Report No. 33206-HR Croatia Country Procurement Assessment Report March 2005 Operations Policy and Services Unit Europe and Central Asia Region Document of the World Bank Table of Contents Executive Summary iv A 1 B Context .. Preface ........................................................................................................................ ......................................................................................................... 3 C. ....................................................................................................................... Discussion and Analysis of Findings: 7 Public Sector ...................................................................................................................... ...................................................................... 7 c.1 Legal and Regulatory Framework for Public Procurement ............................ 7 1.1 Introduction......................................................................................................... 7 1.2 The Law on Public Procurement......................................................................... 7 c.2 Public Procurement Procedures and Practices ............................................... 11 2.1 11 11 11 Procurement ProceduresandFinancial Thresholds.......................................... Assessment o fBidders' Qualifications............................................................. Eligibilityto Participate inPublic Procurement............................................... Procurement Planning....................................................................................... 2.2 2.3 2.4 12 2.5 12 13 BiddingDocuments .......................................................................................... Technical Specifications ................................................................................... Solicitation o fParticipants inProcurementProcedures.................................... 2.6 2.7 13 2.8 BidSubmission andOpening............................................................................ . . 14 2.9 Evaluation o fBids............................................................................................. 14 2.10 Notificationof Contract Award andEntryinto Effect ofProcurement Contracts ........................................................................................................................... 15 2.11 Records o fProcurement Proceedings............................................................... 16 2.12 Procurement o f Consultant Services................................................................. 16 2.13 ReviewofBidProtests...................................................................................... 16 c.3 Organization and Resources ............................................................................. 18 3.1 Public Procurement Office (PPO) ..................................................................... 18 3.2 c.43.3 Audit andAnti-Corruption Measures............................................................. Public Procurement Operations inContracting Authorities ............................. State Commission for the Controlof Public Procurement Procedures.............19 20 21 4.1 21 Anti-CorruptionMeasures................................................................................ Audit ................................................................................................................. 4.2 21 c.5 Public-Sector Performance ............................................................................... 25 5.1 Enforcement of PublicProcurement Legislation.............................................. 26 C.6 Procurement Performance on Bank-financed Projects .................................. 27 6.1 Impact o fDecentralization................................................................................ . . 27 c.7 Electronic Procurement ..................................................................................... 29 7.1 Government Leadership.................................................................................... 29 7.2 Technology andInfrastructure ......................................................................... Legal Framework for e-GP.............................................................................. 30 7.3 31 7.4 32 Applications for e-GP ....................................................................................... Capacity Development.,................................................................................... 7.5 33 C.8 GeneralRisk Assessment ................................................................................... 36 c.9 Recommended Supervision Plan and Identification of Unacceptable Practices . for use inBank-Financed Projects 9.1 RecommendedSupervision Plan on World Bank-financed Projects................38 ................................................................................ 38 9.2 Unacceptable Practices on World Bank-financed Projects............................... 38 C.10 Private Sector ...................................................................................................... 41 10.1 10.2 Infrastructure ..................................................................................................... Enterprises......................................................................................................... 41 42 10.3 Construction Sector........................................................................................... 42 10.4 43 10.5 Banking Sector.................................................................................................. Consulting Industry........................................................................................... 43 10.6 44 10.7 Private Sector Companies' Perspectiveon Public Procurement....................... Operating Environment for Private-Sector Companies.................................... 44 10.8 EvaluationProcedures...................................................................................... 45 10.9 Contract Implementation .................................................................................. 45 10.10 Performance ofPrivate Companiesinthe Public Sector.............................. 46 10.11 Commercial Practices ................................................................................... 46 C.11 Recommendations ............................................................................................... 47 11.1 47 11.2 Recommendations for Reform o fProcurement Practices................................. Recommendations for Reform for the LegalFramework................................. 48 11.3 11.4 Recommendations onthe Development ofElectronic Procurement................48 Recommendations for Institutional Ref0rm...................................................... 49 11.6 Measuresto be Takenby Government and Timetable ..................................... 50 11.7 Technical Assistance and Sources o fFinancing............................................... 51 11.8 MonitoringandFollow-upPlans...................................................................... 52 Index of Tables Table 1:Implementationof the Recommendations of the 1999 CPAR .................................... 3 Table 2: Current Composition of the World BankPortfolio inCroatia .................................. 6 Table 3: Requirementsfor Advertising of Invitations to Bid 13 Table 4: Sample BidEvaluationMethodologyfor Goods ........................................................ .................................................. Table 5: Summary of Penalties for Fraudand Corruption inthe Criminal Law ..................22 15 Table 6: Expenditure on Public Procurement2000-2003 ........................................................ Table 7: Current Decentralized ProcurementWorld Bank Portfolio inCroatia 27 Table 8: Information Technology Indicators (number) ........................................................... ..................25 32 Table 9: Applicable Thresholds by ProcurementMethod ....................................................... 38 Table 10: Private Sector Share of GDP. 1995and 2003 41 Table 11:Action Plan and Timetable ......................................................................................... ........................................................... 50 Index of Figures Figure 1:Percentage of Contract Value Typically Paid inAdditional or Unofficial Payments to Secure a Contract with the Government ............................................................................... Figure 2: Frequency of UnofficialPayments ............................................................................. 24 Figure 3: ChangesinGross Value Added (GVA) inthe Construction Sector. 1996-2003 43 Figure 4: Banking Sector Depth. 2002 ....................................................................................... ....24 44 ii List ofAnnexes Annex A: Overview ofLegislationRelatedto PublicProcurement Annex B: RelatedIssuesonthe LPPandDiscussionofRemedies Annex C: List ofLegislationApplicable to PublicProcurementinCroatia Annex D: ElectronicGovernmentProcurement -A ShortOverview Annex E: BenefitsandBeneficiariesof e-GP Annex F: Examplesof e-GP Benefits iii Executive Summary Introduction Since Croatia gained its independence from Yugoslavia in 1991, the country's rules, regulations and institutions for awarding government contracts have been under regular development. A number o f Government decrees on public procurement were enacted in 1995 and 1996; a Law on Procurement o f Goods, Services and Works -basedon the UNCITRAL Model Law -was passed inDecember 1997; and a further new Law on Public Procurement (LPP) was enactedin2001, which fundamentally redirected the legal framework for procurement away from UNCITRAL and towards the European Union (EU) Procurement Directives, mindful o f Croatia's ever-closer relationship with Europe and its obligations under the Stabilization and Association Agreement with the EU. The World Bank last conducted a fiduciary assessment of public procurementinCroatia in 1999. Given the time that has elapsed since the assessment, as well as the Bank's continuing commitment to assisting Croatia with the development o f its public procurement system and the Bank's own need to assess the fiduciary risk associated with its lending portfolio in Croatia, includingwith potential new lendingmodalities such a Sector-wide Approaches (SWAPS), the Bank's management has authorized the conduct of the current procurementassessment inCroatia. This assessment is an integral part of the Bank's Country Assistance Strategy (CAS) for Croatia, which sets for this assessment and for the simultaneous Country Financial Accountability Assessment (CFAA) the objective that "building on the recommendations of the Bank's forthcoming CPAR and CFAA, over the medium term, public procurement and financial management systems should improve to the point that the practice of `ring-fencing' Bank- financed projects i s no longer considered necessary." Given that the European Commission recommended, on April 20, 2004, that the Council o f the European Union should open accession negotiations with Croatia and gave a broadly favorable opinion on Croatia's application for EUmembership, reform o f the country's public procurement system and its alignment with the EU acquis i s expected to be an increasingly pressingpriority for the Government. However, the Commission's opinion highlights the country's public procurement legislation as one o f a number o f not fully harmonized areas that are in need o f further reform. Key FindingsandRiskAssessment' On average, Croatia spends some 35 billion Kunas (about US%5.5 billion equivalent) on publicprocurement annuall$. That represents about 29 percent of total public expenditure or 19.5 percent of GDP, somewhat higher than the EU average o f 16.7 percent. Therefore, public procurement i s a high-value government activity, with substantial scope for waste, if done badly, and substantial room for efficiency gains and savings, if done well. The experience of public procurement reform in other countries indicates that improving efficiency and competition in ' The report i s based on the review conducted inearly 2004 and may not reflect all changes which were undertaken inthe country towards improvements inthe public procurement systeminthe year 2004. Source: estimates by the World Bankbased onpublishedconsolidated general government budget and public enterprises. It should be noted that the Croatian law onpublic procurement applies to some 1,100 companies whichperform economic- commercial activities but that consolidated expenditure data from such companies was not available at the time ofthis report. iv public procurement can yield savings of 20 to 25 percent of expenditures. It is clear that improving the efficiency of public procurement expenditures would deliver a major contribution to improved economic performance by Croatia's public sector. Yet Croatia's public procurement system exhibits a number of weaknesses, which run the risk that these efficiency gains may require a longer period o f time and additional efforts to be achieved. To its credit, the new management team o f the Public Procurement Office recognizes this situation and is committed to enacting an amendment to the Public Procurement Act, as recommended inthis report, inorder to remedy the most egregious weaknesses inthe law and to bringitcloser to alignment withthe EUacquis. Till late 2004 development in public procurement was taking place without a clear strategic vision, adequate prioritization of actions and with little or no assessment of the resources required to meet the challenge of EU alignment. A positive development in this area has started at the end of 2004 when EU-funded technical assistance in a form of twinning arrangementswas providedto the PPO andthe State Commission. The legalframework for public procurement remains incompleteand the currentlaw on Public Procurementis not fully alignedwith the EUDirectives.Chief among the weaknesses of the current procurement law are the excessive scope o f the exemptions from its application and the deficiencies in the provisions dealing with legal remedies. The PPO has stated its intention to enact amendmentsto the procurement law in order to bringthe range o f exceptions allowed under the current Public Procurement Act in line with the exceptions in the new EU Consolidated Directive (2004/18/EC). Also, although two implementing regulations were publishedin February 2002, the full set of implementingregulations, which are necessary to complete the legal fkamework, have not beenenacted yet. Observations of public procurement practices in Croatia, undertaken as part of this assessment, found that, while compliancewith the procurement law has been improving the longer it has been in effect, there remain some areas in which practice remainsto be weak. In some cases, the origins o f these weaknesses can be traced to provisions in the procurement law, such as those on the assessment o f bidders' qualifications, which over- emphasize documentary checks and do not require stringent requirements for bidders' financial and technical qualifications to be assessed in light o f the specific demands of the contracts for which they are bidding. That said, some significant and encouraging gains have been made, particularly in the legalrequirementsfor the notificationof bidding opportunities contract award notices and the publication of these notices in the Official Gazette online edition is working well. The LPP has fairly comprehensive requirements on the minimumcontents of invitations to bid and this i s reinforcedby a Govemment decree ofFebruary 7,2002, "On Public Procurement Notices and Records," which stipulates the mandatory forms of such notices and i s modeled on the requirements o f the EU Procurement Directives. One o f the strengths o f Croatia's public procurement system is that all such advertisements are published in the online edition o f the Official Gazette (www.nn.hr), and this arrangement work very well. The Government has also made a modest but successful start to the launch of electronic government procurement (e-GP) which has yielded savings o f as muchas 60 percent on some products but has yet to take advantage o f the savings and lower transaction costs offered by rolling e-GP out across state and local government. V With regard to the institutional arrangements for regulatory oversight of public procurement and for the review of procurement proceeding, Croatia has also made significant progress recently. Particularlywelcome is the establishment, in July 2003, of the State Commission for the Control of Public Procurement Procedures as an autonomous and an independent body reporting directly to the Parliament; and, in November 2003, of the Public Procurement Office (PPO). Both of these institutions, however, are relatively new, have yet to establish a credible record of operation and enforcement and are facing resource constraints which inhibit fully effective operation. Of the two key institutions inthe public procurement area, the Public Procurement Office (PPO) lacks the true independence from the Government which it needs to ensure enforcement o f the procurement law. I t i s still physically housed in the Ministry o f Finance building and i s under-resourced in terms o f staffing and technology, although it i s encouraging to note that some new staff have recently been brought in and a new Director of the PPO was appointed in October 2004 and plans are well-advanced to relocate the PPO to the new premises outside o f the MOF in 2005. The assessment found that the PPO spends too many o f its resources in granting bureaucratic ' approvals to various procurement transactions, when it should be focusing on developing good procurement practice among the contracting authorities and on completing the legal framework for procurement. Success of both new institutions is absolutely critical to the effective enforcement o f the procurement law and to ensuring the accountability of public officials in their decision-making relatedto procurement. The controlenvironment for public procurementhasbeeninsufficientlydevelopedto date. Most public institutions do not have functioning internal audit and control systems yet. The State Audit Office, although it has a legal mandate to assess the efficiency and effectiveness o f public expenditure, has yet to develop the capacity to conduct performance audits, which would be an invaluable tool for informingboth Government and Parliament on the cost-effectiveness of the country's substantial expenditures on procurement3. Also, there i s little scrutiny by the public, civil society and non-governmental organizations (NGOs) of public procurement i s ineffective inmaking public institutions enforce the procurement legislation effectively, largely because of the scarcity of publicly available information about public procurement operations. The Government does not publish any statistics on procurement. While rumors o f wrongdoing and corruption are commonplace, the absence o f hard data and of any tangible measures of performance make it difficult for interested stakeholders to holdpublic officials accountable for their actions. An encouraging sign inthis area is that the EUCARDS (Community Assistance for Reconstruction, Development and Stabilization) program i s currently financing the development of a system o f internal audit in state bodies, which should lead to significant improvements inthe control systems applicable to public procurement transactions. In its annual audit report for 2002, the SA0 found many serious misapplications of the procurement legislation and abuses of procurement procedures, including use of the Direct Negotiations procedure without the necessaryprior approval o f the PPO, the use o f the Restricted Procedure for contracts where the financial threshold in the law requires the use o f the Open Procedure, bid evaluations that were conducted using criteria other than those specified in the bidding documents, inadequate record-keeping and recording of procurement proceedings and failure by the contractingauthorities to collect from bidders the bid securities, which are required to offer public purchasers contractual protection and which yieldpublic revenues when called. As in many countries, corruption poses a threat to public procurement operations in Croatia. Although the Government has made significant advances in legislating in the anti- StateAudit Office is planning to introduce performance audits in2005 vi corruption area, the institutionalarrangements for combating administrative corruption relatedto procurement i s undeveloped, as the Government focuses mainly on combating organized crime, rather than on administrative corruption, such as that relatedto public procurement. OverallAssessment Based on the CPAR's analysis o f the legislative framework, procurement practices, institutional capacity and the opportunity for corruption, the assessment found that the environment for conductingpublic procurement inCroatia i s average. Recommendations This report makes a series o f recommendations designed to strengthen the public procurement environment o f Croatia, including legislative reform, improving procurement procedures and practices, institutional reform, capacity buildingandthe development of electronic procurement. The legal framework for public procurement should be reformed by, in the short term, amending the current legislation (both the Public Procurement Act and the Law on the State Commission for Control of Public Procurement Procedures) to address the identified weaknesses and, in the medium term, enacting a new Law on Public Procurement, aligned with the EUProcurement Directives. Short-term measures are designed to address weaknesses inthe current legislationthat require urgent attention, including introducing specific procedures for the procurement o f consulting services, clarifying and improving the provisions on the submission of an objection to a contracting authority, introducing requirements for filing an objection, and opening to all participants the opportunity to object to the contracting authority's selection o f procurement method. The longer-term recommendation i s for the enactment o f an entirely new Law on Public Procurement, aligned with the new EU Consolidated Procurement Directives (2004/17/EC and 2004/18/EC) and covering the award o f concessions. The new law should be harmonized with Law on State Commission for Control o f Public Procurement Procedures and should clarify the respective roles, duties and powers o f the PPO and the State Commission. The new procurement law should be complemented by a comprehensive set o f implementingregulations, in order to clarify the application of the new law and to complete the legal framework for procurement. The report also makes several recommendations to improve the efficiency, effectiveness and transparency of public procurement practices, most importantly in improving areas such as procurement planning, the assessment of bidders' qualifications and the evaluationo f bids. Several important recommendations are made to improve the independence and effectiveness of PPO and the State Commission as the key regulatory and review bodies for public procurement. The Government should provide both the PPO and the State Commission with dedicated office space outside o f the Ministry o f Finance building, in order to underscore their separateness from the MOF. The budgets and staffing o f both the PPO and the State Commission should be increased, in order to provide them with the human and technical resourcesthey needto perform their mandated functions effectively. The status o fthe PPO should be reviewed: inorder to enable it to act objectively intakmg the lead indeveloping procurement policy and legislation and in overseeing its enforcement, the PPO should be independent from Government. The PPO should relinquish the function o f clearing all uses o f procurement procedures other than the Open Procedure and the conditions for use of the other procedures should be more clearly defined ina new procurement law. To increase public-sector procurement capacity, which i s essential both to improve the effectiveness o f public expenditure on procurement and to improve enforcement o f the legislation, the Government should develop a vii local training institution for public procurement, which would be able to conduct procurement courses for public officials on a regular basis. Recommendations are also made for the development of electronic procurement. First, the Prime Minister should appoint an e-GP "champion" who would be responsible for moving forward the e-GP agenda and should also identify the lead agency to develop an e-GP strategy and implementation plan. The Public Procurement Act will need to be revised (or new public procurement law shall include relevant provisions) to provide the enabling legal environment for the application of e-GP, in line with the new consolidated EUDirective. The use o f the existing software application should be extended and piloted both vertically (the implementation of the online tendering functionality with the same group as i s participating in the current consolidated ICT procurement) and horizontally (for procurement beyond ICT and related equipment and services). Transparency in public procurement and the accountability of Government for the effective management of procurement should be enhanced by publishingcomprehensive information onprocurement operations-current legislation, invitations to bid, contract award notices, data on procurement expenditure broken down by level o f government, by institution, by different procurement procedures (open, restrictive and direct negotiation) on a web-based electronic public procurement bulletin. It is also essential that the State Audit Office should start to undertake value-for-money assessments of major public investment projects, in order to inform parliamentarians, the Govemment and the public about the efficiency o f such expenditures. The Govemment should also initiate a formal benchmarking and performance measurement system for public procurement, which would enable Croatia to establish the current state o f development of its public procurement regime, track progress as it implements reforms inthe future and record and report on performance outcomes. There i s currently a substantial effort underway by the intemational community, including the World Bank and the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD-DAC) to develop new tools for benchmarking and performance measurement in public procurement. The World Bank can assist Croatia to adopt and apply these tools. viii A. Preface Date and Basis for Report:The date of this report is March 25,2005 based on the draft CPAR dated November 9, 2004 as presented to the government counterparts at the dissemination workshop inZagreb, Croatia, inNovember 2004. The draft report was further modified inMarch 2005 to reflect extensive additional comments received from the PPO and information presented by the Govemment at the dissemination workshop to make a reference to rapidpositive changes occurringin Croatia since late 2004. Presentations madebythe Government representatives at the dissemination workshop assured that most of the key recommendations o f this report have being considered for inclusion in the future plans and strategies. Implementation o f these plans, however, presents a real challenge. Acknowledgments: The mission members wishto acknowledge the extensive cooperation and assistance received from officials and staff o f the Croatian public organizations, state-owned entities, NGOs and private companies interviewed during this assessment. In the World Bank, Mr. Anand Seth, Country Director and Ms. Indira Konjhodzic, Country Manager, offered invaluable guidance on the scope and overall direction of the assessment. The staff o f the Bank's Zagreb office offered the mission invaluable assistance. Mr. Johannes Stenbaek Madsen, Financial Management Specialist, who led the related Country Financial Accountability Assessment (CFAA), provided essential inputsto the report on the control environment. Mr.Enzo De Laurentiis, Senior Procurement Specialist, Latin America and Caribbean Region (LCOPR) andMr.Piotr-Nils Gorecki, Principal Administrator-Public Procurement, OECDBIGMA acted as peer reviewers for the report. Clearance o f the report within the World Bankwas providedby Ms. Franqoise Bentchikou, Chief Counsel, Procurement and Consultant Services Unit, Legal Vice- Presidency (LEGPR); Ms.Pamela Bigart, Lead Procurement Specialist, Procurement Policy and Services Group (OPCPR); and Mr. SunilBhattacharya, Regional Procurement Manager, Europe and Central Asia Region(ECSPS). Government CounterpartOrganizations: This report is based on information collected during two missions to Croatia undertakenby the World Bank and EBRD during October 2003 and February 2004. During both missions, an extensive series of meetings was held with Government officials of the relevant institutions, particularly the Ministry of Finance, Public Procurement Office and the State Commission for the Control of Public Procurement Procedures, as well as several other ministries, public enterprises, NGOs, private-sector firms, both local and foreign, and with other international financial institutions active inCroatia. Information in the section on e-Procurement i s based on meetings with the Central State Administrative Office for e-Croatia, as well as with current private-sector suppliers o f ICT to the government. The key counterpart officials participating in the assessment on the Govemment's part were the former Director of the Public Procurement Office and Assistant Minister o f Finance, Mr. Jure Bajic, the current Director o f the Public Procurement Office Mr.Mato Regvar, and the Chairman o f the State Commissionfor the Control o f Public Procurement Procedures Mr.Goran Matesic. A first draft version o f this report was discussed with the Public Procurement Office, the State Commission for the Control o f Public Procurement Procedures and the Ministry o f Finance in June 2004. 1 Following discussion of the first draft of the CPAR, written comments were receivedby the Bank from the Public Procurement Office, State Audit Office, the Directorate of Legal Harmonization of the Ministry of European Integration, the Directorate of EUFinancial Assistance and Projects of the Ministry of Finance and from the Directorate of Economic Affairs o f MOF. These comments have been reflected to the fullest extent possible inthe second revised version of the report, dated November 9, 2004 which was further amended following presentation at the dissemination workshop in Zagreb inNovember 2004 and extensive additional comments from the PPO and the State Commission. The final round of consultations took place inApril 2005 via video conference meeting between Zagreb and Washington with participation of the representatives from the PPO, the State Commission, E-Croatia, the MoF and the Ministry of European Integration. World Bank-EBRD Team: This report was written by a joint World Bank-EBRD team comprising Shaun Moss, Lead Procurement Specialist, Operations Policy and Services Department, Europe and Central Asia Region (Task Team Leader till December 4, 2004); Roch Levesque, Senior Counsel, Procurement and Consulting Services Unit, Legal Vice-Presidency; b u t Leipold, Senior Procurement Specialist, Procurement Policy and Services Group; Clifford Birch, Procurement Manager, EBRD; Ljiljana Tarade, Program Assistant, World Bank Country Office inZagreb; and KristijanGalic, Legal Consultant. Srebenka Gudan, Consultantto the Bank Country Office inZagreb, contributed the data on public procurement expenditures in Section 5. The report was finalized inMarch 2005 by Maria Vannari, Senior Procurement Specialist with assistance from DeveshMishra, Senior Procurement Specialist, both from Operations Policy and Services Department, Europe and Central Asia Region. 2 B. Context Since Croatia gained its independence from Yugoslavia in 1991, the country's rules, regulations and institutions for awarding government contracts have been under regular development. A number o f Government decrees onpublic procurement were enactedin 1995 and 1996 and anew Law on Procurement of Goods, Services and Works, based on the UNCITRAL Model Law, was passed in December 1997, coming into force in March 1998. The World Bank assisted Croatia with the development of this legslation by making a grant available from the Institutional Development Fund(IDF). Subsequent to the enactment of the 1997 law, the Bank conducted its first formal assessment of Croatia's public procurement system in 1999. The CPAR that resultedfrom that assessment, gave Croatia an average riskrating, having found that much commendable progress hadbeen achieved, butmade a number ofrecommendations for the fhrther development ofpublic procurement inthe country. Table 1summarizes the progress the Government has made inthe intervening five years with implementing those recommendations. Table 1: Implementationofthe Recommendationsofthe 1999 CPAR Recommendation Action Commentary Taken Enact implementing regulations to resolve 1I1Partial Regulations have been enacted on some topics specific weaknesses identifiedinthe LPP (small-value purchases, standard forms) but not inall areas. Prepare a procurement manual for contracting Partial Since 2001, three public procurementmanuals authorities have beenpublished by consulting fm,which are inuse bypublic bodies. Furtherwork to develop procurement manuals is planned under the EUCARDS programfor 2005. Prepare standardpre-qualification and the No Not done so far. Development o f standard pre- standard biddingdocuments qualification and the standard bidding program for 2005. documents is planned under EUCARDS Until2004 PPOprovided4-5 short courses authorities each year. Starting 2004 training has intensified in2004, over 27 seminars onpublic procurement were conducted bythe PPO, as well as expert meetings at the request of procuring entities. However, provision o f procurement training does not yet approached the demand throughout the country. Train selected procurement staff as trainers and N o Not done so far. I s planned to begin in2005 involve them indelivering training for under EUCARDS program. contracting authorities Disseminate informationonpublic procurement Partial Inadditionto 27 seminars mentionedabove, the opportunities to the private sector, e.g., by PPO provides a telephone advice line, which is information brochures, seminars. open every business day and which any interestedparty may call for advice. A more far-reaching dissemination programfor bidders i s planned for 2005. 3 Better define the role o f the PPO and strengthen Partial The 2002 LPPprovides a clearer definition o f its staffmg and physical resources. the role ofthe PPO. However, during most o f the period since the completion o f the last CPAR, the staffing and technology resources o f the PPO have been insufficient for it to operate effectively. Some encouraging developments have emerged inlate 2004, as a new PPO Director hasbeenappointed and additional staff hired. Also, twinningarrangements with German and SlovenianPPOs were enteredinto to revise an organizational structure and develop a development strategy. Start the publicationo fa public procurement Partial Thereis no bulletindedicated to public bulletin. procurement. According to the PPO it i s now planned for 2005. Procurement notices are regularly advertised inthe printand online editions-of the Official Gazette. Include the procurement professioninthe civil No Not done so far. I s planned for 2005 as a part o f service framework; preparejob descriptions for CARDS program. procurement staff Encourage educational institutions to start No Not done so far andhas beenlimited to the staff procurement courses o fbothPPO and State Commission for Control o fPublic Procurement Procedures providing lecturing and advisory services on an occasional basis. Although the recommendations o f the 1999 report were discussed and agreed with the Government at the time the report was written, only several of them have been partially implementedby 2004. Reasons for this may lie partly inchanges of government inthe interim, as well as in the technical complexity of some o f the tasks, such as writing standard bidding documents and a procurement manual, which take considerable technical and legal expertise. In addition, given the modest resources which the Government has allocated to public procurement, it is likely that the Public Procurement Administration within the Ministry of Finance simply did not have the manpower to deliver such a challengmg agenda. Finally, it must also be admitted that there has not been a continuing dialogue between the Government of Croatia and the World Bank on public procurement reform in the intervening five years, which might have allowed the Bankto follow up onprogress with implementation o fthe report's recommendations. The most significant development inthe interveningperiodhasbeen the enactment o f a new law on public procurement (Public Procurement Act) in2001, which came into force in2002. Section 1 of this report provides a detailed assessment of the new law (LPP). This law fundamentally redirected the legal framework for procurement away from UNCITRAL and towards the European Union (EU) Procurement Directives, mindfulo f Croatia's ever-closer relationship with Europe and its obligations under the Stabilization and Association Agreement with the EU. As can be seen from Table 1, the law also addressed some of the concerns raisedby the Bank inits 1999report. Given the time that has elapsed since the last assessment, as well as the Bank`s continuing commitment to assisting Croatia with the development o f its public procurement system and the Bank's own need to assess the fiduciary risk associated with its lending portfolio in Croatia, including with potential new lending modalities such a Sector-wide Approaches (SWAPS), the Bank's managementhas authorized the conduct of the current procurement assessmentinCroatia. 4 This assessment is also an integral part o f the Bank's Country Assistance Strategy (CAS) for Croatia, which sets for this assessment and for the simultaneous Country Financial Accountability Assessment (CFAA) the objective that "building on the recommendations o f the Bank`s forthcoming CPAR and CFAA, over the medium term, public procurement and financial management systems should improve to the point that the practice of "ring-fencing" o f the Bank- financed projects is no longer considered necessary." It i s evident, therefore, that the Bank looks forward to seeing the improvements in Croatia's public procurement system that this report recommends, in order that it will be able to rely in future on the country's own public procurement legslation and system, rather than requiring the application o f the Bank's procurement guidelines to Bank-financedoperations inCroatia. With regardto the country's relationship with the EU, the European Commissionrecommended, on April 20, 2004, that the Council of Europe should open accession negotiations with Croatia and gave a broadly favorable opinion on Croatia's application for EUmember~hip.~However, the opinion highlights Croatia's public procurement legislation as one o f a number o f non- harmonizedareas, citingthe following specific topics: 0 excessively broadexemptions from the scope of application o fthe LPP; 0 excessively broadexemptions from the scope o fthe Negotiated Procedure; 0 deficiencies inthe remedies system; 0 implementingmeasuresneedto be adopted; 0 regarding administrative structures, boththe PPO andthe State Commissionneedto become fully operational and establish credible enforcement records. Itshould benotedherethat, at the time of finalization ofthisreport, the PPO is inthe process of getting approval of the drafted amendmentsto the Public Procurement Act, as recommendedby thisreport, the primary objective of whichis to address the issuesdescribed above andto bring the law much closer into alignment with the EUacquis. The Commission's concerns expressed in April 2004 mirrored some of those expressed by the Bank in the 1999 CPAR, particularly regarding the need to complete the legal framework by enacting implementingregulations with comprehensive coverage and regarding the absence o f an independent review body (which has since been addressed by the enactment of the Law on the State Commissionfor Control o fPublic PTocurementProcedures o f July 16,2003). It is hoped that this new CPAR will not only update the diagnostic assessment o f the state of Croatia's public procurement system but that it will provide the Government with a clear agenda for completing the procurement reforms necessary not only for accession to the EU but also to complete the construction o f an efficient, transparent and cost-effective public procurement system. WorldBankPortfolioinCroatia Croatiajoined the World Bank in early 1993. Since then, the Bank has supported 23 projects totaling US$1.23 billion in value (based on original commitments). Twelve projects have been completed, including two adjustment lending operations (Enterprise and Financial Sector Adjustment Loan and Structural Adjustment Loan). The current portfolio comprises twelve projects (US$452.8 million), which are summarized in Table 2, below. Initially, lending was mainly focused on investments in "European Commission Opinion onthe Application of Croatia for Membership of the EuropeanUnion" available at http://europa.eu.int/co"/external~relations/see/sap/rep3~cr~croat.h~ infrastructure to support the country's substantial needs for post-war reconstruction. Towards the end of the 1990s, the Bank's assistance expanded to include health, agriculture and forestry sectors, enterprise and financial sector reforms, as well asjudicial and pension systemreforms. The Bank engaged ina dialogue on a new mid-term strategy shortly after the new Government took office in December 2003. Hence, a new Country Assistance StrategyDevelopment Partnership Strategy (CASDPS) was preparedjointly by the Bank and the Government. The lendingscenario o f the new CASDPS reflects the Government's commitment to its policy reformprogram, as supported by the proposed Programmatic Adjustment Lending (PAL). The PAL program aims to support the Government in continuing its structural reform agenda, particularly in the areas of governance, business environment, judiciary and human development. Parallel to the consultations on the new CAS and PAL program, the Bank, together with the Government, i s moving forward on four projects inanadvancedstageofpreparation withanindicativeamount ofUS$156million. Table2: Composition ofthe WorldBankPortfolioinCroatiaas at May31,2004 6 C. DiscussionandAnalysisof Findings: Public Sector C.l LegalandRegulatoryFrameworkfor Public Procurement 1.1 Introduction The Croatian legal system i s rooted in civil laws common to the Central European countries, particularly to the Austrian and German legal systems, where statutes are considered as formal sources o f the law butjudgments are not. One part of the legal framework has its origin in the domestic codification, either of the past when Croatia was a part of former Yugoslavia, or after gaining independence in 1991, while another part of the legislation has been developed since independence by adhering to internationally accepted models, in order to create a legislative framework suitedto a market economy. The Public Procurement Act (hereinafter referred to as the Law on Public Procurement or "LPP") represents a major piece of legislation governing the public procurement process and, as a first attempt to follow EU standards, represents a significant departure from the previous legislation, dating from 1997, which had been based on the UNCITRAL Model Law on Procurement o f Goods, Construction and Services (1994). Other laws that have an important bearing on public procurement operations in Croatia are the Law on the State Commission for Control o f Public Procurement Process6and the Law on Obligations'. The content o f these laws, together with the other laws having an impact on public procurement, i s summarized inAnnex A. 1.2 The Law onPublicProcurement The LPP provides for the major principles of the public procurement process, identifies parties to which it applies, defines the scope o f authority o f the Office for Public Procurement (PPO) and the State Commission for the Control of Public Procurement Procedures (hereinafter referred to as the "State Commission") and outlines the stages inthe procedure. The principal categories o f institutions to which the LPP applies are (i) State and other entities that are users of the State Budget, (ii)legal entities in which the Republic o f Croatia has a predominant interest or participationand(iii) the utilities sector. Among the strong points of the LPP are: 0 it providesfor a decentralized procurementsystem inwhich all users ofbudgetary funds, central and local, are maderesponsible for conducting their own procurement; 0 it requires adequate notification of bidding opportunities to suppliers and contractors, both at home and abroad; 0 it requires publication of various categories of procurement notices in the Public Procurement section of the Official Gazette, which i s also available on the Internet (www.nn.hr), together with quite comprehensive mandatory forms and contents for the various categories o fnotices; Zakon ojavnoj nabavi; Official Gazette No. 117/01. Zakon o driavnoj komisiji za kontrolupostupakajavne nabave; Official Gazette No. 117103. Zakon o obveznim odnosima; OfficialGazette No. 53/91,73/91, 3/94,7/96, 112199, 88/01. 0 it envisagesatwo-tier systemof administrative controlofthe procurement process bythe Office for Public Procurement and the State Commission, an appeal body and, ultimately, judicial control bythe Administrative Court. However, the LPP has been criticized from many quarters. A major flaw of the LPP i s the vagueness o f certain provisions and poor drafting o f others, which may result fiom inadequate translation into the Croatian language of models of other laws used indrafting process. The LPP also suffers from inappropriate structure, in that it i s not organized systematically; this leads to uncertainty in its interpretation and application by the relevant parties. The most serious comments relate to the following: The provisions dealing with legal remedies (Articles 70 and 71), are neither sufficiently elaborated, nor structured in conformity with the overriding principle of equality established in Article 3, which lays down the "General Procurement Principles." Inaddition, the LPP does not provide efficient protectionto all participantsina biddingprocess: 0 the selection of aprocurement methodis not opened to objection to all participants; 0 there i s no possibility to complain during the bidding process, although a complaint ("requestfor administrative supervision '7 may be lodged with the PPO which may take preventive action and require the procuring entity to eliminate any irregularity in the procurement procedure; 0 it is not possible to object to the ordering party against the decision on annulment of the procurement process; however, the right of appeal directly to the State Commission exists; 0 thirdparties or an administrative body itselfarenot entitledto appeal; 0 it is notpossibleto appeal to the State Commissionbefore the objection (i) been filed has with and (ii)dismissed or not responded by the Client (Article 71 (1)). The authority o f the ordering party to reject any bidwhereina thirdcountry, with which Republic o f Croatia does not have a reciprocal trade agreement, i s participatingwith 50 or more percent o f the bidprice (Article 60 (4) could lead to discrimination against foreign bidders and against bids submittedbyjoint ventures betweenlocal and certain foreign bidders. Furthermore, it could lead indirectly to a preference beinggivento domestic bidders. The definition of some fundamental legal terms is poor, such as those of "goods," "works" and "services," which are not sufficiently comprehensive, as many procurement requirements do not fall within their scope (Article 2). Draft amendments to the public procurement law address this issue, however, the amendmentshave not beenpassedyet. The LPP does not acknowledge the unique characteristics of consulting services and other professional and intellectual services, such as audit, training and certain computerization assignments. These services may not lead to measurable physical outputs and, as such, require specific criteria for the selection o f consultants and for service contracts that emphasize the overriding importance of the technical quality o f the services during evaluation. The existing provisions of the LPP may result incircumstances where the lowest price may be given primary consideration with much less regard for technical quality. The development o f distinct rules and criteria for the procurement of consulting service contracts would help ensure the use o f appropriate selection methods. These could include technical quality, combined with consideration of cost; technical quality only; and technical quality within the limitations of a fixed budget. Although the award o f concession contracts i s excluded from the LPP, the approach o f the PPO and their interpretation of the LPP i s that the LPP not only applies to procurement for construction, but also to construction concessions. This leads to a lack o f coherence on the legislative principles guidingconcessions. Eventhough there i s a separate Law on Concessions, greater transparency in the award o f concessions could be achieved if the clear and detailed provisions on concessionswere to be addressedina single document: either the LPP itself or the Concession Law. If it i s the latter, the Law on Concessions should include clear rules for the biddingofthe concessioncontract orrefer to the LPP. Article 6 o fthe LPP, which generally prescribes exemptions from launching a public procurement process, fails to prescribe the adequate criteria and the purpose of application o f such exemptions in sufficient detail. Thus, inpractice, it may contradict Article 12 (2), which enumerates cases where direct contracting without an invitation for bids i s allowed. In a related weakness, the conditions for use of direct contracting, contained inArticle 12 (2), are too broad and should be curtailed, in order to prevent abuse and to increase competition. The various categories o f exemptions from the scope o f application of the LPP, provided for in Article 6, are also excessively broad and it i s plannedto more clearly define them through amendments to the Public Procurement Act in2005. The procurement procedures, particularly the negotiated procedure and the direct contracting procedure, are poorly drafted and need to be clarified. These two methods, due to the structure o f the LPP and the associated provision (Article 12), overlap to a certain extent. Also other provisions such as bid evaluation, bid selection and other associated provisions are scattered elsewhere throughout the LPP and shall be re-grouped. Article 53 provides for submission periods which are realistic, however Article 53.6 sets an unrealistic timeframe by setting a much lower deadline for public availability o f information and preparation of bids setting up a minimum of 10 days from the date of the advertisement in the Official Gazette. Emergency circumstances under which 10 days advertisement i s allowed are not defined, thus, allowing a wide use of this provision. A widely spread practice to justify application of this provision is to delay procurement process to start late into the budgetyear or not properlyplanto have contracts inplace bythe requireddate. Inadditionto the bidevaluationcriteria specifiedinArticle 46 (2) 1 (the lowest price bid) andin Article 46 (2) 2 (the most favorable bid in economic terms, determinedby price and a number of non-price criteria), the LPP also allows the application o f "additional criteria" in bidding documents giving examples o f some additional criteria but without specifying or placing any limitation on how these shall apply. Without the implementing regulations to be adopted pursuant to Article 46.6 and absence o f standard bidding documents, this provision leaves the process of bid evaluation open to abuse and error, particularly in the hands o f public officials who may be inexperienced inpublic procurement. The process of determination of abnormally low bids, mentioned in Article 58 does the article define the possible legal consequences o f the submission o f an unusually low bid, nor whether the procurement processi s to be continued or not. This i s discussed inmore detail inAnnex B. As for the development ofCroatia's legal framework for public procurement, full alignment with the EU acquis i s clearly the overriding priority. This reflected in the Decision of the (EC) Council COM (2004) 275, which deals with, among other topics, the principles, priorities 9 and conditions contained in the European partnership with Croatia, according to which one ofthe short-term goals of Croatia is to ensure that "an efficient andtransparent public procurement systembecome hlly applicablewith the adoption of all necessaryby-laws". A full list of the legislationapplicable to public procurement inCroatia, which was reviewed for this assessment, is attachedat Annex C. 10 C.2 PublicProcurementProceduresandPractices This section provides a step-by-step commentary on the application of the procurement law in practice, from planning, through tendering, to contract administration. It highlights how weaknesses and gaps inthe legislation, as well as the absence o f effective enforcement of the law, translate into diminished levels o f transparency, competition and fairness in the procurement process. 2.1 Procurement Planning Procurement planning, if done at all, is generally weak, with plans reviewed for this assessment consisting o f little more than a list of contracts with budget numbers attached. They are essentially financing plans, with no consideration given to timing, contract packaging, the most appropriate procurement method or the interdependence between different contracts on the critical path of a project. The single greatest weakness o f procurement planning in Croatia, as evidenced by the audit findings o f the State Audit Office, i s that such planning as i s done generally does not start until half-way through the fiscal year. This gives rise to a number o f negative outcomes, including it restricts the contracting authority's choice ofprocurement method as there i s often insufficient time to conduct the Open Procedure, it reduces the margin for error or delay before fiscal year-end and, according to the audit findings o f the State Audit Office, it leads to many procurement procedures not being completed before the end of the year, which means that financial resourcesremainunused. Several major ministries complain about disconnect betweenfinancial planningand budgeting, on the one hand, and procurement procedures, on the other. Many go out to tender for civil works contracts even before they have taken over the site, simply because they have the funds and are concerned about losing them if they have not spent them by fiscal year-end. This often results in the commencement o f works being delayed, as the site i s not ready for the contractor to take over, utilities connections have not been arranged. One of the largest ministries reported that all its works contracts runlate and over-price for these reasons. In its comments on the draft of this report, the State Audit Office corroborated the report's finding on procurement planning, reporting that "The State Audit Office has also perceived the problem relatedto insufficiently elaborated procurement plans and lack of their consistency with financial plans". 2.2 Eligibilityto ParticipateinPublicProcurement While the provisions o f the LPP on non-discrimination are, at first sight, relatively strong, they are undermined by the opportunity which they give contracting authorities to reject a bid submittedby a consortium where the membership of firms from countries with which Croatia does not have reciprocal trade agreements exceeds 50 percent of the value of the bid. The procurement authorities reportnever havingencountered a case where this provision was applied. 2.3 Assessment ofBidders' Qualifications The provisions o f the LPP dealing with the assessment of bidders' qualifications are ill-defined, as they provide only for broad categories o f requirements (business capacity, financial and economic capability etc.) and there i s no secondary legislation in place to guide contracting authorities inhow to apply them. The problem i s exacerbated by the requirements o f the LPP for "qualification proofs" - that is, the list of documents which a bidder must submit to demonstrate 11 his qualifications - which contain vague provisions, such as "adequate bank statements." Many contracting authorities expressed dissatisfaction with this aspect of the law, as the vagueness of the provisions facilitates subjective decision-makingby on which unqualified bidders are allowed to bid and qualified bidders which excluded. Inthe absence of clear guidance, the assessment of bidders' qualification is usually misapplied by requiring bidders to submit a long list of papers, some o f dubious relevance to the contract, and acceptance or rejection of a bidturns on which bid contains all the required papers, without any proper assessment being made o f whether the bidders possess the qualifications, experience and resources necessary to perform the contract satisfactorily. Contracting authorities also require that all such papers have to be notarized, even for relatively low-value contracts, which bidders complain is expensive and unnecessary. As a result of these provisions, manypublic contracts are wonby companies that are incapable of executing them or qualified companies are not biddingon relatively small value public contracts due to high overheads in preparing and submitting the bids which require notarized multiple papers. 2.4 Procurement Procedures and Financial Thresholds The range o f procurement procedures available under the LPP i s similar to those contained inthe EU Procurement Directives: Open, Restricted and Negotiated (called "Direct Negotiation") procedures, althoughthe conditions for use o f the various methods vary somewhat fkom those in the EU Directives. Other than the threshold o f HRK200,OOO (US$3 1,700 equivalent) below which the separate procedures for small-value procurement apply, no financial thresholds apply to the procedures inthe LPP: they may be used regardless of the estimated value o f the contract, provided that the conditions for use o f the procedure are met. Given that the new EU Consolidated Directives, which have recently come into force, contain a revised range o f procedures, including a Competitive Dialogue procedure, the Croatian law will need to be updated to reflect these changes. Box 1provides a more detailed look at the procedures under the LPP and at the conditions under which they may be used. 2.5 Solicitation of Participants inProcurementProcedures The LPP requires the advertisement o f public notices for prior procurement notifications, invitations to bid, contract award notices and, in the case of entities in the utilities sector, for invitations to qualify and periodical notifications. Inthe second stage o f a Restricted Procedure and inthe case of Direct Negotiationswith a single bidder, a public advertisement is not required. Among the procedures for the procurement o f goods, works and services o f small value (HRK200,000 >$3 1,700 Advertise invitationto bidin Official Gazette (Narodne Novine) or a localnewspaper In addition, following Croatia's accession to the EU, contracts above thresholds stipulated inArticle 77 o f the Public Procurement Act, would have to be advertised inthe Official Journal ofthe EuropeanUnion(OJEU). This i s inlinewith EUDirectives. 2.6 Technical Specifications The LPP contains a requirement that the technical description o f procurement requirements in bidding documents should be objective and not result in an advantage being given to a specific bidder.Itallows the use ofbrandnames only incases where no other description canbe madebut requires that such instances be accompanied by a specification that an equivalent product may also bebid. Many contracting authorities report that this i s one o f the most problematic areas o f the LPP to apply inpractice. For example, state-owned enterprises that own and operate large fleets of buses and trams, or operate large industrial plants report that they find it impossible to buy the proprietary spare parts needed for the maintenance and operations o f their existing equipment. This is because they are forced to use the Open Procedure and award on the basis o f the lowest price inevery case and the PPO will not allow them to buy from the original manufacturer o f the capital equipment or to specify the brand name of the parts in the bidding documents, in cases where they use the Open Procedure, even though the LPP clearly allows such a provision. The PPO has commented that there are no reasons to avoid public biddingbecause there are enough biddershupplierswho sell spareparts of the same manufacture. 2.7 BiddingDocuments The LPP has fairly detailed requirements in terms of the mandatory contents of bidding documents. However, because the PPO has not yet issued any standard forms o f bidding documents, the application o f these requirements by contracting authorities is often patchy. For example, an SOE in the transport sector does not include the proposed form o f contract in its bidding documents, even though this is clearly required by the LPP. A sample of bidding documents reviewed for this assessment revealed wide variability in the quality o f bidding documents issued to bidders, with most being particularly weak inexplaining how bids would be evaluated. The President o f the State Committee expressed the opinion that if the contracting entities would observe the requirements o f the LPP on the mandatory contents of bidding documents, it would probably result in a 60 percent drop in the number o f complaints the State Commissionreceives. 13 The price contracting authorities charge for the sale of biddingdocuments is usually around 100 Kunas (US$16), whch i s reasonable. 2.8 BidSubmissionandOpening The LPP requires that the period allowedto bidders to submit their bids shouldbe not less than 36 days from the date of submission of the Invitation to Bidto the Official Gazette for publication, in the case o f the Open Procedure. For the Restricted Procedure, the periods are 36 days inthe first stage and 26 days inthe secondstage. Inthe Direct Negotiationprocedure, the minimumperiodi s 26 days. However, the LPP also permits these time periods to be truncated in exceptional circumstances, for example, for the Open Procedure from 36 days to 15 days and for the Negotiated procedure from 26 days to 10 days in cases of urgency. The LPP also includes what appears to be an overriding provision that the bid submission deadline should not be less than 10 days from the publication of the Invitation to Bidinthe Official Gazette, a provision that appears to undercut all the other provisions and which i s open to abuse. It is clear that 10 days i s a wholly inadequate period of time for bidders to prepare and submit their bids, other than incases o f the simplest o fprocurementrequirements. The LPP contains strong provisions on public opening, which clearly require the Public Procurement Commission to open the bids in public immediately following the expiry o f the deadline for submission o fbids.The law also establishesthe right o f the biddersto be represented at the public bidopening as well as request the copies o f the minutes. 2.9 EvaluationofBids The LPP contains provisions on contract award criteria similar to those in the EU Procurement Directives, namely: 0 the lowest-pricedbid; or 0 the economicallymost advantageousbid, identifiedby applying price and a number of different criteria. By far the most commonly used method of bid evaluation is award to the lowest-priced bid, which i s used in 70-80 percent of all transactions. Contracting authorities prefer to use this criterion because it offers the simplest method of evaluation, which i s also the most easily defended in the case o f a complaint. Also, because the level o f skills and experience in procurement i s low, most public officials shy away from the complexity o f the economically most advantageous approach. For most contracting authorities, the use o f price only also precludes the needto undertake a detailed technicalevaluationo fthe bidssubmitted. Another factor drivingthis i s the fact that the LPP provides contracting authorities with very little guidance on how to apply non-price criteria inbid evaluation The LPP provides that non-price criteria should be specified in terms o f their "importance in proportion to the overall evaluation system (ranging from 1percent to 100 percent), as well as the calculation method." However, as can be seen from the example in Table 4 below, most contracting authorities apply only merit points to the evaluation of price and non-price criteria and fail to define the required "calculation method." The State Commission i s of the opinion that this procedure i s illegal and reports that it accounts for the great majority o f appeals lodged before it. Despite the prevalence o f this illegal practice, inthe two and a half years since the LPP came into force inJanuary 2002, the PPO has not taken any steps to enact the implementing regulation on bid evaluation which Article 46.6 o f the LPP specifically foresees and which i s clearly greatly needed. 14 It is clear that a specific implementing regulation on bid evaluation, dealing particularly the application of price and non-price criteria, i s needed. While awarding the contract to the lowest-priced bid i s an adequate approach for simple procurement requirements, it has severe limitations when applied to complex plant and equipment, for example. Insuch cases, other criteria, such a life-cycle costs (i.e., the cost notjust o f purchasing an asset, but also o f owning and operating throughout its useful life) are also important. However, such criteria arenot applied inCroatia. Where non-price criteria are used, they are usually expressed in terms o f relative importance using a merit points system, such as the following bid evaluation methodology, which was applied to a recent evaluation ofbidsfor the supply o fnickel cadmiumbatteries: Table 4: Sample BidEvaluation Methodology for Goods I Criterion I Points I Price I Technical Advantages I 3 1 It is clear that this is a very subjective methodof evaluatingbids, as the criteria other than price can be applied in a discretionary manner, which leaves the process o f bid evaluation open to manipulation and reduces the accountability o f the members o f the Public Procurement Commission (PPC) conducting the evaluation. Given the considerable leeway allowed to the evaluators by such an evaluation system, it would be very difficult to prove wrongdoing on the part o f an evaluator. Some unusual and non-transparent practices were noted inthe evaluationo f bids.For example, in the award o f civil works for the construction of social housing (apartments of standard design), the Ministry o f Public Works holds an Open Procedure, inviting bidders to quote their price for the construction o f a single unit. Then it asks all qualified bidders to reduce their prices to match the lowest price-per-unit submitted from among all the bids received and it shares the construction work out among the bidders, contracting with each for as many units as it i s qualified to build. The Ministry claims that Article 61.2 o f the LPP specifically authorizes this approach. Ina further configuration of this methodology, when procuring the architecturaldesign services for social housing, the Ministry imposes a ceiling (for example, 640 per square meter) with which the contractor, who i s subsequently awarded the construction contract, must be able to buildthe housing units. The Ministry then takes a performance guarantee of 5 percent from the designer and, if it subsequently transpires that the contractor i s unable to construct the buildings withinthat price, encashesthe designer's performancesecurity. 2.10 Notification of Contract Award and Entry into Effect of Procurement Contracts The LPP requires that the contracting authority must publish a contract award notice within 30 days of the conclusion of the contract, except in cases where the public interest or the business interests of the contractor would be damaged by such a notice. The LPP also specifies the 15 minimumcontents of such notices and the Decree on Public Procurement Notices and Records specify the mandatory form. This, again, i s one of the strong points o f Croatia's public procurement system, as the publication of contract award notices i s an essential element o f transparency. 2.11 Records of Procurement Proceedings The LPP has relatively good provisions on record-keeping. The problem is they are largely ignored by the contracting authorities and, in some cases, not enforced by the PPO. Among the latter category i s an LPP provision requiring all contracting authorities to submit to the PPO, by March 31 of each year, an annual report of all procurement transactions they have conducted during the previous year. However, the PPO does not appear to press the contracting authorities to submit these reports and there were none on record at the PPO at the time o f this assessment. 2.12 Procurement of Consultant Services The procurement procedure mostly commonly used for the procurement of consultant services i s the OpenProcedure, combined with the evaluation o fbidsbased simply on the lowest-pricedbid. This i s a very unsatisfactory way to procureconsultant services, where the emphasis shouldbe on getting high-quality advice, rather than on low cost. Usingthe Open Procedure means that there is no shortlist and, therefore, no effective means of ensuringthat firms are qualified, as participation i s open to both qualified and unqualified bidders. This also has the undesirable effect o f dissuading qualified consulting firms from bidding, as they h o w that the use o f the Open Procedure will likely result intheir beingundercut on price by low-cost competitors who pay less attention to providing quality advice. Contracting authorities interviewed for this assessment expressed strong dissatisfaction with having to use an Open Procedure for the procurement o f consulting services, given the poor results this approach yields. Consulting firms interviewed for the assessment complainedthat the Requestsfor Proposals issued by contracting authorities are o f poor quality; that the Terms of Reference are usually not fully developed; that, because the RFP fails to specify the estimated number of man-months required for the assignment and given the lack specificity in the TOR, writing a responsive proposal i s rendered very difficult, as the firm cannot tell whether the assignment i s large or small. These weaknesses in the procurement process also make the evaluation of proposals problematic, as different bidders make different assumptions about the scope o f work and their proposal are not easily compared one with the other. Some firms expressed the view that contracting authorities leave the TOR vague on purpose, so that they can either extract more work from the consultants once they have them under contract or more easily amend the contract and increase the contract price during implementation. Several firms, particularly well-known firms with international practices, reportedthat, becauseo f these abuses, they never bidon government contracts. 2.13 Review of BidProtests Before the establishment o f the State Commission, the Public Procurement Administration inthe MOF had undertaken the administrative review o f procurement procedures in response to bid protests. This was a wholly unsatisfactory situation, given that the PPA was part o f the MOF which itself was a contracting authority under the LPP and, therefore, PPA did not enjoy the independence necessary to ensure impartial review o f bidders' complaints. During the first nine months of 2003, the PPAPPO received some 600 appeals, o f which it upheld 70 percent. Most complaints related to mistakes made by contracting authorities in the way they conducted procurement proceedings. The State Audit Office's annual report for 2002 found that the PPA had made some incorrect decisions in its review of complaints but did not specify the nature of their findings. Box 1:ProcurementProceduresandtheir Conditionsof Use b e following procurement procedures are provided for under the LPP: Open Tendering: The ma ement procedure, which requires public advertisement o fthe invitation to bid. Restricted Tendering: A two-stage procedure: the first stage is an open call for all interested f m s to submit requests to participate, following gauthority selects the qualified bidders and, int stage, invites ,withaminimumofatleast five, to submit a bid. The Tendering procedure may be usedwhen: o there is a limitednumber o fbidderswho are qualifiedto o use ofthe OpenTenderingprocedure wouldjeopardi interest interms o f Tendering procedure would impose costs on the contracting authority disproportionate to the value o fthe contract; or o use o fthe Open Tendering procedure would be inappropriate because o f the complex nature o f the procurementrequirement. Direct Negotiations: This pr for negotiations with at least 3 qualified bidders, following the advertis resulted inbids that didnot allow the o the type o f service the preparation o f a cost estimate for the contr d(particularly for intellectual, Alternatively, Direct Negotiati y beconducted with a single bidder, without publicationo f an invitationto bid, when: o after a repeated Open or Restrictedprocedure, no acceptable bid or a single bidwas received; o only one bidder canperformthe contract, becauseo o the requirement is urgentand the urgency was not c ods, works or services under a contract previously aw dprocedure, providedthe additional requirement does not e value o fthe original contract; o for standardized works e terms andconditions as under an earlier contract awarded by an Open or Restrictedprocedure, within three years o f the completion o fthe original contract; o for research or development activities not aimed o to take advantage o f unusually low prices that ar procurement o f ; 4. Law on General Administrative Procedure (Zakon o opcem upravnom postupku; Official GazetteNo. 53/91); 5. Law on Administrative Disputes (Zakon o upravnim sporovima; Official Gazette No. 53/91, 77/92); 6. Law on Arbitration (Zakon o arbitraii; Official GazetteNo. 88/01); 7. Labor Law (Zakon o radu; Official Gazette No. 36/95, 54/95, 65/95, 17/01, 82/01, 114/03, 30104); 8. Law on Concessions(2akon o koncesijama; Official Gazette No. 89/92); 9. Law onProtection of Market Competition (Zakon o zaititi triiinog natjecanja;Official Gazette No.122103); 10. Ordinance on the Procedure o f Procurement of Goods, Work and Services o f Small Value (Uredba o o postupku nabave roba, radova i usluga male vrijednosti; Official Gazette No. 14/02). 11. Ordinance on the Publishing and Bookkeeping o f the Public Procurement (Uredba o objavama i evidencijijavne nabave;Official GazetteNo. 14/02, 18/02); 12. Ordinance on the Incorporation of the Office for Public Procurement of the Government of the Republic of Croatia (Uredba o osnivanju ureda zajavnu nabavu Hade Republike Hrvatske; Official GazetteNo. 179/03). Annex D: Electronic Government Procurement -A Short Overview Definition Electronic Government Procurement (e-GP) i s the use of Information & Communication Technology (ICT), especially the Internet, by governments inconducting their relationships with suppliers for the acquisition of works, goods, and consultancy services required by the public sector. The level o f e-GP implementationcomprises three basic phases: 0 Online disclosure of information (e.g. publication o f procurement notices, awarded contracts, andprocurement law & regulations), 0 Online procurement transactions (e.g. electronic distribution of bidding documents and RFP/RFQ documents, electronic submission o f bids/proposals/quotations,electronic bid opening), and 0 Online procurement integration (e.g. integration of e-GP with systems for financial management, tax administration, and others). Along the lines of traditional tendering and purchasing procedures, e-GP can be divided into e- Tenderingand e-Purchasing: 0 e-Tendering can be definedas a solution designed to electronically handle the process of public tender for the acquisitiono f specialized works, goods, and consulting services that are o f high value and low volume. Contracts are usually awarded on the basis o f price and other criteria (e.g. performance, quality, efficiency). 0 e-Purchasing i s a solution designed to electronically facilitate the acquisition o f low- value and high volume standard goods and services. Contracts are awarded on the basis of price as the only evaluation criterion. Examples o f such systems include Mexico's e-Tendering system Compranet", and Brazil's e- Purchasing system Comprasnet". Chile's ChileCompra", Korea's GePY', Romania's Electronic Systemfor Public Acquistion.?, and Western Australia's Government Electronic Market' are examples o f systems supportingboth, e-Tendering and e-Purchasing. '*http://www.comrJranet.gob.mx/ l7 http://www.commasnet.gov.br l9 hm://www.chilecomma.cll 2o ht&I/www.g2b.t?o.kri 21 http://www.e-licitatie.ro/ 22 hm:/lwww. gem.wa.nov.au/Gem Benefits Breaking down the physical barriers o f space and time, e-GP allows a more transparent and efficient information flow as well as improved access to information and services. Beneficiaries include not only governments and suppliers but also the public at large, who can have access to transparent information on the public expenditure o f taxpayers' money. Many countries around the world are investing inthe design and implementation o f more or less complex e-GP systems as part o f the modernization of their public procurement systems. Transparency, efficiency, and improved quality o f government procurement are among the main benefits. In feeding all relevant data and information into a securely operated electronic system and automating public procurement processes, governments can reduce corruption or collusion by minimizing the risk of data manipulation or misuse. At the same time, procurement data and information can be made transparent to government decision-makers who, by using these data, can improve the quality of their decisions inthe context o f public procurement. Besides transparency, e-GP provides for efficiency gains in terms o f costs and time. As competition can be increased by opening up access to online procurement notices to more suppliers - provided an appropriate infrastructure is in place - and transaction costs o f the procurement process drop considerably (usually between 50 to 75 %), prices o f bids and proposals can be cut by usually 15 to 20 %. These savings include time savings due to automated procurementprocedures. As the public procurement volume of a country amounts to a considerable percentage ofthe GDP, the use o f e-GP may have a considerable impact on the economy, not only due to the considerable savings on offer but also due to the encouragement o f small and medium enterprises to use technology andbuildthe appropriate capacity. Key Success Factors Designing and implementingprojects with major ICT components inthe public sector have one thing in common: while ICT is widely available and can be used in many ways to improve government performance, there are some human factors which are critical to the success o f any such ICT project includinge-Government Procurement. Experience in many countries, no matter the level o f income, has shown that government leadership i s the most important key success factor o f e-GP. A strong champion (some countries have seen the President inthis role) needs to give the mandate of leading the e-GP initiative to an agency which i s able to bring about collective commitment for change, inter-government coordination, andpartnership with the supplier community. Appropriate government leadership can contribute to meet the requirements o f other e-GP key success factors, namely: e set a supporting policy and legal framework, including a clear e-GP vision and strategy, the definition of roles and responsibilities, the legal enabling environment with sufficient flexibility not to become obsolete withinthe short innovation cycle o f ICT; 0 awareness and capacity building among government, suppliers and the public at large, including a well thought through communication and outreach strategy, comprehensive training programs, and user help-deskfacilities; 0 institutional change including procurement process re-engineering and appropriate organizational structures; 0 technological infrastructure development, including improved connectivity to promote equal access to online procurement data and information, interoperability based on common standards, appropriate security techniques, and clearly defined e-GP business models. w ..