has improved the situation, the SPA i s still subordinate to the MoE. Duringfurther discussions which took place on the occasion o f the workshop held inTbilisi inJune 2002, it was clear that a further change inthe SPA'Sstatus could not take place inthe immediate future. However, the issue i s recognized and the Minister of Economy undertook to reconsider the status o f the SPA after one or two year's operation. The CPAR continues to recommendthat the state procurement agency be given status that is truly independent and beyond the reach of influence of the Ministry of Economy, Industryand Trade. It needs to be free to implement its mandate o f being a regulating and monitoring body that ensures compliance with the Law on State Procurement by all public entities and that providesthe required oversight and coordination at the national level. In light o f the recent political development to establish a Cabinet o f Ministers, the CPAR recommends that the current governance structure be reconsidered and that the SPA be put under the Cabinet's control (section 2.3). 8. There has also been a chronic shortage o f funds for implementing procurement reform and the situation has not improved between the date o f the first CPAR missions and the date o f this current CPAR. The CPAR recommends that SPA be given proper funding from the State budget, essential for it to implement its functions successfully (section 2.3). The Needto PutTeethinto the Law 9. The limited application o f the law and its regulations can be blamed on a lack o f awareness of the law's provisions, a lack o f enforcement measures, and a culture that i s overwhelmingly fatalistic about, ifnot dependent on, patronage and corrupt behavior. Surveys have found that the public accurately perceives that the laws are fine but that executive implementation o f them i s weak, and that enforcement through the judiciary i s not to be expected. All the incentives currently favor the perpetuation o f vested interests and do not reward those who want to follow competitive procurement practices. 10. The CPAR recommends a full range o f legal, regulatory, budgetary, training, dissemination, audit reform, and value-shifting measures to establish incentives for complying with the procurement law in particular, and to foster the growth o f a culture o f compliance in general. The key recommendations are: 0 to introduce enforcement mechanisms into the LSP and amend the Criminal Code (the Administrative Code and Code on Administrative Violations have already been amended to this effect) to makeprocurement fraud apunishable crime (legal, section 1.7), to define State Procurement Agency authority to raise issues o f non-compliance and wrongdoing with the respective authorities so they can initiate actions against offenders o f the LSP and its regulatory provisions (regulatory, section 3.4.9), Georgia CPAR Page v of vi to establish checks and balances with budget information at the Ministry o f Finance that will disclose non-compliant activities (budgetary, section 2.3), to develop a rolling multi-year budget allocation plan, that includes projections for the two years following its approval, so that long-term contracts can be planned for and efficiently executed (financial, section 2.5), to launch a procurement Web site with a full range o f information and documentation, (dissemination, section 2.9)' to develop a training strategy to build capacity within the procuring entities as it i s not feasible for the SPA to train all entity staff. (training, section 2.7), and to publish procurement blacklists and procurement audit findings, and ensure that broader anti-corruption initiatives include procurement stories and hotlines for procurement complaints and whistle-blowing (shiftingvalues, section 2.9,4.4). 11. The public sector and business people who deal with procurement matters need training and accreditation programs to be made widely available within as short a timeframe as possible. The CPAR recommends that the Bank support development o f a national training strategy for public procurement and auditing, development o f curricula leading to certificate and degree programs, and recognition o f the procurement profession through the roster o f professions and accreditation (section 2.7,2,9,4.2). The Needfor Audit Reformand Anti-corruptionPriorities 12. In order to establish an efficient system to audit public expenditures and to fight corruption, the CPAR recommends that Government consider development and implementation o f a medium-termstrategy for the reform o fthe country's supreme audit functionwhich would Design and implement an effective system o f internal audits within each procuring entity, coordinated possibly by an internal audit unit in the Ministry o f Finance. The internal audit units would not be subordinate to the Chamber o f Control. The units would have a wide mandate to supervise all budgetary expenditures in terms o f strictly defined and uniform criteria (section 4.2). 13. The Government may consider the following recommendations in the finalization and implementation o fthe NACP: Prioritize public sector reforms proposed under the NACP in light o f available resources. In the medium-term, priorities should be given to improving: (i)public expenditure sector management (budget, audit, procurement and finances); (ii)performance o f revenue- collecting agencies; (iii)civil service employment requirements and conditions; and (iv) policymakinginstitutions(section 4.4). Georgia CPAR Page 1of59 A -SUMMARY OFFINDINGS STRENGTHSAND WEAKNESSES OF THE PUBLICPROCUREMENTSYSTEM PublicSector:The PublicProcurementRegime 1. Legal, Regulatorv and InstitutionalFramework 1.1 EconomicandPoliticalBackground In1783, Georgia signeda treaty with Russia inorder to protect itselffrom attack bythe Ottoman Empire. In 1801, Georgia became a province o f Russian Empire and remained so until the 1917 Russian Revolution. On May 26, 1918 Georgia declared its independence and formed a democratic state. In 1921, the Russians annexed Georgia for the second time, this time under a Bolshevik government. In 1922, Georgiabecame a member o f the Trans-Caucasian Socialist Federation, and in 1936, a republic o f the USSR. During the Soviet period, Georgia was one o f the more prosperous republics. After the dissolution o f the Soviet Union, there was a break o f economic relations with other former Soviet republics. Georgia's re-declaration o f its independence on April 9, 1991, was followed by two years o f political instability. Separatist movements in the regions o f Abkhazia and Tskmvali (South Ossetia) created civil unrest and armed conflicts, with negative impacts on the economy. The reestablishment o f political stability in 1993 enabled the implementation o f a program o f structural macroeconomic reforms and a retum to economic stability. The priorities have been addressingthe enormous budget shortages and making the transition to a market economy. The 1995 elections for president and parliament and adoption in the same year o f a new constitution launched a process o f internal political reform. The new constitution declared the wish o f the Georgian people to live in compliance with the principles o f democracy and the protection o f humanrights. The focus o f Georgia's foreign policy has been to foster cooperation with other countries and to integrate itself into regional and intemational structures. Georgia i s diplomatically recognized by more than 100 countries and i s a member o f the CIS (1994), the European Council (1999), and the World Trade Organization (WTO) (2000, less than four years after applying for membership). Georgia i s currently preparing to become a signatory to the WTO's Agreement on Govemment Procurement (GPA). Against the backdrop o f major reform requirements driven by fiscal considerations, Georgia has maintained its determination to make the transition to a market economy, and has initiated an impressive reform agenda covering such areas as budgeting, licensing, and procurement. Most subsidieshave been abolished, taxation and banking control have been improved, prices and trade have been liberalized, state enterprises are beingprivatized, and a new legislative base has been established. As a result of political stability and economic reform, foreign investors and international donors have been attracted to Georgia. Georgia CPAR Page 2 of 59 1.2 Government Structure Georgia is a presidentialrepublic. Political power i s based on a classical democratic model with an executive (the president), a legislative body (the Parliament) and ajudiciary. Although there i s some influence from the Anglo-American Common Law on the Georgian Civil Code, specifically inthe areas o feconomy and trade, Georgian Law finds itsplace inthe legal family ofContinental Europe. The historicalbackground o f Georgian legislationi s rooted in Soviet Civil Law, which i s mainly based on Roman-German legislation. A review ofthe Law Onthe Structure and Activities o fExecutivePower (April 1997)reveals the complexity and multiplicity o f central and local executive bodies in Georgia. The executive agencies o f the Abkhazian and Ajarian Autonomous Republics are independent executive bodies of Georgia. There are over 2,000 bodies exercising executive power in Georgia. At the central level, there are more than 40 govemment agencies, including 20 ministries, 12 state departments (statistics, archives, veterans, roads, forestry, sports, youth, and others) and six state inspectorates. Local government entities have executive power over matters o f localjurisdiction, including local roads, water and sewerage infrastructure, education, health care, culture, and sports, and are regulated by the organic Law o f Georgia on Local Self-Govemance and Governance. The Law says that transfer o f specific central functions to local governments i s allowed only when accompanied by the transfer o f corresponding material and financial resources. However, reality indicates that this transfer i s the exception rather than a rule. 1.3 PublicProcurementPolicy After the abolishment o f the Soviet State Order system, which provided poor incentives for efficient use o f resources, the first order regulating state procurement was a 1993 cabinet decree that was not based on the principles o f competitive tendering (Decree No. 264 o f the Cabinet o f Ministers o f Georgia on Supplying Production and Goods for the State Needs o f the Georgian Republic, March 30, 1993).Inthe absence o f supporting procurement regulation, some procuring entities continued to rely on their traditional supply sources, and many developed internal procurement procedures. Public procurement was conducted in an inefficient and non-transparent manner. Public procurement practices evolved with the gradual realization that tendering should be competitive. A 1996 presidential decree addressed military procurement and a 1998 law covered civil works. Part 111, Chapter One o f the Civil Code (June 26, 1997) i s completely devoted to Contract Law. The principle o f fairness o f agreements was introduced, along with the principle o f contractual freedom. In 1996,Georgia signed the Partnership and Cooperation Agreement (PCA). The PCAprovides a framework for EU-Georgia relations, including political and trade cooperation, and aims at the approximation o f Georgia's existing and future legislation with that o f the EU, including laws governing public procurement. The agreement states that "the Parties shall cooperate to develop conditions for open and competitive award o f contracts for goods and services in particular through calls for tenders" (art. 50). The EU also made a commitment to provide technical assistance for legislative cooperation, related to implementing the approximation o f laws. The World Bank made an IDF Grant available to Georgia in April 1998 to fund technical assistance in drafting public procurement legislation and implementingregulations for public and private sector use. Georgia CPAR Page 3 of 59 1.4 The Law on State Procurement(LSP) The combined efforts o f GOG and technical assistance resulted inthe Law on State Procurement (LSP), adopted in December 1998 and enacted by Parliament on July 1, 1999. Although other related laws have contributed to the development of the public procurement system, the LSP i s a major step towards real reform o f the public procurement system. The LSP i s modeled on the UNCITRAL Model Law and forms a good basis for increased efficiency and transparency of public expenditure. Its purpose i s to ensure efficient spending o f state resources through a competitive and transparent process that restores the public's confidence inthe system The LSP i s an organic law that describes the general rules for state procurement and requires adoption o f normative acts for its implementation. To date, normative acts have been adopted that 0 provide implementingregulations (Regulations on Implementationo f State Procurements (IR), August 1999), 0 provide measures for public procurement reform (Presidential decree No. 403, On Measures for protection o f rules, established by the Georgian Law on State Procurement and for the Implementation o f the Reform o f the State procurement system, May 7,2000); 0 regulate the collection o f tender fees (Ministerial Order No. 84, Rules for payment and reimbursement o f Tender Fees upon effecting the state procurement through resources from the state budget by means o f tender). The law was amended inMarch 2001 to extend its applicability to off-budget funds (see 1.5) and to give the implementing agency, the State Procurement Agency, increased autonomy (see 2.2). The Amendments were adopted by Parliament on March 30,2001. The Charters o f the Board and o f the SPA were approved by the President on June 5,2001 as Presidential Decrees No. 224 and No. 223 respectively. 1.5 Scope andApplicability ofLSP The Law applies to the procurement o f all goods, works and services funded from the State and local budgetary resources, the budgets o f the Abkhazian and Adjarian Autonomous Republics, and the budgets o f other Georgian local units. The March 2001 Amendments also make funds received as international assistance and loans extended under the GOG's guarantee subject to the LSP, along with funds of public or private legal entities wholly or partially government owned (with the exception o f the National Bank o f Georgia). With regard to international funds, Article 3 o f the LSP provides that ifthe LSP i s in conflict with the provisions o f the international agreements, the latter shall prevail. Although the LSP does not apply to procurements financed from funds from the National Bank of Georgia, on May 31, 2001, the Board o f the National Bank o f Georgia approved procurement guidelines by the NBG in their board decree No. 19. These regulations make no reference to the LSP but are generally inline with it (for example, same thresholds). There were two important exceptions to the applicability o f the law as originally adopted that undermined its effectiveness. First, until the March 2001 enactment o f the Amendments to the LSP, procurement from extra-budgetary funds was not subject to the LSP. Procurement funded from the extra-budgetary funds was not transparent and did not follow competitive procedures, resulting in arbitrary, non-competitive award o f contracts and inefficient use o f funds. A large amount o f procurement i s financed from extra-budgetary funds, collected by the government bodies as monetary penalties, income from sale of state property, as well as other sources, and mostly used at their own discretion. Georgia CPAR Page4 of 59 The other exception i s state procurement related to state secrets, for which the "power ministries"-Ministry o f Defense (MOD), the Ministry o f Internal Affairs (MOW) and the Ministry o f State Security (MOSS)-are responsible. The Georgian Law on State Secrets specifies that such confidential procurements are to be conducted in accordance with Presidential Order No. 11, (January 14, 1999) which provides the rules for conductingtenders to procure and order goods for military and defense purposes. This order specifically states that ordinary goods and food items are not subject to the special rules and would therefore fall under the LSP. A list of eligible state secret items i s published and updated every three years, including ammunition, strategic raw materials, military infrastructure, technology, research and development; and production o f bank notes and securities. However, in practice, the power ministries, who are the largest procurers, often present general procurement as state secret procurement, thereby avoiding applicationo f the LSP. This practice i s a major impediment to ensuring efficient use o f a large percentage o f the state funds. This loophole i s addressed in the March 2001 Amendments to the LSP, which require implementing regulations for such procurements to be developed by the National Security Council (NSC) and approved by the President o f Georgia by June 1, 2001 (art. 26 [5]). But the NSC has responded that there is no need to do this because the existing Order No. 11 sufficiently regulates procurement of items related to national security. 1.6 Slow Pace and Lack of Enforcement At the time o f the CPAR mission's February 2001 visit, the reform did not yet seem to be working well. More than eighteen months after the enactment o f the Law, only 12 percent o f public procurements had been conducted based on competitive procedures in accordance with the LSP. Elevenpercent were conducted by open tendering, 1percent by restricted tendering, and the rest o fprocurement was conducted on a sole source basis (see 5.1, 5.2). In1999, only 144procuringentities (60centralbudgetand 84localbudget entities) hadreported at least one procurement that followed methods provided for in the LSP. This represents only a small fi-action o f the 2,000 central budget and o f the more than 6,000 local budget entities that conduct procurement. Itis not unusual to see a gap between the intended procurement reformand actual progress made. While the CPAR mission found strong commitment to procurement reform in the president's office and among some top officials, there are also competing interests at the ministerial level that are less supportive. For this reason, it i s important for the Bank to maintain pressure through the stringent conditions regarding procurement reform included in the Third Structural Adiustment Credit (SAC 111, May 1999). These include agreement on indicators to measure progress and on performance benchmarks for central and local agencies with large procurement budgets. SAC was paired with a Structural Reform Sumort (SRS) project (June 1999) that includes technical assistance, equipment, and training to strengthen the State Procurement Department (SPD), recently strengthened and renamed the State Procurement Agency (SPA; see 2.2). The March2001 amendments to the LSP close, or provide for the closure of, the largest loopholes in applicability of the LSP (see 2.2). But the LSP also fails to provide for disciplinary actions against officials o f procuring entities who fail to follow LSP provisions or normative regulations. This lack o fenforcementmechanisms seriously weakens the law's effectiveness. Georgia CPAR Page 5 of59 1.7 Recommendationsfor Adjustingthe LegalFramework Whilst the National Security Council has already prepared a list o f products attracting the use of confidential procurement procedures, the CPAR recommends that the NSC provide for implementation o fregulations for confidential procurements o f the law enforcement agencies (the "power ministries"), and that the list o f procurement identified as relating to national security, i s cleared by the SPA to ensure that Power Bodies procure general items in accordance with the LSP. The LSP should also be further amended to provide for effective enforcement and penalties for ignoring LSP and normative regulationprovisions. The implementingregulations for the LSP should also be amended to fully reflect the amended law. The Administrative Code and the Code on Administrative Violations have been amended to provide for such penalties but the proposed amendment to the Criminal Code i s still under discussion by the Georgian Parliament. These amendments must be made as soon as possible. 2. OrpanizationAnd Resources 2.1 Procurementand ContractingAuthority Central government procurement functions are restricted to policymaking and monitoring. The responsibility for policymaking in procurement rests with the executive. The Ministry of Economy (MOE), now merged into the Ministry o f Economy, Industry and Trade (MEIT), was the main executive body responsible for initiating procurement laws, prior to the establishment of the State Procurement Department (SPD). However, SPD's continued dominance by MEIT limited the autonomy that SPD was intended to enjoy under the LSP. SPD also heldresponsibility for monitoring compliance with the LSP and procuring entities were required to report to the SPD on the use o f state funds. Even with the creation o f the new SPA, it i s still dependent, at least administratively, on the MEIT. The authority to conduct procurement i s totally decentralized to the procuring entities, which number about 2,000 on the central and 6,000 on the local level. Each o f the 8,000 entities has its own budget line in the state budget and receives an allocation for its procurement needs and has the authority to conduct procurement. There are more entities authorized to conduct procurement than there are state bodies because, for example, the Ministry o f Education has several procuring entities, one in the Ministry and others inresearch institutes, musical boarding schools, libraries and so forth. The rights and obligations o f the procuring entities are defined by article 5 o f the LSP and article 4 o f the Implementing Regulations. They are responsible for the efficient implementationo f state procurement activities. Their capacity varies widely from entity to entity (see 2.7). The authoritv to contract belongs to the procuring entity. Normally, the head o f the entity signs the contract and there are no unnecessary levels o f approvals or cumbersome procedures for conclusion o f a contract. 2.2 Roleofthe StateProcurementAgency The LSP as originally enacted assigned responsibility for coordinating state procurement to the Ministry of Economy (MOE). The State Procurement Department (SPD) was established as a structural unit within MOE. The Minister o f Economy nominated the head o f the SPD, who served at the pleasure o f the President o f Georgia. The SPD was staffed and a few o f the staff Georgia CPAR Page 6 o f 59 went on short study tours in 1999, financed by IDF. Further needed dissemination and training efforts are described below (see 2.6 and 2.7). . However, most procuring entities basically chose to ignore the new mechanisms established by the LSP, as well as SPD's efforts to implement them. SPD's status as a structural unit within MOEdidnot give it the standing itrequiredto ensure proper oversight andto enforce compliance by other state agencies. Following the April 2000 Presidential elections, the Ministry o f Economy was merged with the Ministries o f Industry and Trade, and a new minister was appointed. In July o f 2000, the SPD head and its staff were replaced, despite the clear objections o f the Bank, which viewed such a move as a waste o fthe capacity that hadbeen built up inthe unit.The new head established a unit with 15 specialists with education in engineering, law, and business administration. They are, however, not sufficiently trained. Under pressure to meet the conditions o f SAC 111, the new MEIT management drafted amendments to LSP that would establish SPD as an independent public entity and rename it the State Procurement Agency (SPA). SPA would have authority to develop normative regulations and standard bidding documents and would be responsible for training and dissemination o f information about procurement, and for monitoring, supervision, and conducting administrative reviews. A new Supervisory Board would be establishedto ensure transparency inthe public procurement system and SPA's activities. The board would consist o f seven members, to be appointed by the President o f Georgia, o f which four are expected to be the representatives o f the Chamber o f Control, Ministries o f Finance, Justice, and Economy, Industry and Trade, and the remaining three would represent mass media and civil society. 2.3 Recommendationson Proposed State Procurement Agency The draft amendments to the LSP were reviewed by the CPAR mission, which found that while most o f the Bank's recommendations on other matters had been incorporated, the proposed amendments would not substantially change the position o f the procurement agency. Subsequent review o f the draft charters o f the SPA and its Board confirmed that the proposed governance structure would maintain strong links with MEIT, assign extended authority to the chairman o f the SPA, and weaken the oversight role o f the Supervisory Board. Hence, the new SPA would become de facto an entity under the MEIT, which would contradict the main purpose o f the amendments. The new SPA was established by amendments to the LSP in March 2001 and a Supervisory Board established by Decree No, 224 in June 2001. Notwithstanding the Bank's recommendations, the newly established SPA i s indeed closely linked with the MEIT, although this is apparently more in the nature o f an administrative arrangement and does not necessarily imply direct functional control by MEIT. Following further discussions with the Minister during the workshop held inJune 2002, it i s understood that the status o f the SPA will be reviewed after some two years o f operation because, now that it has been established as a separate Agency, no immediate change inits status can be contemplated. Based on the CPAR mission's discussions and further follow-up, the Bank sent letters dated March 7, 2001, and May 2 and 17, 2001, that highlighted the Bank's concerns about the SPA's independence. The Bank wrote that an adequate governance structure is key to successful implementation o f public procurement reform, and this means that the agency should report to a Georgia CPAR Page 7 of 59 level higher than ministerial level. Ensuring independence and autonomy would further require that: 0 the Supervisory Board, not the chairman, should be the primary decision-malung authority, 0 a competitive and transparent method be adopted for selecting the nominee for chairman, in order to strengthen the independence o f his position, 0 MEIT's control function be narrowly defined to include review and advice, and not extend to overruling SPA decisions, 0 new provisions be included in SPA'S charter to establish a system o f checks and balances through close coordination and information exchange with the Ministry o f Finance (MOF), especially regarding non-compliance with LSP and its regulations (R).These are contained inanewDecreeNo. 85 ofJuly 1,2002. The Bank also strongly recommended that the SPA be properly funded from the State budget so that it does not need to charge fees for additional services that are not within its area o f responsibility, as proposed in the draft charter. Although such revenue collection is permitted by the Georgian legislation, establishing such extra-budgetary funds i s not a good practice. If sufficient allocations cannot be guaranteed, the type o f services to be provided by the SPA for fees should be explicitly defined within a fairly narrow scope in order not to allow the SPA to divert its resources and attention to non-core functions. Withexception o fthe competitive selection o fthe chairman o f the SPA and the provision o fa list o f fee-based services that could be offered by the SPA, the above Bank concerns have been addressed inthe Amendments adopted inMarch and inthe Charters o f the Agency and the Board approved inJune 2001. The CPAR recommends initiation o f efforts to build SPA staff capacity through intensive procurement training inspecialized international institutes (see 2.7). 2.4 TechnicalandFinancialPlanning Eachprocuring entity implements public procurements inaccordance with an annual procurement plan developed and approved in advance. Each entity develops a draft o f the general annual program describing the scope and justification o f the planned procurements. This plan i s to be coordinated with the corresponding budgets (state or local), in accordance with the laws on the Budgetary System and Budgetary Authorities and the Principles o f the Georgia Economic and Social Development Indicative Planning. Therefore, the draft plan i s submitted to the Ministries o f Finance o f Georgia, Abkhazia and Adjaria and the SPA. They review the plan and harmonize the procurement needs with the available budgets andthe overall economic strategy. The respective Ministries o fFinance clear the respective budgets for the annual program and send it to the Parliament for approval. Based on the approved State and other budgets for the general program, the head o f the procuring entity prepares a detailed state procurement plan, within 20 days after adoption o f the State and other Budgets. The state procurement plan details what will be procured, when it will be procured and how much the estimated value o f the contracts is. It i s submitted to the SPA for information. Inthe event a contract is valid for several fiscalyears, the procuringentities shallreflect financial resources to be allocated for implementationo fprocurement inthe budget for the next fiscal year. In this case, the procuring entity obtains budgetary authorizations for contract payments due beyond the current fiscal year. Ifthere are budget constraints and as a result, payments cannot be made, the contractual conditions allow for the procuring entity to annul the contract. Georgia CPAR Page 8 of59 Intheeventofadelayinthe approvalofthe stateorlocalbudgetsorwhenanentity isplanninga procurement that i s not budgeted for, the procuring entity shall conduct procurement in accordance with article 15 par. 6 o f the Law on Budget Systems and Budget Authority, which defines the minimudmaximum allocation. The insufficient, unpredictable and fragmented financing o f procuring entities due to severe budget constraints has for several years impeded or prevented proper procurement planning and results in splitting o f large value contracts in small value packages. Delays in the approval of allocations have been an ongoing problem. The budget for FY 01 was the first one approved in the year precedingthe procurements. There are n o procedures to ensure that the procuring entity obtains budget authorization prior to invitingbids. Article 6, paragraph 7 o f the IR stipulates that for procurements estimated to cost more than GEL250 000 (US$0.5 million), the procuring entity must notify the SPA and Ministry o f Finance o f any procurement procedure initiated, prior to distribution o f notification, in the event o f a tender, and prior to the negotiations, inthe case o fnegotiations with one supplier. The SPA must also be notified about the type and method o fprocurement. InDecember2000, aPresidentialresolutionwas adoptedonRestructuringofTheTreasury ofthe Ministry of Finance and Measures Aimed at Improvement of its Activities (No. 523, December 12, 2000). The resolution establishes that contracts concluded by procuring entities must not exceed the amount shown in the pertinent budget line. Registration o f all contracts above GEL 5,000 is mandatory only for goods and services (excluding communal services); For subsidies and capital expenditures, entities must inform MOF on commitments made against the state budget. 2.5 RecommendationsonProcurementPlanningand Organization Although a substantial effort has been made to improve and formalize the planning process in order to maximize the benefits o f competitive tendering, the planningprocess i s often ineffective, due to inaccurate cost estimates included in the plan and the fragmented release o f funds. The results are inefficient packaging and inappropriate and non-competitive procurement methods, and the procurements cannot be executed as planned. The CPAR recommendsthe development o f a rolling multi-year allocationplan, which includes projections for the two years following its approval, so that long-term contracts can be planned for and efficiently executed. There i s a new draft Budget Law under consideration which may assist inthis regard although its precise details and status are unknown, even by the SPA. The current organizational arrangement o f having procurement conducted by 8,000 entities i s complex and not cost effective. The CPAR recommends that GOG, under SPA's lead, reassess this arrangement in light of the savings that would be possible by simplifyingand consolidating entities and their budget allocations. One o f the suggestions made by the Bank and taken up by the GOG was the creation o f procurement units within certain procuring entities. A Decree was adopted to this effect although it has not yet been implemented, mainly due, it would seem, to a shortage o f funds. The CPAR team will explore opportunities on the Bank side, for sectoral project teams to include simplification o f procurement arrangements within the scope o f broad restructuring o fministriesreceiving Bankproject support. 2.6 Disseminationof ProcurementKnowledge The SPA's annual report has highlighted that, despite the existence o f a good framework law, most heads o f local governments are not aware o f the adoption of the LSP or have an incorrect understanding o f the purpose o f the procurement reform process. Some heads are procuring in Georgia CPAR Page 9 of 59 accordance with the non-competitive Soviet system and do not consider local funds subject to the public procurement law. Therefore, implementationo fthe law on the local level is poor. The problem i s not confined to local government officials. There i s insufficient understanding o f the basic concepts o f public procurement based on market economy principles among public sector officials generally. The inadequate level o f dissemination o f knowledge stems from the assumption that information about the new LSP could be disseminated at a cost that the system could bear. SAC I11 requires measures to carry out dissemination, including preparation and distribution o f a set o fcountry-specific standard documents and manuals. The problem o f informationdissemination i s most acute inthe provinces. One o f the results o f the workshop held inJune 2002 was a suggestion by the delegates that regional information centers be created. Clearly, the absence o f funds precludes the creation o f new centers but, given that the central administration has representations in each of the regions, it was thought possible that departments or individuals could be identified who would be able to hold and disseminate information and act as a contact point for local enquiries. The CPAR recommends and encouragesthe creatioduse o fsuch cost-effective localresourcecenters. 2.7 Training andProfessionalDevelopment Procurement-related tasks are performed by public officials in addition to their official functions and not by trained procurement specialists. A formal position o f procurement specialist does not exist. Although some entities may have a department in charge o f purchasing the necessary supplies (usually called Material-Technicalor Supply Departments), these departments would not automaticallybe responsible for conducting a tender. The head o f the entity would create a tender committee and an ad hoc apparatus to the committee for each case, which might or might not include staff from the supply department. The CPAR mission i s aware that some entity heads do try to build on the existing departments and staff, but it is difficult to judge whether such cases are more the exception than the rule. Limited budget allocations to each entity contribute to the difficulties o f improvingprocurement capacity. The level o f knowledge o f procurement rules and principles varies from entity to entity. Existing public and private training institutions do not yet offer procurement as a subject matter in their curricula, and in-country capacity to provide public procurement training for government officials has yet to be established. Nor i s there any formal mechanism to provide public procurement training for respective government officials. While Bank funds have financed the training o f local staff o f Bank project implementation units (PIU), the implementation o f the new procurement law will require major training efforts to be undertaken inall public organizations and to some extent inthe private sector. As an initial step, the SPD organized a two-day introductory seminar in 2000 for senior central and local government officials, financed by IDF. A series o f seminars i s being planned for the heads and experts o f central and local public procuring entities, representatives o f executive and legislative branches, NGOs and business associations, and the general public. -Such training efforts are requiredunder SAC 111, along with training o f trainers from the SPA. GOGurgently needs to develop a training strategy to buildcapacity within the entities, as it i s not feasible for the SPA to train all entity staff. Such a plan could provide for training o f staff at the largest procuring ministries through courses established at existing institutes identified by the SPA. These staff could then in turn train their subordinate entities. GOG should also provide for secondment o f entity staff to the SPA, once SPA staffhas been trained as recommended. 2.8 InformationTechnologyandE-Procurement The application o f information technology, including the use o f the Internet, has been severely limited due to poor telecommunications infrastructure, high costs o f equipment and connectivity compared to average wages, shortage o f system administrators and qualified engineers, and fi-equent power outages. Inparticular, the government does not possess advanced information systems and only about 0.2 percent o f the population uses the Internet. However, progress i s being made, guided by the GPA requirement to hold regular consultations regarding developments in the use o f information technology in public procurement (Article XXIV o f the GPA). First, the government recently created the State Department o f Information Technology and the State Commission for the Development o f Information Society. Its main objectives are to introduce and promote the use o f the latest information technologies in the public and private sectors. It has prepared a draft law to regulate electronic commerce and authorize electronic signatures. Second, the recently initiated privatization o f the two important telecommunications companies should result in substantial upgrades to the communications networks. The soon-to-be-completed installation o f an optical cable to connect 15 major cities will provide access to better connections for about 20 percent o fthe population. Third, access to the Internet has improved with the launch o f several Internet Service Providers (ISPs). Competition i s fierce and prices are dropping dramatically. As o f M a y 2001, unlimited access i s available for a fixed rate o f about $40 per month, compared to $150 for two hours per month in 1996. Finally, several international organizations are supporting the use o f information technologies. The World Bank has supported the creation o f a website to assist the privatizationprogram under the responsibility o f the Ministry o f State Property Management' and the launch o f the Georgian Development Gateway, with cooperation o fby the State Department o f Information Technology. The Gateway presents local content from all levels o f government, from communities, from civil society and from the business community. Participants at the workshop held in June 2002 were largely in favor o f creating an information website under the aegis o f the SPA, especially given the difficulties o f disseminating information throughout the country ina comprehensive and timely manner. 2.9 Recommendationsfor TrainingandInformationTechnology The CPAR recommendsthat SPA be given a mandate to identifycapable training institutes that can partner with them, to coordinate training activities at central and regional levels, and to develop programs with the institutes to train all public central and local agencies and any interested private parties. SPA could also assist in developing a procurement curriculum that would lead to a recognized procurement certification. It i s also recommended that SPA continue to work with the Training and Research Center o f Regional Policy and Administration, with whom SPA cosponsored in 2000 a training program designed for local government heads, as the 'The website may be found at http:liweb.sanet.ge/mospml The GeorgianDevelopment Gateway website maybe found at http:llgeorgia-gatewav,ord Additional informationregarding the Development Gateway initiative may be found at http:iiwww.developmentgatewav.osd Georgia CPAR Page 11of 59 center i s an important tool for disseminating knowledge about public procurements to local officials. As a first step towards the use o f information technology for public procurement inGeorgia, the CPAR recommendsthat SPA launcha website, linkedto the GeorgianDevelopment Gateway or considers setting up a procurement sub-site of the Development Gateway, where it would promote and coordinate the advertisement o f public procurement opportunities, publish contract awards, dispute decisions, criminal actions, blacklists of contractors, and SPA'S annual report, and promulgate standard procurement documents and examples o f best procurement practices As long as easy and affordable access to Internet i s not a reality for all regions, paper advertisement will haveto be maintainedinparallel. The CPAR further recommends that SPA assess the possibility o f linking the training requirements with IT opportunities becoming available through the use o f the Distance Learning Centers (DLCs) being established with Bank support. The Global Distance Learning Network (GDLN) is growing by leaps and bounds since its launch in 1999. The Ministry o f Education could designate a training institution to become the D L C in order to join the GDLN. The Bank and external partners could assist indeveloping content for the training courses. 3. ProceduresandPractices This section describes the procedures and practices in accordance with the LSP and its implementingregulations (IR). At the present time, these are followed for only a small fraction of public procurement (see 5.1,5-2) 3.1 DomesticPreferenceandForeign Bidders The LSP does not include provisions that would limit the participation o f foreign bidders in open tenders per se. To promote the development o f domestic contracting and manufacturing industries, a 15 percent margin o f preference i s granted in the evaluation o f bids offering inputs (material and labor) from Georgia when foreign and domestic bidders participate in the tender (LSP art.13). Intheory, this approach i s acceptable. However, based on the interviews conducted for the CPAR, it i s evident that the majority o f OT tenders are conducted among local bidders. One reason for this practice may be that political pressure i s being appliedby local manufacturers on public officials to spendpublic money locally, not on foreign bidders. Another reason could be that international advertising for OT, inone o f the most accepted foreign languages, i s only required for very high-value contracts (above GEL 600,000 for goods and services and GEL 8,000,000 for works) foreign bidder participation i s limited for the majority of tenders o f relatively low value which are currently conducted in Georgia. In addition, procurements are sliced into small packages because o f the fragmented budgetary resources, which does not attract participationby foreign bidders (see 5.0). The CPAR recommends that these thresholds for publication in international newspapers be reduced. They will need to be once Georgia has become a party to the WTO's GPA but there i s no reason why these thresholds should not already be lowered to encourage and take account o f more effective competition. 3.2 Conduct of ProcurementProceedings 3.2.1 MethodsofProcurement Inaccordance withtheLSP, publicprocurementmaybeconductedonthebasisof open tendering (OT), restricted tendering (RT), or single source selection (SS) Incasesjustified by the LSP, open and restricted tenders can be carried out intwo stages. The conditions for use o f each procurement method i s explicitly prescribed inthe LSP. The IR clearly state that it is not permitted to artificially divide procurements in order to avoid the monetary threshold specified inthe LSP for specific procurement methods. The most recent Amendments to LSP introduced two additional procurement methods, Request for Price Quotations and Method for Procuring Intellectual Services. The IR will need to be adjusted to include provisions for these two procurement methods. Table 1.CurrentThresholdsfor ProcurementMethods. Mandatoryfor goods and Mandatoryfor works when services when contract estimate ... contract estimate.. . Opentendering Exceeds GEL 70,000 Exceeds GEL 230,000 (USD 35,000 equivalent) (USD 120,000 equivalent) Restrictedtendering Exceeds GEL 25,000 Exceeds GEL 120,000 (USD (USD 13,000 equivalent) but 60,000 equivalent) but is less i s less than GEL 70,000 than GEL 230,000 The procedures for OT apply to restricted tendering, with the exception that in RT, the invitation to bid i s sent to a minimum o f five bidders selected by the Tender Committee. In certain instances, not clearly defined in the LSP, the number o f bidders invited to bid may be restricted to less than five. If the required minimum number o f three qualification packages or three bids i s not received, the procuring entity shall agree with the SPA on an alternative procurement method. Restricted tendering i s permitted where the value o f the contract falls between two financial levels. There is, however, no possibility either inthe LSP or IR for restricted tendering to be used above the upper limit in cases, for example, o f complex equipment available only from a limited number o f suppliers. A two-stage tender may be held when, due to the complexity o f the subject o f the procurement, the procuring entity has difficulty inclearly defining the specific requirements o f the procurement (e.g., for procurement o f complex consultant services, complex information technology equipment, etc.). In the first stage, technical proposals, including qualification information are submitted without indication o f the price. Following a review o f the technical proposal, the Tender Committee i s authorized to negotiate with bidders in order to clarifjdelaborate their proposals and to define the requirements o f the second stage bidding documents. The second stage documents are only issued to those bidders who satisfy the requirements o f the first stage and only upon payment o f a tender fee. Nevertheless, Article 20(3) o f the IR i s unclear in the sense that it does not appear to require submission o f a complete technical bid during the first stage. Georgia CPAR Page 13 of59 Single source procurement is based on direct negotiations with one contractor and i s justified, according to Article 22 o f the LSP, when: 0 the estimated value o f the procurement does not exceed GEL 25,000 (for construction works GEL 120,000); 0 the supply or implementationo fthe works or services i s the exclusive right o f a single natural or legal person; 0 procurement i s needed on an urgent basis or as a result o f force majeure; 0 it is necessary to procure goods or technology equipment, works and services from the original supplier inorder to ensure compatibility with and prevent deterioration o f the quality o f the original supplies. The procuring entity may extend the original contract or sign a new contract with the original supplier, except when the estimated value o f the procurement to be carried out exceeds the initial contract amount. For contracts estimated to cost less than GEL 10,000 (GEL 50,000 for Works), the procuring entity may select any contractor of its choice to negotiate with. For contracts estimated to cost between GEL 10,000 and GEL 25,000 (between GEL 50,000 and GEL 120,000 for Works), the procuring entity shall request quotations from a minimumo f three suppliers and the supplier who offers the most favorable bid that best satisfies the requirements shall be invited to negotiate. Notwithstanding the above provisions, the IR stipulate that SS may be applied for procurements above the thresholds o fthe LSP. Request for Quotation i s a simplified method o f procuring readily available goods and services for which there i s an established market and that are estimated to cost more than 10,000 GEL but less than 25,000GEL for goods and services and more than 50,000 GEL but less than 120,000GEL for minor works. As this method was introduced in the most recent amendments of March 30, 2001, the specifics o f this procurement method have still to be introduced in the regulations. 3.2.2 Tender Committees Ifprocurement is conducted on the basis of either open or restricted tendering, the head of the procuring entity i s requiredto appoint a Tender Committee o f no fewer than five members o f the senior management o f the entity (the head o f the procuring entity, the deputy heads and/or heads o f the entity departments). The conflict-of-interest provision o f the LSP applies to all members o f the Tender Committee. Each Tender Committee i s chaired either by the head o f the entity or by his authorized representative. Inaddition to the Tender Committee, an ad hoc Tender Committee Apparatus i s established by the head o f the procuring entity for eachprocurement. H e delegates to this unit the,authority to conduct and organize state procurements and provide technical and administrative support to the Tender Committee. The Apparatus i s headed by the Tender Committee Chair and i s composed o f a number o f the procuring entity staff. The Tender Committee (based on information from the technical staff o f the entity) prepares the advertisement, identifies the procurement method and sends this information to the SPA for comments. Further, it reviews and approves the tender documents, announces the tender on behalf o f the procuring entity, carries out qualification and receives and evaluates the bids.Inthe case o f two-stage open or restricted tendering, the Tender Committee also holds direct negotiations with biddersto verify any issues o f the initial tender proposal, as well as to define the final parameters for tender documentation. Georgia CPAR Page 14 of 59 3.2.3 BiddingDocumentation The typical timetable for carrying out state procurement i s presentedinAnnex 1,which lists each step in the procurement process and indicates its duration. The LSP requires the Tender Committee to approve the tender documentation prior to publicatioddistribution o f the invitation to tender. Inaccordance with the LSP and the ImplementingRegulations, tender documentation is required to include: (i)the agreement o f intention (AoI); (ii) instructions to bidders (ITB) the which contain all information necessary to prepare responsive bids; (iii) Quantity o f goods, the works, services to be procured and required deliverv schedule, (iv) the technical specifications including reference to Georgian and intemational standards and description o f any altematives, if required; (v) general contract conditions and form o f contract. The adoption o f good quality standard biddingdocuments for all major types o f procurement will undoubtedly make a valuable contribution not only to improving the procurement process but also to better protecting the contractual risks and obligations o f purchasers and sellers. As the development of standard documents i s a SAC I11 condition, the SPA prepared draft standard documents which were reviewed and commented upon by consultants funded from the World Bank`s IDF grant. The SPA adoptedthe finalized documents by order N1o f 15 October 2001. Article 1l(3) o f the IR maintains a provision enabling procuring entities to charge a tender "fee" for the purchase o f bidding documentation. This leaves open the possibility o f charging more for the documents than the costs of producing them, though the applicable rates appear to be set by Article 19 o f the LSP. Both the SPA and the Supervisory Board accepted the Bank's recommendation that the cost o f purchasing the documentation should be limited to the costs o f production but, in amending the LSP, the Parliament appears to have overlooked the proposed amendment. Since the IR must be compatible with the LSP, they also include reference to the tender fee. The CPAR recommendsthat these provisionsbe removed. 3.2.4 Notification and Advertising Because every procurement based on open and closed tendering i s subject to pre-qualification, the invitation to tender, as provided for in the LSP, in essence combines the invitation to pre-qualify and the invitation to bid into one single announcement. The invitation to tender i s approved by the Tender Committee. For contracts that are to be procured following OT or RT, the Tender Committee i s required to notify the SPA and the corresponding Ministries o f Finance about the initiation o f the procurement procedure. Any amendment to the announcement shall be advertised through the same channels as the original publication. The rules for advertisement are provided for in the LSP and the Regulations. For open tendering,the Tender Committee i s required to announce the bid as follows: - mandatory publication o f the invitation to tender in a local newspaper, and - mandatory publication in a wide-spread intemational newspaper or specialized trade joumal, in one o f the intemationally most accepted foreign languages, and distribution to foreign diplomatic representations, for all procurements estimated to cost more than GEL 600,000 (USD 300,000 equivalent) for goods and services - GEL 8,000,000 (USD 4,000,000 equivalent) for works. The local newspaper is published bi-weekly and weekly. As above (3.1), it i s recommended that these thresholds be lowered, even before possible accession to the GPA. For restricted tendering the procuring entity sends the invitation to bid to the selected bidders. Georgia CPAR Page 15 o f 59 The LSP provides specific guidance on the contents o f the announcement. The information provided i s comprehensive and covers ------ qualification criteria and deadline for submission o fthe qualification data; description and method o f delivery o f the goods, works or services to be procured; bidsubmission deadline, amount o fthe requiredbidfee, bidevaluation criteria; eligibility criteria for domestic preference; acceptability o f alternative proposals; rightto appeal violations o fthe procurement proceedings. 3.2.5 QualificationofBidders In accordance with articles 10 and 11 of the LSP, every procurement is subject to a pre- qualification exercise inorder to identify a list o fbidders qualified to participate. Qualification criteria relate to financial and legal standing and to requirements for licenses, registration or other authorizations, and other criteria such as specific experience that the Tender Committee may wish to add. There i s no standard pre-qualificationdocument available. Late submissions are rejected. Only pre-qualified bidders are eligible to purchase the bidding documents. Pre-qualified bidders have the opportunity to review the tender documents prior to purchasing. Upon payment o f the tender fee, the tender documents are issued to the bidders. The tender fee o f GEL 500 ($250) for open tender and GEL 150 ($75) for restrictedtender i s set by law. The bidder has 30 days to prepare hisbid. 3.2.6 Cancellationof Tenders Article 23( l)(b) IR, entitled Revoking State Procurement procedures, appears to allow the cancellation o f all procurements if less than 3 proposals or 3 qualified proposals are received, The Bank strongly opposes this possibility because even a single bid could be received as a result o f competitive bidding, be responsive and acceptable for award. The fact that only one bid i s received does not make the procedure uncompetitive. It may merely demonstrate that only one bidder i s interested in supplying a particular good or service under the terms and conditions offered at that particular point intime. 3.2.7 Agreement on Intention(AoI) The LSP/IR require the procuring entity to enter into an Agreement o f Intention with each participating bidder at the time o f bid submission. Each bidder undertakes to sign a contract agreement, if offered the contract, and each procuring entity undertakes to enter into a contract with the winning bidder based on the terms and conditions o f the biddingdocuments. The terms o f the AoI correspond broadly to those o f a bid security. It makes the bid binding for a specified validity period. However, there i s no cost involved to the bidder at the time o f submission o f the bids.Costs may only be incurredupondefault o fthe obligations o fthe agreement. The AoI form, signed by the head o f the procuring entity, is included inthe biddingdocuments. The bidder signs the A o I and submits it together with his bid. Failure to submit the A o I or submission o f an unsigned A o I results inrejection of the bid. 3.2.8 Tender andPerformanceSecurities The LSP has no provisions requiring a bid security. The IR, however, stipulate that a tender security i s mandatory for high-value contracts, estimated to cost more than GEL 600,000 for goods and services (GEL 800,000 for works); for complex or urgent procurements. The security, GeorgiaCPAR Page 16of 59 in the form of a money transfer or bank guarantee, is expressed in the bidding documents as a fixed amount and by Law, limited to 1percent o f the estimated contract cost. The securities are to be sealed inthe bidenvelope. The tender committee can reject tender securities ifthe authenticity o fthe security i s questionable or ifit i s confirmed that the issuingbank i s insolvent. The bid security may be forfeited (i) if the bidder withdraws or modifies his bid after bid submission deadline; (ii) the successful bidder refuses to sign the contract agreement within the if bid validity period; or (iii) a bidder is disqualified for serious violation of the procurement if procedures. The bidder has the rightto appeal the decision to forfeit his bid security. Article 30 of the IR makes it mandatory for the successful bidder to furnish a performance security in cases o f highvalue contracts (600,000 GEL for goods and 8m GEL for works). The amount o f the guarantee will be between 2 and 5 percent o f the contract value. However, it appears that there is a choice between securities or insurance cover. This does not sufficiently protect the procuring entity because inmost contracts there will be a need for both a performance security (protecting the procuring entity against non-performance by the seller/contractor) and for insurance to be taken out by the seller/contractor against various risks, e.g., loss or damage during transportation, damage caused by the seller/contractor during contract execution, etc. Thus, the provision should be changed to say that for all contracts above a threshold there would be a requirement for both a performance security and for insurance appropriate under the circumstances. Inpractice, performance securities arerarely required bytender committees, thereby exposing the procuring entity to risks o f non-performing contractors and suppliers. For any type o f security, banks typically demand 100 percent cash cover for the amount o f the security throughout the period o f its validity, plus a monthly commission charge ranging from 0.3 percent to 0.5 percent o f the amount o f the security. Based on information received from the SPA, this translates into a cost to the contractor/supplier o f 12-16percent o f the contract price. As a result, domestic bidders have difficulty inraising such securities and many, especially works contractors, prefer to bid as subcontractors to foreign bidders, particularly on high-value contracts. 3.2.9 Submission and Openingof Bids Bidders have a minimumo f 30 days, counted from the date o f issuance o f the biddingdocuments, to prepare and submit their bids. Bids are to be signed by authorized representatives and are to be received in sealed envelopes by the bid submission deadline. The LSP requires that late bids be returned unopened. A bidder may modify or withdraw its bid prior to the deadline for bid submission. After the deadline, a tender committee meeting convenes to open the bids publicly. There i s no requirement that the bid opening immediately follows the bid submission deadline. The bidders' names, the bidprices and alternative prices, if any, shall be read aloud and recorded inthe tender committee meetingminutes. 3.2.10 Evaluation of Bids After bid opening, the tender committee establishes the completion time for bid evaluation. A bid may be considered responsive even if it contains minor deviations that do not materially alter or depart from the main requirements o f the biddingdocuments. During the preliminary examination the tender committee is authorized to check bids for arithmetical errors. The method o f correcting errors i s specified in the LSP and i s in accordance with internationally accepted practice. GeorgiaCPAR Pane 17 of 59 Substantially responsive and corrected bids are subject to detailed evaluation by the tender committee, following the criteria and weights outlined inthe bidding documents. The evaluation criteria listed in the IR are: Price, Delivery Schedule, Technical Quality and functional requirements of goods works and services, Payment Schedule, Operating and Maintenance Costs, Responsiveness to the interests o f the country and the Region (including factor o f use o f local labor, materials etc; environmental, national and security interests; etc.). The IR suggest that all criteria must be applied for each procurement and that the maximum score for each criteria is 10. Each evaluator scores each bid and the bid ranked highest by him receives his vote. The successful bid i s the bid that has collected the majority o f votes. Inthe event o f a tied vote, the head o f the tender committee casts the deciding vote. The tender committee ensures confidentiality o fthe process and records the evaluation procedure inwriting. Re-confirmation o f the qualification requirements may be requested from bidders at any stage o f the biddingprocess. Sub-contractors' qualifications may be evaluated at the time o f award. 3.2.11 Award and Contract Effectiveness Bidevaluationreports are prepared inthe form o f a protocol, which is attachedto conclusions o f the tender committee members. The protocol shall contain information such as a summary o f the bidders' proposals, a clear and complete description o f the evaluation process, including the reasons for rejecting o f any bid as non-responsive, how the stated evaluation criteria were applied, and how the successful bidder's qualifications were verified.The protocol i s binding. Negotiationswith the winningbidder are strictly prohibitedby Law. Based on the limitednumber o f procurements that have followed the LSP, it i s difficult to say whether this provision o f the Law i s adhered to at all times. Contract conditions are not covered in the LSP. Within 10 days o f the notification to award, the winningbidder is requiredto sign the contract agreement with the procuringentity. No additional govemment approvals are requiredbefore contracts can be made effective. Procuring entities are required to publishthe result o f the tender procedure and the name o f the contractor selected inthe local gazette, Sakartvelos Respublika. 3.2.12 RecordKeeping and Monitoring Procedures and practices regarding maintenance o f records o f public procurement proceedings are found both in Article 24 o f the LSP and Article 32 o f the IR.They define in a very detailed manner which information i s to be included in the State procurement records in order to allow verification that the legislative requirements have been fulfilled. Post Review: For each procurement, a report shall be submitted to the SPA within 10 days from the contract signing for procurements following tender procedures and for single source procurements for which the contract amount exceeds GEL 25,000. For all other procurements, the reports are due on a quarterly basis. To promote transparency in state procurement procedures, a summary o f the reports i s published at least twice a year. The reports are also available to stakeholders upontheir request. All reports are kept for a period o fthree years. In addition, each procuring entity is required to prepare an annual report. As a minimum, the annual report must contain the number and amount o f all contracts signed in the fiscal year, per procurement type (works, goods and services), the number and contract amount o f the completed and ongoing contracts, a quarterly overview o f the projected and actual disbursements made, and Georgia CPAR Page 18 of 59 data on the debt accumulated due to delayed payment and other unsettled contract issues. These reports form the basis for the SPA's annual report, which i s submitted to the President, together with the SPA's recommendations for improvement ofthe public procurement system. Unfortunately, despite the SPA's numerous appeals, there i s ample evidence that most entities do not submit the required reports or submit them incompletely. It i s hoped that the revised status of the SPA will allow for a reversal of this trend. Nor does the M O F provide the SPA with data on flow o f funds disbursed for procurements, even though this information i s needed to assess the accuracy o freports received fkom the procuringentities.. Based on the need to ensure a system of checks and balances and consultations between the procurement entity and the MoF, the recent amendments to the LSP added the requirement that the central MoF, finance ministries o f the republics o f Abkhazia and Adjaria, and local finance departments provide the SPA with data on actual disbursements on a monthly basis. The Amendments also stipulate that the chairman o f the tender committee shall report on the procurement process to the President o f Georgia at the government meeting, when the tender exceeds GEL 2 million (USD 1million equivalent). The requirement for prior review by the SPA of contracts estimated to cost more than GEL 50,000 has been abolished inthe Amendments. 3.3 ContractImplementation 3.3.1 ContractAdministration A small cadre o f specialists in contract administration and contract management is currently being developed, in particular through the PIUs that administer IDA-funded projects. However, their numbers are tiny, incomparison with the large number ofpublic officials involved inpublic procurement at various levels of the Government. For the most part, effective contract administration i s laclung. In the development o f human resources for public procurement, emphasis should be placed on building capacity for contract administration and management in the public sector. 3.3.2 AdministrativeReview The recent amendments introduced article 24.1 to the LSP, which establishes a procedure largely following, at least in principle, the UNCITRAL model law, for any bidder to seek review o f an action of a procuringentity or tender committee that he believes i s inbreach o f the LSP/IR or that he believes has violated his rights. Unless a contract has entered into force, a complaint shall in the first instance be submitted inwriting to the procuring entity. The entity shall not entertain a complaint unless it was submitted within 20 days from the day when the bidder became aware o f the circumstances givingrise to his complaint, or 20 days from the date when that complainant should have become aware of those circumstances, whichever i s earlier. A bidder may also file his complaint directly with the SPA. The LSP sets no limitation on the time allotted the entity to provide a decision. Ifthebidderisdissatisfiedwiththeentity's response,hemayappealtotheSPA.TheSPA however has a deadline o f 10 days to provide a final decision inwriting. Ifthe SPA considers the claim justified, it i s authorized to call on the entity to observe the LSP, to demand the procuring entity to cancel improper decisions or bringthem into conformity with the established rules, and to advise the appropriate bodies ifa bidder has failed to comply with the provisions o f the LSP. Georgia CPAR Page 19 of 59 It is to be noted that, unlike the provisions o f UNCITRAL, the SPA does not have the power to make a fully binding decision on the basis o f a complaint from a bidder. Once a complaint is lodged, the SPA will enter into discussions with the parties and will seek to resolve the dispute by mutual agreement. It may make a "reasonably justified decision" which will consist o f wamings or recommendations to a defaulting procuring entity but this will not be bindingon the procuring entity inthe sense that it is obligedto comply. Indeed, evidence from the SPA suggests that many Ministries do not accept its ``decisions~'which is, o f course, one o f the main reasons why the SPA needs a greater and more independent status enabling it to make proper and effective decisions where the LSP has been infringed. A s it stands, the negotiations between the parties would appear often to descend to the level o fhorse-trading with muchpressure put on the SPA. The only possibility open to the SPA is, inthe event o f a failure o fthe procuring entity to respond appropriately to one of its decisions, to prepare a "Protocol" (minutes o f the process) which it will send to the Court for decision, after having consulted with the Chamber o f Control. The SPA will also send such a Protocol to the administrative court where, duringthe negotiations, it establishes inhngements o f the LSP. It i s the Court and only the Court which has the power to impose the penalties foreseen inthe amended Administrative Code and Code on Administrative Violations. Ifa bidder wishes to appeal the "decision" ofthe SPA, or ifthe 20-day deadline has expired or if he wants to file a complaint after contract signing, complaints can only be filed and settled in court. For any claim submitte,dto the entity, the SPA or court, prior to contract signing, the entity shall suspend the procurement procedures for a period o f 10 days, which can be extended to maximum o f 30 days. Again, the SPA rather depends on the willingness o f the procuring entity to comply with its decisions. As it stands, therefore, the administrative review before the SPA lacks teeth. The procedure resembles the UNCITRAL model but the SPA lacks the real powers to make it an effective and efficient review mechanism. It would seem that this has a lot to do with the status of the SPA since procuring entities do not feel the need to comply with its decisions. 3.3.3 Payment Letters o f Credit (LE) are used frequently. Most banks issue confirmed L/C's. The commission charge for an L/C amounts to about 14percent. Several banks in Georgia participate in a trade support program initiated by the (European Bank for Reconstruction and Development) EBRD, with the purpose o f promoting and expanding documentary operations. The EBRD confirms a limit to carry out credit and security operations, which are guaranteed to be confirmed by foreign banks participating in the EBRDproject. Procuring entities do not submit timely withdrawal applications to the Treasury, which therefore i s unable to anticipate the necessary reallocation o f funds to meet contractual payment requirements. As a result, delays in payment are endemic in Georgia and entities become liable for interest on delayed payments. 3.3.4 PriceAdjustment The State Department o f Statistics publishes a monthly Consumer Price Index (CPI) and a Producer Price Index (PPI). It does not publish construction or labor indices. To date however, the common practice in contracts of long duration has been that the procuring entity awards a fixed price contract, regardless o f the duration o f the contract. Price increases during contract Georgia CPAR Page 20 of 59 execution are generally agreed through ad hoc negotiations between the procuring entity and the supplier/contractor, and have no basis in the terms o f the contract itself. This practice fails to afford adequate protection o f the contractual rights to either party and may facilitate corrupt collusion betweenthe employer and the supplier/contractor duringexecution o f the contract. 3.4 Recommendationson ProceduresandPractices 3.4.1 DomesticPreference andForeignBidders As the provisions for domestic preference spelled out in the LSP/IR are not clear, the CPAR recommends that a clear description o f the eligibility criteria for the preference as well as the procedure to apply the margin of preference duringevaluation o f bids be included in the LSP/IR. The CPAR also recommends that the threshold for mandatory publication o f invitation to bid in international newspapers be lowered in order to increase foreign bidders' participation in open tendering. 3.4.2 MethodsofProcurement The law implies that restricted tendering i s mandatory if the contract estimate falls between the financial thresholds specified by law (see Table 1, page 13). The CPAR recommends that RT may also be applied for contracts above the threshold, for procurement o f specialized items that are only available from a limited number o f bidders. To ensure transparency o f the process, the decision whether or not RT i s fully justified for contract amounts above the threshold should not be left to the discretion o f the Tender Committee but should be subject to approval by the SPA. This should be a transitional arrangement only and once the practice is established, the procuring entities should make the decision based on the conditions to be set out inthe LSP. Where RT i s used, there i s a lack o f transparency in selecting the five potential bidders. This leaves room for corrupt practices and possible collusion among bidders. To this effect, the CPAR recommendsthe introductiono f a fair process o f establishing a list o f suppliers and contractors qualified for a specific procurement. Although it i s difficult to define a process that guarantees a fair selection, one approach might be a random selection from a list o f qualified suppliers. Another approachmightbe a systematic rotation from that same list. In two stage tendering, the CPAR recommends further clarity in the IR. The provisions in Article 20 IR should require a complete technical bid (subject to technical as well as commercial qualifications and adjustments), but without a price bid and without a bid security. It should also be made clear that the bidder has no obligation to submit a second stage bid, i.e., that he may drop out after the first stage. SS procurement i s allowed (but not mandated) for procurement o f small contracts estimated to cost less than GEL 25,000 (GEL 120,000 for works) or ifjustified in accordance with the criteria in the LSP. This approach has led to heavy overuse o f SS, which has been especially open to corrupt practices. In2000 about 53 percent o f state expenditures were procured following SS (see section 5). Therefore, the CPAR recommends that for larger contracts above the SS threshold, all applications for SS should be made subject to prior approval of the SPA in order to regain control over the use o f this method. Again, this should be only a transitional arrangement and procuring entities must leam to apply the conditions o f the LSP correctly. In addition, the provisions o f Article 5(7) o f the IRconcerning the prohibition against splittingcontracts to avoid the threshold values o f the LSP should be properly enforced Georgia CPAR Page 21 o f 59 The rules for negotiations under SS are not specified and are left to the discretion o f the head o f the entity. The CPAR recommends that rules be established in order to provide the basis for a fair and transparent process. SS based on negotiations with the most favorable bidder selected following comparison o f price quotations i s cumbersome and allows for manipulation o f the SS method. The CPAR therefore recommendsthat itbe deleted. The CPAR further recommendsthat the upper threshold for contracts to be procuredbased on comparingprice quotations obtained from at least three suppliers, be set at GEL 25,000 for goods and services (GEL 120,000 for works). The definition of "goods" in the LSP includes the procurement o f buildings and thereby brings real estate acquisition within the scope o f the law. As it i s unique to cover acquisition o f real estate property in a procurement law, the CPAR recommends that this reference be removed from the law. Alternatively, the implementing regulations may need to introduce special procedures to cover the unique circumstances associated with purchasing real estate property. 3.4.3 Tender Committees The composition of the Tender Committees as provided by the LSP does not guarantee inclusion of specific technical expertise. The latter is left up to the discretion o f the committee chairman. As a result, the quality o f technical evaluation o f proposals may suffer. The ad hoc nature o f the Tender Committee Apparatus does not provide for continuity in development o f specific procurement-related knowledge and skills that could contribute to improved adherence to procedures as more experience i s gained. SPA'S Action Plan includes capacity building of procurement units. The CPAR recommends the consolidation o f the number of procuring entities where possible to simplify the complexity o f the institutional setup and to establish permanent procurement units within at each procuring entity. Notwithstanding the existence o f a Decree to this effect, little has been done actually to create these units.It is, therefore, an ongoing commitment. The CPAR further recommends to limit the number o f Committee members to five as a large number does not add value and affects the quality and the timeliness o f the decision making. 3.4.4 BiddingDocuments Technical Specifications mostly provide design specifications, which describe in detail the materials and the methods to be followed. The CPAR recommends the introduction o f functional and performance specifications to describe the object to be procured. 3.4.5 Notification Although the notification requirements inthe LSP are in line with international practices, it must be stated that publication of announcements in international newspapers i s costly, and often unaffordable to procuring entities. As a result, advertisements are often not properly disseminated. The CPAR recommends (i)that all tender announcements be published in Georgian and a major foreign language such as English, on SPA'S website once the website has been established; and (ii) that procuring entities be required to advertise an annual overview of the large procurements scheduled for each fiscal year, to alert the business community o f upcomingpre-qualificationhidding opportunities; Georgia CPAR Page 22 of 59 3.4.6 PrequalificationandUse of Registry Pre-qualification adds substantial time and administrative burden to the procurement process and i s only justified for large complex contracts. In addition, the pre-qualification requirements for licenses, registration and other authorizations are not always clear, and too many requirements from government agencies may increase the opportunity for bribes and corruption. The CPAR recommends that a registry o f qualified suppliers/contractor be established and maintained for small-value contracts that could substitute for the lengthy procedure o f pre-qualification. In addition, supplier and contractor performance should be routinely evaluated and any standing lists o f pre-qualified suppliers and contractors updatedbased on this information. It should be ensured that newcomers can readily apply to be qualified. For non-complex, larger value contracts for which a large number o f contractors i s available to bid, pre-qualification could be substituted, withpost-qualification o fthe bidderproposed for award. The CPAR recommendsthat the tender fee be adjustedto represent the costs o fpreparation and dispatching o f tender documents. 3.4.7 Cancellationof Tenders Since competitive procedures may legitimately result in the receipt o f a limited number o f bidders, often less than 3, there i s no reason why a competitive procedure should be cancelled where fewer than 3 bids are received. The CPAR recommends therefore the deletion o f Article 23(l)(b) o f the IR. 3.4.8 Use of AoI andPerformanceSecurities In transition countries where bidders' financial capacity is limited, the use of an Agreement o f Intention (AoI) in lieu o f more costly bid security provisions i s acceptable for small value contracts, because it affords the entity reasonable protection against irresponsible bids without discouraging bidders. The CPAR recommendsdeletion o f the provision that allows A o I terms and conditions to be negotiated, and that instead, the actions in case o f default should be clearly defined. It i s further recommended that bidders who do not meet the commitment o f their A o I be blacklisted. The CPAR recommends that the provisions relating to performance securities be clarified making sure that both performance securities and insurance cover may be available to procuring entities. As an additional point, the reference in Article 22(4) o f the IRis incorrect (although this may be a translation error): bid security should readperformance security. 3.4.9 BidOpeningandEvaluation There i s no requirement that the bid opening immediately follow the bid submission deadline. The CPAR recommends that bids be opened immediately after the deadline for submission because this i s a fundamental prerequisite for transparent procurement. While the notification period may be acceptable for domestic bidders, it i s not adequate for international bidders. In order to promote international as well as domestic participation, a minimum bid preparation period o f 45 days i s recommended for all tenders. Inorder to allow bidders to compete on a level playing field, the CPAR recommendsthat the evaluation criteria and the evaluation methodology be clearly spelled out in the bidding documents, and that all evaluation criteria be expressed in monetary terms. Given that pre- qualification i s mandatory for every procurement, the tender committee should only verify the Georgia CPAR Page 23 of 59 qualification of the successful bidder. The CPAR also recommends to do away with the point system for evaluation o f goods and works. Each bid should be evaluated on its merit as compared to the criteria inthe biddingdocuments. 3.4.10 AdministrativeReview The CPAR recommends that each complaint first be submitted to the entity, and to the SPA only incase o f appeal. It may also be acceptable to state that complaints forwarded directly to the SPA will be dealt with in consultation with the relevant procuring entity. Otherwise it i s likely that bidders will take their claims directly to the SPA, thereby missing the opportunity to resolve the claim quickly with the entity. It should be made clear which means the SPA has to enforce compliance by entities. This is a problem in many laws that do not state what happens when the procuring entities disregard the LSP. However, it i s not clear whether the solution to such a problem lies with the procurement law. The SPA not only reports to the President in an annual report but also should presumably be able to raise complaints about a non-compliant entity to those arms o f Govemment that can take action. The CPAR recommendsthat the LSP define the authority o f the SPA to raise issues o f non-compliance andor wrongdoing with the respective departments and authorities, so that they can initiate disciplinary actions against offenders. Any actions will be determined in accordance with the administrative Code and Criminal Codes. Amendments have been made to the Administrative Code and to the Code for Administrative Violations. However, amendments to the Criminal Code are still under discussion by the Georgian Parliament. The CPAR therefore recommends that the Criminal Code be amended as a matter o f urgency both to identify appropriate disciplinary actions for infringement o f the LSP and to ensure completeness and compatibility with the amendments to the Administrative Codes. Inparticular, the CPAR recommendsthat any powers the SPA is given to act on complaints of biddersand correct infringements o fthe LSP shouldbe sufficientto allow itperform its duties. In addition to endowing the SPA with sufficient authority, the means o f correcting infringements should be made clear and explicit. The LSP (Article 24) sets out detailed procedures for administrative review o f complaints by the SPA but it does not describe the institutional structure within the SPA for hearing complaints. The SPA has a set o f internal procedures which i s uses to hear complaints but these are not collected into a single text and are not available to third parties. The CPAR recommendsthat formal and fair procedures be established for considering claims. The existing procedures should be consolidated into a single and coherent text, published and made available to all interested parties, notably bidders wishing to complain. Once a website has been established, these procedures and any required forms should be made available on-line. In order to avoid even the appearance o f a conflict o f interest, the SPA staff hearing complaints should be different from those who are providing guidance and advice to procuring entities in the conduct o f procurements. On the recommendation o fthe Bank, a specialized unit has been established within SPA for conducting administrative reviews. This "Legal Department", however, is not staffed by specially trained personnel but, rather, depends on existing capacity. The CPAR recommends that proper and specializedtraining be provided to the new Legal Department. 3.4.11 PriceAdjustment The CPAR recommends that the implementing regulations be amended to require the use o f price adjustment formulae in contracts o f long duration (more than 18 months) and that the CPI GeorgiaCPAR Page24 of 59 published by the State Department of Statistics be used to calculate price adjustments for this purpose. 4. Audit And Anti-CorruDtionMeasures 4.1 AuditingPerformance 4.1.1 Auditingof PublicExpenditures The Law on the Chamber o f Control (COC) o f Georgia o f April 15, 1997, created the country's supreme audit institution. Its mandate i s to review how budget expenditures are being made on a post factum basis. The Chamber o f Control reports to the Parliament and comprises about 770 staff. Despite the fact that the Chamber enjoys an acceptable level o f independence, its impact has been limited so far mainly because its management and staff have very limited experience and few resources. Inaddition, the fact that part of the Chamber operations are financed through off-budget penalties, applied for irregularities discovered by its staff, seriously affects its credibility. Moreover the Chamber lacks modern management tools. 4.1.2 AuditingofPrivateExpenditures The Law o f Georgia On Auditing Activities (1995, amended in 1997 and 1998) defines the state regulations o f auditing activities, the subjects o f audit, the rules o f conducting audit, and the rightsand obligations o f the parties inthe audit. According to the Law, all audits o f legal entities inGeorgia are to be carried out accordingto the InternationalStandards onAuditing(ISA). Bylaw, the Council for Audit Activities ofthe Parliament of Georgia is the statebody designated to regulate the audit activities. The Council works out the standards and recommendations for conducting audit, issues certificates to auditors and licenses for audit services, keeps records o f auditors and audit firms inthe state register. Since 1995, the Council has been providing training and advice on professional development of auditors to universities and business schools. However, compliance with the Law i s extremely limited because the accounting and auditing professions are just beginning to develop and because the enterprises, mostly small and medium- sized, have no incentive to comply. 4.2 Recommendationsfor ReformingAudit Inorder to establish an efficient system to audit public expenditures and to fight corruption, the CPAR recommendsthat Government consider development and implementation o f a medium- term strategy for the reformo f the country's supreme audit function, which would 0 Clarify the mandate o f the COC and upgrade related legislation (including review o f division o fresponsibilities between the executive and the supreme audit institution); 0 Provide training to staff to upgrade and maintain their shlls; 0 Channel all monetary penalties thoughthe general consolidated fund; 0 Finance staff salary and operating expenses through regular budget appropriation; 0 Design and implement an effective system of internal audits within each procuring entity, coordinated possibly by an internal audit unit in the Ministry o f Finance. The internal audit units would not be subordinate to the Chamber of Control. The units would have a wide mandate to supervise all budgetary expenditures in terms o f strictly defined and uniform criteria; Georgia CPAR Page 25 of59 0 Mandatory regular publishingand detailed financial reporting, accessible to the public, for every budget organization. 4.3 NationalAnti-CorruptionProgram There i s resistance to the principle o f audit from many interest groups. The traditional trade links within the CIS are to some extent maintained by government organizations and the industry, which results in the continuous use o f direct contracting. Nationwide surveys have established that corruption permeates Georgian society, undermining the credibility o f the State and its officials. 4.3.1 SurveyonCorruption In 1997, Georgia accepted the Bank's offer to conduct surveys on corruption. The results were published in the report "Corruption in Georgia - Survey Evidence" in June 2000 The main findings o f the surveys, targeted at households, enterprises and public officials, were that 0 Corruption i s significant and increasing; 0 The customs services, tax authorities, police, traffic police and energy companies are perceivedto be the most corrupt; 0 The main causes o f Corruption are: -- the existence o f large rents due to loopholes inlaws and regulations; the highdegree o f discretion o f public officials; - the extremely low official salaries o fpublic officials; and - the low degree of accountability, which limits the probability that corrupt officials will be detected andprosecuted. The survey confirmed that corruption literally permeates Georgian society, undermining the credibility o f the state, impeding its economic development and stifling its ability to reduce poverty. Fortunately, political leaders have recognized the critical need for the State to undertake serious and immediate action to combat corruption. President Shevardnadze has declared: "If we fail to avoid this national disaster, ifwe fail to cure the nation, public and state fkom the horrible, poisoning malady o f corruption, Georgians as a civilized nation and Georgia as an independent, democratic state will have no future." 4.3.2 Working Group andProgramLaunch Following the publication o f the survey, Presidential Decree No. 296 o f July 9, 2000, established a working group to elaborate a National Anti-Corruption Program (NACP). InNovember 2000, the working group presented interim NACP guidelines with the objective o f initiating a broad public debate that would create political and social consensus in support o f the NACP and its implementation. The proposed NACP guidelines presented a thorough diagnosis and excellent strategy that covers all relevant areas. The guidelines underscored the need for a balance between prevention, detection, prosecution and education, and the need for broad-based civil society oversight and monitoring. Key policies included amending the Criminal Code to impose stricter sanctions for illegal actions, a review o f the tax system, introduction o f transparent procedures for issuingbusiness licenses and permits, and establishment o f effective public procurement and o f internal and external audit mechanisms. Based on these guidelines, the worlung group submitted to the President a final draft NACP at the end o f March 2001. Having completed its mandate, the working group was disbanded. Georgia CPAR Page 26 o f 59 Simultaneously, the National Security Council reviewed and cleared a draft Decree on the establishment of an Anti-Corruption Agency and recommended it to the President for signature. While reviewing the draft decree to establish an anti-corruption agency, the President issued Decree No. 95 o f March 15, 2001, requiring the implementation o f a set o f preliminary anti- corruption measures that include setting up a Civil Monitoring System to review activities carried out by o f the Customs Department the elimination o f most o f police posts on highways, and the submission by all Ministries and State Departments o f licensing activities. Although these measures are very limited in scale compared to the NACP proposed agenda and do not address the causes o f corruption, the President indicated that he wanted to demonstrate his commitment towards the fight against corruption and to spur civil society involvement. For many observers, failure to implement the decree satisfactorily could seriously compromise the credibility o f the Government and the support o f the civil society towards the full-fledged implementation o f the NACP. Then on M a y 8, 2001, the Anti-corruption coordination Bureau was established by Presidential Decree No. 187. However, as o f May 2001, the approval o f the NAC program by the President was still pending. The launch and implementation o f the proposed NACP clearly represents a daunting task that will require consistent and concerted efforts by government, civil society and the international community to curb the influence o f corruption on Georgia's political, economic and social life. Nevertheless, the struggle against corruption rests upon continuing strong political will and a consistent strategy. 4.4 Recommendationsfor Anti-CorruptionMeasures The Government may consider the following recommendations in the finalization and implementationo f the NACP: 0 Finalize and adopt the NACP urgentlyin order not to break the momentum; 0 Ensure that the new Anti-Corruption Agency can function as an independent body reporting to the President as the head o f executive and comprising respected individuals from civil society and government agencies; 0 Prioritize public sector reforms proposed under the NACP in light o f available resources. In the medium-term, priorities should be given to improving: (i)public expenditure sector management (budget, audit, procurement and finances); (ii)performance o f revenue- collecting agencies; (iii)civil service employment requirements and conditions; and (iv) policymalung institutions; 0 Set up benchmarks by which success o f the NACP can be assessedover time; and 0 Seek support from multi-and bi-lateral donors and coordinate their actions. 5. Public SectorManagementPerformance 5.1 Extent and Compositionof ProcurementunderLSP The data collected by the SPD for 1999 and 2000 only partially reflect the magnitude o f public procurement because they do not include procurement from off-budgetary funds, which are not subject to the LSP and therefore not reported to the SPD. For example, the Ministry o f Tax Revenues reported GEL 281,200 spent from their extra-budgetary funds on procurements in 2000, while their allocationfrom the central budget for procurement amounts to GEL 121,335. The following data obtained from the Ministry o f Finance indicate that despite the slight increase intotal revenues and total expenditures, public funds available for expenditures onworks, goods and services have decreased drastically. Government Spendingfrom the StateBudget,1998-2000 * **All figures : inthousandGEL ***Excluding Interest Payment and Subsidies and other current transfers Goods and Services category also includes expenditures for utilities. Based on SPD data for 2000, GEL 114.1million from the state budget was allocated to central procurement and GEL 96.1 million (84 percent) was actually disbursed. The local budgets were allocated GEL 142.2 million for procurement out o f which GEL 126,000 (88 percent) was disbursed. The share o f contracts awarded following competitive tendering procedures in accordance with the LSP i s small (Figures 1and 2). During 1999, a total o f 10tenders were carried out resultingin a total contracted amount o f GEL 2.7 million. Central purchasing accounts for 77 percent o f the total contracted amount (GEL 2.1 million, 8 out o f 10 tenders through 21 contracts; multiple contracts were awarded per bid, to implement different portions o f the procurement.). In2000, there was an increase inthe number of tenders. A total of 52 tenders were carried out, resulting in a total contracted amount o f GEL 24.1 million. While in 1999 central purchasing accounted for 77 percent o f the total contracted value, in 2000 municipalities handled a larger share o f transactions. Thirty-five tenders were held at the local level with contracts totaling GEL 18.2 million, 75 percent o f the total contracted value, while 17 tenders were conducted (39 contracts) at the central level, amounting to a total contracted value o f GEL 5.9 million. Interestingly, average contract value i s higher for municipal than for central purchasing (GEL 537,000 as compared to GEL 150,000). Figure1. Numberof Tenden Held byLevel of Administration('99 and '00) 2wo ILocalBuaget 1999 0StateBuaget 0 i o I 1 20 30 40 N u m o f 1 e n d . n Georgia CPAR Page 28 of 59 5.2 Competitivenessof PublicProcurement Looking at both levels o f administration, competitiveness o f public procurement appears to be rather poor, with most procurement expenditure being done through sole source (30 percent) or following "small procurements" (60 percent), leaving few expenditures handled following open (11percent) andrestricted (1 percent) tendering (Figure 3). Figure 3: Expenditures by Procurement Method -All Levels of Administration 11% /-I% 58% 30% Total disbursements for procurements in 2000 amount to GEL 222.1 million (GEL 96.1 million central and GEL 126 million local). According to SPD, almost GEL 131 million i s spent on so- called small procurements that are described as operating expenditures (small office supplies, fuel, etc.) purchased from any supplier of the procuring entity's choice and without benefit o f contractual arrangements. These are low-value transactions below GEL 10,000 for goods and services and below GEL 50,000 for works. Sole source contracts amount to GEL 66.3 million. Most o f these contracts are below GEL 25,000 for goods and services and below GEL 120,000 for works, although some larger value sole source contracts have been awarded. Unstable and unpredictable availability and disbursement o f funds, coupled with a lack o f proper planning by the procuring entities, could be possible explanation for such a phenomenon, along with absence o f enforcement o f the LSP The extent o f expenditures through small procurements and sole sourcing i s however alarming. Figures 4 and 5 demonstrate that the problem exists at both the central and local levels, with competitiveness being slightly higher at the municipal level. I Figure 4. Expenditures by Procurement Method Central Level (GEL Million) - I 1 F l ~ S ~ ~ t y R w u e m a n t M e t h o d - LocdM( E LMllii) .2 72 3 BOpen Tenders Restricted Tenders PCpenTdes DWbedTer&x 0SoleSource OSmall Procurements 5.3 Impactof BudgetaryConstraints Due to the irregular availability o f State funds, procuring entities are frequently unable to fulfill their contractual payment obligations and are forced to terminate contracts. This has resulted in claims from suppliers and contractors and an increasingnumber o f arbitration cases and penalties, Georgia CPAR Page 29 o f 59 4 which inturn worsen the already critical budget situation and result in a loss o f confidence inthe GOGbythe private sector. 5.4 SPA Database and Registry The State Procurement Implementing Regulations o f August 1999obliged the MOEto create and maintain a uniform database for state procurement-related information. Inthe draft o f the March 2001 amendments to the LSP, this function was shifted to the State Procurement Agency. Such a database has already been set up by the SPD. Currently it embraces about 144 procuring entities (of which 60 are funded from the central budget and the rest from the local budgets) that have at least once reported their procurement to the SPD (see Figures 6 and 7). The information in the contracts database is classified by method o f procurement, item o f procurement, estimated and actual values o f contracts, duration o f contracts, and provider o f servicedgoods. ~ Central Budget (year 2000) Budgets(year2000) 48% 44% 52% 56% IejReported to the SPD BNot reportedto the SPD I@ Reportedtothe SPD Not reported to the SPD1 The database also contains the "blacklist" o f providers who failed to discharge their contract obligations. Its purpose i s solely informative. The firms on the blacklist are not banned from participating in future procurements. The SPA may notify "the procuring entity regarding the unreliability of such firms, but the final decision to invite the firm to bid i s the decision o f the procuring entity. Inaddition to the database, the SPD and now the SPA has establishedandmaintainsa registry of suppliers that have supplied a state entity on at least one occasion. The registry currently counts 500 suppliers, who are considered to be qualified and need not prequalify. 6. Performanceof Bank-AssistedProjects 6.1 Natureof the Portfolio Georgia joined the World Bank in 1992 and IDA in 1993. So far, the objectives o f the Bank's assistance have been to reverse economic decline, assist the transition to a market economy, and alleviate poverty. Twenty-four IDA credits totaling U S 5 5 7 million have been approved with specific focus on (i)improving public management; (ii)developing human resources; (iii) building institutional capacities; (iv) strengthening safety nets; (v) promoting regional environmental initiatives; (vi) rehabilitating infrastructure; and (vii) promoting private sector development. As o f March 2001, eight IDA-financed projects totaling US$244 million have been completed satisfactorily and 16 totaling $313 million are under implementation. Six projects are under preparation. Of the 24 IDA-financed operations, five were adjustments credits for US$ 280 million and 19 were investment or technical assistance credits for US$ 277 million. Such an important volume Georgia CPAR Page 30 of 59 o f adjustment lending fully justifies a close look at public expenditures management systems and procurement regimes. Regarding investment and technical assistance operations, the Bank's procurement guidelines and standard bidding documents have been applied, including ECA sample standard biddingdocuments for N C B works, N C B goods, I S for goods and minor works. 6.2 Performanceof the Bank-assistedPortfolio The overall performance o f the portfolio has returned to a satisfactory status after a worrisome performance during FY 2000. The March 2000 CPPR indicated that portfolio performance had seriously deteriorated, with five projects with unsatisfactory development objectives or implementation performance. Since then, performance has improved, with only one project rated unsatisfactory. As o f May 1, 2001, ratings given to the Procurement category by the Bank's supervising team are satisfactory for all projects. The main problems that have recently affected the portfolio involved the lack o f counterpart funds, the unclear taxation policy and regulations applying to contracts, the ambiguous operation of special accounts, and variations in the roles, organizational structure, and accountability frameworks o f different project implementation units (PIUs). Following the recent decentralization o f portfolio management responsibilities to the Bank's Office in Tbilisi and the pro-active collaboration o f the Government, these problems are being satisfactorily addressed. 0 Counterpart funds. Govemment has made adequate provision o f counterpart funds a priority. 0 Taxation. The Government's decision to impose taxes on all contracts has led to a review o f financing arrangements for existingprojects. Future project cost estimates and financing will take the new taxes into account. 0 Special Accounts. Interim arrangements have been made to open new SAs in commercial banks. 0 pIus.Steps are being taken to clarify PIUs' legal status and standardize their employment conditions. 6.3 ProcurementPerformance 6.3.1 Procurement Strengths Most PIUs are staffed with relatively well-paid local consultants and include at least one procurement specialist with a good knowledge o f the Bank's guidelines and procedures. Most projects provide for formal procurement training, and procurement plans are regularly updated. Although the Bank's Office in Tbilisi does not include a procurement advisor or specialist, an intemationally recruited financial management specialist has recently been assigned to the office in order to strengthen the financial management o f the portfolio and improve auditing and oversight capacity inGeorgia, Armenia and Azerbaijan. 6.3.2 ProcurementWeaknesses InNovember 1999, the World Bank commissioned a specialized andindependent consultant firm (Global Procurement Consultants Limited) to carry out a procurement audit o f two --assisted projects. Under these two projects, a total o f 52 contracts were reviewed, o f which 38 had been below the prior review threshold. The auditor concluded that the procurement processing o f 11 contracts valued at US$4.1 did not meet the requirements o f the Credit Agreements. These cases are currently being reviewed by the Bank. Several minor deficiencies were also detected in several other contracts. Georgia CPAR Page 31 o f 59 The main findings, which were made available inJune 2000, revealed the following weaknesses: 1. Weak contract administration (poor planning, poor documentation, no cost estimate); 2. Too short a periodallowedto prepare and submitbids; 3. Inadequate specifications, including use o f brandnames; 4. Use o fprocurement methods not included inCredit Agreement; 5. Slicing o f contracts to bringprocurement within financial threshold o fnational shopping; 6. Modifications o f contract specifications, scope, quantities and unitprices after bid submission; 7. Contracts signedat higher amount than evaluated without justification; 8. Inadequatejustification for bidrejection; and 9. Poor quality o f works executed and use o fpurchasedequipment. It is true that most of the contracts reviewedwere initiated four to six years ago, at a time when the PIUs had limited experience with Bank's procurement requirements. In addition, it was underlined in the auditor's report that project financial audits failed to uncover any wrongdoing with regard to contracting activities. But it was the government's own conclusion, through its working group on anticormption, that foreign-assisted projects are not exempt from corrupt and fraudulent practices. The fact that the Bank supervising teams rated the two audited projects satisfactory-and even highly satisfactory at one stage-with regards to procurement activities indicates that the limitedtime available for project supervision may not be sufficient for the sort of detailed post-review work that would be required to detect and correct project-specific deviations, especially inan environment where corruption i s endemic. A number o f short-term measures to improve procurement oversight in the field are being implementedor considered: (1) Holdpre-bidconference for NCB contracts to educate contractors; (2) Conduct a specific audit o f shopping procedures for the entire portfolio and compare price obtained with local markets; (3) Limituse o f shopping procedures to a strict minimum; (4) Promote the utilization o f the UN IAPSO services for the procurement o f off-the- shelf goods such as vehicles, office equipment, fumiture, computer hardware and software; (5) Provide procurement training to all Operations Officers based at the WB office in Tbilisi; (6) Assign a Bank Procurement Accredited Staff from a resident mission inthe Caucasus to provide regional services; (7) Define composition o f selectiodevaluation committees prior to project negotiations, limit number to a maximum o f five specialists with composition subject to prior review, and provide training to committee members. Private Sector: Regulation and Practices 7. CommercialRegulation In the aftermath of independence in 1991, the economic situation in Georgia became unstable. This was manifested by a reduction inpersonal incomes, devaluation o f the national currency, a dramatic reductioninindustrial and agriculturalproduction, weakening o f the tourist industryand an increase inunemployment. Since 1994, Georgia has begun the implementation o f an economic stability program involving improvement o f the taxation and bank surveillance systems, abolition o f state orders, liberalization o f trade and currency exchange and a privatization policy. In September, 1995 a national currency was introduced. As a result o f the economic stability program, a process o f economic growth began in Georgia. Inparallel, a new market economy Georgia CPAR Pane 32 o f 59 oriented legislative base was established. It includes a Civil Code, a Tax Code, a Law on Promotion and Guarantees o f Investment Activities, a Law on Entrepreneurs and a Law on Privatization of State Property. 7.1 Law on Entrepreneurs(1994) The Law on Entrepreneurs sets forth the organizational and legal forms for participants in commercial activities. These are Individual Enterprise, Solidarity Liability Company, Commandite Company, Limited Liability Company, Joint-stock Company and Co-operative. Limited liability companies, joint-stock companies and individual enterprises account for the greatest portion o f enterprises registered in Georgia. An enterprise o f any organizational f o m becomes a legal private entity only from the moment it is entered into the Company Register. The law covers financial accounting and reporting, minimummandatory amount o f a Charter Fund, and stipulates that annual accounts, financial accounting registers and business reports are subject to mandatory checkingby independent auditors. 7.2 Law on SupportingSmallEnterprises(1999) The Law on Supporting Small Enterprises defines the economic and legal basis for the development o f small business enterprises in Georgia. According to the Law, a small enterprise may exist in any form determined by the Law on Entrepreneurs. Small enterprises are those companies inwhich the number o f employees and amount o f annual turnover do not exceed fixed amounts ranging from 10 to 40 employees and GEL 50,000-500,000 depending on the sector. The law also defines special measures to stimulate their development, including financial support programs, financial and consulting services, training of small enterprises employees, and leasing services. Small business development and support centers and small business coordination councils have been established to promote small business development. 7.3 Law on PromotingInvestmentsand Guarantees(1996) The Law on Promoting Investments and Guarantees defines the legal basis both for foreign and local investments and investment guarantees. The Law aims to restore a legal environment that promotes investments. Revocation o f an investment i s allowed only in special cases and only by paying an appropriate amount o f compensation. The investment regime applies equally to foreign and local investors. Foreign investors are free to repatriate their profits. Disputes may be resolved by mutual agreement, in Georgian Court, through the International Center for the Resolutiono f Investment Disputes, or any international arbitration court that i s established according to UNCITRAL regulations. 7.4 Law on LicensingEntrepreneurialActivities (1999) The Law on Licensing governs licensing o f entrepreneurial activities. Licensing i s required only for 12 types o f entrepreneurial activities that may create a certain danger to human health, life, state security or public order. The license i s issued for an indefinite period o f time and i s not transferable. 7.5 Civil Code and Civil ProceduralCode (1997) The Civil Code comprises legalnoms and principles governing contractual relationships between legal private entities. Chapter One o f the Code i s devoted to Contract Law. It defines general norms for concluding contracts involving property, purchase, and lease. Chapter 5 (article 65) stipulates that in a private law relationship, administrative bodies acting as legal bodies under Georgia CPAR Page 33 of59 Public Law shall be guided by relevant norms o f the Civil Code when entering into contracts (including State Procurement Contracts). In Georgia, civil cases may be heard by courts of common law. The Courts of Primary Jurisdiction for the courts o f common law are the Regional and District courts, whose rulingsmay be appealed to the Appeal Chamber o f the District Court. That court's ruling may be appealed to the Cassation Court. Courts o f Common Law consider cases whose parties are citizens, enterprises and organizations. Parties can also agree to submit a property dispute to a private arbitration court. 7.6 Private Arbitration Law (1997) The Private Arbitration Law provides regulations for considering civil disputes by permanent or ad hoc private arbitration panels. The arbitrator's decision i s bindingon the parties in dispute and when not implemented, forcible implementation i s mandated. Procedural norms in Georgia are broadly consistent with internationally recognized rules for arbitratione.g. UNCITRAL In Georgia economic (business) disputes are mainly resolved by the Common Law Courts of general jurisdiction or informally rather than by court. Recently there have been some precedents o f using private arbitration panels and it i s expected that they will be more broadly used in the near future. This i s because after the abolishment o f arbitration courts, arbitration institutions did not exist in the country. Recently some permanent arbitration courts have been established and it is likely that inthe near future they will be more broadly used. 7.7 TaxCode (1997) Inits foreign economic relations, Georgia does not apply any restriction or banning that would conflict with international practice. The Georgian Tax Code identifies 15 types o f customs regimes and defines issues related to the functioning o f the customs department. It i s within the competence o f the customs regime to collect from entrepreneurs all taxes (duties) that fall due when goods or transportation vehicles cross Georgia's borders. The rates are determined by other laws such as the Law on Customs Duties. Duringtimes o f civil conflict, Georgian customs borders can not be fully controlled. This results inarather heavyvolume ofsmuggling, which complicates tax collection. 8. Commercial Practices 8.1 Private Sector Development The most important sectors o f the Georgian economy are: agriculture (21 percent o f GDP), industry (13 percent), trade (12 percent) and transport (12 percent). The main exports are ferro- alloys, wine and fertilizers. The main imports are commodities such as oil, sugar, electricity, wheat and flour. The high share o f trade and communication i s to a certain extent a result o f Georgia's geopolitical location. Trade and cargo haulage operations occupy a major place in Georgian business activities. Agriculture accounts for almost a third o f the GDP, with half o f the population living in rural areas. To assist the revival o f the sector the Government undertook to transfer the land to private hands and to provide better access to credit trough credit unions. Georgia CPAR Pane 34 of 59 Following independence, the manufacturing sector was hit hardby the disintegration o f the soviet industrial system and the shift to market-based energy prices and lack o f access to investment. By 1996, Georgia's industrial output was estimated at 14 percent o f its 1989 level. Privatization o f the sector was then undertaken. Construction is rebounding after an almost complete collapse. Currently, most construction i s private and carried out by small-scale firms. Very few projects are financed by the state. Reconstruction and modernization o f existing tourism facilities, along with the design and implementation o f publicity campaigns, are top priorities. In addition, the government seeks cooperation with WTO and UNESCO in the fiamework o f the Big Silk Road Project. The reform o f the banlung sector began in 1995 with the National Bank o f Georgia (NBG) as supervisory body. The NGB instituted bank consolidation and reform, imposing stringent reporting requirements and progressively increasing the minimum capital requirements. As a result, the number o f banks fell from 247 in 1995 to 33 in 2001. The remaining banks are still small and undercapitalized and further consolidation i s expected. Still, the financial sector plays very little part inthe economy. 8.2 ForeignTrade andWTO Immediately after the dissolution o f the Soviet Union, Georgia started preparation for membership in GATT and then WTO. Assisted by multi-and bilateral donors, Georgia became a full member o f WTO on June 14, 2000. Negotiations to become a signatory to the GPA are scheduled to start in August 2001. Membership o f WTO allows Georgia to get Most Favored Nation status in trade with the 134 WTO member countries. The main benefits expected include increased efficiency o f local industry, increased foreign investment, increased exports; increased transparency; and reduced prices. In addition, Georgia has signed free trade agreements with eight CIS countries. 8.3 ConstraintsandOpportunities Although Georgia has made substantial progress in establishing the legal and regulatory framework for a market economy, a number o f obstacles hamper a faster pace o f private sector growth: corruption, smuggling, bureaucracy, ambiguous legislation and lack o f access to affordable credit. Most o f these issues would be addressed under the umbrella o f the proposed anti-corruption program. Standards. Georgia i s in the process o f replacing 21,000 soviet-type standards with internationally recognized standards, to be completed within three years. However, the responsible agency GeoStandard has so far struggled to meet WTO regulations. Although Georgia takes standards from the International Organization on Standards (ISO), the question of whether to take the U.S. or EUapproach to standards is still debated. A decision should be made and implemented as quickly as possible. Legislative Environment. The enforcement o f all legislation would be facilitated by eliminating ambiguity in legal texts. In part, this ambiguity reflects outdated legislation still in effect, the rapid pace o f the legislative drafting process and lack o f familiarity with new laws. Inparallel with the elimination o f ambiguities, the Government should also focus on enforcement and information. The business community claims that one o f the main reasons why foreign investments are very limited i s the weak rule o f law prevailing in Georgia. For example, court rulings have sometimes led to unjustifiedchanges o f enterprise control that avoided desirable restructuring o f enterprises in line with the bankruptcy laws. Moreover, prosecutions of corrupt judges, as well as other government officials, should lead to stronger penalties than simple loss o f position or reassignment, as it i s the case now. Thejudiciary system could enjoy broader public support ifit would apply impartially the legislative base. Recent progress towards establishing a stronger rule of law includes the recent law that requiresjudges to pass an examination to retain their seats. Banking Sector. The commercial banking system has substantially improved in recent years but remains weak, with a majority o f small and under-capitalized commercial banks. Most o f the loans are small, short-term and expensive. However, the National Central Bank has tightened supervision and encouraged consolidation by progressively raising the minimum capital requirement. Over the past two years, the total number o f commercial banks shrunk from 294 to 33. Further consolidationi s expected. Civil Service. It i s believed that Georgia's heavily corrupt civil service i s a major obstacle to the development o f the private sector. The survey on corruption o f June 2000, doing business in Georgia i s difficult and expensive. The system o f extortion used by public servants when dealing with entrepreneurs has created an informal tax chain where unofficial payments received exceed the revenues o f the State. This shadow economy is estimated by some at 50 percent o f all activities. Arbitration. The international business community was pleased to learn that the International Chamber o f Commerce inaugurated in December 2000 a Court o f Arbitration, which i s based on the recent Laws on Private Arbitration, and on Private InternationalLaw. Court decisions will be bindingin countries that signedthe 1958 New York Convention, including Georgia. The parties are allowed to choose who will be thejudge from a list o f twelve candidates. Energy Crisis. Inorder to attract major foreign investments and sustain economic development, the Government will have to resolve the energy crisis that has affected the country duringthe past eight years despite major investments inthe sector. 8.4 Privatization Georgia made the privatization o f state property an important part o f its economic reforms. The strategy and mechanisms o f the privatization process are stipulated by the Constitution o f Georgia, the Civil Code and the Law on Privatization o f State Property o f May 30, 1997. The Ministryo f State PropertyManagement (MSPM) is responsible for carrying out the privatization o f state property and for controlling related organizational issues. The purchaser o f any state property may be an individual or legal person, either a resident or non-resident o f Georgia. The law stipulates that the state's share inthe property after the purchase o f the state property should be less than 25 percent. The privatization o f state enterprises i s being carried out in two distinct phases. The first phase saw the successful privatization o f about 15,000 small and medium-sized enterprises inthe trade and service sectors between 1993 and 2000. The second phase, which i s assisted by the World Bank, was initiated in 1997 for the privatization o f industrial, energy and communications enterprises, and ports and public services facilities such as water supply and sewerage, through international tender. For this purpose a Case-By-Case unit was created within the M S P M to carry out the large enterprise privatization program3. The M S P M has encountered difficulties in this With Bark assistance MSPMcreated an Internet-based privatizationmarketingwebsite. This website provides informationon investment opportunities arising from privatizationto potential worldwide second stage, mainly because the targeted enterprises are large, more expensive, equipped with outdated technologies, have weak management, are not competitive, are heavily indebted and in need o f major investments. So far, several large entities in the energy, communication and transport sector have beenprivatized. Inaddition, the entire process is plaguedwith allegations of fi-aud and corruption. Public opinion towards privatization i s largely negative, as many feel that the political leaders and bureaucrats are selling what not so long ago were called the country's jewels for discounted prices in exchange for bribes. While it is difficult to assess the extent to which this type o f transaction occurs, certainly the process i s ripe with rich incentives. Where the Bank has a place at the table, it has sought to support open, competitive, and strategic privatization, restructuring o f newly privatized entities, and improving the corporate management o f the privatized enterprises (power rehabilitation, enterprise rehabilitation, private and financial sector projects). Bank project funds have also given concrete support, as for outside financial, legal, and technical advisory services duringthe privatizationprocess. The international donor community should continue to assist the privatization process and support the privatized enterprises, as {his i s the best way to set a standard and bringoutside eyes into the process. 8.5 CommercialProcurement The private sector i s still in a nascent state, struggling to meet the challenges o f a market economy. For a multitude o f reasons, the majority prefers to continue to do business the old way, which is characterized by ,ad hoc decisions, absence o f market analysis and surveys, cash transactions, personal relationships, absence o f a formal contract, smuggling to avoid taxes and duties, low quality products, no respect for deadlines, and delayed payments. Disputes that arise between the parties are often resolved through informal mediators and negotiations. At all cost, the parties try to avoid legalrecourse due to the weak rule o f law. With regard to procurement, the private sector rarely applies competitive procedures for procuring goods, works and services. Direct purchase is the main method o fprocurement and it is done based on personal or traditional contacts. Contractors' representatives interviewed for the CPAR report indicated their strong objection to awarding contracts to the lowest bidder, which in their view always results in low quality products. Their preference is for the old system, where contracts are awarded to the bidders that are the closest to the cost estimate. Inorder to convince the industryo f the advantage of open competition based on price, a major effort will have to be undertaken to make sure that the contractors that do not deliver in accordance with the terms o f their contracts would be penalized as specified inthe contracts or have their contracts terminated and their performance security forfeited. Training should also be provided to project supervisors incontract management. Considering that competition i s rarely encountered inthe private sector and that smuggling,fi-aud and corruption are rampant, thresholds for commercial practices under Bank-financed operations should be kept low ,with some variations depending on the sector. Considering the increasing participation o f foreign investors in the power and telecommunications sectors, slightly higher thresholds could bejustified in those sectors. In other sectors that are still strugglingto adjust to a market economy, the thresholds should be kept low. investors includinginformation onprivatizationclimate and on the legal framework and state privatization program. The website address is http://georgia-gateway.orglENG/Law&Justice/casebycase/~dex.htm GeorgiaCPAR Page37 of 59 8.6 Customs Customs procedures are complex, time-consuming and often applied arbitrarily. The share o f illegal imports in the overall volume is estimated at more than 40 percent o f the total imports. One o f the main reasons i s the complexity o f the custom tariff system, which has several thousand classifications and custom rates. A customs duty o f 12 percent i s levied on most non- CIS imports. A s o f January 1. 1997, certain goods, including specific capital goods, electricity, natural gas, and equipment previously taxed at 12 percent, were made subject to a customs duty o f 5 percent. All imports are subject to a general customs processing fee o f 0.2 percent. Georgia will benefit from slight tariff reductions negotiated within the framework o f the WTO. The agreement requires Georgia to reduce its import tariffs over a period o f 5 to 7 years. The level o f computerization o f Customs operations i s low. Common Customs abuses include: 0 under-invoicing to lower the assessed import duties; 0 mis-descriptiono f goods to place them into a lower-rated Customs classification category; 0 bribery o f Customs officers, reported to be commonplace; Customs officers use incorrect or incomplete import documentation as an opportunity to demand bribes. To avoid or minimize exposure to these abuses, many importers employ specialist logistics companies to handle Customs formalities and documentation on their behalf. Theft o f goods during inland transport is commonplace. Many importers hire armed guards to accompany their shipments. To attack the above listed abuses, the Customs Department competitively selected a private pre- shipment inspection company and signed a two-year contract in2000. All goods valued at more than $2,500 equivalent are subject to the pre-shipmentinspection. In addition, the Customs Department has developed an action plan for customs reform, with technical assistance from EU-TACIS and Eurocustoms. The action plan aims at improved relations and coordination with government agencies and the business community, at establishing improved mechanisms o f control and enforcement o f the Customs Code, at recruitment and training o f personnel, and at a structural re-organization o f the Customs Department. Eurocustoms i s currently providing TA for the recruitment and training o f new staff. EU-TACIS assisted in the drafting o f normative acts for the Customs Code. In addition, the Customs Department has established a working group with the State IT department to prepare a plan to expand customs infrastructure and install a communications network in all regions o f Georgia (ASYCUDA was installedthree years ago insome regional and Tbilisi offices). B-STRATEGIC MEASURESAND ACTION PLAN 9. GeneralRiskAssessment 9.1 The Letter vs. the Spirit of the Law: EarlyDays Georgia's experience with formulation and implementation o f a unified public procurement policy has been brief. Increasing attention has been directed at public procurement reform since 1997. The reform efforts concentratedas a first step, on preparinga solid legal framework to form the basis for launching procurement reform. But it is barely two years since the Law on State procurement came into effect in July 1, 1999, with passage o f implementing regulations the GeorgiaCPAR Page 38 of 59 following month. Prior to enactment o f the LSP, many entities had developed their own internal procurement procedures and procurement was conducted in an inefficient and non-transparent way. The LSP i s modeled on the UNCITRAL Model Law and although improvements are required, especially concerning enforcement provisions, it forms a good basis for increased efficiency and transparency inpublic expenditures. Despite strong top-level commitment within the executive and the legislature, problems with implementation have slowed down the reform. There i s very little evidence o f adherence to the legislation. In monetary terms, only 1 percent o f the annual value o f contracts entered into in 2000 has been procuredthrough open tendering. As a result, the public has no trust inthe system and the private sector i s not interestedinbusiness deals with GOG. The GOG i s aware o f the implementation problems, and inresponse to pressure to meet SAC I11 conditionalities, has made substantive changes to the legislative instruments to improve monitoring o f the operations and enforcement by the executive. But satisfying the SAC conditionalities will not be enough. For one thing, there are additional changes inthe current draft amendments to the LSP recommended by the CPAR mission that will also be required, in particular concerning removal o f the heavy hand o f MEIT and establishing the independence o f the state procurement agency. The LSP also further needs to be amended to incorporate enforcement measures. Moreover, while inclusion o f provisions and measures in the text o f laws and regulation are important, they are not the only, or even the main, obstacles to effective implementation. SPA also desperately needs to receive the funding it requires to do its job. It also needs to set up structures and procedures for enforcing the law and its regulations, without which they remain comprehensive, but toothless, documents. Expecting compliance without enforcement measures i s unrealistic, even where good law has been ineffect for a long time. Making compliance with procurement regulations non-voluntary and attaching a price to non- compliance i s essential, particularly in Georgia, where (as in other former Soviet republics), possibly the largest obstacle to implementation o f procurement reform i s the persistence o f the old patterns o f supply. Weakening the power o f omnipresent vested interests will require investment in enforcement and in training. Building the capacity o f staff at Georgian procuring entities at all levels o f the administration i s a massive challenge that has just gotten underway. While the initial steps taken by GOG are encouraging, including holding training seminars for senior officials on central and local level, several thousands o f officials are yet to be trained. 9.2 Procurement ReformTiedto Larger Anti-CorruptionEfforts Measures that target changes in procurement behavior do not impact in a vacuum. They will succeed or fail as a function o f what i s going on in the larger context. They will succeed faster, the faster goes the fundamental shift inthe attitudes and behavior o f politicians and civil servants in the wider environment. The pervasive nature o f old attitudes is thus an aspect in the risk o f procurement reform process, and the success o f procurement reform will rely heavily on the success o f the implementation o f the GOG's anti-corruption strategy. NGOs and the media have been involved in monitoring the application o f the procurement law and the GOG i s encouraged to continue information sharing in the interest o f transparency. The CPAR recommends a number o f ways in which this sharing can be expanded with regard to procurement and business regulations generally, including creation o f information centers, a Georgia CPAR Page 39 of59 distance learning center, and a website. It i s also in the interest o f those backmg procurement reformto ensure that procurement stories are part o f the larger anti-corruption effort. 9.3 HighRisk At this time, the CPAR ranks Georgia as a high-riskcountry inrespect o f its public procurement system. Further removing the obstacles to successful implementationshould be one of the GOG's top priorities. However, this assessment should not detract from nor diminish the recognition deserved for having created a strong legal and regulatory foundation in a short space o f time. In thisrespect, Georgia stands at the head o fsome o fits former sister republics and can be taken as a model. The example o f other transition economies in the region further suggest that with steady progress in the larger anti-corruption effort, and by following the road map offered by the CPAR Action Plan for Georgia, the savings realized from competitiveprocurement reform can be tripled in 2 years time. Literature suggests that savings can amount to 15 percent o f the State Budget. The CPAR report estimates that coverage o f LSP/IR-compliant competitive procurement procedures can increase from the current 12percent to 50 percent within five years. 10. Stratepic Workshop of June 2002 From June 3-5, 2002 the GOG and SPA with the support o f the Bank organized a strategic workshop to consider procurement issues raised in the CPAR, discuss general issues o f procurement policy and to devise a strategy to take forward the development o f procurement law and implementationinGeorgia. The full program for this workshop i s attachedinAnnex 6. All interested Ministries and departments, representatives from the private sector, civil society and the donor community had been invited to attend the workshop and a number did. Obviously, the SPA was in attendance as well as representatives o f the Ministry o f Finance and the MEIT. However, the spread o f procuring Ministries and departments who attended was disappointing and demonstrated a certain lack o f commitment on the part o f the Government as a whole to procurement reform. Likewise, private sector, civil society and donors were poorly represented. This may have something to do with lack o f awareness and there is little doubt that the SPA has insufficient funds to disseminate information on procurement reform as widely as it should. Without highvisibility and status, there i s little more that the SPA can do. This may account for the comparatively narrow turnout but i s nonetheless o f concern. Despite the narrow representation, the number o f participants was encouraging and, although there was a slow start to the proceedings, the audience actively participated in the discussions. The workshop included, as well as a number o f presentations by local officials, Bank staff and invited guests with intemational procurement experience, a series o f break-out sessions in which the participants were encouraged to discuss and debate the current problem areas o f procurement reform in Georgia as identified in the CPAR and to offer solutions and recommendations for the way forward. The intention was to come up with a blueprint for future reform based on the input o f the participants. This intention was amply fulfilled and the results o f the discussions in the break-out sessions were debated in the plenary sessions. Based on these discussions, the SPA was able to design a framework for ongoing reform which received the support o f the stakeholders present. The objectives and means o f implementation o f these reforms were discussed subsequently with the Minister o f Economy and with the Vice Minister at the State Chancellery. They have both pledged their support to the continuing reform. Inparticular, it i s anticipated that the blueprint or business plan for continuing reform prepared by the SPA based on the outcome o f the workshop will be forwarded to the State Chancellery and to the President and then incorporated into a GeorgiaCPAR Page 40 of 59 Presidential Decree. This Decree will set up a working group o f defined key officials who will be assigned specific tasks relatedto the blueprint. Inthis way, the reforms will not only bear the seal o f approval o f the President but will also identify key steps to be taken by senior officials. The task o f monitoring the progress o f the reforms will thus be made easier and more transparent and will have an accordingly higher probability o f success. The detailed SPA work program resulting from the workshop i s set out in Annex 3A. However, some of the mainthemes (not all o fwhich are new) to emerge were: The needto ensure effective coordinating unitsineach procuring entity; The desirability o f creating regional structures for the dissemination o f information on the LSP and IR and to provide basic guidance; 3) The desirability o f creating an information website operated and maintained by the SPA. The regional structures could also provide access to the website inthe provinces where access i s otherwise limited; Improved transparency and dissemination o f appropriate information; The importance o f increasing the status and authority o fthe SPA; Improved monitoring basedon measurable qualitative and quantitative indicators; Improvedremedialpowers for the SPA; The need to ensure proper training and to develop a body o f procurement professionals. Before final adoption into a decree, the SPA work program still requires some more detail to set out precisely the extent and form o f some o f its components, notably the regional and intemational training. Although not currently covered in the SPA work program, the Bank would actively encourage and support assistance from appropriate intemational consultants to assist the government with the design of its training strategy and programs, which should form one o f the key tasks in the anticipated Presidential Decree, in order to ensure a comprehensive and sustainable approach. 11. Strateeic Measures 11.1 Objectives This report recommends that an appropriate strategy for advancing the ongoing public procurement reform would focus on removing the obstacles that are slowing down the implementation of the reform. The mainobjectives are: 0 to increase the scope for competitive procurement in the public sector by completing the legislation and regulation to extend the law's applicability, extend eligibility of foreign bidders, and include enforcement; 0 to create real institutional capacity to apply the law and regulations by amending the law to ensure the independence o f the state procurement agency, by providing adequate funding, by building capacity of procuring entities at all levels o f the administration, and by creating enforcement structures; 0 to weaken existing incentives for non-compliance by creating penalties and enforcing them, and by fostering a broader culture o f compliance. Georgia CPAR Page41 of 59 11.2 ComplementaryCPAR and SPA Action Plans The strategy recognizes that changing rules withinthe public administration i s not enough. To be effective, the Bank must work with its partners to understand and address a broader range of incentives and pressures, both inside and outside o f government, that affect public sector performance. A broad framework i s thus required, one that addresses competition, having a "voice," and building o f partnerships, in addition to intemal rules and incentives. A successful outcome will include restoring the confidence o f the public and the business community in the fairness o f the procurement system. A clear agenda o f achievable reforms exists. They are set forth in complementary action plans adopted by the state procurement agency and the Bank (see Annexes 2 and 3). The actions that the SPA has been pursuingare linked to the SAC I11conditionalities and the signing o f the GPA. The CPAR recommendations take a longer view o f what i s required that goes beyond changes in the law andregulations. Not only the content, but sequencing o f the actions has been carefully designed. These actions plans (Annexes 2 and 3) should now be read in conjunction with Annex 3 A which contains the SPA'S Working Program for 2002 based on the outcome o f the strategic workshop. This plan will be submitted to the State Chancellery and incorporated into a Presidential Decree setting up a working group to implement the program. 11.3 Sequencinginthe Short- and MediumTerm The CPAR Action Plan, and the document as a whole, are intended to act as a unifying tool to bringthe GOG,the Bank, and the donors aroundthe table to design a medium-termprogramand assign funding and support responsibilities. Several donors were consulted during the collection o f data and opinions, but none participated in developingthe recommendations. Sequencing will need to take into account what i s achievable inthe short term, without adversely affecting the realization o f the longer-term measures. Comparative advantage in parceling out donor responsibilities can usefully build on current areas o f involvement. The Bank can usefully continue to assist GOG in perfecting procurement policy and developing standard bidding documents. The Bank could also assist the Govemment in developing a training strategy that could have multiple sources o f support at the implementation stage. Short-term priorities include passing the amendments to the Criminal Code to allow the SPA to instigate penalties for breach o f the provisions o f the LSP, revisions to the Law on Chamber o f Control, reducing MEIT's control function over SPA, and moving to the next phase o f anti- corruption activities. The other immediate priority i s to ensure the adoption o f the Presidential Decree which puts into effect the working plan devised by the SPA as a result o f the strategic workshop and appended in Annex 3A. Within the current favorable environment for cooperation between GOG and Bank, the Bank would continue its financial support. Good governance and procurement reform fit well into the country assistance strategy and the Bank assistance program under the SRS project. The SRS task team has confirmed that the actions identified as needing support from the Bank could be eligible for financing from the ongoing SRS project. Another opportunity for Bank support for longer term actions rests within planned Public Sector ReformCredit (PSRC) and SATAC 111. GeorgiaCPAR Pane42 of 59 12. RecommendedBankApproach for Supervision 12.1 ThresholdsandNCB The following financial thresholds for procurement methods are recommended for Bank financed procurements: ThresholdsbyProcurementMethod Procurement Method Threshold ICB: Works >US$600,000 I NCB: Works I us$loo.ooo International Shopping: Goods IUS$lOO,OOO; and 0 contracts with individual consultants >US$50,000. The Bank should also conduct post review on at least one in five o f contracts that are subject to post review. 12.3 Strategyfor FiduciarySafeguards ActionPlan - The fiduciary risk for Bank portfolio in Georgia continues to be high. The overall weak procurement environment raises concerns about the value o f money and accountability for public funds, especially because practices vary widely fi-om the formal rules and enforcement i s weak. The increasing shift in the World Bank's new lending to social sector projects, which involve thousands o f small-value contracts at the sub-national government level that are generally not subject to prior review by Bank staff, and where capacity for implementation and monitoring i s generally weak, would further increase fiduciary risks inBank-financedprojects. GeorgiaCPAR Page 43 of 59 Despite the Bank's best efforts, it i s simply not possible to fully insulate Bank-financed projects from the systemic problems o f the environment in which they are implemented. The Bank's strategy to help reduce opportunities for corruption and thereby help ensure that proceeds o f Bank loans are used for their intended purposes with due attention to economy and efficiency, will include the following: Buildingof adequate safeguards for fiduciary risks including actions to strengthen capacity and finalize procurement arrangements at an early stage, inthe design ofnew projects. Installation o fplanning, budgeting, and project managementreporting systems at an early stage and requiring updatedand satisfactory annual procurement and financial plans and use o f these plans for guiding implementation and supervision. Additional legal provisions to make the National Competitive Bidding(NCB) procedures acceptable to the World Bank. The current side letter on the acceptability o fNCB procedures i s being substantially strengthened based on findings o f this report, for use in all future projects (see Annex 4) Follow up on procurement complaints and audit findings. Relying on Corruption and Fraud InvestigationUnit (CFIU) to investigate cases o f alleged fraud and corruption, and apply sanctions where called for. Bank procurement staff should exercise particular vigilance to prevent discrimination by Georgian implementing agencies against foreign bidders under all procurement methods, but especially NCB. Given the high level o f corruption in the country, Bank staff should exercise particular diligence in reviewing requests received from Georgian implementing agencies to award contracts on a Single Source basis; Also as an anti-corruption measure, Bank teams should make sure that procurement post reviews are conducted by every supervision mission and that the Back-To-Office report of every supervision mission contains a specific annex dealing with procurement post review, which should be sent promptly to the Regional Procurement Adviser; The Bank should support organization of business seminars to encourage Georgian industry to participate as bidders inBank-financed projects; 13. Action Plan The time-based Action Plan, appended to this Report as Annex 2, proposes detailed steps for implementing recommendations made in this report, along with priorities and time periods in which they might be achieved. Annex 3 is the Public Procurement Reform Action Plan prepared by SPD in December 2000 and last updated in April 200. This SPD action plan is now complemented by a Working Programappended inAnnex 3 A which i s based on the results o f the strategic workshop held inTbilisi inJune 2002. -- - x x X x c 3 X X Y x X x Y X 3 3 13134 d 3 3 3 0 0 013 % 2 80 3 3 3 3 I Is Q B B4- W B3 a, B8 3 3 9 W a, r) 0 +0 - - U 3 h v * n 2. 3 d 5 N . c1 n f sM 0 3 '4 Y '4 3 4 d !3 J Georgia CPAR Annex 3 A Page 49 o f 59 Annex 3A SPA Working Programfor 2002 Task Measure Time sheet 1 - 2 3 1. Organization o f business visit of the To organize Study Tours in Slovak Republic, The third and fourth collaborators o f the State Procurement Agencq Poland and Bulgariaby the SRS Credit means Quarter in order to share intemational experience in the sphere o f State Procurement and to establish the horizontal communications with the Public Procurement Agencies o f other countries. 2. Working out the appropriate documentation, a) To work out answers on questioner o f WTO Upto September which is necessary for negotiations about GPA committee and member states and to Georgia's accession in WTO Govemment prepare Georgian Annexes by the assistanceof Procurement Agreement (GPA) the Intemational Consultant; b) To develop etemally updated register of suppliers Inconformitywith Annexes o f WTO GPA and to ensure its transparency 3. Organization o f Training-Seminars in order To organize the training-seminars by the to retrain State Procurement Specialists assistance o f the World Bank and other intemational organizations: a) For collaborators o f Ministries and Central July Entities (Borjomi); b) For procuring entities o f Tbilisi (Tbilisi); July c) Regional Training-seminar for the local August procuring entities o f westem Georgia (Kutaisi); i) Training-seminarforprocuring Regional August organizations o f autonomous republics [Batumi); :) Regional Training-seminar for the local September procuring entities o f eastem Georgia (Telavi) 4. Participation in the intemational workshops Participation o f the representatives o f State Fourth Quarter On a theme o f state procurements Procurement Agency in the conferences xganized by aegis o f World Bank, WTO, UN mdEU 5. Organization o f trainings for SPA staff Retraining o f SPA staff by the means o f SRS Fourth Quarter :redit: i)In the Intemational Training Centers o f Washington and Turin; 1) Training o f SPA staff inEnglishlanguage 6. Distribution o f information about the State To establish the Web site o f the Agency inthe August Procurement System o f Georgia in the ntemet (On the Web site will be published: international information networks ender announcements; Information about :ontracts and their execution; Annual reports )f the Agency; Review of the facts of an )ffence, Methodological and Normative locumentation on State Procurement and etc.) 7. Institutional improvement o f the State I) To provide organizational and Upto August 1 Procurement System nethodological support for raising knowledge md experience in the sphere o f state rocurement in order to establish structural inits o f procurement in each state procuring irganization; I) To establish the structural unit o f GeorgiaCPAR Annex 3A Page 50 of 59 administrative resolution in the Agency and supply it by appropriate conditions by the SRS credit means (designing o f electronic program "Kodeqsi", providing by communication means, establishment o f the center of administrative resolution and etc); c) To strengthen the Advisory center. 8. Working out the rule o f State Procurement To present suggestions in the Government in Upto September 1 Specialist's certification and conditions of cooperation with the Ministry o f Education accreditation about entering o f State Procurement specialist inthe national list ofprofessions 9. Ensuring o f transparency and publicity of a) To organize the briefing for media and Monthly State Procurements nongovemmental organizations; b) To establish the Regional informational and Fourth Quarter methodological centers; c) To organize cycle o f television programs September about urgent problems o f State Procurement reform; d) To publish periodical bulletin o f the Quarterly Agency; e) To distribute information about the state Weekly procurements (In case o f an opportunity to establish the special publication or to publish the weekly addition o f newspaper). 10. Ensuring o f revealing o f State Procurement %) Strengthening o f Monitoring on state Constantly Legislation's offenses and using of compulsory procurement implementation and mechanisms o fperformance o f the requirements implementing o f appropriate measures on the o f the law Against the infringers o f Legislation facts o f infringement, by the cooperation with ippropriate bodies; 3) To increase the work ability o f contract Constantly implementation's inspecting groups and mblishing o f information which they will >resentto the Agency; :) To organize the meeting in procuring September mtities for coordinators which are responsible instateprocurements; i) implementthecomparativeanalysisof To Constantly nformation presented by the Ministry of about actual allocation o f means and .eceived reports on procurement mplementations. 11. Improvement o f planning, implementation i) To work out the form which will show the Upto August 1 and report o f State Procurements ictual allocation o f means for procuring ntities, in order to ensure the checking o f ,ational usage o f means; 1) To improve the structure o f an account part Third Quarter If the budget together with the Ministry of %"e inorder to improve state procurement Aanning; :) To publish the detailed instructions of Upto September 1 lispute resolution procedures between the I )arties; I) To publish the common instructions of Fourth Quarter ising standard forms o f state procurement mplementation and report. 12. Ensuring o f financial support o f State .) Ensuring o f appropriate financing o f the Constantly Procurement Reform 4gency f?om the State budget o f Georgia Increasing o f salaries for SPA staff; ;oreseeing the necessary financing in the state GeorgiaCPAR Annex 3A Page 51 of59 budget of2003; Financingof the Agency fully and timely within the means stipulated in the budget for the Agency) in order to fully implement its functions; b) Presentation of an appropriate projects to Constantly the International Donor Organizations on each directionofreform; c) To implement Joint projects with the FourthQuarter GeorgiaCPAR Annex 4 Page52 of 59 Annex 4 ACCEPTABILITY OFNATIONAL COMPETITIVE BIDDING JSuuulementalLetter) 1. We represent that the procedures to be followed for nationalcompetitivebidding under the Loadcredit Agreement shall be those set forth in the Law on State Procurement of Georgia, its Amendments and ImplementingRegulations, provided however that the following requirements are met for compliancewith the provisionsof the "Guidelines for Procurementunder IBRD Loans and IDA Credits" (the Guidelines) publishedby the Bank inJanuary 1995 and revisedin January andAugust 1996, September 1997 andJanuary 1999. (a) the biddingperiod should not be less than 30 days from the date o fpublication o fthe Invitation to Bidor the date o f issuance o f the biddingdocuments to the bidders, whichever i s later; (b) pre-qualification shall not be used for simple goods and works butshall be conductedfor large and complex works; (c) biddingshall not be restricted to pre-registered firms. Ifregistration i s required, it shall not be denied to eligible bidders for reasons unrelated to their capacity and resources to - - - successfully perform the contract (e.g., mandatory membership inprofessional organizations, classification, etc). Post-qualificationshall be conducted to verify that the bidder has the capability and resources to successfully perform the contract; biddingdocuments shall be made available to all bidderswho are willing to pay the required fee; state-owned enterprises inGeorgia shall be permitted to bidonly ifthey are legally and financially autonomous and operate under commercial law; the opening o fbids shall follow immediately after the deadline for bidsubmission and bidders' representatives should be permitted to attend; a single envelope procedure shall be used for the submission o fbids for goods and works; procuring entities shall use the Bank's regional standard N C B documents, which shall be satisfactory to the Bankprior to their issuance to bidders; bidders shall be requiredto submit bidand performance securities inan amount appropriate to the estimated value o f the contract and in a form acceptable to the government; evaluation o f bids shall be based on quantifiable criteria, clearly defined inthe bidding documents. Responsiveness o f the bidto the interests o f the country, the region or the procuring entity i s not an acceptable criteria; contracts for long duration (more than 18 months) shall contain appropriate price adjustment provisions; Rebiddingshall not be carried out without the Bank's prior concurrence; Contracts shall be awarded to the lowest evaluated bidder. 2. Unless otherwise agreed to in writing between the Government o f Georgia and the Bank, these representations and assurances form an integral part o f said BanWCredit Agreement. 3. It is our understanding that in signing the BanWCredit, the Bank may rely on the statements set forth inthis letter. Annex 5 Listof PeopleInterviewedfor CPAR, Georgia February 20 -March ,2001 Person Title George Isakadze Deputy State Minister Levan Dmeladze Former Deputy State Minister Temur Basilia Advisor to the President on Economic Policy Reforms Parliament Van0 Merabishvili Chairman of Parliamentary Committee on Economic Policy Reforms Gia Siradze Parliamentary Committee on Economic Policy Reforms, member Suliko Pavliashvili 1'' Deputy Chairman o fParliamentary Committee on Budget Control Temur Giorkhelidze Head of Subcommittee on Budget Control Zurab Adeishvili Chairman, Parliamentary Committee on legal issues Ministryof Economy, George Gachechiladze Minister Industry andTrade Gela Charkviani DeputyMinister Van0 Chkhartishvili Former Minister State Procurement Temur Khomeriki Chairman o f the State Procurement Agency Agency MinistryofFinance Levan Chrdileli Head o f Budget Department David Ramishvili Headof Treasurv DeDartment Chamber o f Commerce Guram Akhvlediani Head o f Chamber o f Commerce Fady Asli Head of American Chamber o f Commerce Pier Orlov Head of InternationalChamber of Commerce National Bank of Levan Kistauri Macroeconomic Department Georgia Commercial Banks Vakhtang Butskhiridze Director o f TBC Bank Organization E U Delegation Jacques Vantomme Active Ambassador o f EUDelegation Mike Masbaum Legal Team Leader, GEPLAC UnitedNations Marco Borsotti UNResident Coordinator andUNDP Resident Representative MinistryofJustice Kote Kublashvili lst Minister Deputy Ministryof Urban Beso Tulashvili Headof Department on Economic Development and Policy Reforms Construction Project Implementation Alex Sikharulidze Head o f Institutional BuildingProject Units Gia Tsagareli Head of Transport Project PaataBolashvili Head of Municipal Projects George Nikolaishvili Implementationand Coordination Center Heado f Health Project Gigi Maglakeidze Director of Apcultural Projects CoordinationUnit Shalva Kokochashvili Deputy Executive Director, Georgian Social Investment Fund DavidNinidze Director, Fundfor Cultural Heritage Preservation Nana Adeishvili Director o f CERMA State Department o f Tamaz Ozbetelashvili Price Statistics Division Statistics Revaz Tsakadze National Accounts and Macroeconomic Analysis Division Private Businesses Michael Scoley Head of AES Telasi State Customs George Gachechiladze Head o f Customs Department Department Anti Corruption DavidUsupashvili Secretary of Workmg Group ~~~~~ Worlung Group Chamber of Control Tamriko Bichikashvili Deputy Head Large Tax Payers Vakhtang Chakhnashvili Head o f Large Taxpayers Inspection Department State Information Davit Tarkhan-Mouravi Head of State Information Technology Technology Department Institute o f Public George Margvelashvili Director of Institute o f Public Administration Administration GeorgiaCPAR Annex 6 Page 55 of 59 ANNEX 6 Workshop on Improving Procurement inGeorgia June 4-6,2002 Location: Tbilisi Agenda 09:OO -09:30 Registration 09:30 - 09:45 Openingofthe Workshop Mr. George Gachechiladze, Minister of Economy, Industry, and Trade 09:45 - 1O:OO The Importanceof ImprovingProcurementin Georgia I This presentationwill discuss the importance for economic growth and development of an effective procurement systemin Georgia. The discussionwill explore the manner inwhich procurement can save scarce revenues and serve to spur on private sector expansion. Key issues inthe developmentof an effective procurement systemwill beidentified Mr. Tevfik M. Yaprak, Georgia Country Manager, World Bank 1O:OO - 10:30 The Challengeof ImprovingProcurementin Georgia I 1 ~~~ This presentationwill examine the current situation inprocurement in Georgia, and highlight the key challengesfor improvingthe performance ofthe system. Mr. Temur Khomeriki, Chairman, State Procurement Agency 10:30 - 11:OO Discussion 11:OO- 11:15 Break Session I I Establishing New Procurement Practices I This sessionwill focus on strategies for implementing new procurement practices, including dissemination o finformation, establishment o f clear proceduralguidelines and development o f a planto train staff innew procedures. Special attentionwill be givento approaches to phasingin newpractices. Chair: ElsHinderdael, WorldBank 11:15 - 11:45 Lessons from InternationalExperience Mr. Peter Trepte, World Bank 11:45 - 12~30 ImplementinganewProcurement Law: The Case o fKazakhstan and Poland Mr. Madi Duisembaev, General Director, Association "Procurement " Mr. Marian Lemke, Representativefrom Poland 12~30- 13100 Discussion 13:OO - 14:OO Lunch Session I1 )w-to improve performance in the new Georgia procurement system I This sessionwill focus on strategies for improving procurement effectiveness. The session will include a discussion o fthe authority and functions o fthe Ministry o fFinance and purchasingministries and subnational governments ina well-designed decentralized procurement system. Strategies for involving the private sector in calling attention to misbehavior on the part o f government officials or competitors will be reviewed.The role o fthe Procurement Agency inthe performanceo fthe procurement system will also be explored Chair: Mr. Gela Charkviani, Deputy Minister of Economy, Industry, and Trade Georgia CPAR Annex 6 Page57 of59 14:OO - 14~30 International Experiencewith making decentralized procurement systems work effectively Mr. Peter Trepte, World Bank 14130- 15115 Country Example: Establishing Effective Incentivesin Procurement: The Case o fKazakhstan andPoland Mr. Madi Duisembaev, General Director, Association "Procurement " Mr. Marian Lemke, Representativeform Poland 15:15 - 15145 Discussion 15~45- 16:OO Break 16100- 17145 Break out session: Establishing effective procedures and practices inthe Georgiaprocurement system. bay2: June5 1 09:OO- 1O:OO Report to the Plenary from the Working Groups 1o:oo- 0:30 Discussion 10130- 0:45 Break Session I11 Monitoring of Procurement This session considers the fundamental components o fan effective system for monitoring and evaluatingprocurement. The session includes a discussion o fthe information that i s critical to monitor, as well as the role o f different groups inmonitoring and evaluation. The session concludes with an examinationo f strategies for prioritizing monitoringresources and usingmonitoring and evaluationdata to change procurement practices. Chair: Mr. Vladimer Ugulava, Anit-corruption Bureau, Director 10:45 - 11115 Principles o fMonitoringand Evaluation o f Procurement: Lessons from International Experience Ms.ElsHinderdael, WorldBank Mr. Joel Turkewitz, World Bank 11:15 - 11:35 Implementing Changes inMonitoring: The Case o fthe Philippines Ms. Kristina Pimentel, Program Director, Procurement Watch 11:35 - 12:05 Discussion 12:05 - 13145 Lunch Session IV EstablishingEffective Oversight of the ProcurementSyste This session examines the role o fdifferent institutions inestablishing effective oversight o f the Procurement System.Particular attentionwill be placedon the establishing effective collaboration among the main oversight bodies, including: the Procurement Agency, the State Chancellery, the Ministry o f Finance, the Chamber o f Control, Parliament, the Anti-Corruption Bureau, business associations, the media, and civil society Chair: Mr. Malkhaz Shubitidze, Chairman of the SPA SupervisoryBoard 13145- 14115 International Experience with Oversight o f Procurement Pamela Bigart, World Bank 14:15 - 14145 Establishing Effective Oversight: The Case o fthe Philippines Ms.Kristina Pimentel, Program Director, Procurement Watch 14~45- 15~15 Discussion 15115- 15130 Break 15:30 - 17:15 Break-out Groups - Improving the Monitoring and Oversight o f Procurement 17~15- 18:OO Report back to the plenary from break-out groups 18:OO- 18~30 Closing o f the Workshop 18:30- 19~30 Cocktail GeorgiaCPAR Annex 6 Page 59 of 59 Session V BuildingCapacityinProcurement 09:OO- 11130 BuildingCapacityinProcurement -priorities and the sequencing o freform Discussionwith the group of officials andrepresentativesof donor community 11:30 - 12:OO Summingup the outcomes and agreements reached 12100- 12:30 Press Conference