Report No. 26778-AZ Republic of Azerbaijan Country Procurement Assessment Report June 2003 Operations Policy and Services Europe and Central Asia Region Document of the World Bank Acronyms and Abbreviations CURRENCY CurrencyUnit =Azerbaijan Manat (AZM) US$ 1.00=AZM 4,848.0000 (May 8,2002) FISCALYEAR January 1-December31 ACRONYMS & ABBREVIATIONS ARRA Azerbaijan Agency for Rehabilitationand Reconstruction AM0 Anti-monopoly Office ANB Azerbaijan National Bank AZ Azerbaijan BER Bid Evaluation Report BSL BudgetSystems Law CAS CountryAssistanceStrategy CFAA CountryFinancialAccountabilityAssessment CPAR CountryProcurementAssessment Report CPPR CountryPortfolioPerformance Review CTF ConsultativeTask Force EBRD European Bank for Reconstructionand Development ECA Europe and Central Asia Region ED1 ElectronicData Interchange EU European Union FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service FY Financial Year GPA GovernmentProcurementAgreement of the World Trade Organization GTZ Deutsche Gesellschaftfur TechnischeZusammenarbeit(GTZ) GmbH ICB International CompetitiveBidding IF1 International FinancialInstitution IMF International Monetaw Fund I-PRSP Interim PovertyReduction StrategyPaper IS International Shopping PPL PublicProcurement Law MED Ministryof EconomicDevelopment MOF Ministryof Finance NCB National CompetitiveBidding NGO Non-Governmental Organization NS National Shopping PEIR Public Expenditure and InstitutionalReview PIU Project ImplementingUnit PPL PublicProcurementLaw PMAU ProjectMonitoringand Auditing Unit PSA Production SharingAgreement RFP Request for Proposal RPA Regional ProcurementAdviser SBD Standard BiddingDocuments SOE State-ownedEnterprises SPA StateProcurement Agency TA Technical Assistance TC Tender Committee UNCITRAL United NationsCommission for InternationalTradeLaw UNDP United Nations DevelopmentProgram WGPP Working Groupon Public Procurement wco . World CustomsOrganization WTO World TradeOrganization Regional Vice-president: Johannes F. Linn, ECAVP Acting CountryDirector: Donna Dowsett-Coirolo, ECC03 SectorDirector: Alain Colliou,ECSPS Task TeamLeader: Els Hinderdael,ECSPS Azerbaijan Country Procurement Assessment Report June 2003 1 ii Contents AZERBAIJAN Country ProcurementAssessment Report Table of Contents Executive Summary..................................................................................................................... A.Preface ..................................................................................................................................... vi 1 A.l Date andBases for the Report ......................................................................................... 1 A.2 Acknowledgements.......................................................................................................... 1 A.3 Participating GovernmentOrganizations......................................................................... 2 A.4 World Bank Team............................................................................................................ 2 B.Background.............................................................................................................................. 3 B.l Country Background........................................................................................................ 3 B.2 Bank Portfolio inAzerbaijan ........................................................................................... 4 C.Findings.................................................................................................................................... 5 PUBLIC SECTOR C.l Legal andRegulatory Framework ................................................................................... 5 1.1 Adoption of2001 Public ProcurementLaw............................................................ 5 1.2 ImprovedLegal Framework.................................................................................... 6 1.3 Conditions for Assessment ...................................................................................... 6 1.4 OutstandingIssues................................................................................................... 6 C.2 FraudandCorruption....................................................................................................... 8 2.1 Provisions inthe PPL .............................................................................................. 8 2.1.1Fraud................................................................................................................ 8 2.1.2Misrepresentation............................................................................................ 9 2.1.3Conflict of Interest........................................................................................... 9 2.1.4Bid Rigging ..................................................................................................... 9 2.2 Additional Provisions ............................................................................................ 10 2.3 Corruption.............................................................................................................. 10 C.3 The State ProcurementAgency ..................................................................................... 11 3.1 GeneralFunctions and Structure ........................................................................... . . 11 3.2 Implementation Measures...................................................................................... 12 3.3 InformationDissemination.................................................................................... 12 3.4 Website.................................................................................................................. 13 3.5 Electronic Procurement......................................................................................... 14 3.6 Training ................................................................................................................. 15 3.6.1SPA Staff Training ........................................................................................ 15 3.6.2Trainingfor ProcuringEntities...................................................................... 16 3.6.3Training for Senior Officials ......................................................................... 17 3.6.4Training ofTenderersandthe Public ............................................................ 17 3.7 Supervision............................................................................................................ 17 3.8 Records andReporting .......................................................................................... 18 3.9 Annual Reports...................................................................................................... 19 C.4 Control andReview ....................................................................................................... 20 4.1 Basic Structure....................................................................................................... 20 4.2 SPA Administrative Review.................................................................................. 20 4.3 Judicial Review ..................................................................................................... 22 4.3.1Jurisdiction .................................................................................................... 22 4.3.2Procedures..................................................................................................... 23 Contents 4.3.3 Liability for Damages.................................................................................... 23 4.3.4Arbitration ..................................................................................................... 24 4.3.5 LegalRetraining andPublic Respect for Law............................................... 24 4.4 Additional ControlMechanisms............................................................................ 25 4.4.1Supply-side Control....................................................................................... 25 26 c.5 ProcurementProceduresinPractice.............................................................................. 4.4.2Smuggling andMoneyLaundering............................................................... 26 5.1 AdministrativeDecentralization............................................................................ 26 5.2 State-ownedEnterprisesandUtilities.................................................................... 27 5.2.1Legal Status of SOEs..................................................................................... 27 5.3 Budget Allocation.................................................................................................. 29 5.2.2Procurement by SOEs ................................................................................... 28 5.4 Treasury andMOF Involvement ........................................................................... 30 5.4.1Use of "Average Market Price" ..................................................................... 30 5.4.2Control ofTotal Spend.................................................................................. 32 5.5 The Conduct ofProcurement................................................................................. 32 5.5.1Bakuand Environs ........................................................................................ 33 34 C.6 Public Sector ManagementPerformance....................................................................... 5.5.2Provincial Authorities.................................................................................... 36 6.1 ProcurementExpenditure for 1995-2000.............................................................. 36 6.1.1Goods and Services....................................................................................... 37 6.1.2Capital Expenditure....................................................................................... 37 37 6.2 ProcurementExpenditure for 2001........................................................................ 6.1.3Estimate of OverallPublic Sector Procurement............................................ 38 6.3 Competitivenessof Procurement........................................................................... 38 C.7 Performanceon Bank-assistedProjects 7.1 Development ofWorld Bank Portfolio ................................................................. 39 7.2 CommonProblems andLessonsLearned.............................................................. 40 7.3 Local ProcurementCapacity ................................................................................. 41 7.4 RecommendedSupervisionApproach .................................................................. 42 7.4.lThresholds ..................................................................................................... 42 7.4.2Prior andPostReview ................................................................................... 43 7.4.3Strategy for Fiduciary Safeguards................................................................. 43 C.8 Generalf i s k Assessment............................................................................................... 44 PRIVATE SECTOR C.9 CompetitivenessandParticipation................................................................................. 45 9.1 The ConstructionIndustry..................................................................................... 45 9.1.1Privatized GovernmentCompanies............................................................... 45 9.1.2Private Contractors........................................................................................ 46 9.1.3Construction Demand.................................................................................... 47 9.2 Road Construction................................................................................................. 47 9.3 Goods and Services................................................................................................. 48 C.10 Performanceon Public ProcurementContracts............................................................ 48 C.11 Commercial Practices................................................................................................... 49 C.12 The Business Environment........................................................................................... 49 12.1 Bank Guarantees................................................................................................... 50 12.2 CompanyRegistration.......................................................................................... 51 12.3 Licensing .............................................................................................................. 52 12.4 Foreign Currency Payments ................................................................................. 53 ~~ Azerbaijan Country Procurement Assessment Report June 2003 1 IV Contents 12.5 Inspections ............................................................................................................ 53 12.6 Customs ................................................................................................................ 54 12.6.1 Customs Procedures .................................................................................. 55 12.6.2 UNDP Modernization Program................................................................. 55 D.RecommendedAction Plan.................................................................................................... 57 D.1 RecommendedActions .................................................................................................. 57 58 D.3 Measures Takenbythe Government ............................................................................. D.2 DetailedAction Plan...................................................................................................... 58 D.4 Technical Assistance...................................................................................................... 59 D.5 MonitoringResults ........................................................................................................ 60 Tables 2. 1. Azerbaijan: Current Composition o f World Bank Loan Portfolio .................................. 4 Thresholds by Procurement Method.............................................................................. 42 Figures 1. Azerbaijan: Actual Government Budget Expenditure on Goods and Services and Capital Expenditure. 1995-2000 ................................................................................................ 36 2. Azerbaijan: Actual Government Budget Expenditure on Goods and Services and Capital Expenditure as Percentage o f Total Budget. 1995-2000 ............................................... 36 3. Azerbaijan: Estimated Government Budget Expenditure on Goods. Works and Services. 4. 1995-2000 ...................................................................................................................... 37 Azerbaijan: Estimated Government Budget Expenditure on Goods. Works and Services 5. Azerbaijan: Budget Plan Breakdown for Goods. Works and Services. 2001................37 as Percentage of Total Budget. 1995-2000 .................................................................... 38 6. Azerbaijan: Procurement Contracts Awarded by Tender Using Budgetary and Extra- Budgetary Funds. 1999-2001......................................................................................... 38 7. 8. Azerbaijan: Percent o f Budget-financed Contracts Awarded by Tender. 1999.............39 Azerbaijan: Percent o f Budget-financed Contracts Awarded by Tender. 2000.............39 Annexes I SummaryofBankOperationsinAzerbaijan I1 I11. .. Commentary on the PPL TOR for Proposed TA to SPA N - A. DetailedAction Plan N-B. Action Planfor the Improvement o fPublic Procurement inAzerbaijan V. Supplemental Letter on NCB Procedures Azerbaijan Country Procurement Assessment Report June 2003 I v Executive Summary EXECUTIVESUMMARY INTRODUCTION Improvement o f Azerbaijan's public procurement system falls squarely within the Government's Poverty Reduction Strategy, which i s concerned with restructuring the system o f public expenditure management with a view to improving the effectiveness o f the expenditures. The Government's Interim Poverty Reduction Strategy Paper (I-PRSP) o f May 2001 demonstrated its intention to improve the country's economic management system with a view to enhancing its effectiveness, converting it more fully to functional management, reducing the administrative structure, and raising the level o fprofessionalism and responsibility o f government employees. The CAS o f November 29, 1999 identified the area in need o f the most urgent attention to be comprehensive public sector reform and improved governance. The main thrust o f the CAS was therefore assistance to the Government in implementing its public sector reform agenda to improve public sector management. Clearly, efficient spending o f public funds i s a critical element o f good governance. In the procurement context, it was expected that, under SAC-11, substantial progress will be made in: (i)governance; (ii)the business environment; (iii) transparent budget execution and accounting; (iv) implementation of public procurement legislation (v) the institutional capacity responsible for oversight in the field o f public procurement and (vi) monitoring o f improvements in public procurement expenditure. These expectations were fulfilled and, by the date o f the finalization o f this CPAR, the conditionalities for the second tranche o f SAC-I1 linked to procurement reform were satisfied in all material aspects. Procurement reform has been a priority inAzerbaijan inthe last two or three years and significant progress has been made. This first comprehensive assessment o f the public procurement system in Azerbaijan seeks to investigate and assess all relevant aspects of procurement operations including the legislative framework, the effectiveness o f its regulatory institutions, the strength o f its enforcement regime, the capacity o f its institutional and human resources and the threat o f corruption. It was carried out in consultation with counterparts from the relevant ministries and with the valued cooperation o f the State Procurement Agency. The primary objectives o fthe CPAR are to: review the country's public sector procurement structure, including the new legal framework, organizational responsibilities and capabilities, and present procedures and practices, including how these may differ from the formal rules and procedures; make possible a general assessment o f the institutional, organizational and other risks associated with the procurement process; establish the basis for dialogue between the country and donors on how to streamline and improve the economy, efficiency and transparency o f public sector procurement; develop a detailed action plan for reform to achieve institutional improvements, including interim modifications to existing practices in the country so that contracts being financed under current projects will meet the Bank's procurement standards pending completion o f the broader reformprogram; and encourage better commercial practices inthe private sector. Executive Summary OVERALL ASSESSMENT The CPAR's key findings, including risk assessment, the strengths and weaknesses o f the public procurement system currently in place and the main features o f a proposed action plan, are summarized below. Kev Findinas Legal Framework (C.1) Azerbaijan has very recently adopted a new Public Procurement Law (PPL) which clarified and consolidated two existing and contradictory pieces o f legislation. The PPL i s based extensively on the UNCITRAL Model. It was also discussed at length with the Bank duringthe drafting stage and was found to be largely satisfactory. The version o f the PPL as adopted has, to a large extent, incorporated the previous comments o f the Bank. There are a few remaining issues with the PPL which would benefit from future amendment but they are not urgent nor do they detract from the immense progress made in the legal framework in the last five years. In terms o f substance and degree o f development, the PPL i s one o f the better such laws inthe region. With a view to assisting further development o f the PPL, this report makes a number o f recommendations for improvement. As a result o f the positive opinion o f the PPL, these further recommendations together with a commentary on the PPL are contained in a separate Annex I1 which discusses the PPL and recommendations in detail. These recommendations do not seek to detract from the considerable progress made to date and are offered as positive suggestions. Many of these suggestions may readily be incorporated into guidance and explanatory statements by the State Procurement Agency which will then be in a position to propose appropriate amendments to the PPL at a later date when experience has shown such amendment to be appropriate. The WorldBank makesthe followingrecommendations for dealingwith a number o f issues which would be best dealt with by way o f amendments to the current legislation when the time i s right. rather than simplyrelying on explanatory statements and guidance. Applicability: There i s confusion among the parties interviewed during the mission (notably State-owned enterprises and municipalities) as to the precise coverage o f the PPL.The definitions contained inthe PPL do not clarify the situation ina way which enables those applying the L a w to understand whether or not they are covered. The result i s that many entities do not believe they are subject to the PPL when in fact they are. The definition o f procuring entity should be amended to define the position clearly. This may be done by reference to the identity of the procuring entity rather than by relying exclusively on the source o f funds. The current plan i s that, once the new Law on municipalities i s adopted, the position will be reconsidered. Donor-funded contracts: Inthe previous laws, such contracts were subject to the rules applied by the appropriate donor. The PPL i s silent but the definition o f State funds (the spending o f which are subject to the PPL) includes grants and credits contracted by the government. In theory, Article 151 o f the Constitution provides that where there i s a conflict with an international agreement, that agreement will prevail. However, it would be preferable to make clear, in the specific context of procurement, that donor funded contracts may be subject to local procurement rules provided that, in cases o f conflict, the donor agency may impose a requirement that its rules shall prevail. Executive Summary ( 3 ) Services contracts: The PPL concems both intellectual (consulting) services and more general services which may be contracted on the basis o f performance o f a measurable physical output. Whilst the PPL does permit the use o f the primary procurement procedures (open, restricted procedures) for the award o f services contracts (but only under vague conditions referred to in Article 16(3)), the PPL appears to foresee the award o f all services contracts under a separate Chapter V which i s more appropriate to intellectual services. The different treatment o f the two types o f service should be clarified, preferably by malung Chapter V applicable only to the award o f intellectual services contracts, leaving other services subject to the primary procurement procedures. More detail on the use o f chapter V i s provided in some o fthe supporting documents relating to services contracts and the SPA has said that it will clarify the position in the implementing regulations. Ultimately, however, this would bestbe done byway o famendment to the PPL. (4) Prior authorization: Currently, Article 17.3 o f the PPL requires procuring entities to seek the prior authorization o f the SPA before using a procurement procedure other than the open procedure. Given that the conditions for the use o f these alternative procedures are clearly set out in the PPL, this i s unnecessary, duplicative and merely likely to cause delays. It i s recommended that this requirement be deleted and, as a corollary, that the procuring entity's choice o f procedure be subject to review under the review procedures of Chapter VIII. As a transitional measure, such prior authorization may be acceptable as a means o f familiarizing procuring entities with the conditions for using procedures other than the open procedure but this should only be seen as a temporary measure. (5) Preferences: Though preferences for domestic suppliers and restrictions on the nationality o f tenderers are foreseen in the PPL, the circumstances and conditions under which these may be used is not mentioned. Bothrequirements should be used only in limited circumstances and these should be made clear in the legislation. The new Charter o f the SPA which was approved on February 20, 2003 appears to give the SPA the task o f making proposals on the level o f preferences to the Cabinet o f Ministers but no further details are provided in the legislative provisions. It appears that proposals have been prepared by the SPA as part o f the implementing mechanisms and have been submitted to the Cabinet o f Ministers. It i s imperative that these be adopted. (6) Technical specifications: Article 15.2 currently guarantees objectivity in the setting o f technical specifications. However, there will be circumstances where there i s no meaningful way o f describing products without reference to specific makes or processes and it i s important, in this respect, to allow such references to be made subject to a requirement to accept any other "equivalent" product. The SPA's current position i s that it will always be possible to define technical specification without such references. (7) Estimated prices: The PPL allows tenders to be cancelled where the prices are significantly above or below the procuring entity's estimated prices. Whilst such estimates are appropriate for the purposes o f calculating the budget, they have no place in comparison and/or evaluation o f bids. This provision should be removed. The SPA's position i s that procuring entities will always be able to make accurate estimates. Executive Summary Review: The review mechanisms contained in Chapter VI11 o f the PPL, whilst they are extensively based on the comparable provisions o f UNCITRAL, appear to have been interpreted in a novel way. In particular, the administrative review procedure before the SPA does not result in a binding decision o f the authorities which can be relied upon by disappointed bidders in the event o f infringements o f the PPL. The powers o f the SPA are limited to malung recommendations, not decisions. Only the courts have the power to make bindingdecisions. This removes an effective tool for the enforcement o f the PPL and should be corrected inorder to preserve the integrity o f the system set upby the PPL and the confidence o f tenderers inthat system. Fraud and Corruption (C.2) There i s a widely held perception in the private sector that fraud and corruption exist and have a counterproductive effect on public procurement. As a result, the PPL sets out a number o f provisions which address fraud and corruption, notably fraudulent practices, misrepresentation, conflicts o f interest and bid-rigging. Nonetheless, these provisions are often vague, ill-defined and leave excessive scope to the procuring entities themselves to decide when they might apply. The CPAR therefore recommends (1) that these provisions be more clearly defined, preferably relying on provisions contained in UNCITRAL, (2) that the procedures for applying these provisions be established in a transparent manner and (3) that the appropriate authorities having jurisdiction to make findings o f guilt be identified (although the new Charter o f the SPA implies that the relevant authorities will be the courts or unspecifiedadministrative bodies). State Procurement Agency (C.3, C.4) This regulatory agency has been inoperation since 1998. It is staffed, at the highest level, by able and competent individuals whose commitment and personal contributions to the development o f the PPL cannot not be overstated. Inaddition to drafting the PPL, the SPA has prepared a number o f implementing mechanisms and a range o f standard form tender and contracts documents to be used by procuring entities and a series o f guidelines. It has been involved in the dissemination o f information through its annual reports (bulletins), the publication o f articles and through procurement training programs. It has responsibility for general supervision and monitoring and, despite the absence o f a sufficiently systematic and appropriate reporting system, has been able to identify and correct a number o f breaches by procuring entities o f the procurement rules (those applicable before the adoption o f the PPL). It has, encouragingly, adopted a practice o f "naming and shaming" those procuring entities who are found to be in contravention o f the law and publishes the results o f its findings in an annual bulletin. This policy appears to be the result o f the SPA's findings as a result both o f its supervisory functions and o f complaints brought to it for review. The weakness o f this system i s the lack o f reporting requirements. Whilst procuring entities are required to keep extensive records o f their procurements, there is no systematic reporting requirement, which makes the SPA's task o f monitoring more difficult. The CPAR recommends the design and introduction o f a systematic reporting system based on measurable benchmarks with a view to making monitoring more effective. The SPA has prepared a reporting format for use by procuring entities which i s now being considered by the Cabinet o f Ministers. This must be adopted and implemented before matters will improve. In addition, the appropriations procedures and statistics are opaque inrespect o fprocurement contracts. It is also recommended ~ ~~ ~~ Azerbaijan Country Procurement Assessment Report June 2003 7 Executive Summary that the appropriations procedures be designed to more clearly identify spendingon goods, works and services contracts with a view to enabling the SPA to carry out its own monitoring and reporting activities. Inaddition to this general supervisory role, the SPA also constitutes the second and potentially most effective tier for review (the effectiveness o f the third tier o f judicial review i s open to question). To carry out these tasks, it does not yet have in place either an appropriate review departmentldivision separate from its functional departments or a transparent and formalized review procedure. Whilst the personal approach to review adopted by the current head o f the SPA (a man o f considerable authority in Azerbaijan) may well successfully address infringements o f the procurement laws in the current political environment o f Azerbaijan, characterized by the dominance o f key personalities and political patronage, it i s not satisfactory as a permanent solution. The CPAR, therefore, recommends that formalized review procedures be put inplace under the aegis of the SPA. An even greater weakness o f this system i s the fact that the SPA appears to have no power to make bindingdecisions, merely recommendations. Given the state o f the judicial system, this would effectively deprive bidders o f any meaningful recourse in the event o f an infringement o f the PPL. The CPAR strongly recommends,therefore, that the SPA be given the power to make bindingdecisions as foreseen inthe UNCITRAL model. InstitutionalCapacity (C.3, C.4) With the PPLinplace and a competent regulatory agency to oversee its implementation, the main weakness in the procurement system appears to be one o f capacity and resources. Procurement based on market economy principles i s a relatively new concept and there are few trained procurement officers. There are, it i s true, a number o f purchasing and supply departments in some ministries but, for the most part, procurement i s undertaken by staff with little or no procurement training. Despite the best efforts o f the SPA, there i s currently no comprehensive country-wide program o f procurement training. The SPA simply has insufficient funds to achieve this. It has, nevertheless been active in conducting seminars and training sessions in Baku and surrounding areas. Consideration i s also being given by the SPA to set up a training institute (perhaps in partnership with an educational establishment, to be identified) with a view to certifying procurement officers. Resources need to be found to implement a comprehensive training program and the Bank i s actively discussing possibilities for funding o f such initiatives. As a result, EUTacis has committed funds inits 2002-2003 program. The SPA'S limited resources also affect its ability to disseminate information as widely as i s desirable. It publishes a great deal o f information in its annual bulletins (including the laws, standard documents and annual reports) and these are distributed free o f charge to procuring entities. It i s unable, however, because o f cost, to maintain adequate stocks o f this and other information (such as copies o f seminarhaining materials) and as a result, wider distribution is simply not carried out. Copies will readily be copied to diskettes brought in to the SPA by individuals but this i s a wholly unsatisfactory state o f affairs since it presupposes sufficient knowledge o f the individual (i.e. that he knows what he i s loolung for and where to find it) and the ability to visit the SPA office inBaku which i s not always possible for provincial officers and tenderers. The CPAR recommendsgreater emphasis on information dissemination and is also assisting in the search for funding in this respect. The CPAR notably recommends the use o f an information website to be created by the SPA with a view to publishing relevant information to both procuring entities and tenderers. The PPL already provides for the possibility of limited communication by electronic means in the procurement procedure. The proposed action plan Azerbaijan Country Procurement Assessment Report June 2003 I x Execubve Summary seeks to build on this initiative and the proposed website will form an integral part o f the SPA'S information dissemination strategy and may ultimately be used as a springboard for the introduction o fmore sophisticated electronic procurement. Procurement Procedures in Practice (C.5, C.6) Experience o f procurement i s limited, with the previous legislative provisions on procurement dating from 1996-97. The volume o f public procurement is not substantial. Based on extrapolation from public expenditure data (excluding extra-budgetary funds), actual expenditure on goods, works and services has been relatively constant over the 1995-2000 period at around 1.3 billion Manat but declining as a percentage o f the government budget from about 55 percent to 35 percent. The percentage o f budget-financed contracts awarded by tender increased from less than 8 percent to 23 percent from 1999 to 2001 to a level o f about 500 million in2001 Including procurement contracts funded with extra-budgetary funds, total procurement i s on the order o f 1 billion Manat a year. At least in respect o f central government authorities in Baku and the surrounding local authorities, there appears to be a reasonably good understanding o f what competitive tendering means and, with the assistance o f the SPA, a large number o f procuring entities have been able to develop a consistent practice and approach to the organization o f their procurement functions which was compatible with the previous legislation. Sufficient time has not yet passed to determine whether the new PPL i s fully understood but a number o f procedures are already being conducted under it and the SPA has launched a training initiative. Experience outside the capital and surrounding areas is much less developed. Very few local authorities have experience o f tendering procedures under the previous provisions and, although they have been informed o f the new PPL, only a handful o f procedures under the PPL are foreseen. Even then, the contracts to be opened for tender mostly fall well below the threshold for the application o f the PPL. There i s a serious lack o f investment inthe provinces (though it does not appear to be significantly greater in the capital) which implies very few contracts open to tender. Despite the decentralization o f the procurement function, the Ministry o f Finance continues to exercise a certain control over the procurement process, namely ex post approval, which creates significant uncertainty for tenderers. Given the existence o f a strong SPA with, if the recommendation made in relation to strengthening its review procedures i s adopted, appropriate powers o f control over the procurement process, there is less need for the Ministry o f Finance to exercise any additional controls and the CPAR recommends abandonment o f specific control over the procurement function by the Ministry o f Finance. Inaddition, this Ministry o f Finance approval also relies in part on a comparison o f competitively bid prices with some hypothetical estimated price which simply ignores the underlying rationale o f a competitive bidding process. The CPARrecommendsthat such a comparisonbe abandoned. Performance of Bank-assistedProjects (C.7) The overall performance o f the Bank's portfolio has returned to satisfactory after a worrisome performance in 2000-01 (see Annex Ifor summary o f Bank's operations in Azerbaijan). The CPAR mission identified problems affecting procurement o f Bank-financed contracts inthe areas of taxation and customs clearance procedures, bank issuance o f bid securities, and technical procurement knowledge on the part o f PIU staff. Government and the Bank have agreed to (1) set up a working group that would meet regularly with the deputy prime minister on project Azerbaijan Country Procurement Assessment Report June 2003 I XI Executive Summary implementation issues, including procurement, (2) establish good reporting procedures to keep the MOF informed on donor-funded activities, and (3) improve consistency and expediency in Bank responses to procurement inquiries and contract approvals. The Bank i s now hiring a procurement specialist who will located inthe Georgia office to handle the Caucasus portfolio. The CPAR also recommendsthat 0 project officers inthe Bank's Baku office receivebasic procurement training, 0 civil servants from the line ministries work with existing PIUs on simple procurement tasks to build capacity within the ministries, and international procurement consultants hired to support the PIUs are requested, as part o f their TOR, to train line ministry staff during the course o f project implementation. 0 a number o f other steps be taken to helpreduce risk to Bank funds, including legal provisions to make National Competitive Bidding procedures acceptable to the Bank (see side letter in Annex V), mandatory independent supervision o f civil works contracts, and independent procurement audits every three years. Private Sector (C.10-13) The Azeri private sector i s at the very early stages o f development. Notably in the construction sector, many o f the "private" sector firms are former in-house government construction departments and those that are no longer in-house tend to retain a limited State shareholding or be owned by former and sometimes current government employees. There i s a feeling inthe private sector, confirmed by others, that such companies are favoredbyprocuring entities. Outside the oil sector, the limited level o f investment ensures that private companies lag behind in terms o f experience and ability to grow and develop. The CPAR,therefore, recommends a speeding up o f the privatization program and a clarification, by way o f legal instrument if necessary, o f the status o f these entities and o f their entitlement to tender for public contracts. The general business environment does not encourage the establishment and growth o f the private sector, with excessive bureaucracy and spurious spot checks being the norm, along with associated "facilitation" payments. Though difficult to prove, there i s a widely held perception in the private sector that corruption i s widespread and has a significant effect on the procurement process. The PPL addresses many issues o f corruption but cannot deal with all levels. Similarly, company registration, licensing and customs procedures are outside the scope o f the PPL. Problems in these areas do, however, have a significant effect on public procurement and need to be addressed at the highest level. The main areas o f concernrelate to the procedures and delays in the registration o f companies, licensingo f certain activities and in customs clearance procedures. RiskAssessmentCC.8) Based on the analysis o f its legislative framework, the effectiveness o f its regulatory institutions, the strength o f its enforcement regime, the capacity o f its institutional and human resources, performance on Bank-assisted projects and the threat o f corruption, the assessment found that the environment for conducting public procurement inAzerbaijan i s medium- to high-risk. Action PlanSummary D.1-41 Given the stage o f development reached in the public procurement reform of Azerbaijan, the pressing need i s to ensure effective implementation of the PPL through the institution o f the SPA. Immediate requirements center around capacity building, training, information dissemination and monitoring. To that end and indiscussions primarily with the SPA, a major part o f the action plan Azerbaijan Country Procurement Assessment Report June 2003 1 XII Executive Summary has been translated into a technical assistance project (see Annex I11for TOR for TA and Annex N for detailedActionPlan). Inaddition to the recommendations made above, the main focus ofthis assisted actionplanis: Legal Development (1) Assistance to the SPA to prepare suitable explanatory statements and guidance with a view to the eventual amendment o f the PPL; Monitoring and Control (2) The development and implementation o f a reporting and monitoring system to enable the SPA better to prepare its bulletins and annual reports, including the preparationo f a benchmarking system for assessing the progress o f implementation and conduct o f pilot audits; (3) Assistance to prepare, design and implement a formal and effective review procedure, including decision-malung powers, within the framework o f the SPA; Capacity Building (4) The training o f SPA staff as well as the training o f trainers; (5) The establishment o f a substantively and geographically comprehensive in-country training program for procuring officers; Information Dissemination and Transparency (6) A public awareness campaignwhich would provide, inaddition to information, basic training to potential tenderers; (7) Improved information dissemination through increased printing and publication o f basic procurement documents and training materials; (8) The creation and maintenance o f an information website to provide an electronic means o f dissemination and access to relevant procurement information with a view, ultimately, o f facilitating electronic procurement. Azerbaijan Country Procurement Assessment Report June 2003 I xiii Preface A. PREFACE A.1 Date and Bases for the Report This report was completed on May 10,2002. The report i s based on the results o f interviews with more than 90 public institutions and companies during a series o f three World Bank missions that visited Azerbaijan between November 14 and 21, 2001, January 27 and February 2, 2002 and February 26 and March 6, 2002. The mission held discussions with public sector institutions at State, local and municipal levels as well as with many State-owned enterprises. With regard to the private sector, interviews were conducted with private domestic and foreign companies operating in the field o f works, supplies and services as well as with a number o f consultancies, trade associations and educational establishments. Meetings were also held with a number o f donor agencies and NGOs. Whilst interviews were conducted outside the capital, notably in Sungayet municipality and with some private companies in various neighboring municipalities, it was not possible to conduct as comprehensive an assessment in the provinces. Nevertheless, the services o f a locally established consultancy were retained in order to investigate procurement practices in four regions outside Baku. The regions chosen (both as large regional centers and for reasons o f geographical spread) were the Baku province municipalities, the Autonomous Republic o f Nakchevan, Ganja in the North-West and Lenkaran inthe South. A.2 Acknowledgements The mission members wish to acknowledge the extensive cooperation and assistance received from officials and staff o f the public organizations, State-owned enterprises and private companies interviewed. Ms. Judy O'Connor, Country Director, and Mr. Nicolas Mathieu, Senior Country Officer, offered invaluable guidance on the scope and overall direction o f the assessment in advance o f the mission. Mr.Roberto Tarallo, Senior Financial Management Specialist, and Mr.Ranjan Ganguli, Financial Management Consultant, who conducted the related Country Financial Accountability Assessment (CFAA) jointly with this assessment, provided essential inputs to the assessment and the report on accountability and auditing issues. Ms. Pamela Bigart and Robert Hunja, Senior Procurement Specialists OPCPR, Mr. Naseer Rana, Senior Procurement Specialist, EACIF, Mr. Gary Reid, Lead Public Sector Management Specialist ECSPE, Ms. Alison Micheli, Senior Counsel, Legal Department acted as peer reviewers for the report. Mr. Gurcharan Singh, Senior Procurement Specialist ECSPE, provided input for the risk assessment o f the Bank financed portfolio. Mr. Akbar Noman, the Bank's Country Manager in Azerbaijan offered advice and guidance throughout the mission stages. The staff o f the Bank's Baku office offered the mission invaluable assistance, especially Ms. Saida Bagirova, Operations Officer, Mr. Farid Mamedov, Operations Officer, Ms. Ulviya Ibrahimova and Ms. Nigar Aliyeva, all o f whom helped in arranging the mission's program. Ms.Ana Cristina Hirata and Mr.Mohammad Ilyas Butt assisted with the formatting o fthe report. Ms.Suzanne Snell assisted withreport editing and formatting. Preface A.3 ParticipatingGovernmentOrganizations This assessment was conducted in consultation with a counterpart team comprising representatives from the Milli Majlis (Parliament), Ministry o f Finance, Ministry of Economic Development, the Chamber of Accounts and the State Procurement Agency. The mission members would like to express their particular thanks for the cooperation and assistance received from Mr.ImranMehdiyev (Head) andMr.VagifNasirof (Deputy Head) o fthe State Procurement Agency. A.4 World BankTeam The World Bank team that worked on this report comprised Ms. Els Hinderdael (Senior Procurement Specialist, ECSCS), Task Team Leader; Mr.Peter Trepte (Procurement Consultant), Mr.UrfanNadirovandDr.RaulfMuradov ofCurrie &Brown(Consultants). Background B. BACKGROUND B.l CountryBackground The Republic o f Azerbaijan i s located in the southeastern Caucasus region o f western Asia. Azerbaijan was part o f the Russian Empire from the early nineteenth century to 1918, briefly an independent republic from 1918 to 1920, and a part o f the Soviet Union from 1922 to 1991. On August 30, 1991, it declared its independence from the Soviet Union. Azerbaijan covers an area o f 33,440 square miles (86,600 sq. km), has a population o f 7.8 million and includes two administrative divisions with special status, the autonomous Republic o f Nakhchevan, which i s separated from Azerbaijan proper by southern Armenia, and the autonomous district o f Nagorno- Karabakh (Qarabag). The capital and largest city o f Azerbaijan i s Baku. As an independent nation for only ten years, Azerbaijan i s still in political and economic transition. The Constitution o f the Republic o f Azerbaijan (the Constitution), ratified by popular referendum six years ago inNovember 1995, contains a Western system o f checks and balances aimed at securing separation o f powers among the legislative, executive andjudiciary branches o f the government. The Constitution provides for a unicameral parliament (the National Assembly or MilliMajlis), a president, and a prime minister. Following the break-up o f the Soviet Union and until the mid-l990s, Azerbaijan's economy suffered a dramatic output collapse, with a cumulative real GDP drop o f about 60 percent, accompanied by hyperinflation, sharp currency depreciation and rapidly depleting foreign exchange reserves. These difficult initial conditions largely reflected the collapse o f the Soviet Union and related trade and transport links, sharp negative terms-of-trade shock as suppliers movedto market pricing, the military conflict over the Nagorno-Karabakh region, and large fiscal deficits financed by money creation. Azerbaijan has only recently begun making progress on economic reform, and old economic ties and structures are slowly being replaced. Following President Aliyev's succession to power in 1993 and the cease-fire in Nagorno-Karabakh in July 1994, the Government launched a comprehensive stabilization and structural reform program in 1995, supported by the IMF and IDA. Prospects for growth were further improved by the negotiation o f 19 production-sharing arrangements (PSAs) with foreign firms that have thus far committed $60 billion to oil field development and should generate the funds needed to spur future industrial development. During the past five years, Azerbaijan has made significant progress in securing macroeconomic stability, price and trade liberalization, as well as in land and small-scale enterprise privatization. Real GDP growth averaged 7.1 percent during 1996-2000. Azerbaijan shares all the formidable problems o f the other countries o f the former Soviet Union in making the transition from a command to a market economy, but its considerable energy resources brighten its long-term prospects. Important challenges need to be overcome if future growth prospects are to be realized and provide for rapid expansion o f employment and income opportunities as well as a decline in poverty: the non-oil sector remains constrained by slow progress with financial discipline and efficient management in public utilities that together generate a significant quasi-fiscal deficit; weaknesses in public sector governance, the judicial and financial systems, and slow progress in privatization o f large enterprises also deter non-oil investment; and delivery and quality o f infrastructure and social services have deteriorated, especially in the rural areas. The majority o f the population lives below the poverty line. Background B.2 BankPortfolio inAzerbaijan The Azerbaijan Republic joined the World Bank in September 1992 and the Multilateral Investment Guarantee Agency (MIGA) in that same year. Azerbaijan has also been a member o f the Intemational Development Association (IDA) and Intemational Finance Corporation (IFC) since 1995. The Bank's portfolio inAzerbaijan currently comprises 16loans totalingUS$359.8 (see Table 1). Three loans, including one structural adjustment loan, have been completed. The current pipeline contains five new projects totaling US$59.92 million. A detailed breakdown o f World Bank Group Operations inAzerbaijan i s presentedinAnnex I. Table 1.Azerbaijan: Current Composition of WorldBank Loan Portfolio Findings-Public Sector; Legal and Regulatoly Framework C. FINDINGS PUBLIC SECTOR This section briefly reviews the main legal enactments which currently govern public procurement in Azerbaijan, highlighting provisions for dealing with fraud and corruption, and indicates the extent to which legislative texts and procurement information are accessible to the public. The section also examines the role and powers o f the State Procurement Agency (SPA) in the monitoring and implementation o f the applicable procurement rules as well as considering other methods used to enforce procurement legislation. Finally, this section assesses public sector management performance and performance on Bank-assisted projects and assesses general risk. c.1 Legal And Regulatory Framework Just one year following the ratification o f the Constitution, Azerbaijan adopted two legislative texts on public procurement. These were the L a w on Tenders o f February 11, 1997 and Decree 524 o f December 19, 1996 which set out the "Regulations" on the procurement o f goods, construction and services o f budget organizations. In essence, these texts were based partly on a tenuous understanding o f a tendering system and partly on provisions very loosely modeled on the UNCITRAL Model Law. Apart from the incomplete nature o f these texts, one o f the main difficulties was the inconsistency and contradictions between them. Under the auspices o f the SPA, work commenced fairly soon after their adoption to prepare a single revised text which would reflect more accurately the desired objectives o f a more transparent and competitive biddingsystem. 1.1 Adoption Of 2001Public ProcurementLaw Following the preparation of various drafts and after extensive debate over a two-year period within the Government and Parliament, the draft Public Procurement Law (PPL) preparedby the SPA was adopted by Parliament and signed by the President on December 27, 2001. The PPL i s inspired to a great extent by the UNCITRAL model law. Implementing mechanisms were promulgated by way o f Presidential Decree and signed on January 29, 2002 as Decree No. 668. The PPL explicitly abrogates the previous Law on Tenders o f February 11, 1997. Decree 668 explicitly abrogates Decree 524 o f December 19, 1996. The new PPL in effect consolidates and amends both o f these previous texts so that there i s now only one legislative text applicable to public procurement inAzerbaijan. Under article 33 of the Law on Normative-Legal Acts, existing legal acts concerning the same subject matter are implicitly abrogated on the adoption o f a new Law, and existing acts which are explicitly abrogated in the new Law cease to have effect. The Public Procurement L a w o f December 27, 2001 thus now constitutes the primary legal text governing public procurement in Azerbaijan. It was published inthe Respublika newspaper immediately following signature by the President and came into force that day. It will also be reproduced by the State Procurement Agency in its next bulletin. ffnd/ngs-Pubbc Sector; Legaland Regulatory framework 1.2 ImprovedLegalFramework Duringthe conception and drafting o f the PPL, the Azeri authorities, notably the SPA, were in communication with World Bank representatives conceming the scope and content o f the draft law. The World Bank's comments were largely favorable and it was generally accepted that the draft PPL was not only a considerable improvement on the previous applicable legislation but also a suitable law which was consistent with best international practice. Bank representatives made extensive comments and provided valuable assistance to the Azeri authorities in the preparation o f the Law. Many o f the suggestions made have been incorporated into the final PPL; some have not, and this report points out the few remaining issues that may hinder or distort the successful application o f the PPL, which do not alter the CPAR team's overall positive view o f the PPL. . 1.3 Conditionsfor Assessment Recent changes in the legal and regulatory framework conceming public procurement place certain constraints on the assessment o f this work. As in the case o f all transition countries, the promulgation o f procurement laws introducing market economy based concepts o f purchases from a competitive private sector are novel acts for Azerbaijan and, not unusually, it takes time for the necessary changes in the procurement environment and attitudes to take hold. The introduction o f public procurement legislation is relatively recent with the first acts having been adopted at the end o f 1996 and the beginning o f 1997. These initial acts were broadly based on the UNCITRAL Model but were deficient in a number o f respects which became the subject o f extensive discussions between the World Bank and the State procurementAgency. The result was the much improved PPLjust passed. But any current assessment o fprocurement performancewill necessarily be based on compliance with the earlier legislation and not on compliance with the PPL. This has only very recently come into force and success in its implementation cannot yet be measured. Analyses o f procurement performance in this report must therefore be read in this light. Whilst the likely influence of the new PPL may be readily assessed in terms o f its appropriateness and compatibility with internationalbest practice, the assessment o f the procuring entities' awareness o f the new provisions and o f their willingness and ability to implement them successfully is less easy to gauge. 1.4 OutstandingIssues There i s little doubt that the new PPL is an immense improvement on the previous legislation and i s a commendable piece o f legislation. There are a number o f minor issues which could benefit from detailed guidance and/or explanatory statements issued by the SPA. The Bank has a number of suggestions and recommendations and these are included inthe detailed commentary inAnnex 11. Some of these issues are somewhat more significant in the sense that they may not be amenable to correctionby way o f guidance and would be better dealt with by way o f amendment to the PPL or other appropriate legislation. These are also discussed in Annex I1and are also identified here and inthe Executive Summary. (1) Applicability: There i s confusion among the parties interviewed during the mission (notably State-owned enterprises and municipalities) as to the precise coverage o f the PPL. The definitions contained inthe PPL do not clarify the situation ina way which enables those applying the L a w to understand whether or not they are covered. The result i s that many entities do not believe they are subject to the PPL when in fact they are. The definition o f procuring entity should be amended to define the position clearly. This may be done by reference to the identity o f the procuring entity rather Azerbaijan Country Procurement Assessment Report June 2003 1 6 Findings-Public Sector; Legal and Regulatory Framework than by relyingexclusively on the source o f funds. The current position i s that, once the new Law on municipalities i s adopted, the position will be reconsidered. Donor-funded contracts: Inthe previous laws, such contracts were subject to the rules applied by the appropriate donor. The PPL i s silent but the definition o f State b d s (the spending o f which are subject to the PPL) includes grants and credits contracted by the government. In theory, Article 151 o f the Constitution provides that where there i s a conflict with an international agreement, that agreement will prevail. However, it would be preferable for it to be made clear, in the specific context o f procurement, that donor funded contracts may be subject to local procurement rules provided that, in cases o f conflict, the donor agency may impose a requirement that its rules shall prevail. ( 3 ) Services contracts: The PPL concems both intellectual (consulting) services and more general services which may be contracted on the basis o f performance o f a measurable physical output. Whilst the PPL does permit the use o f the primary procurement procedures (open, restricted procedures) for the award o f services contracts (but only under vague conditions referred to in Article 16(3)), the PPL appears to foresee the award o f all services contracts under a separate Chapter V which i s more appropriate to intellectual services. The different treatment o f the two types o f service should be clarified, preferably by malung Chapter V applicable only to the award o f intellectual services contracts, leaving other services subject to the primary procurement procedures. More detail on the use o f the altemative procedures i s provided in some o f the supporting documents relating to services contracts and the SPA has said that it will clarify the position in the implementing regulations. Ultimately, however, this would best be done by way o f amendment to the PPL. (4) Prior authorization: Currently, Article 17.3 o f the PPL requires procuring entities to seek the prior authorization o f the SPA before using a procurement procedure other than the open procedure. This is, however, consistent with the current wording o f UNCITRAL (although it i s understood that, following widespread criticism, this particular provision may be abandoned in the forthcoming review o f UNCITRAL). Given that the conditions for the use o f these alternative procedures are clearly set out inthe PPL, this i s unnecessary, duplicative and merely likely to cause delays. It i s recommended that this requirement be deleted and, as a corollary, that the procuring entity's choice o f procedure be subject to review under the review procedures o f Chapter VIII. As a transitional measure, such prior authorization may be acceptable as a means o f familiarizing procuring entities with the conditions for using procedures other than the open procedure but this should only be seen as a temporary measure. (5) Preferences: Though preferences for domestic suppliers and restrictions on the nationality o f tenderers are foreseen in the PPL, the circumstances and conditions under which these may be used i s not mentioned. Both requirements should be used only in limited circumstances and these should be made clear in the legislation. The new Charter o f the SPA appears to give the SPA the task o f making proposals on the level o f preferences to the Cabinet o f Ministers but no further details are provided in the legislative provisions. It appears that proposals have been prepared by the SPA as part o f the implementing mechanisms and have been submitted to the Cabinet o f Ministers. It i s imperative that these be adopted. Azerbaijan Country Procurement Assessment Report June 2003 I T Findings-Public Sector: Legal and Regulatory Framework (6) Technical specifications: Article 15.2 currently guarantees objectivity in the setting o f technical specifications. However, there will be circumstances where there i s no meaningful way o f describing products without reference to specific makes or processes and it is important, in this respect, to allow such references to be made subject to a requirement to accept any other "equivalent" product. The SPA'Scurrent position is that it will always be possible to define technical specification without such references. (7) Estimated prices: The PPL allows tenders to be cancelled where the prices are significantly above or below the procuring entity's estimated prices. Whilst such estimates are appropriate for the purposes o f calculating the budget, they have no place in comparison and/or evaluation o f bids. This provision should be removed. The SPA'S position i s that procuring entities will always be able to make accurate estimates. (8) Review: The review mechanisms contained in Chapter VI11 o f the PPL, whilst they are extensively based on the comparable provisions o f UNCITRAL, appear to have been interpreted in a novel way. In particular, the administrative review procedure before the SPA does not result in a binding decision o f the authorities which can be relied upon by disappointed bidders in the event o f infringements o f the PPL. The powers o f the SPA are limited to making recommendations, not decisions. Only the courts have the power to make binding decisions. This removes an effective tool for the enforcement o f the PPL and should be corrected inorder to preserve the integrity o f the system set up by the PPL and the confidence o f tenderers inthat system. C.2 FraudandCorruption 2.1 Provisionsinthe PPL The PPL provides for a number o f mechanisms designed to protect the procuring entity against instances o f fraud and corruption. These are summarized here and discussed in detail in Annex 11, which also details recommended actions. Reference i s also made to the private sector perception o f the incidence o f corruption. 2.1.1 Fraud Article 12 permits the procuring entity to reject a particular proposal/tender where the entity determines that the tenderer has been engaged in fraudulent practices in order to influence adoption o f a procurement decision. In this case, the procuring entity's determination must be confirmed by the SPA. The difficulties here are (1) that "fraudulent practices" are not defined and (2) that it i s the procuring entity which makes the decision, subject to confirmation by the SPA. The definition should be expanded clearly, preferably along the lines o f UNCITRAL Article 15 which includes both the offer and acceptance o f a financial inducement. It i s also imperative that the SPA (but preferably also the PPL) define the meaning o f the term and have procedures in place to be able to carry out such a confirmation objectively and expeditiously. Article 12 also permits the procuring entity to prohibit a tenderer determined to be fraudulent from participating in future procurement procedures, for a period o f time fixed by the SPA or for an indefinite period o f time. This latter penalty would appear to be excessive and should be used Azerbaijan Country Procurement Assessment Report June 2003 l a Findings-f ublic Sector: Fraud and Corruption sparingly, if at all. In addition to its supervision o f the procuring entities, the SPA also has the duty to compile and disseminate a list (database) of suppliers, contractors and service providers who have been in breach o f the procurement legislation and who are therefore ineligible to participate in tender proceedings. This type o f blacklisting should be used very cautiously and its use should be carefully controlled. Certainly the conditions for the use o f blacklisting should be set out indetail. ! Recommendation:The SPA should set out clearly the bases for exclusion from future procurements and the level o fpenalties interms of exclusion, preferably sequential. 2.1.2 Misrepresentation Under Article 6.2.6, tenderers may be disqualified where they "have been found guilty" o f "misrepresentation" or making false statements. It i s not clear (1) how these terms are defined, (2) how they relate to the fraudulent practices o f Article 12 (above) or (3) which authority i s able to make a finding o f guilty. As in the case o f blacklisting due to fraud, the definitions and procedures for a finding o f guilt need to be clarified and explained. Inthe hands o f the procuring entity, this may be a dangerous power open to abuse. 2.1.3 Conflict of Interest Article 13.1 renders ineligible, tenderers with a legal, financial or organizational dependency on the procuring entity. Whilst this i s an appropriate provision, the situation in Azerbaijan i s such that the majority o f "private" works contractors are or were the former in-house repair and maintenance departments o f Ministries, local authorities and State-owned enterprises (see Private Sector, below). A number o f these have been privatized, although many still have a significant State participation. Duringthe privatizationprograms, there is also a concern that such companies will be "looked after". Under this provision, where persons in the procuring entity have a financial interest in such a legal entities, that entity may not, quite properly, participate in procurement procedures. On the other hand, since all o f these entities are rather specialized inthe business o f their former parent Ministries, this effectively cuts them o f f from their primary source of work. It i s difficult to see how such a practical difficulty will be resolved in a manner consistent with the PPL. 2.1.4 Bid Rigging The PPL provides in Article 11.2 a reason for terminating the procedure which, although used in practice in many jurisdictions, i s rarely made explicit: the tender may be cancelled if it i s discovered that at the time o f tender proceedings tenderers have negotiated among themselves with a view to raising prices. This is, in effect, an anti-cartel provision which gives to the procuring entity the opportunity to terminate a tender where cartel behavior is discovered. Whilst this may be useful in light o f the lack o f powers possessed by those authorities responsible for antitrust enforcement (see 4.4.1 below), the danger i s that the procuring entities themselves have no additional powers to discover, verify or prove anti-competitive behavior on the part o f bidders. Cartel behavior i s notoriously difficult to prove and, without proper investigation and the appropriate powers to conduct such an investigation, procuring entities are inno position to make the assessment foreseen inArticle 11.2, whatever suspicions they may have. Further, the ability to cancel tenders on such grounds provides a flexible tool capable o f abuse inthe wrong hands. Azerbaijan Country Procurement Assessment Report June 2003 l 9 Findings-Public Sector; Fraudand Corruption 2.2 Additional Provisions Inadditionto the provisions ofArticle 12PPLthat allow for a tenderer to berejected where ithas been determined that he has been engaged in fraudulent activities, there is a provision in the criminal code which makes it an offence for a government official to accept bribes. There i s a similar provision in the Law on State Officials. Under the civil code, any citizen i s entitled to appeal an administrative act and could, under this provision, challenge a corrupt official in the civil courts. There i s currently a draft Law on Anti-corruption before the Parliament which was approved during its first reading on December 29, 2001. This is a relatively extensive text making it unlawful for government officials to abuse their positions by accepting financial inducements (comprehensively defined inthe draft) and imposing, inaddition to reimbursement o f the diverted funds to the Government, a series o f administrative measures from reprimands and demotions to dismissal. A workmg group has been established in the President's Office to combat corruption, although the draft Law envisages enforcement o f the L a w by the Azerbaijan Republic Public Service Administration Council. 2.3 Corruption Corruption is by its nature clandestine and instances o f corruption and those that practice it are often difficult to identify with precision. Whilst officials interviewed in connection with this assessment report did not readily acknowledge the existence o f corruption in Azerbaijan, there i s a clear perception on the part o f the private sector actors who were interviewed that corruption is pervasive and that the procurement sector does not, uniquely, escape its effects. Even if, as the Government (SPA) appears to believe, corruption is not actually as widespread in the procurement sector as private companies would claim, theperception that it is a factor at all inthe tendering procedure i s enough to severely weaken confidence inthe procurement system. Further, it is not only the private sector that recognizes the existence o f corruption. The IMF and World Bank Joint Staff Assessment o f the Interim Poverty Reduction Strategy Paper o f M a y 2001 expressed the view that corruption, particularly administrative corruption, had been a major constraint to Azerbaijan Republic's economic growth and poverty alleviation. The clandestine nature o f corruption is such that it is impossible, in the short term, to make a proper and accurate assessment o f the extent o f corruption and o f its effects on public sector expenditure. Strengthened procurement laws such as the PPL will certainly assist in the prevention o f opportunistic corruption in the sense that the opportunities for making and receiving bribes or other incentives are curtailed. A strong and competent regulatory authority such as the SPA is likely to encourage greater probity on the part o f procurement officers and procuring entities alike. Proper and extensive training and re-education not only inthe procedures themselves but also in the underlying rationale o f the competitive bidding system can only serve to improve understanding o f the perniciousness o f corrupt practices in the context o f procurement. In order to monitor the incidence of corruption on a longer term basis, the assessment has included within the scope o f the Foreign Investment Advisory Service questionnaire/survey relating to the business environment inAzerbaijan, a couple o f questions aimed at discovering the private sector's perception o f the incidence o f corruption in public sector tendering. The FIAS survey i s likely to be repeated at regular intervals and may, therefore, provide an indication o f any progress or lack thereof inthis area. Azerbaijan Country ProcurementAssessment Report June 2003 I lo Findings-Public Sector: State Procurement Agency C.3 The State ProcurementAgency Azerbaijan has already establishedan executive body answerable to the Cabinet o f Ministers with responsibility for carrying out State policy in the field o f public procurement. This was done at around the same time as the introduction o f the first procurement legislation. The Statutes o f the State Procurement Agency (SPA) were adopted in 1997 (Presidential Decree 583 of M a y 16, 1997 and Cabinet o f Ministers' Order 66 o f June 24, 1997) and the SPA became operational in 1998. This was an enlightened move and an unusual one in a country formerly part o f the Soviet Union. The early establishment o f the SPA in Azerbaijan serves to reflect the importance and commitment attached to the reform o f the public procurement system in the country. The SPA is staffed, at the highest level, by competent and motivated staff and has, in its few years o f existence, been very active in a number o f areas, most notably in the preparation o f the PPL. In addition, the SPA has prepared a number o f critical documents for use by procuring entities, has undergone training and provided training to procuring entities in Azerbaijan and has prepared at least two annual reports o f its activities. A new Charter for the SPA has been approvedby the Cabinet o f Ministers. Thischarter reflects the provisions o f the new PPL and does not affect the functions and role o f the SPA to any significant extent. 3.1 GeneralFunctionsandStructure The functions o f the SPA are described here thematically by type o f activity and not inthe order they appear in the Statutes themselves. The general fimctions o f the SPA are grouped into the following activities: implementation measures; information dissemination; training; supervision and control. Inaddition to the requirement inthe SPA's Statutes that it should report regularly to the Cabinet o f Ministers on the status o f the public procurement system, it i s also required, under the Budget L a w and incooperation with the Ministry o f Finance (MOF), to report twice a year to the President. The SPA has a Director, appointed by the President, and Deputy Director, appointedby the Prime Minister, and i s currently organized into six departments dealing with (1) organization and supervision o f goods contracts; (2) organization and supervision o f works and services contracts; (3) organization o f seminars and (training) methodology; (4) preparation o f legal documents; (5) finance and (6) administration. Perhaps the most limiting aspect o f the SPA's Statutes i s that it may have no more than 18 members o f staff, including both professional and support staff (Cabinet of Ministers' Order 66). Whilst the extent o f its current activities are to be commended, there i s little doubt that further expansion and improvement o f its activities could be hindered by its inability to recruit more staff. ! Recommendation:SPA staff levels need to be increased. Cabinet of Ministers and MOF ~ should be approachedto amend the current limitations. The SPA also has one branch office in the autonomous Republic o f Nakchevan with a head, a chief specialist and two senior specialists. The CPAR mission was told that this branch office will, in the near future, become an independent agency, funded by the Nakchevan Ministry o f Finance. The intention i s to increase the number o f full-time staff to seven. Azerbaijan Country Procurement Assessment Report June 2003 I 11 Findings-Public Sector: State Procurement Agency 3.2 Implementation Measures The first function given to the SPA is the establishment o f the normative-legal grounds for the operation o f the State procurement system and the development o f rules, regulations and procedures o f procurement, awarding contracts and the fulfillment o f liabilities under them. The SPA'S initial focus on this very important function led to the draft o f the PPL, now adopted. The task o f consolidating and amending the previous inconsistent legal provisions regarding public procurement fell to the SPA and it was the SPA which liaised, for example, with the World Bank and others on the content o f these drafts. Both during the drafting o f the PPL and now with its adoption, the SPA continues to prepare further normative-legal acts. The SPA has also produced guidance on a number o f contractual issues such as compulsory insurance, risk sharing between procuring entities and suppliers, payment schedules and contract administration. As recorded in the bulletins issuedby the SPA in2000 and 2001, the rules adopted by the SPA govern mechanisms for the procurement o f goods, works and services and include standard form tender documents, comparison tables, standard form contract documents (approved by Cabinet o f Ministers' Decree 87 o f May 12, 2000), normative acts and other documents to guide the procurement process. There are also guidelines to assist in the selection o f tenderers and mechanisms for implementing "scoring" systems. It i s not clear whether these scoring systems rely on "weighting". The Bank does not recommend such weighting but, where it i s used, recommends that the evaluation criteria adoptedbe expressed inmonetary terms. Currently, the documents available provide instructions on: 0 procurement o f goods under the open tender, RFP, RFQand single source procedures 0 the preparation o f the evaluation report for the procurement o f goods 0 the evaluation of bids for procurement o f goods and works 0 procurement o f construction works (small works) 0 the preparation o fthe evaluation report for the procurement o f civil works 0 procuremento f consulting services 0 the evaluation and comparison o fbids for consulting service !Recommendation:Technical assistance shouldbeprovidedto ensure the completenessand appropriateness o fthese normative-legal acts. 3.3 InformationDissemination The task o f disseminating information on procurement does not appear as a single function inthe Statutes o f the SPA, although the SPA has clearly taken the need for this critical function on board. This task i s really an amalgamation o f a series o f functions and duties which are assigned to the SPA., covering, for example, 1. the collection o f information concerning procurement both in Azerbaijan and outside (including coordination with foreign procurement agencies) and the dissemination o f resulting information inthe country; 2. the provision o f transparency and publicity in the procurement process; general advice and counsel to procuring entities; 3. provision o f explanations o f the normative acts regulating State procurement to participants intender procedures; 4. compilation o fbulletinsfor the purposes o f disseminating procurement information. Findings-Public Sector: State Procurement Agency It also concerns training which is dealt with separately below. The annual bulletins are the main vehicle through which the SPA can disseminate information to a wide audience. Thus far, there have been two bulletins and these have contained copies o f the applicable Laws and amendments thereto (the next bulletin will include a copy o f the new PPL), instructions and the standard form documents prepared by the SPA, the SPA Statutes, annual reports and an estimation o f savings as a result o f adherence to the (pre-PPL) laws on procurement. These bulletins are provided free o f charge to all procuring entities. They are also available free of charge to all other interested parties, namely the potential tenderers, although limited funds makes this process less than efficient. The SPA will gladly copy versions o f the printed documents on a diskette brought in by a tenderer but i s unable, for reasons o f cost, to provide printed or photocopied versions. A prohibition on commercial activities effectively precludes the sale of the bulletin (which would, at least, have provided funds for the production o f further copies). The other vehicle for the general dissemination i s the authorship and publication o f newspaper notices and articles informing the general public o f the adoption o f laws and other normative- legal acts in the field o f procurement. SPA staff regularly publishsuch articles in the Respubliku newspaper. More targeted information dissemination takes place as part o f the SPA'S functions o f advising and counseling procuringentities and it i s apparent that this is an ongoing process. There i s clearly no problem with the motivation o f the SPA staff who are consistently seeking ways o f disseminating more information on procurement. There are, however, significant problems with capacity (interms o f the number o f staff) and funding. !Recommendation:Technical assistance should be provided to assist ina number of areas related to information dissemination. The immediate need, in terms o f funding, would appear to be (1) assistance in producing and disseminating more bulletins and (2) the creation and operation o f a procurement information website. 3.4 Website Article 9.2 o f the PPL i s unusual for a transition economy in that it already provides for certain communications to be made by electronic means. Certain communications may be made by a means that does not provide a record o f the content o f the communication provided (e.g. e-mail) that, immediately thereafter, confirmation o f the communication i s given to the recipient o f the information in a form which provides a record o f the communication (i.e. a hard copy version).At present, the range o f documents that may be submitted by electronic means i s limited, including, for example, 1. requests for clarification and the results o fpre-qualification procedures; 2. notice o frejection o fproposals; 3. requests for clarification o f tender securities; 4. clarifications o fproposals and arithmetical errors; 5. notification o f successful bids. In addition, electronic means of communication may also be used for direct solicitation in services contracts under chapter V and for the direct solicitation o f proposals in restricted procedures. These possibilities are mostly, o f course, for the benefit o f the procuring entities. On the tenderers' side, electronic means o f communication may also be used for the submission o f the pre-tender submission. Azerbaijan Country Procurement Assessment Report June 2003 13 Fmdmgs-Pubbc Sector. State ProcurementAgency w At a more global level, a national IT strategy is currently beingdeveloped and coordinated by a division o f the President's Office. Originally set up to manage the President's information database, it now seeks to coordinate the computerization process inthe country. It is, for example, responsible for the Global Development Gateway inAzerbaijan. It i s also seeking to establish an interministerial council to debate the desirability o f interfacing all the separate databases maintained in the country. At a very practical level, it has drafted a law on e-signatures. It has tried to advertise the idea o f the electronic government and has at least considered the possibility o f e-procurement. This i s also something which finds support at the SPA. Interms ofpublic access to and availability ofthe Internet, there are anumber ofprivate sector ISPs operating in Azerbaijan. Access i s currently estimated to be around 356 per hour (down from $5 per hour, two years ago). There i s increasing use o f digital lines offering free dial-up. Baku i s 40 percent digital and Nakchevan, 100percent. 3.5 Electronic Procurement Azerbaijan would, therefore, appear to be well placed to explore the possibilities of e- procurement. As a term o f art, "e-procurement'' tends to be used (and mis-used) to cover a number o f different activities. Perhaps the most basic level consists in the posting to the Internet o f procurement notices (generally and preferably, simultaneously with the hard copy publication o f the same notices ina newspaper or Gazette). This i s a procedure used extensively, for instance inthe U.S. (Business CommerceDaily),inthe EU(the TEDdatabase and, now, SIMAP), inmost GPA signatory countries andby most o fthe donor organizations. The next level (and the one already adopted in Azerbaijan without having employed the on-line advertising) i s perhaps the use o f electronic communications to post subsequent notices and to communicate in other ways. This is, in truth, little more than malung use o f e-mail facilities, although this could also be accomplished by posting such information on a dedicated website. The subsequent level could well consist in the submission o f tenders via e-mail or the Internet. There remain some difficulties with this application, however, not least the questions o f confidentiality (i.e. when the tenders are opened) and authenticity (the issue o f e-signatures, already addressed inAzerbaijan). Whilst these initiatives may demonstrate the increased use o f electronic means o f communication and o f the Internet, they are not, strictly speaking, "e-procurement". What existing systems do not do (e.g. SIMAP), at least not yet, i s to enable direct electronic communications to be established between the buyers and sellers so as to allow them to proceed further with and, ultimately, conclude a procurement transaction. In fact, e-procurement, as understood above, is possibly too underdevelopedunderused globally to seek to introduce to Azerbaijan inthe short term. That is not to say that such transactions cannot already be concluded electronically. Apart from the obvious but time-consuming manual possibilities offered by e-mail, automated systems also exist. Electronic Data Interchange (EDI) i s a system which has enabled the creation and transmission o f electronic forms and documents needed to conclude commercial transactions, such as purchase orders, tenders and invoices between buyers and sellers. But it is expensive and requires compatible equipment and software at either end. Then there are business-to-business (B2B) electronic marketplaces which overcome compatibility constraints but they are still expensive and require high transaction volumes and sophisticated users. B2B marketplaces are Internet software systems that take traditional stages o f the purchasing process online, such as product search and identification, tendering negotiation, ordering, receipt, and invoicing. The Azerbaijan Country ProcurementAssessment Report June 2003 I 14 Findings-Public Sector; State ProcurementAgency significant difference with ED1i s that the data interchange i s n o longer dependent on bilateral equipment compatibility but i s open to all. Apart from the dollar cost (which is easily remedied) the real difficulty in adopting these approaches to e-procurement i s likely to be liquidity (ie. the level and number o f transactions) o f an electronic procurementmarket and the sophistication o f users. Nevertheless, there i s no reason why Azerbaijan should not seek to develop further its promising start with electronic communication. The SPA i s keen to proceed and the conditions o f the country would appear to be favorable. Following discussions with the SPA, the ideal solution would appear to be the creation o f an information website which will contain all the relevant documentation (otherwise only available in the bulletins) and which may serve, in future, as a means o f publicizing progress o f implementation o f the PPL. Indeed, it could serve as an on-line bulletin and contain all the same information as the hard copy, including the "name and shame" section described below (see 3.7). Tender-specific information and notices could be posted on the Internet and tenders submitted online (provided this i s compatible with the procedures and time limits o f the PPL). It may also provide a useful means o f publicizing blacklisted suppliers, also referred to in IBTA and SAC-11. The website may also, ultimately, act as a platform for more sophisticated e-procurement mechanisms. The immediate purpose o f the website would be to provide a readily accessible means o f disseminating information. !Recommendation:Technicalassistance shouldbeprovidedto create aninformationwebsite at the SPA. This should include not only the software and website development costs but also the necessary equipment. In addition, the TA should consider ways o f moving forward to the next level o f e-procurement and consider the necessary buildingblocks for a phased electronic government procurementprogram. 3.6 Training The statutes o f the SPA require it to provide training free o f charge to the personnel o f ministries, committees and other State bodies which deal with procurement in order to improve their qualifications and skills in accordance with the legislative procedures and to provide them with education materials; coordinate the exchange o f specialists; arrange visits to seminars, conference and training programs abroad. 3.6.1 SPA Staff Training Training has many aspects and calls for a number o f comments. Inthe first place, a distinction must be made between at least two levels of training. The first consists inthe training o fthe SPA staff themselves as a means o f simply providing for competent and able SPA staff. The second consists in training SPA staff as a means o f also providing trainers for in-country training programs. Both of these tasks are critical to developing sustainable domestic procurement knowledge and capacity. Ideally, such training should take place at a recognized training center with a view to repatriatingthe knowledge and experience gained to provide a solid domestic base from which to develop in-country training. The director o f the SPA has participated in training outside Azerbaijan on a number o f occasions, most notably at the E O training center in Turin. Indeed, it i s believed that he also teaches at the ILO. It i s believed that other members o f staff have also participated in such training but the extent and depth o f this training i s unknown. However, given the lack o f financial resources, it i s unlikely that such training has been sufficient to establish a comprehensive and reliable resource fiom which to produce a sufficient number o f trainers to carry out in-country training. Azerbaijan Country Procurement Assessment Report June 2003 1 15 Findings-Public Sector: State Procurement Agency !Recommendation:Technical assistanceshouldbeprovidedtoensuretrainingofSPA staffat two levels: training for familiarization purposes and the training o f trainers. This should ideally take place at appropriate training institutions such as the ILO inTurin. 3.6.2 Trainingfor Procuring Entities The SPA has been working hard on creating training programs and seminars for the relevant procuring entities inAzerbaijan. The SPA has conducted a number o f seminars at different levels (central and local authority level) as well as for State-owned enterprises and the Ministry o f Defense. This, of course, i s the primary target audience for ensuring a properly implemented Law. Inthe case o f Azerbaijan, as with many other, if not all, transition economies, this task i s imperative given the absence o f a class o f professional procurement officers. With an economic history and experience founded in a command economy, there has inthe past been n o call for and no development o f a separate profession concerned solely with purchase and supply functions in the public sector. There may be individuals who have experience o f international procurement activities and there i s clearly a growing number o f individuals who have experience o f procurement under donor funded contracts. These are, however, rather a recent development. The training programs organized by the SPA have been wide-ranging and have also included free training materials, though limited funds have again meant that there i s no constant supply o f materials generally available. The practice o f the SPA has been to assign staff to research and prepare training materials on specialist subjects and then to deliver their papers at the seminars. In this way, the SPA has covered a range o f topics such as bank securities; how to buy goods, works, services and consultancy services (as separate papers); pre-qualification; technical specifications for bid preparation; description o f tender procedures; rules for open tender; rules for the use o f alternative procurement methods; planning and forecasting. Nevertheless, this training i s not systematic and is irregular. This i s due, as above, not to the lack of need or willingness but to a lack o f capacity and funds. There are, so far as can be ascertained, no universities or technical schools which teach procurement, for either private or public sector users, as a readily identifiable module or even as part o f a wider course, although the SPA is considering, jointly with the Ministry o f Education and a number o f State universities, to introduce a discipline on the theory and practice o f government procurement. Approaches have been made to the Economic University o f Baku. Other than this, there are no procurement modules taught as part o f any courses dealing with engineering subjects or those dealing with law, economics and commerce. The Public Administration Academy appears to have just commenced a course dealing with project management but no more i s known about this. There is a fledgling NGO called the Azeri Project Management Association which i s a member o f the InternationalProject Management Association (IPMA) and which hopes to begin training courses inproject management once accepted by IPMA,butthis is very muchinits early stages. As with many NGOs, the commitment and desire to improve the lot o f their countrymen is there, but resources and the slow pace o f development holdback rapid progress. For the moment, therefore, it i s fair to say that there i s no discernible body of procurement professionals in Azerbaijan and that those who do have experience o f procurement are those who have learned it whilst carrying out their duties. Whilst there i s an argument for saying that such on-the-job learning i s as useful as any more academic teaching methods, the situation in Azerbaijan suggests that on-the-job training i s inadequate. In addition to the command economy background o f any established officials are the novelty o f any public procurement legislation, the conflicting experience o f using different procurement rules (of the different donors) and the Azerbaijan Country Procurement Assessment Report June 2003 1 16 Findings-Public Sector: State Procurement Agency relative inappropriateness o f the pre-PPL procurement legislation. Extensive new training and re- training are, therefore, necessary. !Recommendation: Technical assistance should be provided to ensure adequate in-country training to procuring entities at all levels o f government and in all parts of the country. A Imechanism should also be created to establish a procurement profession perhaps beginning with a certificationprocedure throughthe SPA and/or associated schools or associations: I 3.6.3 Trainingfor Senior Officials Inaddition to ensuring training at the operational level, the adoption o f the new PPL provides an excellent opportunity to create awareness o f the legislation at the highest level, especially with those senior officials who are likely to become members o f the TCs or those who have the authority to commence tender proceedings. For this reason, specific training should be provided, preferably by experienced procurement trainers. !Recommendation:A training assessment should include or program awareness training of senior government officials by, for example, the ILO. 3.6.4 Training of Tenderersand the Public The training component o f the SPA's Charter i s confined to the training o f procuring entities although its information dissemination function also includes tenderers. There i s little point in changing the legislation on public procurement and training the public purchasers when those on the supply side o f the equation have not got the same information. Tenderers must also be informed o f the rules with which they need to comply and o f the opportunities presented by a more competitive bidding environment. Public awareness and tenderer awareness o f the new procurement legislation should be a key component o f any initial implementation drive and a series of specific training seminars and conferences should be envisaged at the outset. With the intended creation o f a procurement information website, consideration should also be gwen to providing appropriate distance leaming modules on-line. !Recommendation:technical assistance should be provided to fund public awareness and tenderer awareness campaigns now that the PPLhas been adopted. 3.7 Supervision Supervision means the general monitoring o f the public procurement system to ensure, so far as i s possible, compliance with the applicable legislation. Supervision i s to be contrasted with "control" (see C.4, Control and Review Mechanisms), a term which i s used here to refer to direct control by the SPA o f a particular tender procedure through the provision o f a complaints and review procedure. The SPA's statutes require it to supervise the compliance o f State bodies with national procurement legislation; to raise issues o f violation cases before the relevant State authorities; and to regulate and oversee implementation o f procurement procedures and contract payments, all incompliance with legislation. This is a task the SPA appears to take very seriously. Staffo fthe SPA are inconstant contact with ministries, departments, committees and State-owned enterprises that enquire about procurement practices and request assistance. The methodology and frequency o f these contacts i s unclear but the results are very clear. The new Charter o f the SPA does, however, give the SPA the right to Azerbaijan Country Procurement Assessment Report June 2003 I 17 Findings--Public Sector: State Procurement Agency participate as an observer in all State procurement processes. It i s assumed that this means it may monitor the decisions o f tender commissions or TCs (possibly where a particular procuring entity has a history of non-compliance) by attending, though not participating in, the deliberations o f a T C. The SPA has adopted a "name and shame" policy inits annual bulletins through which it refers to procuring entities by name and sets out their failures to follow the procurement legislation or to errors o f compliance. These are not vague references but specific and detailed challenges to the defaulting procuring entities. In the 2001 bulletin, for example, the SPA cites the Baku City authorities' failure to follow tender procedures in awarding contracts whose value exceeded the AZM 250 millionthreshold and proceeds to identify each and every such contract together with its value. It does the same for the Ministry o f Defense, Ministry o f Health, several State Committees and for a number o f State-owned enterprises such as the Caspian Shipping Company, SOCAR and Azerigaz. It then proceeds to examine those tenders which were sought to be awarded competitively and to set out deficiencies in the procurement process or the results, seeking to give explanations. Whilst it may be too early to assess the success o f such a policy, it i s a positive course o f action which has the potential to be a very usehl and successful tool inthe supervision of procuring entities. 3.8 Records andReporting Inorder to accomplishits supervisory role, the SPA needs information fromprocuring entities as well as from the Treasury. Without such information, monitoring and supervision become superfluous. The basic information required are, from the Treasury, statistics o f procurement expenditure (discussed under Public Sector Management Performance, below) and, from procuring entities, records o f procurement procedures conducted. The PPL sets out extensive reporting requirements. There are two types o f records which must be kept by the procuring entity. The first type o f records, under Article 10, are records of procurement proceedings containing all the relevant information, including a brief descriptiono f the works, goods or services; the identity and prices offered by the bidders and the successful bidder; the internal "estimated market price"; an explanation o f any cancellation o f the tender; an explanation o f the failure o f any procedure other than open tender; statements regarding any tenderers rejected on the basis o f fraud or conflict o f interest; reasons for employing methods other than open tender in the case o f goods or works or methods other than Chapter V inthe case o f services; the reasons for restricting eligibility on the grounds o fnationality; a descriptiono f any clarifications sought o f tender documents or pre-qualification documents. This article allows tenderers to request portions o f the records following award or following termination o f the procedure without an award, subject to the proviso that information containing commercial secrets shall not be disclosed. In addition, there will be no detailed disclosure o f the evaluation and comparison o f tenders. The second type o frecords, under Article 54, consists in a set o f documents for each procurement containing Findings-Public Sector: State Procurement Agency the official decision to commence the procurement; copies o f the tender notices; the tender documents; bank documents confirming payment o f the participation fee and tender proposals o f all the bidders; minutes of the TC regarding the results o f the procedure; the final procurement contract; inthe case o flong-termcontracts, reports onprogresso fimplementation; any documents relatingto the settlement o f disputes; documents relating to payment o f tender expenses; and contract completion document. The report containing this second set o f documents must be completed within 20 banking days after completion and be kept by the procuring entity for five years. Thereafter, it will be archived. Despite these extensive recordingrequirements, the use made o f the records interms o f reporting is much less extensive. It i s clear that the SPA does have information concerning a number o f tenders, as i s evident from the information contained in its annual bulletins. This information i s not, however, provided either on the basis o f a comprehensive and standard format or systematically. The new Charter o f the SPA appears to give the SPA power to define the format o f reports on procurement and it i s unclear how this sits with the provisions o f the PPL. However this apparent conflict is to be resolved, there is an urgent need for the reporting function to be properly established. The current status appears to be that the SPA has submitted a draft format for reports from the procuring entities for approval to the Cabinet o f Ministers. The only requirement o f the PPL i s that the SPA should be sent a copy of the minutes o f the TC malung the award decision within three days o f that decision. For the moment, it i s unclear what these minutes will contain. Article 37.6 o f the PPL, states that the sample form o f the TC's final minutes are to be developed and approved by the Council o f Ministers. Given the absence o f any other reporting requirements, the design o fthese minutes will be crucial and provides an excellent opportunity for ensuring that the SPA is `given, without the need for making specific requests, adequate information upon which to base its own reports. Again, the SPA has already submitted a draft form for the T C final minutes to the Cabinet o fMinisters for approval. The difficulty in reporting and monitoring i s compounded by the opacity o f the appropriations system discussed under Public Sector Management Performance which makes it very difficult to identify data relating to procurement contracts. ! Recommendation:The design of the sample form of the TC's final minutes should be meticulously completed and adopted by the Council o fMinisters as soon as possible. 3.8 Annual Reports The SPA has a duty to make regular reports both to the Council o f Ministers and to the President. N o information i s available on the content o f these reports but it i s fair to assume that their content i s reflected in the consolidated annual reports contained in the published bulletins. The SPA has been heavily involved in the preparation and drafting o f the PPL and has been actively involved inpersuading and lobbying the relevant executive powers and the Parliament. Whilst the SPA clearly has the authority to seek information where necessary, there i s little in the way o f systematic voluntary reporting by the procuring entities to the SPA and the only obligation on Findings-Public Sector; State Procurement Agency procuring entities i s to supply a copy o f the TC's final minutes to the SPA, for which a sample form has yet to be preparedby the Council o f Ministers. Also it is evident from the available statistics used to extrapolate current procurement volume (see C.6, Public Sector Management Performance), there i s no readily accessible source o f information from which procurement statistics can easily be extracted. The SPA cannot, therefore, easily describe the existing state o f public procurement and would have difficulty in making reliable projections. The SPA has indeed done an admirable job o f making the most o f the available information, but the extent and availability o f pertinent information is insufficient to allow it to make a comprehensive and accurate assessmento f the situation. !Recommendation:Technical assistance shouldbeprovidedto enable the development ofa comprehensive reporting system which would (1) oblige procuring entities to provide relevant information on a timely basis (through the use o f obligatory procedures) and (2) enable the SPA to gain access to country-wide procurement statistics from a range o f other relevant authorities. C.4 ControlandReview Mechanisms 4.1 The Basic Structure Chapter VI11 o f the PPL provides for the complaints and review mechanism set out in the UNCITRAL Model, which requires an initial complaint to the procuring entity before review by the relevant executive authority, in this case the SPA. It also provides for jurisdiction o f the national courts over breaches o f the PPL and for judicial review o f the decisions o f the procuring entity and the SPA. The provisions are not, however, identical. Inparticular, in respect o f damages or compensation, the PPL fails to elect either o f the options offered by UNCITRAL (wasted costs or loss o f profits) and simply states that compensation i s an available remedy. This i s unfortunate since the determination o f the level o f compensation i s an issue which has caused much controversy and i s subject to much debate in a number o f jurisdictions. Lack o f clarity at this level may well be problematic. Whilst the Civil Code provides for the possibility o f both measures o f damages before the courts, there i s no guarantee that an administrative body such as the SPA would have such authority (see below). Even if it does, tenderers need to know. The SPA should issue a "practice direction" setting out the bases for obtaining and the level o f damages to be awarded for breaches o f the PPL. Despite the current wording o f UNCITRAL, the CPAR recommends that the selection o f the procurement method and any limitation on the nationality o f bidders be subject to review. 4.2 SPA Administrative Review As well as providing for review by the procuring entity itself and for the general availability o f judicial review, the PPL also provides for a complaints and review procedure before the SPA either in lieu o f a complaint to the procuring entity (when the contract has entered into force) or on appeal fiom such a decision. Given the uncertainties over the effectiveness o fjudicial review Findings--Public Sector: Control and Review (see 4.3), the SPA thus constitutes the second and potentially most efficient tier o f the complaints review mechanism foreseen in the legislation. It i s no secret that tenderers in most countries are court-averse and experience has shown that an administrative review procedure before an independent review board (independent o f the procuring entity) offers an acceptable and often preferable review mechanism. It i s important, therefore, that this possibility be and be seen to be accessible, fair, objective and effective. However, this potential appears to be seriously hindered by the SPA'S lack o f teeth, inthe sense that it is unable to make bindingdecisions such as those foreseen inthe UNCITRAL Model. To assist the SPA, its statutes provide it with limitedpowers o f investigation inthe conduct of its review procedure. It is, for example, entitled to obtain any information on procurement from procuring entities and may examine procurement documentation and "draw conclusions". In conducting the review, it may make "recommendations" setting out the goveming principles (of the PPL) and may, where it has found evidence o f violation o f the legislation, make further "recommendations" to annul decisions o f the procuring entities, for the revision o f unlawful decisions, to terminate the award procedure, for the suspension o f the tender procedure and, where necessary, for the extension o f that suspension. It may even make a recommendation for the award o f damages. Despite the superficial similarity with UNCITRAL, however, these are only recommendations and are pursued largely through personal contacts between the Chairman o f the SPA (and sometimes Ministers) and the procuring entities. This lack o f power and/or authority i s a serious weahess o f the review mechanism foreseen. Currently the review procedure i s conducted on the authority o f the Director. Complaints are received by the Director, who then transfers the dossier to a relevant department o f the Agency. These may be the departments responsible for procurement o f goods, works or services (depending on the subject matter o f the complaint) and could also be the Legal Department, whose primary tasks largely consist o f drafting documents rather than conducting reviews. There i s no separate or independent department responsible for review. The procedure i s handled by the existing departments under the supervision o f the Director and it i s the Director who takes the appropriate action. Given the current political climate o f Azerbaijan, where personality i s key and where the degree o f authority and therefore compliance i s heavily reliant on the personality and competence o f individual office holders rather than on the office itself, this approach has the distinct advantages o f practicality and realism. In other words, in the context o f Azerbaijan, it i s a system which appears to work and to achieve results. The current Director i s a man o f considerable authority in Azerbaijan who was previously Prime Minister o f the autonomous Republic o f Nakchevan and was appointed by and enjoys the support o f the President. These advantages cannot be exaggerated. His ability to challenge non-compliant procuring entities i s evident inthe "name and shame" approach o f the SPA bulletins and his personal intervention (both on the basis o f complaints and o f his own motion) have resulted in significant and positive changes to the procurement practices o f the procuring entities found to be at fault. The CPAR team was told that there have been a total o f 17 complaints in 2001, o f which 12 were decided in favor of the complainant but was given n o further information about the substance o f any o f these cases. Perhaps the greatest advantage offered by the strength and authority o f the current Director will be his ability gradually to set in place and establish a structured review mechanism within the SPA. His influence will facilitate the creation o f the system and his authority will guarantee respect o f a system that does not depend on such a personal approach, which i s not sustainable in the longer term. Officers change or are replaced even where the office remains, political allegiances and patronage shifts and further development and familiarity with the PPL will ~ ~~ Azerbaijan Country Procurement Assessment Report June 2003 7 Findings-Public Sector; Control and Review require more systematic and sophisticated responses to violations o f the PPL. Whilst it i s undeniable that this i s an effective system in the current context, it should only be seen as a temporary solution to direct control over the tender procedures o f procuring entities covered by the PPL. An internal structure capable o fconductingreviews independently o fthe other departments o f the SPA should be based on clear procedures relating to access and the conditions which apply to review procedures, adequate and transparent time limits, the filing o f appropriate documents, suitable hearings which enable the presentation o f evidence, educated and objective decision- mahng and clear and effective remedies. Inaddition to further procedural drafting, the system's effectiveness will also require the retention o f suitably qualified technical and/or legal staff who are trained in and have experience o f procurement matters and dispute resolution. This requirement further underlines the need to increase the number o f staff recruited and the funds necessary to build adequate capacity indispute resolution. ! Recommendation: Technical assistance should be provided to assist the SPA in the development o f a medium- to long-term internal review structure and to ensure the build up o f sufficient capacity in terms o f staff trained in dispute resolution. Inaddition, measures should be taken to endow the SPA with effective decision-making powers. 4.3 JudicialReview Under the Constitution, the separation o f the executive, legislative and judicial powers i s guaranteed. Judicial power i s exercised through a three-tier court system consisting of first instance courts, appeal courts and cassation. The latter i s heard by the Supreme Court. Apart fiom the specific criminal and military courts, the first instance court incivil cases (which will include procurement cases) i s either a Regional District Court (RDC) or a Local Economic Court (LEC). There i s n o separate administrative court system, although there has been some discussion o f setting up such a system. GTZ i s conducting a preliminary investigation into the feasibility o f such an administrative system, although there had been n o concrete developments in this regard at the time o f the CPAR missions. 4.3.1 Jurisdiction The RDCs, o f which there are 85 countrywide, will hear all civil cases, except those concerned with economic matters, including cases o f administrative violation. These cases essentially concern disputes between natural persons and between a natural person and a legal person, including public bodies and civil cases concerning corrupt officials. Appeals fiom the RDCs are heard by the Court o f Appeal which has a committee to hear appeals incivil cases. The LECs, o f which there are four (in Baku, Ganja, Ali-Bayramli and Nakchevan) hear cases concerning administrative or economic disputes between two or more legal persons, including disputes over contract terms, contract amendments and termination. These courts hear "economic" cases, defined as those which concern disputes between legal persons, one o f whom may be a public authority. A special economic court, the Economic Court dealing with Arguments o f International Agreements located in Baku, will have jurisdiction over commercial matters involving a foreign entity or (and here there i s a difference with the generaljurisdiction o f the LECs) foreign natural person. Appeals from the LECs are heard by the Economic Court. Inbrief,jurisdiction depends onthe nature o fthe parties. Casesbrought bynaturalpersons, either against another natural person or a legal person (including the Government) will be brought in an Azerbaijan Country ProcurementAssessment Report June 2003 1 22 Findings--Public Sector; Control and Review RDC. Cases brought by a legal person against another legal person (including the Government) will be brought in an LEC. Whenever one o f those parties i s either a foreign natural or legal person, the special economic court has jurisdiction. Inprocurement cases, therefore, any dispute brought against a public authority by a tenderer who i s a legal person would be brought in an LEC. Cases brought by natural persons (such as individual consultants) would be brought inthe RDCs. Wherever a case i s brought by a foreign tenderer (a legal or natural person), it would be brought in the special economic court. To the knowledge o f the Ministry o f Justice, no procurement cases have beenbrought in any o f the courts to date. 4.3.2 Procedures According to the Ministry o f Justice, procedures before the courts take about three months from commencement to decision. It i s possible that, when a foreign entity i s involved, the court will require further information or documentation from abroad and that there will be a delay in the procedure. The courts also have the power to appoint experts in any given case which may also cause a delay. In all cases, the courts have power to suspend the procedure pending further information. The decisions o f the courts must be implemented within one month o f the decision (or 20 days in the case o f criminal actions). Failure to comply with a court's decision is a criminal offence. There is a department o f control within the Ministry o f Justice together with a Marshall Service. Once a failure to comply has beennotified, the Marshall Service will informthe public prosecutor who initiates a procedure. The investigation department o f the Ministry o f Justice then pursues the matter. 4.3.3 Liabilityfor Damages The powers o f the courts are set out both in the Constitution, the Civil Code and inthe Law on Rules and Rights o f Court. Under Article 21 o f the Civil Code, wherever a person's civil rights have been violated, there i s a concomitant right to full recovery o f damages. These may consist of recovery o f losses incurred or to be incurred (actual loss) as well as profits the person would have earned had the right not been breached (lost profits). The rights violated encompass both contractual rights and tortious liabilities. Articles 22 and 1100 provide that state authorities, bodies of local authorities, municipalities or officials o f such bodies are also responsible for all losses caused as a result o f their unlawful actions, their failure to act or (under Article 1100) of their approval o f unlawful acts. This imposes liability, therefore, on those, on the demand side, who have decision-making authority inthe procurement procedure or those who have the right to approve decisions o f other government officials. In addition, Article 19 provides that acts o f public bodies and local administrations which are incompatible with legislation in force and which violates the rights and interests o fnatural or legal persons may be declared invalid. Inprinciple, therefore, in procurement cases the courts have the ability both to declare invalid acts o f public procuring entities which are incompatible with the procurement laws and to award damages to tenderers who have suffered or will suffer harm as a result o f the infringement. Damages may compensate actual losses or lost profits. Inthe absence o f any cases, however, the Ministry o f Justice was unable to comment further. Similarly, there has not, to the Ministry's knowledge, ever been a claim for injunctive relief, although the possibility o f such relief should not be discounted. Whenever an action i s commenced in the first instance courts, a preliminary meeting i s held within 7 days (3 days in a criminal case) and the court has the power to take appropriate measures. Article 1098 o f the Civil Code provides the courts with a general protective remedy which allows them to prohibit activities which risk causing (tortious) damage in future. Findings--Public Sector: Control and Review The balancing provision provides that a claim for such an injunction may be rejected where the injunction would be against the State's interest. Such a remedy i s available in addition to damages. 4.3.4 Arbitration Azerbaijan i s a signatory o f the 1958 N e w York Convention on the Recognition and Enforcement o f Foreign Arbitral Awards which became effective on M a y 29, 2000. There i s currently no system o f private arbitration inthe country, although it i s not prohibited. Indeed, Article 17(2) o f the Civil Code provides that "a contract may provide for dispute resolution between parties prior to resorting to a court." The former arbitration courts which existed under the Soviet system have metamorphosed into the LECs. There i s a Law on International Arbitration which appears to regulate intemational disputes, although it is not based on the UNCITRAL model. Under this Law, parties may select independent arbitrators o f any nationality and the proceedings may be conducted in any language chosen by the parties. The applicable law (other than in the case o f matters which must be resolved exclusively under Azeri law) and the procedural law may be chosen by the parties. Ingeneral terms, the parties are free to stipulate the tems o f the arbitration. 4.3.5 Legal Retraining and Public Respectfor Law The courts andjudges have recently been the subject o f an educational drive steered by GTZ and USAID/ABA. A number o f seminars have been organized and conducted dealing with a number o f legal topics worthy o fjudicial interest. All judges have recently undergone re-training followed by an examination. However, failure inthe examination did not result in dismissal: instead, the judges were subjected to a secret interview and re-admitted. Doubts concerningtheir competence, therefore, remain. The novelty o f many recent economic laws and the apparent acceptance by many commentators o f the poor academic levels and competence o f judges in Azerbaijan suggests that many judges, especially those sitting in the economic courts, lack sufficient understanding o f the market principles which underpin the new laws, including the PPL. Sadly, there i s also a widely held belief that corruption i s as prevalent inthe court system as elsewhere. Whether that i s true or not is, to some extent, irrelevant. What matters, particularly in the context o f procurement disputes, i s the perception that there i s corruption and that, as a result, infnngement casesbrought before the courts will not be decided fairly. Respect for the rule o f law i s not something which can be legislated; it is something which develops over time where the law and the application of the law i s seen as something worthy o f respect. Notwithstanding the recent improvements in the educational and training opportunities made available to the courts, there appears to be some way to go before the general public (and tenderers are members o f that general public) will have sufficient confidence in the court system to make it a suitable forum for the resolution o f procurement disputes. Inthe meantime, therefore, the powers o f the SPA, staffed as it i s and will be, by competent people well versed in the PPL, will be critical in ensuring the proper implementation o f the PPL. However, without sufficient decision-making authority, even this review mechanism will be insufficient to guarantee the integrity o f the procurement system set up by the PPL or to foster the necessary bidder confidence inthat system. Azerbaijan Country Procurement Assessment Report June 2003 I 24 Findings-Public Sector; ControlandReview 4.4 Additional ControlMechanisms 4.4.1 Supply-side Control Whilst any public procurement legislation can readily monitor and control the activities o f demand-side procuring entities, it i s notoriously difficult and, one might say, inadvisable for the same legislation to seek to deal with supply-side activities (bid-rigging, for example) which might impede the proper course o f a competitive bidding process. Such control is normally within the purview o f the anti-trust authorities. Article 11.2 o fthe PPL does introduce a mechanismwhereby procuring entities can cancel tender proceedings where it i s discovered that tenderers have negotiated among themselves with a view to raising prices (see 2.1.4). Apart fi-om the evidential difficulties involved, such a power can (1) impose unnecessary burdens on the procuring entities who already have a difficult task to perform and (2) lead to and certainly facilitate abuse by the procuring entity. Inany event, an anti-monopoly office (AMO)has recently been created as a department of the Ministry o f Economic Development. Whilst part of the AMO's functions would appear to be to enforce the provisions o f the Civil Code relating to unfair competition (Article 560 which prohibits both anti-competitive agreements between legal entities and the abuse o f a dominant position), a further important function would seem to be the regulation o f the activities o f natural and State-owned monopolies. Indeed, this would seem to be the primary function o f the AMO. Part o f its functions concern the setting o f tariffs and monitoring o f investments for the purpose o f protecting the rights o f the consumer. To this extent, the AM0 considers that it could, as part o f its regulatory functions, ensure that prices paid for goods and services are compatible with "market prices." Inconductinginvestigations up to now, the AM0 has noticed a tendency to split contracts into smaller lots in order to avoid the application o f the procurement laws. The AM0 has the option to notify the law enforcement authorities (inthis case the SPA) and to impose their own economic sanctions, although it i s unclear whether either course o f action has been followed ina concrete case. Whilst the provisions o f Article 560 o f the Civil Code appear to be co-extensive with the comparable provisions o f the Sherman Act in the U.S. and the Treaty o f Rome, as amended, in the EU, with respect to the prevention of anti-competitive behavior by undertakings or groups of undertakings, the AM0 lacks the investigatory powers and the staff o f comparable authorities. They may not carry out unannounced "dawn raids" o f business premises, for example, and have no power, other than the ability to request, to compel production o f written documents. The AM0 has no power to initiate investigations and may only act on the basis o f a complaint. Even inthe case o f the construction sector, which i s especially prone to cauterization, the AM0 has not been ina position to take any action, because there havebeen no complaints, although AM0 suspects that anti-competitive behavior has taken place. There i s clearly room for improvement but, rather than seek to impose anti-trust responsibilities on procuring entities in addition to their existing duties under the PPL, it would be preferable to enhance and strengthen the powers and field o f action o f the AMO. GTZ currently has a program which is linkedto the AM0 but it i s not clear whether they are intending to review its powers in this way. !Recommendation: Technical assistance shouldbe found to assist the strengthening ofthe AMO. Azerbaijan Country ProcurementAssessment Report June 2003 I 25 Findings-Public Sector; Control and Review 4.4.2 Smuggling and Money Laundering The Ministryo f Justice states that there are a number o f laws which deal with terrorism, although they did not identify any o f those laws. Money launderingi s dealt with inthe same laws. There i s also a draft law working group (under the Council o f Ministers) set up to revise the existing provisions. It is envisaged that this will culminate inan action plan for the Govemment, although it is not intendedto set up any specialized Agency to implement a specific program. Rather, it is intended to establish intemal security units in each government department. These will be given the task o fpreventionrather than any powers to correct expost. It should be added that the State Customs Committee is very aware o f the dangers o f drug smugglingas a means o f funding terrorist activities. This is a particularly live issue inAzerbaijan as it is, geographically, a transit country for illegal substances between, for example, Afghanistan and Georgia. In2000, the Committee had some 120 officers dedicated to the anti-smuggling and fraud investigation but the results have been modest. Azerbaijan is a member and active participant o f the World Customs Organization ("WCO") which i s currently considering the setting up o f a second regional training center in Azerbaijan. Funds have been secured for the building o f facilities, although the customs authorities are still looking for funds for equipment, library documentation and training. An important part o f the proposedtraining will include border security and anti-terrorist measures. C.5 ProcurementProceduresinPractice 5.1 AdministrativeDecentralization Following the collapse o f the Soviet system, there has been a move towards the decentralization o f administrative power. The Constitution provides for the creation o f elected local authorities and municipalities which remain, at least duringthe transition period, subject to a local Executive Power whose head i s nominated by the President o f Azerbaijan (Article 109 o f the Constitution gives the President power to create a local executive body, funded by the budget, to exercise the executive power which, under Article 99, belongs to the President). The Executive Power has a representative ineach o f the local authorities. This system is presently in transition and the municipalities are currently subsidized by the central budget (which covers the operational costs in any event) but will have their own budgets as well as their own assets and property. The Executive Powers are currently in the process o f allocating these assets and property, including land and buildings. The L a w on the Financial Status o f Municipalities identifies some 17 taxable activities which will provide revenue to the municipalities; for example, taxes on land (of individuals and legal persons); land use (mines, quarries); State duties (such as parking fees); distribution o f advertisements, hotels, health resorts and the like. These taxes are collected locally but are regulated by the tax code and may be spent by the municipalities upon the authorization of the MOF. For its part, the Executive Power is funded through another set o f local taxes which include VAT and income tax, utility fees and maintenance charges (for sewerage, for example). These are collected by the local office o f the Ministry of Taxes. Based on an annual revenue plan, the percentage o f these taxes to be retained by the Executive Power i s identified and the remaining funds are sent to the central tax administration. Interms ofprocurement, the local municipalities generally haveresponsibilitiesfor the repair and maintenance o f facilities which are located in their area. Whilst buildings such as schools and Azerbaijan Country Procurement Assessment Report June 2003 1 26 Findings-Public Sector: Procurement Procedures hospitals are built and owned by the relevant Ministries, it i s the municipality in which the building is located that is responsible for its upkeep. Similarly, the municipalities will be responsible for streets, for example, but not for the highways which are the responsibility o f the Road Agency. In Sungayet municipality (one o f the largest outside Baku), for example, there has been no capital investment above AZM 250m. The value o f most o f the repair and maintenance contracts has also been below AZM 250m and, even where the value o f a single contract i s above that, the novelty o f the administrative system and the procurement laws are such that there i s little practical experience o f competitive procurement. Nevertheless, efforts are being made by the municipalities to educate themselves and to prepare for the PPL. A number, such as Sungayet and Baku municipalities have conducted seminars with the assistance o f the SPA and have initiated pilot procurements under the PPL. Once the municipalities become financially independent o f the State budget, it is arguable that these municipalities will no longer be subject to the PPL since this, by its definitions, covers only budgetary institutions. The position o f post-independent municipalities i s very unclear. The definition o f State funds in the PPL, as adopted, includes "non-budgetary funds o f budget organizations and other funds recognizedby legislation as state funds," but this would not appear to resolve the uncertainty. This i s another specific case o f confusion about the coverage o f the PPL, and the CPAR has recommended that the definition o f procuring entity be amended to define the position clearly (see also 1.4above and EntityCoverage inAnnex 11). 5.2 State-owned Enterprises and Utilities There are a number o f State-owned enterprises (SOEs) operating in Azerbaijan, mainly in the utilities sector. Many are 100 percent State-owned but a number have a more limited State participation. Where the State participation i s less than 100 percent, these companies are commonly referred to simply as joint stock companies (as i s correct, for that i s what they are). The L a w on Enterprises properly defines a joint stock company as one which provides that the liability o f shareholders i s limited to their share participation (regardless o f whether the stock i s State-owned or not). Only entities in which the State owns 100 percent, are referred to as SOEs. However, in terms o f terminology actually in use in Azerbaijan, reference to joint stock companies would, confusingly, seem almost always and only to refer to companies in which the State holds a less than 100percent shareholding, although this i s clearly not the case inreality.. 5.2.1 Legal Status of SOEs Unlike other forms o f corporate entity in Azerbaijan, such as the joint stock company, there i s n o Law or other legal provision which either defines or regulates 100 percent State-owned enterprises, although their existence i s recognized in the L a w on Enterprises. This is at least partly due to the fluidity o f the transition period from the Soviet regime to the Azeri market economy, but the result i s to keep inplace a legal entity which is largely unregulated, save that it is subject to its own Charter. Historically, these companies have tended also to be the regulators in their own spheres of activity. Thus, for example, the Caspian Shipping Company is both the major operator o f water transport services in Azerbaijan and also the authority with the duty to license other water transport companies. The same was true for the State oil company (SOCAR), although this situation may change as a result o f the creation o f a new Ministry for Fuel and Energy, which also now takes on the political/regulatory functions o f Azerigaz and Azerenergy, the State-ownedmonopoly providers o f gas and electricity. A number ofthese State-owned enterprises are self-financing and their funds are, therefore, extra- budgetary. They tend to be strong and powerful companies. Despite their ostensibly private Findings-f ublic Sector; Procurement Procedures nature, the chairmaddirector i s generally nominated by the President and the company's Charter i s approved by the Council o f Ministers. The deputy directors are nominated by the chairmaddirector with the approval o f the Council o f Ministers. There i s some confusion as to their exact status but the members o f the board o f the Caspian Shipping Company, for example, consider themselves to be government officials. There i s also some confusion with respect to the status o f internal organizations. Most o f the State-owned enterprises are divided into a number o f departments or units and have a number o f subsidiaries. . Inpractical terms, these units may perhaps best be described as separate cost or budget centers which are regulated by the central administration. In some cases, these "subsidiaries" have been corporative; in others, they have not. Inall cases, however, the status o f these intemal organizations i s wholly unclear, especially since they are, almost without exception, considered to be separate legal entities. Since they do not fit within any definition o f legal entity contained inthe Constitution or Law on Enterprises, they are not legal entities inthe same way as companies defined in that Law. On the other hand, they are clearly treated as such by the organizations themselves and, indeed, in some cases are also self-financing. Notwithstanding the claim that they are separate legal entities, the relationship between these entities and the "parent" State-owned enterprise i s not govemed by contract. They are treated in exactly the same way as departments o f a ministry, for example. This structure i s undoubtedly the result o f the transition fi-om the Soviet "apparat" to market economy and there are no signs that this fluidity will be remedied quickly. 5.2.2 Procurement by SOEs Confusion over the status o f the State-owned enterprises leads to similar confusion over their procurement practices. The Caspian Shipping Company, for example, considers that, because it i s entirely self-financing, it i s not subject to the previous Law on Tenders, notwithstanding the State's 100 percent ownership o f it. It considers itself not to be a budget organization and that, as such, it "may" apply the Law on Tenders. This optional use o f the Law appears to result from the original Law on Tenders which was curiously drafted so that the use o f open tender was not an obligation but a right (notwithstanding the provisions o f the Presidential Decree mahng it obligatory). This optional use of tender procedures i s no longer the case under the PPL and an entity i s either covered by the PPL or it i s not. If it i s covered, then it must comply with the prescribed procedures. But he position o f SOEs i s uncertain and certain SOEs clearly do not consider themselves subject to the PPL (see Annex 11, EntityCoverage). Inrespect ofthe Caspian Shipping Company, its requirements for materials and spare parts are largely satisfied by its subsidiary factories. Its contracts department cames out all procurement (for electrical devices, uniforms, fuel, lubricants and so forth) on the basis o f its own market searches and by using personal contacts. It does not procure by tender. The value o f such contracts was not disclosed to the CPAR team as it i s considered a commercial secret. On the other hand, the company did suggest that its purchases were o f low value falling below the relevant threshold and that there has been no attempt to aggregate smaller contracts . It considered that the purchase o f vessels would have been subject to the L a w on Tenders and, presumably, i s now subject to the PPL. Incontrast, SOCAR, responsible for oil extraction, would appear to consider itself generally subject to the L a w on Tenders. Within SOCAR, its procurement functions are divided into those for imported and those for local goods. All purchases which need to be imported (mostly commodities) will be dealt with by the department o f foreign economic relations. The supply departments will determine, on the basis o f local market research and Internet searches, whether Findings-Public Sector: ProcurementProcedures to advertise locally or internationally. In all other cases, each o f SOCAR'S seven subsidiary production units (on-shore and off-shore extraction, design and construction, refinery production and three other production units, employing in total some 70,000 people) has a department for purchase and supply. These purchase local goods needed for the oil operating activities such as rigs and associated equipment. For both types o f procurement function, where contracts are below AZM 250 million, they will follow their own procedures. Above AZM 250m, they procure by tender. In the case o f subsidiary companies and in the event o f a need to import products, a representative o f the department o f foreign economic relations will be a member o f the TC. Inthe case o f procurement o f domestic goods, the units and subsidiaries will seek the approval o f the central administration before making the purchases (based on a annual estimate o f needs submitted to the supply department) and a representative o f the relevant department (each unit i s responsible to a specific central department) will be invited to sit on the TC. The beneficiary unit will set the technical specifications. The relevant department will authorize the ultimate contract. Likewise, Azerigaz, another wholly State-owned enterprise, also considers itself subject to the Law on Tenders. This company provided a service to the public in the field o f the extraction, transport and distribution o f natural gas. It i s also divided into a number o f units, most particularly the transport subsidiaries which are responsible for maintaining the pipeline network and the self-financing regional maintenance departments which receive the gas and undertake distribution. There are also a number o f repair and maintenance companies are currently in the process o f being corporative and may act as subcontractors to other organizations such as SOCAR. When carrying out work for Azerigaz, these companies are clearly paid something but there i s no contract and the amount paid i s less than the going market rate In this capacity, they are treated as internal works departments. Unlike the case o f SOCAR, Azerigaz procurement i s controlled from the center. In the case o f low-value supplies where no tender i s required, procurement may be made by these units against a procurement plan approved by the president o f Azerigaz. Where the AZM250m threshold i s exceeded (generally in the case o f large-scale projects funded by the government budget), the President o f Azerigaz will authorize the procurement and establishes the TC for all o f the units. Members o f the TC will be the heads o f department o f the central apparat (e.g. gas maintenance department, planning department). The T C makes the final award decision which does not need approval o f the President. The contract will be signed by the beneficiary unit. 5.3 Budget Allocation The Budget Department o f the MOF i s responsible for budget appropriations and for preparing the annual budget based on an MOF order each February. The department i s organized in a number o f divisions which are responsible for sectoral activities and which collect data pertaining to the relevant sector activities. These divisions collect budget requests from each o f the relevant line Ministries and central government departments. There are also different divisions which are responsible for the various hierarchical budgetary institutions such as the local government departments (for example, the local office o f the Treasury or the financial departments o f the Executive Powers). These are not further sub-divided by sectoral activity and collect aggregated budget estimates from each region or municipality (at least, while they still receive budget funds). These report to the sectoral divisions who collate the information for the purposes o f the budget. It is not clear, however, how the sectoral divisions are able to allocate the local budgets by sector for the purposes of the annual budget which is drafted on a sectoral, rather than institutional, basis. Based on the data collected by June, draft budgets are prepared and submitted to the Cabinet o f Ministers in order to bringthe overall budget into line with the perceived needs o f the country. The final draft i s submitted to the President in September. ~~ ~~~ Azerbaijan Country ProcurementAssessment Report June 2003 7 Findings-Public Sector: Procurement Procedures As i s indicated in the discussions above on reporting and below on public sector management performance, the relative opacity o f the budgetary system in relation to public procurement spending makes it difficult to paint an accurate picture o f the precise levels o f spending and o f the identityo f the purchasers. 5.4 Treasury and MOF Involvement The Treasury is the implementing arm o f the MOF. Whilst the Budget department is responsible for setting policy and establishing the budget for the budgetary institutions, the Treasury i s responsible for expenditure and for transferring funds. There i s a two-stage control by the Treasury following budget allocation, (1) a contract-by- contract control under which the prices bid are compared to some "average market price" and rejected to the extent that the successful bidprice exceeds the hypothetical market price, and (2) a further total budget control to ensure that the value o f all contracts let in any one budgetary year does not exceed the budget allocation for that year. The first o f these controls should be abandoned. These appear to be the only controls by the MOF, other controls present during the Soviet era having been abolished as part o f Government's strategy to reduce obstacles for private sector development. A Presidential Decree was issued in late 2000 abolishing all internal inspectiodcontrol departments inthe ministries, except for the financial control and internal audit department (KRU) in the MOF. It was felt that these departments unduly harassed the budget organizations and companies under their jurisdiction, leading to both widespread inefficiencies and corruption. The role formerly played by these departments in terms o f monitoring compliance with fiscal requirements was taken over by the tax inspectorate, and in terms o f compliance with accounting rules and regulations was assumed by KRU inthe MOF. The KRU does not appear to involve itself inauditing the procurement function. 5.4.1 Useof "AverageMarket Price" Once the TC has decided on the award o f the contract and has proceeded with the signature o f the contract, a package o f documents needs to be sent to the Treasury department o f the MOF. This package will include the bid documents, the minutes o f the TC meeting making the award o f the contract and a copy o f the signed contract. The MOF will then consider the "appropriateness" o f the contract, with particular reference to the payment terms. However, in loolung at "appropriateness", the MOF will also consider the price to be paid. Inthe food sector, the Council o f Ministers has established a special commission which identifies the quality and price o f different food products on a quarterly basis. T o the extent that the price included in the contract for a food product exceeds the price indicated in the Council o f Ministers' list, the Treasury will not agree to pay. According to the Treasury, there are no other such price lists (although other institutions, such as the State Construction Committee, may maintain their own list to create, for example, schedules o f rates). There is also a State Statistics Committee which maintains a consumerhetail price index and a production price index. It is not at all clear to what extent the Treasury has recourse to such indexes. Even outside the food sector, the Treasury remains concerned with overpayment. In cases o f procurement for products other than food, the Treasury will seek to identify the "average market price". It will do this by way o f informal market survey as well by loolung at prices paid in previous contracts, especially in the case o f consumer products such as vehicles. It will even contact known dealers by telephone, for example. Ifit discovers that the lowest price offered (and Findings-f ublic Sector: Procurement Procedures accepted by the TC in its signed contract) substantially exceeds this supposed "average market price", then it will simply refuse to pay, i.e. transfer the relevant budget to the procuring entity which, in tum, will be unable to honor its contractual obligations. Where the Treasury does approve the contract, it will issue a document approving the expenditure which is attached to the contract and retumed to the procuring entity. Itshouldbe addedthat, inthe autonomous Republic ofNakchevan, the price o f goods, works and services are set in accordance with a price list set by a special commission o f the Nakchevan Ministry of Finance. The prices are reviewed every quarter. The price list is used as a guide on prices when the TCs submit their recommendation for a "no objection" clearance from the NakchevanMinistryo f Finance. This practice o f estimating an abstract (however well researched) average market price, following and despite the results o f a competitive bidding procedure,-common in many transition countries not only in Azerbaijan-is o f considerable concem and demonstrates a lack o f understanding o f a competitive procurement system. The prices offered as a result o f an open tender, for example, are the market prices available to the procuring entity. It may be that similar products are available inthe retail market for different prices but the bidprices will be the market prices available in the case o f and under the terms and conditions offered by a public purchaser. T o arbitrarily decide otherwise, as the Treasury seeks to do, is to undermine the competitive bidding system. Once tenderers realize (if they have not already) that their best and final offers will not be accepted, they will havenoreason to provide such offers. Of course, if all the bid prices offered exceed the budget allocated, then all the offers may be rejected. But that i s a simple calculation to make and should be made, in any event, before a contract i s signed. However, there does not appear to be a systematic mechanism for estimating the price o f proposed contracts. Nevertheless, procuring entities as well as the MOF seem to believe that they are able to estimate market prices accurately and tend, as a result, to compare bid prices with their abstracted average market prices which are sometimes wildly divergent. More often than not and in the absence o f any compelling evidence to the contrary, this i s the result not o f inflated bid prices but o f an inability to estimate prices correctly. Where the estimated contract prices are used to set in stone the allocated budget, problems will invariably arise. The problem i s not with excessive bid prices but with unrealistic estimates and this issue needs to be tackled. I!Recommendation: The MOF should be encouraged (1) to reject tender prices only when I they exceed the allocated budget and not when they differ from their own arbitrary average market prices and (2) to develop and put inplace a budget allocation system which i s based on realistically estimated prices with a degree o f flexibility. See also the recommendation in Annex 11, Estimated Prices. Though frequent in practice, it appears that this process o f refusing to honor signed contracts i s largely accepted (though not happily) by the bidders. Nevertheless, the Treasury has stated that some bidders have taken procuring entities to court for failing to proceed with the signed contract and that, moreover, some court decisions have been in favor o f the bidders. N o records have been kept o f such actions and no figures are available. This i s consistent with the Civil Code which, by Article 17 requires state bodies to respect civil rights, including rights arising under contract. Under Article 399 o f the Civil Code, an agreement becomes effective and binding on the parties from the moment o f its conclusion and, under Articles 405 et seq., an agreement i s concluded once an offer has been accepted. Findings-Public Sector; Procurement Procedures The CPAR finds that this use o f "average market price" i s wholly unsatisfactory because it means the Treasury is unnecessarily placing procuring entities inan unlawful position. Article 40.8 PPL does provide that, ifthe solicitation documents stipulate that the contract i s subject to approval by a higher authority, the procurement contract shall not enter into force before approval i s obtained. This provision requires additional foresight by the procuring entity and, in any event, does not resolve the underlying problem (i.e. the attempt to replace actual market prices with a fictitious estimated market price); it merely seeks to protect the procuring entity from the legal consequences o f an economically unjustified interference by the higher authority. ! Recommendation: The MOF should take note of its responsibilities and the legal consequences o f its actions under the Civil Code and discontinue the use o f "average market prices" inrefusing to honor signed contracts. The Treasury i s currently in the process of automating its management systems and is implementing a Treasury Information Management System (TIMS). As part o f this modernization, it appears that the Treasury will recommend a condition inthe contract that it will be subject to Treasury approval. There was even a suggestion that it would act as co-signatory. If this were merely a formality making the MOF liable in law to make payments for services rendered, it would not be objectionable. However, if it implies any further involvement o f the MOF in the decision-making process, it would constitute a backward step from the process o f decentralization o f the procurement function and, as such, would not receive the support o f the Bank. The CPAR, therefore, recommendsthat the MOF does not become a co-signatory. 5.4.2 Control of TotalSpend A further budgetary control exercised by the Treasury is over the total spend o f any given procuring entity. Based on their estimated spend on each proposed contract, each procuring entity will be given a total annual budget allocation. The procuring entity may not exceed that total budget, even if, in the case of any particular contract, the budget i s exceeded. As a result, where the contracts let in the first part o f the year exceed their estimated budgets (but are nevertheless approved by the Treasury under its contract-by-contract approval system), the approval will cease at the point at which the value o f a later contract exceeds not its own estimated value, butthe total budget available. No contracts will be authorized for the remainder of the budget year. There appears to be no facility for increasing the budget including, it i s believed, to cover increases in costs following change orders. 5.5 The Conduct ofProcurement Given that the existing procurement rules have only been inplace for three to four years and that the government's budget (as opposed to contracts funded externally and, therefore, more often than not, subject to different procurement rules) rarely allow for contracts above the thresholds, it i s not surprising that there i s little practical experience of competitive procurement. Further, despite the existence o f the previous legislation, it i s clear that it i s the importancebeing attached to the new PPL by procuring entities that i s encouraging a desire for compliance. Many procuring entities are only now beginning a process o f compliance with the PPL and initiating procedures compatible with it, including the setting up o f appropriate TCs. Having said that, a number o f procuring entities clearly do have some experience o f competitive procurement. There i s quite different experience between the capital and surrounding municipalities and the provincial authorities. Findings-Public Sector; Procurement Procedures 5.5.1 Baku and Environs From those procuring entities interviewedby the CPAR team, it appears that the system adopted inpractice is widely recognized and consistent. Once the budget has been approved, the head o f the procuring entity will issue an internal ordeddirective setting up the TC and naming its members. In many cases, the T C will include the deputy head o f the procuring entity or other senior management (who will chair the TC), along with technical and, sometimes, legal experts from the entity itself. External advisers are also occasionally used. Membership of the TC is generally around seven or eight persons, although this can increase to up to 20 inthe case o f large or particularly important contracts. It i s then the TC that prepares all the relevant documents, including the advertising, and processes the bids. Members o f the TC are generally taken from the staff o f the procuring entity. It is possible that the same individuals act on different TCs but there appears to be no systematic procedure for either using experienced people, training them specifically in procurement or developing and maintaining procurement expertise within a procuring entity. On the other hand, a number o f entities do have purchase and supply departments where such experience can be fostered and some have already launched a series o f training seminars with the assistance o f the SPA. However, it i s too early to say that there i s a distinct class o f procurement professionals (see also C.3.6, Training). Inopen procedures which appear to form the majority o f procedures above the thresholds, there will invariably be a formal bid opening. Interms o f advertising, it appears that there i s no central publication in which potential contracts can be advertised. Procuring entities have a choice of suitable newspapers, although the most popular would appear to be Respublika, published in Baku which carries much govemment-related information. It would also seem to be a common practice to send tender documentation, after the advertisement, to knownbidders. Where a restricted procedure i s used (and this is, apparently, quite rare), invitations to bid are generally sent to known suppliers and contractors. These are known generally as a result o f having performed contracts previously and appearing on a roster or list o f supplierdcontractors. These are not formal lists and are not compiled on any formal basis requiring the attainment o f any qualification criteria. Below the thresholds, the common practice would still appear to be to conduct some form o fmarket search, though this i s far from formalized. Standard form tender and contract documents have only recently been prepared (not surprising, considering the 1996/97 date o f the first legislative provisions on procurement) and the procuring entities have largely been depending on their own versions, some o f which had presumably been adapted from documents supplied by internationallending institutions. It is the TC that carries out all the steps inthe procurementprocedure from preparing the tender documents to making the award decision. The practice for signingthe contract does seem to vary, however. Insome cases, it i s the head o f the procuring entity that signs the contract, inothers, the chairman o f the TC acting as the delegated authority o f the head o f the procuring entity. In all cases, the signed contract together with the minutes o f the TC meeting making the award decision will be sent to the MOF for approval (see also C.3.8, Reporting). One procurement practice which appears to be widespread i s the practice o f aggregating various procurements into one announcement. For example, the Ministry o f Education conducted one tender and made one announcement in 2001 for the purchase o f textbooks to the value o f AZM 1.6 billion. These were effectively divided into lots o f AZM 200m, 189m, 547m, 633m. The Azerbaijan Country Procurement Assessment Report June 2003 1 33 Findings-f ublic Sector: Procurement Procedures contracts were split between "four o f the nine successful tenderers" although it i s not clear whether this was based on the lowest price for each lot or whether the contracts were divided in some other way. This may well be the result o f the PPL's Article 24.1.6 which provides for the division o f contracts, not based on the award o f contract lots. This is not a recommended procedure. Nevertheless, the value o f competitive bidding was clearly recognized because the estimated cost o f these lots prior to biddingwas inthe region o f AZM 2.5 billion. Whilst the aggregation o f contracts for the supply o ftextbooks would appear logical, this may not always be so. The municipality o f Sungayet, for example, has simply aggregated a number o f disparate procurement requirements in order to conduct their first tender under the new PPL. By doing so, the municipality i s able to bringthe value of a contract (albeit a number o f lots) above the AZM 250 million threshold for the first time thus allowing it to rely on the provisions o f the PPL. Of course, the threshold is meant to be only an indicator o f when they must apply the Law whereas they may use its provisions at any time. Nevertheless, procuring entities are just beginning to use and understand the Law, and the attempt to aggregate contracts with a view to exceeding the threshold i s a positive indicator o f commitment and, obviously, far better than the reverse. 5.5.2 ProvincialAuthorities As is perhaps to be expected where funds are limited, the experience o f the provincial authorities with the public procurement legislationis more mixed and, certainly, more limited. That is not to say that there i s no procurement conducted under the legislation, but the number o f contracts exceeding the threshold is limited, mainly due to a lack o f investment available at local level. Though the heads o fthe finance departments o f provincial authorities would appear to have taken steps to inform all authorities o f their obligations under the new legislation (PPL), information is generally scarce and formal procurement i s a new skill. Although the need is recognized, very little local experience exists and, for the moment, all procurement will be carried out with the help o f the experts inBaku (SPA and others). There i s no evidence o f historical formalized tendering procedures but there are strong indications that the PPL i s known and o f a willingness to comply. Intwo o f the provinces investigated (Ganja in the Northwest and Lenkaran in the South), there are examples of procurement by the local health departments under the PPL. However, the value of the packages to be procured would appear to be below the AZM 250m threshold which, as above, indicates a strong willingness to comply and to gain experience o f the new procedures. The autonomous Republic o f Nakchevan i s in a slightly different position since it also plays host to a branch office o f the SPA (which will, in future, become an independent agency). There i s evidence o f at least 11 procurement exercises having been conducted under the previous legislation (even though the value o f the procurements was below the AZM 250m threshold), at a time when the SPA could itself be represented on the TC, and it would appear that SPA was indeed actively involved inthe procurement exercises. The participation o f the SPA branch office took place before the promulgation of the new PPL which does not provide for the participation of, at least the principal office o f the SPA inany TC. The position o f the Nakchevanbranch of the SPA, as future independent office, i s unknown. Whilst this i s positive in one respect, namely that the local authorities were given the benefit o f the SPA staffs greater expertise and familiarity with procurement law and procedure, it also has a potentially negative effect: Active participation o f any body in the decision-making process makes that body responsible for the outcome and the role o f procuring entity and overseer must Azerbaijan Country Procurement Assessment Report June 2003 1 34 Findings-Public Sector: Procurement Procedures be kept separate. To the extent that there i s a complaint (whether founded or not) that body would, apart from a purely internal administrative review, be excluded from participating in any external review. Given that the SPA is, in fact, the second level review body in cases o f infringement o f the procurement legislation, this would effectively prevent any review by the SPA. Whatever the actual probity and objectivity o f the SPA, the appearance o f a body being a judge in its own cause i s sufficient reason to abandon SPA'S participation in the review procedure. It i s unlikely that tenderers would have confidence in such a system. The SPA is also very well aware o fthe invidious position inwhich such a dual responsibility would put it and i s in favor o f keeping these roles separate. To the extent that the SPA'Sbranch office in Nakchevan continues to be involved in the decision-makmg process, this practice should be terminated as soon as is practicable. With the assistance o f the SPA branch office, procurement in Nakchevan has followed a consistent course through the following steps. 1. The procuringentity obtains a letter o fauthorizationfrom the SPAbranchoffice to proceed with procurement; 2. Invariably because the procurement is small invalue and i s for goods which are o f a repeat nature inthe form o f standard food, medical supplies and such like, the solicitation document i s based on a standard request for quotations; 3. The procuring entity convenes a meeting to appoint and confirmthe procurementhender committee, which consists o f three or four personnel selected for their lmowledge o f the subject o f the particular tender. One member o f the committee is from the Nakchevan MinistryofFinance; 4. The Invitation to Tender (RFQ),clearly indicating the substance o f the tender, i s prepared and confirmed by the procuring entity; 5. The deadline for submission and bid opening dates are agreed upon; 6. Tender documents inthe form o f standard quotation documents and Formo f Agreement are dispatched to all tenderers; 7. When bids are receivedthey are held under lock and key; 8. The bids are formally opened; 9. Minutes o fthe Tender opening are prepared; 10. The committee then evaluates the tenders, technically and commercially; 11. Recommendationfor award i s basedon lowest economic compliant bid; 12. the committee submits their recommendationto the Nakchevan Ministryo f Finance special committee for no objection; 13. The award i s made by the procuring entity; 14. The successful tenderer i s informed o f the award; 15. The procuring entity signs the contract; 16. The Final minutes ofmeetings are prepared and sent to the MOF and the SPA. There i s little doubt that the provinces require significantly increased information and training in order to prepare them for the full application o f the PPL.As a result o f the limited funds available to the SPA and despite its best efforts, training by the SPA has tended to be concentrated around Baku. Since this is where most o f the larger value contracts will be let, this makes the most o f the available funds but there i s a danger that many procuring entities will be left without sufficient training and lmowledge o f the PPL and o f the procurement procedures it imposes. Further financial assistance needs to be provided. Findings-f ublic Sector: Management performance C.6 Public SectorManagementPerformance 6.1 ProcurementExpenditurefor 1995-2000 General data for the budgetary years 1995-2000 i s available but i s not broken down sufficiently to provide accurate information indicating procurement information. The data represented below has, therefore, been extrapolated fiom the available figures. The Government has prepared a new Budget Systems Law (BSL) which has been reviewed in detail by the IMF. The L a w i s intended to set the stage for major improvements to the budgetary process, clearly delineating the core responsibilities o f the Treasury, establishing a clearer delineation o f state revenues as well as separating general govemment from the non-govemment sector, including state-owned enterprises (SOEs). The budget preparation process i s intended to have better strategic priority setting and involvement o f line ministries, executed according to a detailedbudget calendar and a comprehensive list of documents to be submitted with the draft State Budget to the Parliament. Enactment o f the BSL was a core policy action required prior to Board presentation o f SAC-11. It is, however, too early to tell whether the new B S L will have a significant beneficial effect on the identification o fprocurement expenditure. Figure 1. Actual Expenditure PctudEye"as%dBudget (`000 Manat) Findings-P ublic Sector; ManagementPerformance 6.1.1 Goods and Services Inthe case o fitem (l), is clearly a needto break down the figures further inorder to extract there expenditure figures for goods and services which would be subject to the PPL. These figures also contain a small element o f works, namely current repairs on buildings. A further difficulty with these categories i s that, in addition to including purchases o f electricity, gas and water (which, underthe definitions o fthe PPLwould, were there competition inthese sectors, be coveredbythe PPL) they contain a number o f disparate services which are difficult to identify. Nevertheless, it i s possible to make a breakdown for these broad categories o f goods and services on the basis of the available figures. 6.1.2 CapitalExpenditure Item (4), capital expenditure, also poses a similar difficulty in that this heading contains expenditure both for capital goods and capital works. The available data for the years 1995-2000 do not contain a sufficiently detailed breakdown to enable an accurate distinction to be drawn between the goods and services (as well as other items not subject to the PPL) contained in this heading. Nevertheless, the data for the planned 2001 budget does contain such information. In order to provide some yardstick by which to estimate historical expenditure, therefore, the percentage o f the capital expenditure applied to goods and works contracts, respectively, as total o f capital expenditure for the planned 2001 budget, has been applied to the previous years. Thus, inthe plannedbudget for 2001, o f the total funds to be spent on capital expenditure, 64 percent was to be spent on the procurement o f works and 4.6 percent on the procurement goods. The results o f this extrapolation cannot, o f course, be considered as accurate since it assumes a constant level expenditure throughout all the previous years despite the fact that the percentage o f the budget spent on procurement contracts has been decreasing. However, it does provide an appropriate yardstick for comparisonpurposes. 6.1.3 Estimate of OverallPublic Sector Procurement In order to present a realistic, if not entirely accurate, picture of procurement expenditure, the CPAR team conducted an estimation involving a breakdown o f data for all eight categories by type o f contract (goods, works and services), seeking to exclude obviously non-procurement items, in order to provide more pertinent data. This also involves breaking down into goods and works, the items under capital expenditure (by applying the percentages derived above). This exercise yields Figures 3 and 4, the first in value terms, the second as a percentage o f the total annual budget. Figure 3. EstimatedExpenditureon Goods, Works an Services1995-2000('000 Manat) FigureSeNiCeSas Expenditure on Goods, Works an 4. Estimated %of Total Budget 1995.2000 Azerbaijan Country Procurement Assessment Report June 2003 I 37 findings-Public Sector: Management Performance 6.2 ProcurementExpenditurefor 2001 FIGURE 5. BUDGET PLAN 2001 7% 63% k Works m Goods Services Remaining Budget Ite Budgeted expenditure on goods, works and services foreseen for 2001 i s displayed in Figure 5. These figures are again broken down in a way which seeks to reflect the expenditure on goods, works and services under item (1) inthe budget and on works and services under item (4). 6.3 CompetitivenessofProcurement The biggest difficulty with providing complete data on procurement expenditure arises fkom the fact that the state budget provides information only on procurement contracts funded by the consolidated budget (central and local). It does not provide information on expenditure financed through extra-budgetary resources used to fund many government departments, local administrations and State-owned enterprises. Whilst disposal o f such funds also requires adherence to the PPL, there are no figures available for the total value o f these funds, although, as will be seen below, there are figures for the value o f contracts funded through extra-budgetary resources which have been let pursuant to the PPL. The SPA has, in its 1999 and 2000 annual reports, provided some basic information on tendering through budgetary funds. Whilst there are also figures for the value o f contracts awarded by tender from extra-budgetary funds, the absence o f the total extra-budgetary funds available means that it i s impossible to calculate what percentage o f these extra-budgetary funds are spent in accordance with the existing procurement laws. Interms ofvalue, Figure6represents theprocurement Procurement Contracts Awarded by Tender (billion Manat) contracts let by tender. 16W 1200 loo0 800 6W 400 200 0 I 1999 2000 2w1 Azerbaijan Country Procurement Assessment Report June 2003 38 Findings-Public Sector: Management Performance Inpercentageterms and for budgetaryfunds only, Figures 7 and 8 show the percentage ofbudget financed contracts which were let by tender. Figure 7. % of Budget Financed Contracts Awarded by Tender 1999 Figure 8. %of Budget Financed Contracts Awarded by Tender 2000 8% 92% One final difficulty with these later figures i s that they refer to contracts let by tender. What i s not clear i s whether that refers to open tendering procedures or also to any other forms o f tendering such as restricted procedures, RFPs or single-source procurement. A further breakdown o f the various tenderingprocedures within these figures would be required or, where the reference inthe reports i s only to open tendering, additional figures for the other forms o f tendering foreseen in the existing legislation. The SPA must hold this information. Both the PPL and the existing legislation require procuring entities to seek the approval o f the SPA before using any form o f tendering other than open tendering-to do so without their approval i s an infringement o f the existing laws. If SPA does not have the date, then it i s clear that either (1) the procuring entities are not in compliance with the existing laws or (2) there are inadequate reporting or data collection and retrieval systems inplace. C.7 Performanceon Bank-assistedProjects This section reviews the quality o f the government's conduct o f Bank-financed procurement in terms o f its adherence to Bank fiduciary requirements. It identifies the major problems and lessons learned from past implementation and recommends measures to be instituted to strengthen procurement portfolio management arrangements. In addition, it provides a basis for decisions on the level o f intensity o f supervision over Bank operations, including whether and to what extent the Bank`s fiduciary responsibility for procurement can be delegated to field offices. Last, this section serves the purpose o f identifying those areas where national procurement procedures are suitable for procurementunder Bank financing. 7.1 Developmentof the World BankPortfolio The Bank's main focus in Azerbaijan has been in providing policy advice, financing for both investments and the government budget and coordination o f aid. Specifically, the Bank's development strategy has been to promote a radical reform o f public sector institutions and improved governance, to strengthen the regulatory and business environment for sustainable private sector development (with particular emphasis on non-oil sectors), and to invest in social development. The vast majority o f the credits (twelve in all) are investment projects in the energy, environment, social, agriculture, culture and infrastructure sectors. The remaining four are adjustment projects (see also Annex I). Findings--Public Sector; Performance on Bank Projects 7.2 CommonProblemsandLessonsLearned Based on Country Portfolio Performance Review: The overall performance o f the portfolio has returned to satisfactory after a worrisome performance in 2000-200 1, when the Bank declared misprocurement in three instances (in Education Reform, Gas Rehabilitation and JBTA-I). The December CPPR indicates that nine out o f 10 active projects in the portfolio were rated satisfactory interms o f procurement performance. Based on Post-Reviews: During the period 2000-2002, the Bank carried out a very limited number o f Post Reviews o f projects in Azerbaijan (two contracts under the Financial Sector TA project, 4 under IBTA and 5 under the Pilot Reconstruction Project) and found no non- compliance with the Bank's procurement guidelines. However, based on feedback from the task teams, it i s apparent that contracts subject to post review are frequently submitted to the Bank for prior review. This appears to indicate that procurement capacity in the PIUs i s weak and that many o f the PIU staff do not feel comfortable dealing with Bank procurementprocedures and are not empowered to make decisions. Based on Independent Procurement Audit: The auditor completedhis fieldwork inBaku on May 10, 2002. The audit report, dated June 2002 identifies the following common operational issues related to procurement: 1. Lack o f procurement planning: except for the initial Procurement Plan as presented in the Appraisal Document, four o f the five projects reviewed (Gas Rehabilitation, Pilot Reconstruction, Education Reform, IBTA I) did not have updated annual procurementplans. This lack o f procurement planning has in all cases resulted in ad hoc procurements, non- competitive procurementmethods and higher prices. 2. Serious lack o f procurement expertise and capacity in project PIUs specifically with respect to conductingNCB and ICB. The overuse o f I S and N S has not helped inbuildingcapacity in applying more complex methods. This has led to lengthy evaluations, inappropriate decisions and undue delays incontract awards. 3. Insufficient attention i s given to contract administration, specifically o f works contracts. In almost all works contracts reviewed, there was little or no supervision o f the construction activities resulting in poor workmanship as well as use o f low quality materials in the construction. 4. Poor record management. The review pointed out that all projects had difficulty procuring some o f the files requested for review. 5. Changes in staff o f Bank task teams combined with limited basis procurement knowledge o f the task team leaders has ledto inconsistencies inBank repliedno-objection letters. Based on meetings of the CPAR mission with PIU stafJ the following main problems or weaknesses were identified as affecting efficient procurement o f Bank financed contracts: 1. Taxatiodcustoms clearance procedures: There is a clear policy on taxation (Tax Code) and customs duties (Customs Code) for Bank-financed projects (see C.12.4 below). The process i s not always known to tax and customs officers and there are no clear and transparent procedural arrangements in place on how to apply the policy. The result i s an Findings-Public Sector: Performance on Bank Projects ad hoc application to each procurement made on a case-by-case-basis. It i s anticipated that this will improve following the UNDP modernizationprogrambut it is important that transparent procedural rules are adopted. 2. Interference o f the SPA in tender committees: this will no longer be the case since SPA membership o f TCs i s no longer provided for underthe new PPL. 3. Problems with the technicalities o f bid securities: Several local banks are not familiar with issuing bid securities and they often adjust the Bank's standard forms, thereby malung the security unacceptable. In addition, some banks are still using an old version o f the standard bid security form from the goods document. This has frequently resulted inrejection of otherwise acceptable bids.There is a needto standardize local forms and train banks. 4. Insufficient knowledge by PIU staff o f contracting concepts such as joint and several liability. There i s a need for training o f PW staff. To ensure closer monitoring by Government o f the Bank financed projects and closer cooperation betweenthe Government and Bank teams, the following initiatives were agreed upon at the CPPR meeting: 1. A workmg group, consisting o f PIUs and representatives from the respective line ministries will hold regular meetings with the deputy prime minister and the World Bank to address issues (including procurement) arising duringproject implementation; 2. In order to address MOF's interest in more involvement in project implementation, Government agreed to establish clear reporting procedures for the PIUs to inform the MOF o f the implementation status o f grants, credits, PPFs and other donor-funded projects. The Bank will ensure that MOF receives adequate information and feedback on the findings o fthe supervision missions; 3. The Bank will improve its country focus in addressing procurement issues and ensure consistency and expedience o f repliedno objections. There i s one additional issue which the Bank will need to bear in mind when financing construction related contracts. To be able to participate in Bank-financed procurement, firms, contractors and suppliers must be legally and financially independent from the State and operate under commercial law. However, the majority o f "private" construction companies were former works departments o f the various ministries (see C.9 below). Inmany cases, these retain a limited State participation and are sometimes owned by current as well as former government employees. Indetermining eligibility ofcontractors, therefore, the status and ownership ofthe tenderer would have to be looked at on a case-by-case basis bearing inmindthe Bank's requirements. 7.3 Local Procurement Capacity Currently no procurement capacity exists in the Bank's Baku office and procurement for all projects i s handled from headquarters. The Bank i s in the process o f hiring an international procurement staff member, to be stationed in Tbilisi, Georgia, who would be responsible for providing a wide range o f procurement services for projects in the three Caucasus countries. To improve local procurement capacity, the CPAR recommends training several o f the project Findings-Public Sector;Performanceon BankProjects officers in the Baku office in order for them to obtain a basic understanding o f the Bank's procurementrequirements. Procurement under Bank-financed projects i s carried out by project implementation units (PIUs), most o f which are established as independent legal entities. Although it i s suggested, and confirmed by the Government at the CPPR meeting, that beneficiary line ministries are the appropriate implementing bodies, very few PIUs currently consist o f staff o f the relevant beneficiary line ministries. To allow phase-out o f independent PIUs, the CPAR recommends having civil servants from the line ministries cooperate with some o f the existing PIUs on simple procurement tasks in order to promote a gradual transition from independent PIUs to implementing entities within the line ministries, thus building capacity to conduct procurement within the beneficiary ministries. Line ministry employees could start by attending some o f the SPA training to familiarize themselves with procurement concepts. In addition, intemational procurement experts hired to assist the PIUs could be tasked with training line ministry staff or altematively, could advise the line ministryPIUs instead o f the independent PIUs. Such transition will, o f course, require a change in the roles, organizational structure, and accountability frameworks o f the public entities involved. Independent o f the status o f the PIUs, serious training o f PIU staff inBankprocurement is a must for every new project. 7.4 RecommendedSupervisionApproach 7.4.1 Thresholds The following financial thresholds for procurement methods are recommended for Bank-financed procurements: Table 2. Thresholds by ProcurementMethod. Procurement Method Threshold ICB: Works >US$600.000 ICB: Goods >us$loo.ooo For the future, in regard to goods for which a sufficiently competitive supply market exists in Azerbaijan and for which foreign firms would not be interested in bidding, the Bank may consider, on a project-by-project basis, the procurement o f goods by NCB below a threshold o f US$lOO,OOO; above this threshold, ICB would apply for such goods. Azerbaijan Country ProcurementAssessment Report June 2003 I 42 Findings-Public Sectoc Performance on Bank Projects Based on the relatively low level o f development o f the Azeri consulting industry, it i s recommended to establish $100,000 as the national threshold below which shortlists for consulting firms may consist entirely o f national firms. 7.4.2 Prior and Post Review The Bank should conduct prior review on: 0 all contracts for goods and works procuredby ICB; 0 the first two to five contracts for goods and works procured by NCB (may be modified depending on the nature, number and size of contracts; 0 contracts with consulting firms >US$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. An appropriate frequency to include a procurement accredited member o f staff in Bank supervision missionwould be once a year. 7.4.3 Strategyfor Fiduciary Safeguards The fiduciary risk for Bank portfolio in Azerbaijan continues to be high. The overall weak procurement environment raises concerns about the value o f money and accountability for public funds, especially because the PPL i s still new andprocurementpractices are inthe early stages o f transition to efficient procurement. The increasing shift in the World Bank's new lending to adjustment lending and 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. 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 inwhich they are implemented. Given the rating o f Azerbaijan as a medium to high-riskcountry from a procurement point o f view, the Bank's strategy to help reduce further risk to Bank funds should be suitably cautious and include the following steps: 1. Buildingadequate safeguards for fiduciary risks, including actions to strengthen capacity o f PIUs to conduct procurement and finalize procurement arrangements at an early stage, inthe design ofnewprojects. 2. Ensuring adequate procurement planning and establishing o f procurement reporting systems at an early stage and requiring updated and satisfactory annual procurement plans to guide implementation and supervision. 3, Adding legal provisions to make the National Competitive Bidding (NCB) procedures acceptable to the World Bank. The current side letter on the acceptability o f N C B procedures i s being substantially strengthened based on findings o f this report, for use in all future projects (see side letter inAnnex V). 4. Followingup on procurementcomplaints and procurement audit findings. 5. Relying on Corruption and Fraud Investigation Unit (CFIU) to investigate cases o f alleged fraud and corruption, and apply sanctions where called for. 6. Exercising particular vigilance to prevent discrimination by Azeri implementing agencies against foreign biddersunder all procurement methods, but especially NCB. Findings-Public Sector: Performance on Bank Projects 7. Exercise particular diligence in reviewing requests received from Azeri implementing agencies to award contracts on a Single Source basis. 8. Ensuringthat procurement post reviews are conducted as per the provisions o f the credit agreement and that the Back-To-Office report o f the post-review supervision missions contains a specific annex dealing with procurement post review, which should be sent promptly to the Regional Procurement Adviser. 9. Supporting organization o f business seminars to encourage Azeri industry to participate as bidders inBank-financedprojects; 10. Ensuring that staff other than civil servants from the beneficiary ministry who are appointed to PIUs are appointed following a competitive process and that they are properly qualified. 11. Keeping to a minimum,procurement by less competitive procurement methods, including International Shopping and National Shopping, for all new projects (both per contract and aggregate thresholds). 12. Requiring quality independent supervision o f civil works contracts. 13. Placing an obligation on all implementing agencies, through Credit Agreements and/or Sub- Credit Agreements, to establish and maintain an asset register for all goods and works financed by Bank funds. 14. Conducting independent procurement audits every three years. C.8 General Risk Assessment Any assessment o friskina country's national public procurement system should be based on the stage o f development o f its legislative framework, the effectiveness of its regulatory institutions, the strength o f its enforcement regime, the capacity o f its institutional and human resources and the threat o f corruption. Legal Framework: With the introduction o f the new PPL, Azerbaijan's legal framework is in good shape. It i s based extensively on the UNCITRAL model. The early drafts were discussed extensively with the Bank and many o f the Bank's comments were incorporated into the final text. There remain some minor issues which should be resolved but these do not affect the overall positive assessment o fthe PPL (C.1.4). Regulatory Functions: These are vested in an appropriate institution (the SPA) which i s staffed with competent and well-trained people. It has appropriate duties and powers and has shown a willingness to ensure compliance with the PPL. The only obvious weaknesses are the lack o f adequate budget and the restriction on the number o f staff that it may employ (C.3.). Enforcement Regime: The PPL has set up a three-tier review system based on the UNCITRAL model. This consists o f an internal administrative review, review by the SPA andjudicial review. Perception o f the courts' ability to deal with procurement disputes i s poor and under current conditions, judicial review i s unlikely to prove to be an effective means o f redress. The SPA's current review procedure may be effective in the current circumstances but will fail, in the medium- to long-term, to provide a sufficient degree o f confidence and transparency in the review process and i s unlikely to be sustainable ((2.3.7, C.4). Institutional Capacitv: Despite the SPA's valiant attempts on its low budget to provide procurement training, there remains a concern that the training o f procurement officers is inadequate and geographically uneven. Whilst some procuring entities do have purchase and Findings-Pn'vate Sector; Competitiveness 8. Participation supply departments, staff who undertake the procurement task often do so without sufficient or any formal training. The country lacks a plannedtraining system for procurement (C.4.5). Corruption: Whilst the Government and its agencies do not recognize corruption as a problem at all, the private sector (domestic and foreign) has a strong and consistent perception that corruption is rife. To be fair, there have been few allegations o f corruption specifically inthe field o f public procurement (though sufficient complaints o f bias and favoritism towards former government departments now partially in the private sector); it concerns more the general perception o f a culture o f corruption which affects the business environment generally (C2). Whilst the private sector perception o f pervasive corruption and the performance on Bank- assisted projects are both serious concerns, the advanced state o f the procurement law and the existence o f an appropriate and competent regulatory framework mitigates in favor o f assessing the environment for conducting public procurement inAzerbaijan as mediumto highrisk. PRIVATE SECTOR This section has a number o f objectives. Inthe first place, it will consider the competitiveness and participation o f the private sector in public sector contracts. Secondly it will examine performance in public sector contracting. Thirdly it will examine commercial practices as they relate to the public procurement system. This section will also deal, fourthly, with aspects o f the business environment which may impact on the public procurement system. Many o f the comments made in this section are based on extensive interviews with the private sector as well as with the public sector. The CPAR team recognizes that, from current experience inAzerbaijan, it is unlikely that the views o f the private sector will be accepted by government representatives. However, whether they are accepted or not, it i s only proper that they should be aired. If the views o f the private sector should prove to be incorrect or unwarranted, then there may well be a problem o f perceptionwhich will needto be addressed by the appropriate government authorities. The SPA can play a pivotal role inchanging these perceptions through information dissemination and training (see C.3.3 and C.3.6 above). C.9 Competitivenessand Participation As is apparent from the country backgroundand commentary above, Azerbaijan continues to face a number o f difficulties. It i s a country still very much in transition and, although there has been much progress, the pace o f privatization and administrative decentralization i s slow. These issues have a significant effect on private sector participation inpublic contracts. 9.1 The ConstructionIndustry 9.1.1 Privatized Government Companies There are a number o fprivate construction and "maintenance" companies inAzerbaijan, many of which were formerly government departments or units which were corporative, turned into joint stock companies and then privatized. In some cases and depending on the level o f transition achieved, these corporatizedprivatized companies remain not only State-owned but also structurally dependent on certain ministries. This i s particularly the case with low-cost construction and maintenance companies. For example, the State Committee for Water Use and Irrigation, unlike the gas and oil utilities which might be called public undertakings and clearly part o f the State apparatus, remains a public body and continues to rely on some 100 regional F/ndings-Prfvate Sector: Competitiveness & Partfcfpatfon I_L """""' """""" "' ' """"' " maintenance departments which, although in some cases privatized, are part o fthe structure o f the Committee. They are, however, separate legal entities and, as in the case o f other government agencies (e.g. the Road Agency) and the State-owned enterprises which have a similar structure, these maintenance companies may also enter into agreements with thirdparties (with farmers, for example, to provide irrigation). Where these former maintenance companies have been properly privatized and are no longer part o f the State apparatus, most o f them retain a State participation o f some 25 percent but this figure will vary. The subway construction company, for example, remains 100 percent publicly owned (by the City of Baku). The remaining stock is held by private individuals or current government and former government employees. One example is Promstroi, the former State construction company which had previously been the Ministry o f Industrial Construction (MOIC). Inthe 1970s, the MOIC, founded in 1957, created a series o f departments each o f which was assigned to a different Ministry (e.g. Agrastroi to the Ministry o f Agriculture construction department; Glabakstroi to the Baku City construction department). Each o f these companies tended, as a result, to be specialized in certain fields o f construction (e.g. Promstroi in the construction o f factories), although they have now considerably broadened their respective portfolios. In 1997, the MOIC was dissolved and many o f these departments were corporative and eventually privatized. These companies together with the former and existing in-house construction companies o f the Ministries and State-owned enterprises appear to constitute the bulk o f contractors bidding for all constructionworks (usually low value) outside the oil sector. The highest value contracts tend to be in the AZM 1.5 to 2 billion range ($400,000 equivalent). Other examples are Azerkendikmti, formerly part o f the Ministry o f Rural Construction (now with a 25 percent State participation) which, as its name suggests, concentrated initially on construction in rural areas, including processing factories, schools and hospitals but which has now expanded its portfolio; and Azerenergy construction, responsible in Soviet times for the construction o f electricity plants in Azerbaijan and elsewhere in the USSR which i s now a joint stock company in the sense understood by many, i.e. with a 51percent State participation. The problem expressed by many i s that these former government construction companies are often seen to be preferred by public procuring entities, regardless o f the merits o f their bids, and tend to win a disproportionate number o f contracts. N o figures are available on the identity o f the successful bidders inbudget-funded construction contracts and this (rather strong and consistent) perceptioncannot, therefore, be verified. 9.1.2 Private Contractors Whilst there is, according to a many procuring entities, a significant number o f private construction companies (though not many have been discovered during this assessment), these tend to be much smaller and to compete for the lowest value contracts. This may be the result o f the relative novelty o f the market economy although many concerns have been raised that the bureaucracy involved in establishing and operating a private company (in terms o f registration, licensing, spurious spot-checks and tax inspections) i s such as to discourage the growth o f the private sector in general, including the construction industry(see C.12 below). At the same time, the established construction companies complain about the high incidence o f "briefcase" contractors, whose office i s their briefcase. This would seem to represent two sides o f the same coin. Findings-Private Sector; Competitiveness & Participation Interviews with private construction companies indicate a distinct lack o f interest in bidding for public contracts. This is not only evident in the construction industry but applies equally in the case of the private providers o f goods and services interviewed. Apart from the general feeling that the result o f public tenders i s a foregone conclusion, those interviewed also expressed their concern that there i s often little or no information available on upcoming tenders; that the tender advertisements are mostly unclear on the scope o f works and assignments; and that technical specifications are often ambiguous. In addition, the Government has a reputation for paying late among the few private contractors that do exist, a further disincentive. 9.1.3 ConstructionDemand Interms o f demand, the Azeri constructionindustryis, as with many things inAzerbaijan, split into two distinct categories: construction related to the oil and gas sector, and all other construction. Procurement in the oil and gas sector is, thanks to significant private foreign involvement and the existence o f extensive production sharing arrangements, largely private procurement and not subject either to the existing procurement laws or the new PPL. A large proportion o f these contracts i s let to foreign companies, leavingthe local construction companies lagging behind interms o f experience. Of the remaining construction in the country, a consistent picture emerges o f modest demand by the Government (which i s nevertheless the biggest purchaser o f goods, works and services by far), probably due to a shortage o f funds rather than an absence o f need. It should be pointed out, however, that many low-value construction and maintenance contracts which might otherwise provide work for private contractors are given (as internal work orders) to the remaining in-house departmentshnits o f ministries, agencies and committees which are considered to be separate legal entities. Given the limited funds available outside the oil and gas sector, it i s perhaps not surprising that there i s little experience o f usingthe existing L a w on Tenders, since there appear to be very few construction projects funded by the national budget which exceed the relevant threshold o f AZM 250m. The exception would appear to be contracts funded through the Oil Fund (and spent by procuring entities subject to the Law on Tenders and, now, the PPL). The Oil Fund finances the work o f ARRA and would appear to be one o f the main sources o f publicly funded contracts available to the private sector. Those contracts which do exceed the AZM 250m threshold, and there are a number which exceed it significantly, are generally funded by international donors or international lending institutions. These contracts are, for the most part, governed by the procurement procedures o f and supervised by those organizations. As a result, many o f the former Government construction companies which inherited not only the plant and equipment from their previous incarnations but also the large labor force, often spread geographically in a number o f regional "subsidiaries," are burdened with many idle units, despite their perceived advantage in relation to other private contractors. 9.2 RoadConstruction Road construction in Azerbaijan i s carried out by the Road Agency (Azeravtoyol). Formerly, this was the Ministry o f Construction and Maintenance o f Roads (in Soviet times, the Department o f Highways). It became a production unit for road maintenance in 1984 and, in 1993 became the Road Agency which i s a structural unit o f the Council o f Ministers. As with other Ministries, the Road Agency i s divided into several departments and controls a series (73 innumber) o f local and regional "maintenance subsidiaries." In common with the structure o f local government and o f State-owned enterprises during this transition period, these maintenance companies are considered to be separate legal entities (with their own charters) whilst, at the same time being controlled by the Agency as structural units. In the case o f the Agency, it would appear that some Findings-Private Sector; Competitiveness & Participation o f these units are self-financed, although others (47) are financed directly by the central budget. Inaddition, these unitsare also free to attract fundingbyproviding, on a contractual basis, repair and maintenance works to local government where the latter are responsible (e.g. streets and rural feeder roads) or contract with the private sector, e.g. to maintain factory access roads. Such agreements must be sanctioned by the Agency. Other than in the case o f these private contractual arrangements, works are carried out on the basis o f works orders emanating from the central administration o f the Agency. The program of works and the corresponding budget plan for each subsidiary i s approved by the MOF. Their performance i s monitored on a monthly basis and, if satisfactory and in accordance with the agreed program, the salary o f the payroll staff and seasonal workers will be paid. Their annual budgets range fkom AZM 500 million - AZM 5 billion. The Agency's total budget was AZM 75 billion of which AZM 5 billion was for Nakchevan, AZM 14 billion for the financing of an ongoing road project (Baku-Alet), leaving AZM 42 billion for road maintenance and repairs in the rest o f the country and divided between the remaining 47 maintenance units. This AZM 42 billion represents about 5 percent o fthe needs o f the Agency. Of these 73 units, 20 were selected to be privatized in the second privatization program (2000). Most o f these have been corporative but not yet privatized. There i s apparently a legal obligation in the privatization program which requires the Agency to help sustain these newly corporative entities for a period o f some 4-5 years. As a result, when contracts are below AZM 250m, the work i s allocated to these 20 companies. This i s done on the basis o f contract since these companies are separate legal entities as defined by the legislation. In the only contract to be tendered and awarded above AZM 250m by the Agency last year (at a value o f AZM 59bn.), the successful bidder was also one o f these 20 companies. 9.3 Goods and Services Due to the very diversity o f goods and services which may be provided to the Government by way of tender, it was not possible to achieve an adequate cross-section o f opinion. Nevertheless, interviews were also conducted with a number o f suppliers o f industrial products and construction related services as well as with construction related consultancy companies (mostly, it has to be said, in the oil sector). Whilst this does not provide sufficient evidence to make a complete assessment, the results o f these interviews serve to confirm the opinions expressed in interviews with the private construction industry.Comments were, infact, almost identical, indicating a lack o f publicity or inadequate publicity, the feeling that the successful bidders had already been chosen, unclear specifications and scope o f works/services. The payment record o f the Government was also a disincentive for suppliers o f goods and services. As with all private sector parties interviewed, considerable unhappiness was expressed in relation to the bureaucracy involved in doing business in Azerbaijan, discussed more fully below. Those fortunate enough to be employed by the oil sector expressedno desire to work for the Government. C.10 Performanceon PublicProcurementContracts Since there have to date been few procurement procedures conducted under the previous law and, understandably, almost none under the PPL and given that there are relatively few private sector contractors (as discussed above, it i s more difficult to identify suppliers o f goods) with the majority o f works contracts going to former (and existing or partly State-owned) entities, it i s perhaps not surprising that there i s little information regarding the performance o f private sector companies on public procurement contracts. All procuring entities interviewed expressed their findings-Private Sector: Performance on Public Procurement Contracts general satisfaction with the performance o f the few private sector companies they had come across. The same story emerges from the few CPAR questionnaires retumed, including, significantly, the questionnaire returnedby the SPA. Indiscussions with some of the procuring entities, there was mild reference to the existence of "briefcase" private contractors but no details were provided. With the limited number o f public contracts on offer (as a result o f a lack o f investment funds), it i s not surprisingthat those private companies that do emerge have themselves invested little in their own plant and equipment. "Briefcase" contractors may simply be a euphemism for struggling private contractors. On the other hand, in discussions with the private sector, as mentioned below, it emerged that the fear o f onerous bureaucracy, unjustifiedinspections and a desire to avoid "facilitation" payments, also leads to a tendency for private businesses to keep as low a profile as possible and to avoid any obvious signs o f success. This i s confirmed by comments from the banks interviewed regarding the availability o f bank securities, including reference to the absence o f audited accounts, prompted, intheir view, by this very same desire for discretion (the term used by one o f the banks was the "shadow economy"). C.ll CommercialProcurementPractices The position on private sector tendering i s extremely difficult to determine. As discussed above in the context o f the Azeri construction industry, most o f the "private" companies retain a significant State shareholding (and receive State funds to pay salaries and operating costs) and, to the extent that their own procurement exceeds the relevant threshold which is, inany event, a rare occurrence, they would be bound by the PPL. Finding any truly private companies whose spending power i s sufficient to warrant any formal tendering has proved almost impossible. None at all were identified in the provinces. Several private companies were identified in Baku and interviewed. Of those, most did not procure by formal tender but based their purchases either on informal requests for quotations or on negotiations with known suppliers. The largest private purchasers in Azerbaijan are to be found in the oil sector. Most entities are formed on the basis o f production-sharing agreements (PSAs) and, although they obviously include Azeri (State-owned) companies, it i s the foreign participants (the large oil companies) which are largely responsible for procurement. The procurement practices adopted by these entities reflect their intemational experience and bear no relationship at all to commercial procurement practices in Azerbaijan. It i s o f little benefit, therefore, to look at these practices in any detail with a view to identifying commercial procurement practices in Azerbaijan. There are, of course, a number o f specialized local private companies clustered around these PSAs but they are generally retained for very specific projects (generally consultancy-type services or minor repair and maintenance work) o f a relatively low value. There i s no evidence to suggest that their obligations to the PSAs require them to conduct their own procurement in order to fblfill those obligations. To the extent that these companies are in a position to grow and expand into more domestic markets, it is likely that they will "import" the purchasing procedures they have learnt with the PSAs. C.12 The BusinessEnvironment A common complaint by all private sector companies, both domestic and foreign, operatinginall sectors (works, supplies and services) concerned the difficulties o f doing business inthe country. These problems affect all private sector companies and are not specific to companies seelung to bid for public contracts. Nevertheless, they may significantly hinder the latter's access to public Azerbaijan Country Procurement Assessment Report June 2003 I 49 Findings-Private Sector: Business Environment C ' ' contracts. The main issues concern access to bank guarantees, company registration, licensing, inspections, and customs procedures. 12.1 BankGuarantees There are some 53 registered banks in Azerbaijan, some o f which are more creditworthy than others. There are 15 very strong banks all o f which are auditedby the big 5 accounting firms and all o f which have credit lines with larger international banks. There are currently some restrictions on currency transfers and the National Bank (Am), as regulator, will prepare appropriate Regulations. All o f these banks carry out guarantee operations which is one o f the elements o f the banlung license. The practice o f requiring and acquiring bank guarantees inthe shape o f tender securities and performance guarantees i s reasonably well developed. The main difficulty with the terms o f the guarantees themselves stems from the absence o f an accepted Azeri format. Most procuring entities will have their own standard form for tender securities but this will often have been translated from a different language. They will, o f course, all be similar but the translation will sometimes create uncertainties, particularly where parts o f the original text have not been translated. These problems are, however, generally remedied through discussions and, in most cases, the proffered forms are accepted. It may be an indication o f the level o f activity in the market that not many bank guarantees are issued. Though precise figures are unavailable, in the case o f one large foreign commercial bank with an active localpresence, for example, no more than 12 are issued each year. Inthe case o f a local bank whose clients request bid securities for goods procurement the figure i s higher at something less than 10 per month (though, given the uncertainty o f the interlocutor, this figure could be anything from 1to 9). Access to bank guarantees i s very much dependent on the client in question. This may well be similar to practices elsewhere, although the issues do seem to be rather acute. Inthe case of long- standing clients with funds in the bank and with a demonstrated large turnover (usually demonstrated by the production o f balance sheets since few companies can produce audited accounts), banks will generally provide the requested bank guarantees without collateral. In the case o f a newly established company or a new client with the bank, the banks will require collateral such as cash, goods and immovable property. There appears to be some confusion over the possibility o f usingland as collateral. Insome cases, the banks say that it i s not possible to mortgage land (since sic., inlaw, all the land i s the property o f the State, although this position i s not consistent with the Civil Code which recognizes both the right to private property inland and the mortgage obligation), in others the banks seem prepared to accept a mortgage on land. Where the client requesting a bank guarantee i s not a regular client, the practice appears to be to require collateral exceeding the value o f the guarantee. For a guarantee o f $50,000, one private bank, for example, would ask for collateral to the value o f $100,000. Another requires only 100 percent collateral. Inboth cases, there i s a concern that, inthe current market conditions, it i s not possible to guarantee the value o f the collateral. Azerbaijan Country Procurement Assessment Report June 2003 I 50 Findings-Private Sector: Business Environment The difficulties for the banks o f assessing the financial situation o f their clients are exacerbated by the lack o f financial information. There are few, if any, audited balance sheets and many companies do not have adequate records o f their turnover because they work extensively in the shadow economy. They have little experience o f workmg with Banks and have been used to working with their own capital. Further,legislation in this area is weak in the sense that it i s not known what documents and formalities must be concluded in order to present a building, for example, as collateral. Reflecting the comments made by the private sector, a number o f bank interviewed expressed their belief that the tender securities were a mere formality since it was always known beforehand who the successful tenderer would be and that the securities were easily issued to such a tenderer. It i s nor surprising, therefore, that only one bank interviewed was able to indicate an occasion when a security neededto be cashed in. The cost o f providing guarantees varies from bank to bank. In one, it is 3-5 percent o f the value o f the guarantee. In another, the rate i s set at 6-8 percent per annum, with the cost o f an average tender security for goods procurement valid over 3 months amounting to some 1.5 percent. This latter bank tends only to receive requests for tender securities for the procurement o f goods and has little experience o f issuingperformance guarantees. The rates for such guarantees would be negotiated separately. There i s one additional formality. Where the beneficiary of the guarantee i s a client o f a different bank to the person supplying the guarantee, the guarantee must be registered at the National Bank. The CPAR team has found that there are no real altemative means o f providing guarantees other than through issuance o f bank guarantees, because there are no bonding companies to issue bid bonds and insurance companies are not well established inthe Caucasus countries ingeneral. 12.2 CompanyRegistration Until 1996, there was no comprehensive State strategy on company registration and, from about 1985, registration was carried out in an ad hoc fashion by some 10 different ministries in their relevant sectors, e.g. the National Bank for financial institutions. A new law was introduced in 1996, the Law on the State Registrationo f Entities, which brought in some order and transferred the duty for company registration to the Ministryo f Justice. The Ministry's registration functions are divided into 12 departments, two inBaku, and 10 inthe regions, including Nakchevan. All companies, whatever their legal form, must be registered. Foreign companies must also be registered where they carry out an activity in Azerbaijan or where they open a representative office, affiliate or branch in the country or participate in a joint venture. No company may participate in a public tender unless it i s registered. Where registration i s required o f foreign companies, they must also be registered before bidding. There are currently some 80,000 registered companies and 4,500 foreign registered companies, many o f which are NGOs. Whilst the official line i s that company registration will be completed ina matter o f weeks, none o f those interviewed achieved such a feat. Most felt relieved to have completed the formalities and received registration in one or two years, although there appear to be many cases o f even longer periods. The Law sets out the documents to be presented, the reasons for rejection o f termination o f registration and the appeal mechanism. Followingthe Law, registration should now be completed within 10 days o f the application. A new proposal to amend the Law is currently being prepared Findings-Private Sector: Business Environment which will reduce this time to seven days. The cost o f registration has been fixed by Parliament. For agricultural companies and NGOs the cost i s AZM 11,000 ($2.50 equivalent). For branches o f foreign companies, the cost i s $200. For all other companies, it i s AZM 55,000 ($12 equivalent). 12.3 Licensing In addition to company registration, some 70 activities require a license. As with company registration, the grant o f licenses would also appear to be somewhat arbitrary and can entail significant delays. In some cases, the authorities responsible for granting licenses themselves compete with the licensees, either directly or through subsidiaries. Licensing is not carried out centrally, but by the relevant Ministry, depending on the area o f activity. The activities to be licensed are determined, however, by the Council o f Ministers. The most current list i s contained in the President's Decree 637 on the Types o f Activity to be Licensed o f October 4, 1997. Whilst many o f the activities to be licensed concern such things as the handling and transport o f dangerous substances, there are a number o f activities which are relevant for procurement legislation. For example, the following activities require a license: geological surveys (State Committee o f Geology and Mineral Reserves); mining industry, pipelines for the transport o f gas, oil and oil products, highpressure facilities and boilers, design, construction, operation and maintenance o f transport pipelines (State Committee for Industrial Safety and MiningSupervision); installation and repair o f energy related equipment and facilities (State Committee for Industrial Safety and Mining Supervision); communications services (Ministry o f Communication); civil and erection works including design, construction, engineering, survey, commissioning and start up (State Committee for Construction and Architecture); production and maintenance o f medical equipment (Ministry o f Health); attraction and use o f foreign work force (Ministry o f Labor and Social Protection); establishment o f customs warehouses and customs operations activities (State Customs Committee N o attempt has been made to investigate all licensed activities but in the case o f buildings construction, for example, the State Committee for Construction and Architecture issues 5 separate licenses for topographicalhopological works; design works; construction works (which includes a number o f sub-licenses such as licensing for mechanical works, electrical works, concrete works, steel works, including building materials and supervision works); plant manufacture and the reconstruction and rehabilitation o f monuments. It has issued some 150 licenses for design works. This is relevant because it i s itself an entity which offers design and project management services to other government entities through a number o f special departments o f the Committee and subsidiary design institutes. Government entities choose the design institute or organization by way o f tender. This is a common feature in all sectors o f activity where the ministries involved in granting licenses for the operation and provision o f certain activities are themselves active inthe provision o f those services. Private companies operating in the construction sector require a series o f licenses in order to operate. For example, a private cement factory visited explained the need for, in addition to a production license, a series o f other licenses such as licenses to operate electrical transformers, to ensure power and water supply, for equipment and crane operation and for the operation o f transport by truck. Each o fthese licenses must be obtained from the relevant ministry. License fees will vary fkom ministry to ministry and according to the type o f license. Some known figures suggest that a construction design works license costs $500 and a consultancy activity in the context o f privatization costs $1,000. One example was given of a license granted Azerbaijan Country Procurement Assessment Report June 2003 I 52 Findings-Private Sector; Business Environment by the State Mapping Committee for the use o f (old) topographical maps prepared by it on database. The cost of this was $2,000 for a period o f five years. It would appear that a retroactive additional fee was also levied amounting to 2 percent o f the profits earned on each project using these original database maps. 12.4 ForeignCurrency Payments The three cases o f misprocurement inbank funded contracts identifiedin section 7.2 above, have also shed light on a further difficulty inthe business environment which affects procurement. The auditor's review of these misprocurements sought to identify the underlying reasons for these cases. It was noted that in almost all cases where it was identified, the misprocurement was due to the award and payment to a company other than the supplier who had won the bid. As a result o f this discovery, meetings were held with both the Tax Ministry and the National Bank o f Azerbaijan to identify the related country laws and rules with respect to import of goods and foreign currency payments. The review showed that the current laws on foreign currency payments provide a ceiling o f USD10,OOO for advance payments (to be increased to $25,000 under a new proposed law) for imported goods and that a local supplier cannot open a foreign currency bank account outside the country unless (1) it has a foreign branch that i s approved by the Azerbaijan National Bank or (2) there i s a one-off project which also requires specific approval from the National Bank. Exceptions to these rules can only be authorized by the Azerbaijan National Bank which requires submission of extensive documentation and, as with many things inAzerbaijan, the process can also take a great deal o f time. These provisions which are designed to protect the country against large outflows o f currency are not necessarily successful in protecting the outflow o f currency and the local suppliers have generally found ways o f circumventing these rules by either partnering with a foreign company outside o f Azerbaijan or by opening an account in another country under a different company name (and hence the root o f the problem underlying the misprocurements). These companies are then used for invoicing and receiving payments on all foreign currency accounts. As such, not only are the revenues not brought into the country, taxes can also not be imposed on these activities. Discussions with the business community also revealed that even if the local supplier does not have a bank account outside the country but still needs to send foreign currency abroad for the purchase of goods, the local bank i s generally amenable to arranging for the transfer o f any sums o f money outside Azerbaijan for a commission fee o f 3% o f the total transaction. Given that the Azerbaijan business community and the Government is seeing an increase in import/export transactions requiring payments in foreign currencies, these restrictions are clearly a hindrance to efficiency. The deleterious effects o f these restrictions are clearly seen in the context o f bank funded contracts. These problems are likely to be amplified when the PPL i s implemented and are likely to act as a disincentive to bidders seeking to source from outside the country as well as to foreign bidders. The auditors rightly recommended that a review o f these laws and the imposed restrictions needs to be made and a decision reached on the usefulness of these laws under the current environment. 12.5 Inspections Various permits and licenses appear to proliferate and companies routinely complained that they are subject to frequent and spurious spot checks by various branches o f the bureaucracy. Spot checks can be halted fairly quickly, by all accounts, where facilitation payments are made. This Azerbaijan Country ProcurementAssessment Report June 2003 1 53 Findings-Private Sector Business Environment problem has clearly been recognized by the Government which i s seeking to deal with the problem. A Presidential Decree to minimize the incidence o f unauthorized checks has been adopted, although the resources and powers available to the Ministry o f Economic Development to enforce this Decree would seem, at first sight, to be inadequate. Checks are carried out by various branches of Government. The most frequently mentioned were the Ministry o f Labor and the Ministry of Taxes. In the construction sector, the State Standards Committee also has a departmenddivision for technical inspections which will make general inspections of, for example, equipment and machinery, cranes and trucks, in the case o f a construction materials factory. Technical inspections are not the sole reserve o f the State Standards Committee, however, and may be carried out by different authorities in the relevant sectors. For example, in the construction industry, the State Committee for Construction and Architecture has departments o f "expertise" (Gostraya) and for the inspection o f the quality of construction works which carry out similar functions in the construction sector. The department o f expertise will check designs submitted by procuring entities (and prepared either by an SCCA design institute or private firm) to make sure that they comply with national standards. Such a "feasibility study" is a requirement for any construction project. The cost o f this expertise i s between 0.1 percent and 20 percent o f the cost o f the design works and i s borne by the procuring entity. This department also calculates quantities for the Bill o f Quantities and sets unit costs and average prices for the construction industryfor the purpose of verifying the estimated costs o f the procuring entities. The State Committee i s able to assist in this verification because it also provides a representative inthe TCs o f the procuring entities. The department for the inspection o f the quality o f construction works will carry out compulsory inspections o f works against quality standards following completion and, where necessary, will make recommendations for improvements. A successful inspection will result in a certificate o f satisfactory completion. Failure by the contractor and his design firm to comply with any recommendations made by the Committee could lead to the loss o f a design firm's license (also granted by the Committee). There i s no charge associated with this inspection. Many ministries also have their own technical supervision departments who supervise whether works are in compliance with the contract documents including the technical specifications and the drawings. There are also a number o f private companies who conduct construction supervision on the basis o f a license granted by the Committee. 12.6 Customs The customs authorities are largely financially independent of the MOF in the sense that they generate their own income and do not depend on budget funds for their operations. They rely entirely on extra-budgetary funds save for a portion o f the salaries paid. Customs officials earn about $70 pcm [STANDS FOR?], o f which 30 percent i s financed from the budget. The remaining 70 percent i s financed from funds obtained by the customs authorities themselves from (1) penalties imposed for customs infractions, (2) the sale o f confiscated goods and (3) a customs "service fee" charged to importers which i s currently set at 0.15 percent o f the value o f imported goods. In addition to the basic salary, customs officials receive significant bonus payments when they prevent customs infractions and seize illegal imports (smuggling). Though no figures are available, it i s understood from the customs authorities themselves that these bonus payments are large enough to make the basic salary incidental. There are 1,870 employees throughout the country, including the decentralized customs points. The average rate o f duties i s 7.8 percent and, in 2001, the customs authorities collected about AZM 822 billion in customs duties, representing some 20 percent of the Government's total Azerbaijan Country Procurement Assessment Report June 2003 I 54 Findings-Private Sector; Business Environment budget. Of this, AZM 23 billion was collected in cash at the customs points o f entry, AZM 20 billion (90 percent) o f which related to payments o f duties by individuals on the import of vehicles. In 2001, there were 18,889 recorded cases o f infringement, although this figure i s generally and gradually decreasing. 12.6.1 CustomsProcedures At border crossings, the physical facilities include warehousing and offices for customs officials and customs clearance service providers who are licensed by the Committee. It i s understood that these latter rent space from the customs authorities and, for a fee paid to the authorities, carry out many o f the customs clearance procedures on behalf o f the authorities. These are not formally customs brokers but have been described by the IMF, which i s participating in a project to modemize the customs service, as "declaration officers." They are generally, it would seem, experienced former customs officers who are employed by independent organizations to provide assistance to importers in completing customs documents. Once the relevant documentation has been completed and the customs procedures finalized, the final forms are approved by the customs officials. Inspections are camed out by the customs officials. For the payment o f duties other than by way o f cash payments at the border, the customs procedures are as follows: before the goods arrive, the importer needs to fill out a customs declaration on the basis o f which the appropriate duties are calculated (with the assistance o f a declaration officer), and this declaration i s approved by a cargo officer. The duties are calculated, based on the declaration, by the tariff and finance office o f the Committee. The importer then pays the appropriate duties at the bank and receives a receipt. The receipt i s attached to the declaration and submitted at the border, for hrther verification, at the time o f examination (by a customs officer) and collection o f the goods. There are special procedures used for clearance o f goods imported under exempt schemes, i.e. those that are funded by international organizations such as the World Bank. These procedures are not written down in any formal normative act but, inpractice, the procedure is as follows: the beneficiary line Ministry will send a letter containing a description o f the goods and the quantities to be imported free o f VAT and customs duties to the Council o f Ministers which verifies the contents o f the letter; the verification is then given to the customs authorities in Baku which will provide a signed certificate o f exemption; this certificate i s handed to the customs officer with the customs declaration who will then release the goods free o f VAT and customs duties. Goods arrive sealed at the border, are opened and checked against the declaration. There i s systematic inspection at the border and 90 percent o f all imports are inspected. According to the customs authorities, the declarations appear to be false in about 90 percent o f those inspections. The two main areas o f default appear to be connected with under-invoicing (declaring lower prices) and declaring lower volumes. This latter i s a particular problem with goods imported by road (as opposed to rail and air cargo) where volumes appear to be systematically under-declared. 12.6.2 UNDPModernization Program 1 There i s little doubt that the current customs declaration and other procedures are cumbersome and bureaucratic and that the systematic inspection o f goods causes delay. A common complaint among those interviewed has been that goods are often delayed at customs for significant periods o f time. There i s a distinct lack o f transparency in the procedures and practices o f the customs authorities with importers unable to ascertain, in all cases, the reasons for the delay. Under a project financed by UNDP to modemize the customs procedures, a recommendation has been Azerbaijan Country Procurement Assessment Report June 2003 -r 5 5 Findings-Private Sector: BusinessEnvironment made to change to a system o f random o f inspections. The UNDP modernization project i s intended to improve the situation by automating the procedure so that customs officials will have advance information concerningthe imported goods. The system will also enable imported goods to be tracked fiom the point o f import to final delivery. Given the apparently large number o f detected irregularities, this i s not an option favored by the customs authorities who are not ready to implement a "Green Line" ("nothing to declare") system. This reluctance may be relatedto the fiequent comment that under current procedures, customs clearance i s speedy where "additional payments" are made. Azerbaijan Country ProcurementAssessment Report June 2003 I 56 RecommendedAction Plan D. RECOMMENDEDACTIONPLAN D.l RecommendedActions This section sets out a series o frecommendations designed to address the various weaknesses in the public procurement environment in Azerbaijan, as identified in the preceding sections and attached Commentary on the PPL. The recommendations contained in this report are designed to be as comprehensive as possible given the current stage o f development o f the Azeri procurement system. The recommendations in the CPAR action plan (Annex IV A) were discussed both with the SPA and with the Workmg Group established as the Counterpart Team and the resulting Action plan for the Improvement o f Public Procurement inthe Azerbaijan Republic (Annex IV B) represents a consensus between the parties setting out the priority and medium term goals for further reform. Before finalizing the Action Plan, the SPA also sought input from the Ministry o f Justice. Discussions on the Action Plan were conducted within two joint CPAR/CFAA workshops held in Baku on 27 January 2003. As well as including members and representatives o f the Working Group (Cabinet o f Ministers, Ministryo f Economic Development, Ministry o f Finance, Chamber o f Accounts, and the State Procurement Agency), other interested parties (National Bank, Parliamentary Commission for Economic Reforms) and representatives o f the international donor community (USAID, EUTACIS, IMF) were also invited. Inthis way, the CPAR and Counterpart Teams were able to gather the broadest possible spectrum o f opinion and advice and to engage the international donor community in the process o f reform funding. As already mentioned, EU Tacis has agreed to fund a number o f the larger scale actions set out inthe Action Plan. The recommended actions may conveniently be divided into two main parts. First, the detailed analysis o f the PPL has revealed a number o f procedural issues, some o f which may be resolved by guidance issued by the SPA as part of its powers under its Charter, and others which are more fundamental and should be considered as part o f the eventual amendment o f the PPL. A detailed commentary o f these issues i s contained in Annex 11. A detailed list o f recommended actions, based on this commentary, i s contained in Annex IV . The main areas o f concem which require legislative changes are identified inC.2 and the Executive Summary o f the CPAR report. Secondly, flowing from the generally positive view o f the PPL, there i s an urgent need to ensure sufficient financial and human resources and institutional capacity. In particular, the following actions are envisaged to support successful implementation o f the PPL. (1) To support SPA monitoring and supervision o f procurement and to prepare better bulletins and annual reports, SPA needs to develop and implement a reporting and monitoring system. This system would cover not only the information to be provided by procuring entities but also the data and information made available to the SPA through the budget appropriations procedure. The Bank i s proposingto fundTA for this purpose. (2) There i s a pressingneed to provide a transparent and reliable review mechanism under the aegis o f the SPA which i s the second tier review body. SPA requires assistance to prepare, design and implement a formal review procedure. EU Tacis has agreed to fund these reforms by way o f technical assistance. Azerbaijan Country Procurement Assessment Report June 2003 I ~~ 57 RecommendedAction Plan (3) It i s critical that knowledge and training capacity be built up within the SPA. In particular, there i s a need to train SPA staff and to provide additional training o f trainers. EUTacis has also agreed to fund suchtraining. (4) With new laws and procedures, it becomes imperative to ensure adequate training for procuring entities throughout the country. The establishment o f a substantively and geographically comprehensive in-country training program for procuring officers i s also foreseen under the EUTacis TA. (5) The new laws and procedures must be disseminated as widely and comprehensively as possible at the outset, which i s to say, now. The Bank i s ready to provide assistance for a public awareness campaign which would provide, in addition to information, basic training to potential tenderers. (6) Information may also be disseminated in printed form and the EU Tacis TA will also finance increased information dissemination through increased printing and publication o f basic procurement documents and training materials. (7) This CPAR recommends encouraging the use o f electronic means for improving both information dissemination and for the procurement process itself. An IDF grant and EU Tacis funding have been agreed to assist with the creation and maintenance o f an information website to provide an electronic means o f dissemination and access to relevant procurement information with a view, ultimately, o f facilitating electronic procurement. D.2 DetailedAction Plan Inview o f the general compatibility of the new PPLwith international procurement practice, the main thrust o f any action plan must be to ensure that the aims and objectives o f this very solid law can be translated into effective procurement inpractice. The detailed action plan inAnnex IV places the detailed recommendations summarized here and made throughout the CPAR into a framework for action. Effective implementation requires the participation and commitment o f three main groups o f stakeholders acting in concert: (i)the Government as legislator and regulator, acting essentially through the SPA, (ii) the procuring entities and (iii) private sector the tenderers themselves. The action plan addresses the duties and needs o f these three groups under separate headings. The benefits arising from the successful implementation o f the action plan will be felt by all three groups and are not mutually exclusive. Greater dissemination o f information, for example, will benefit all three groups o f stakeholders equally directly. The separate treatment in the detailed action plan serves to highlight where action is needed and how it may best be achieved. This detailed agreed Action plan for Improvement o f the Public Procurement in the Republic o f Azerbaijan, representing the combined efforts o f the CPAR and Counterpart Teams, was approved by the Cabinet o f Ministers before the finalization o f this CPAR and thus satisfies one o f the conditionalities for the second tranche o f SAC-11. D.3 MeasuresTaken by the Government It s clear that primary responsibility for ensuring that the PPL is comprehensive and effective lies with the Government o fAzerbaijan, inparticular with the SPA. To the extent that clarifications o f the PPL can be achieved by use o f guidelines and interpretative documents, it is the SPA that i s best placed to carry out the necessary actions in order to achieve the stated results. Likewise, it i s Azerbaijan Country Procurement Assessment Report June 20031 58 RecommendedAction Plan the SPA that should ensure the development o f an appropriate long-term review procedure which will guarantee speedy and effective recourse to tenderers who suffer damage as a result o f infringements o f the PPL. D.4 TechnicalAssistance Clearly, at this stage inthe development o f Azerbaijan's public procurementreform, the emphasis o f the action plan should be on ensuring the capacity o f the SPA to carry out its assigned task o f implementing the PPL. Of particular importance at this juncture i s technical assistance to assist with information dissemination and capacity buildingthrough in-country training programs. The best means o f addressing these critical issues were all considered during the CPAR missions and a number o f immediate possible initiatives were identified. In discussions with the SPA, a TA program was devised (see Annex I11 for TOR for TA) which, in brief, seeks to address the capacity building o f the SPA itself (notably with regard to monitoring) and to strengthen the dissemination o f information not only within the Govemment and the contracting entities but also to the private sector. This capacity-building exercise foresees, further, a series o f public awareness seminars and campaigns as well as intensive external and in-country training for both SPA staff (training o f trainers) and procurement officers throughout the country. The TA envisages, inparticular, the creation o f an information website which will contain all the relevant documentation and which may serve, in future, as a means o f publicizing progress o f implementation. It may also, ultimately, act as a platform for more sophisticated e-procurement mechanisms. However, with a view to achieving the possible in a short time frame, the initial purpose o f the website i s merely to provide a readily accessible means o f disseminating information, including information conceming the forms for initiating complaints as well as the progress and outcome o f complaints. The Bank has already financed technical assistance as a follow-up to the CPAR and as outlined above, through an agreed Institutional Development Grant (IDF #052027), for the purpose o f ensuring the effective implementation o f the PPL. Two areas, inparticular, have been progressed swiftly: 0 Pilot Study: With a view to increasing the monitoring capacity o f the SPA, it was agreed that a study needed to be made o f the implementation o f the existing law in order to identify weaknesses inthe system. With this inmind, a conditionality was included inthe second tranche of SAC-I1 which required the commencement o f a process o f random reviews by an independent procurement auditor o f completed procurements and conducting o f pilot audits in 2002. The pilot results were to be published together with plans for any appropriate remedial action. Under the IDF grant, an international consultant was appointed to conduct the pilot audit. Three entities were visited based on the high level o f procurement (the Ministries o f Agriculture and Education and the Azerenergy joint stock company). Though there was a high degree o f compliance, the resultingreport identified a series o f shortcomings and providedrecommendations to deal with them. This report was publishedas a press release by the Head o f the SPA who also indicated in the press release the development o f a country-wide action plan to eliminate the identified shortcomings. The immediate result o f this activity i s that Azerbaijan was able to meet a further SAC-I1 conditionality. 0 Web-based InformationSystem: The local capacity for information dissemination and monitoring has been identified as one o f the weakest areas o f the current reforms. In order to start the process o f dissemination, it i s necessary for the SPA to have the Azerbaijan Country Procurement Assessment Report June 2003 I 59 RecommendedAction Plan technical equipment required to collect, collate and present procurement related information. Specifications have been prepared and procurement i s underway for the provision o f a local area network, software, computerized database, website, computer hardware, as well as copying and other hardware to produce and disseminate bulletins and training materials and assess data on completed procurements. The Bank has also been coordinating with other donor agencies such as the EU in order to determine whether the technical assistance would benefit from a division o f funding to deal with the different tasks. The good news i s that EUTacis has agreed to fund a significant portion o f the proposed action plan and TA and has approved a TA package o f lmillion Euro. It i s understood, however, that the EUTacis funds are not immediately available. Discussions therefore took place with the Counterpart Team and the SPA with a view to identifying the most urgent requirements so that the Bank may provide immediate and productive assistance in those areas. The priority areas are currently being funded through the IDF grant, above. D.5 Monitoring Results This CPAR action plan is beingimplemented by the SPA per the PM approved Action Plan for the Improvement o f Public procurement in the Azerbaijan Republic. Monitoring and Follow-up o f the implementation o f the priority actions will be done though supervision o f the IDF grant and follow-up missions by the Bank. Azerbaijan Country ProcurementAssessment Report June 2003 I 60 Annexes ANNEXES ANNEXI SUMMARY OFBANKOPERATIONSINAZERBAIJAN A. STATEMENT OF BANK LOANS (as of May 9,2002) US$ Million (Less Cancellations) Loan No. FiscalYear Project Principal Undisbursed Trust Funds TF-25796-AZ 2000 Pension& Social Protection Reform 0.4100 0.0139 TF-26438-AZ 2002 EducationSector Development 0.4830 0.4330 TF-40001-AZ 2002 PovertyAssessment 0.0200 0.0098 TF-40943-AZ 2002 PovertyAssessment 0.0225 0.0057 TF-38664-AZ 2002 EducationSector Development 0.0290 0.0117 TF-25582-AZ 1999 Urgent Environmental Investment 0.8000 0.3016 TF-26258-AZ 2002 Preparationof Irrigation II 0.4580 0.4330 TF-40986-AZ 2002 Shah-Dag Rural Environment 0.0499 0.0499 TF-40895-AZ 2002 Cultural Heritage 0.0475 0.0285 TF-40231-AZ 2002 Farm Privatization 0.0180 0.0180 TF-36802-AZ 1998 Caspian Environment 0.9940 0.3479 TF-38908-AZ 2001 Preparationof EnvironmentalInvestment 0.0260 0.0091 TF-21293-AZ 2000 Pilot Reconstruction 0.5582 0.0000 TF-38993-AZ 2002 Reviewof Forestry Sector Notefor PRSP 0.0651 0.0651 Total 3.9812 1.7270 IDA 27510-AZ 1995 Greater BakuWater Supply Rehab 61.OO 1.85 27690-AZ 1996 Institution Building Technical Assistance 18.00 1.81 29230-AZ 1997 Gas System Rehabilitation 20.20 6.42 29330-AZ 1997 Farm Privatization 14.70 1.01 31070-AZ 1998 Urgent Environmental Investment 20.00 16.60 31090-AZ 1999 Pilot Reconstruction 20.00 10.57 31091-AZ 1999 Pilot Reconstruction (Supp. Credit) 10.00 8.49 32070-AZ 1999 Cultural Heritage Support 7.50 6.08 32200-AZ 1999 Education Reform 5.00 2.19 32360-AZ 1999 Agricultural Developmentand Credit 30.00 215 0 33900-AZ 2000 Irrigation & Drainage Rehab/Completion 42.00 32.79 35170-AZ 2001 Highway 40.00 0.00 3518042 2001 Financial Sector Technical Assistance 5.40 0.00 35230-AZ 2001 Health Reform 5.00 4.89 36150-AZ 2002 Structural Adjustment Credit 2 60.00 30.78 Q1960-AZ 2000 IBTA 2 (PPF) 1.oo 0.51 Total 359.80 145.49 Azerbaijan Country Procurement Assessment Report June 2003I Annexes ANNEXI1 COMMENTARY ONTHEPPL The Commentary below takes a thematic approach and discusses the PPL according to the salient issues. Whilst this does generally follow the numbering o f the Articles, this i s not always the case. 1 APPLICABILITY OFTHE PPL The PPL makes a significant change to the previous legislation regarding the coverage and applicability o f the law. Curiously, under the terms o f the previous L a w on Tenders, the use o f open tender was not an obligation imposed on defined procuring entities but a right, i.e. it was optional. Inthis way, no entity covered by that Law was obliged to apply the Law; it was merely given the right to use it. On the other hand, the Presidential Decree setting out the Regulations on public procurement (and it i s accepted that these texts were often contradictory), appears to have been obligatory. The PPL clarifies this position by (correctly) requiring all defined procuring entities to apply the procedures o f the PPL. Nevertheless, this ambiguous history may have added some unnecessary confusion which may take time to overcome. Certainly, there are some entities that one would expect to be covered by the PPL (see main report, C.5.2, State Owned Enterprises and Utilities) which clearly do not consider themselves to be covered. The PPL applies to government organizations and State-owned enterprises as well as to any other organization or enterprise in which the Government share o f its authorized capital i s equal to or exceeds 30 percent. This i s an arbitrary figure which was originally set at 50 percent inthe draft. This was a figure similar to the 50 percent public subsidy which triggers the EU's procurement directives. In the absence o f a full and detailed list o f State entities or public utilities, the 30 percent shareholding figure will guarantee that any entity with a significant State participation will be covered by the PPL. There i s a second condition: it applies only where these organizations and enterprises use State funds. This is an important definition since the previous legislative texts, notably the Regulations, applied essentially to organizations and enterprises usingbudget funds. State funds are defined as including the extra-budgetary funds of budget financed organizations as well as other funds that are recognized by legislation as State funds. This definition gives rise to a number o f separate considerations. First, the program o f decentralization will result in a number o f local authorities and municipalities which will be self-financing in the sense that they will receive no funds from the national budget (see main report, C5.1, Administrative Decentralization). They would be financed from local taxes specified in the Tax Code and elaborated in the L a w on the Financial Status o f Municipalities o f December 1999, which will be collected locally. When they become self- financing, they would not, therefore, be benefiting from budget funds and would escape the provisions o f a procurement law applying only to bodies usingbudget funds. This would appear to be the current understanding o f a number o f municipalities who consider that, once they have become self-financing, they will n o longer be coveredby the PPL. The position under the PPL i s unclear. The PPL, as adopted, states that "sate funds" includes non-budgetary funds o f budget organizations and other funds recognized as State funds. But non-budgetary funds will only be covered where they are spent by budget organizations. State funds are also defined as "other funds that are recognized by legislation as State funds" but there is no explanation inthe PPL as to what this might mean or where such a definition might be found. Most importantly, it i s unknown whether this expression would encompass local taxes collected by the municipalities. Annexes As a result o f the lack o f clarity o f the definition o f "State funds", therefore, there remains some ambiguity inthe minds o f those bound to apply it. There i s currently a new Law on Municipalities under discussion. Once that has been adopted, there will be an opportunity to reconsider the definitions o fthe PPL and it applicability. The Bank would propose (i) a definition o f "procuring entity" which includes department, agency, organ or other unit, or any subdivisionthereof, or public company engaging inprocurement, or any non- public company engaging inprocurement usingpublic funds to carry out an activity inthe public interest, with the exception o f certainclearly identified entities; and (ii) a section addressing the scope o f the PPL which states that the PPL applies to all procurementby procuring entities except for certain expressly identifiedtypes o f procurement that are exempted. !Recommendation:All public funds emanating fkom taxpayers shouldideally be subject to the provisions o f the PPL. Guidance notes, training materials and seminars distributed and conducted by the SPA should make clear the entity coverage o f the PPL with particular reference to what precisely i s meant by "State funds". Further, the meaning o f "other funds that are recognized by legislation as State funds" should be clarified, preferably by way o f an official statement or direction from the SPA or other relevant authority. Ultimately, this implies an amendment to the PPL. Second, i s the position o f certain State-owned enterprises which are revenue producing. Although many State-owned enterprises benefit fkom State funds at least for their salaries and operating costs, a number of them are financially independent and rely entirely on extra-budgetary funds. Despite inclusion in the definition o f State funds o f extra-budgetary funds, contracts funded by such funds are covered only where the entity usingthose funds i s a budget financed organization as explained above. To the extent that State-owned enterprises receive no budget finds at all, they may believe that they would escape the provisions o f the PPL. This may be the case, for example, o f enterprises such as the Caspian Shipping Company which consider themselves outside the PPL. Thus, even where an enterprise is entirely State-owned and where it i s controlled by the State through appointments to the board (which would be sufficient to bring it within the EU directives, for example), it may not be covered by the PPL where it relies entirely on extra- budgetary funds. The result o f this wording of the PPL is to open up the possibility that a range o f State-owned enterprises, especially utilities, could fall outside the terms o f the PPL notwithstanding their "State" character and their monopoly (natural or legal) positions inrespect o f their activities. !Recommendation: The position o f State-owned enterprises and utilities shouldbe made clear in the SPA'S guidance notes and, where appropriate should be the subject o f explicit normative-legalacts to ensure the correct coverage. Third, "public finds" will also include "grants and credits contracted by the Government." This may be problematic. Inan earlier draft, as in the previous legislation, there was an exception for procurement funded by grants and credits o f different donors which would be governed by the procurement procedures determined by those donors. The adopted PPL i s completely silent on the fate o f procurement funded by donors but, with public finds defined as including grants and credits, it i s to be supposed that such procurement is also subject to the PPL and not to other procurement rules and/or procedures, even where there i s a conflict. During the Parliamentary hearings on the PPL, it was apparently stated that Article 151 o f the Constitution regulates conflicts between national law and obligations undertaken in the context o f international Annexes agreements. It was, therefore, assumed that this would be sufficient to resolve this issue in the context o f procurement legislation. Even if every grant o f donor funds were an "intemational agreement" (which i s far from clear and subject to debate under public intemational law), this general provision may not be sufficiently well-known and apparent to ensure that it i s applied in the context o f donor funded contracts. ! Recommendation: This situation must be clarified and, notwithstanding the generally applicable legal provision inthe Constitution which resolves conflict between national law and intemational agreements, a procurement specific provision should be expressly made, either by amendment to the PPL or by way o f Decree. Inaddition, it should be clarified that, in case o f conflict betweenthe national and the donor-funded procurement rules, the latter will prevail. 2 SCOPE The PPL applies to the procurement o f goods and works and services. Services are defined as anything other than goods or works and go well beyond the limited consultancy services ordinarily covered by the provisions o f the World Bank and other donors. This definition is more akin to the definitions used inthe EUdirectives, the WTO and UNCITRAL. N o attempt has been made to define or limit the services covered (as i s the case with the systems referred to) with the result that the procurement o f any service i s coveredby the PPL. !Recommendation:Giventhebreadthofservices covered, the SPA shouldtakeespecial care inpreparing appropriate standard RFP and contract documents which are apt to apply to the range o f services likely to be procured under the PPL. 3 DEFENSE PROCUREMENT The Ministry o f Defense and other Forces were not originally subject to the previous L a w on Tenders (1997) for any o f their purchases. However, following a proposed amendment to the L a w onTenders presentedby the SPA and supported by the President, the President adopted a Decree in 1999 (No. 147 of July 1, 1999) which applied the provisions of the Law on Tenders to purchases o f items such as food, general services, clothes, transport facilities for auxiliary services and capital repairs and construction by the Ministry o f Defense, Department o f National Security and the Security Department o f the Ministry o f the Interior. A further Decree added purchases o f medical equipment to the list. Thus defense procurement i s not excluded from the scope o fthe PPL. In the case of clothes, service facilities, medicines, medical equipment, transport facilities for auxiliary services, civil construction and repairs, procurement will, as before, be conducted on the basis o f open tenders. For the procurement by these entities o f all other goods, works and services, procurement will be by way o f "closed tender." These entities have been cooperating with the SPA, which has already assisted inthe preparation o fa series o ftenders by these entities. 4 THRESHOLD Decree 668 sets out a universal threshold o f AZM 250 million above which all procurement o f works, goods and services will be subject to the biddingprocess o f the PPL.This is the equivalent Azerbaijan Country Procurement Assessment Report June 20031 Annexes o f some US$55,000. Whilst there may be advantages in terms o f simplicity to maintaining a single threshold level for the application o f the PPL, the figure chosen (or any figure for that matter) would appear to be rather too high for the procurement o f goods and services and rather too low for the procuremento f works. !Recommendation:Consideration should be given to providing for two thresholds, one for works and the other (lower) for goods and services. The terms and order o f Article 17 are not particularly clear and, although an improvement on previous drafts, has not taken up a previous World Bank recommendation to avoid reference to the alternative procurement methods in the provision relating to thresholds since the conditions for the use o f those methods are not threshold related. The essence o f this Article, however, i s that (i) thethreshold,theopentenderistobeused,savethat(ii) theauthorizationofthe above with SPA (see comment under Methods o f Procurement, below), an alternative method may be used and that (iii)below the threshold, any procedure may be used. There i s a specific anti-avoidance provision in Article 17.2, prohibiting the splitting o f contracts inorder to avoidthe applicable value threshold ofthe PPL. 5 ELIGIBILITY Unusually, the PPL provides explicitly that, except in cases specified in the procurement legislation, tenderers o f any nationality may participate inprocurementproceedings inAzerbaijan and that none may be disqualified on the basis o f nationality. Article 8.2 does, however, provide that, where a procuring entity limits participation o f bidders on the basis of nationality, it shall describe the reasons for such a limitation inits report on the procurementprocedure. This appears to contradict the main principle o f non-discrimination on grounds o f nationality but there i s no explanation at all o f when or why such a limitation might occur or which authority may authorize it,The SPA has prepared implementing regulations which deal with this issue as well as with the issue o f national preferences (see below) and these have been submitted to the Cabinet o f Ministers for approval. Further, a limitation on participation based on nationality i s not an action which i s subject to review (Article 52.2.2). ! Recommendation: The conditions for the use of a limiting eligibility on the grounds of nationality must be explained and adoption by the Cabinet o f Ministers i s a priority. The PPL also sets out conflict o f interest prohibitions such that a number o f tenderers are ineligible to participate inprocurement procedures. These are welcome provisions, although there i s one which may be difficult to implement in practice. It i s the provision in Article 13.1 which renders ineligible tenderers with a legal, financial or organizational dependency on the procuring entity. Whilst this i s an appropriate provision, the situation in Azerbaijan (as described in section C.9 o f the Report) is such that the majority o f "private" works contractors are or were the former in-house repair and maintenance departments o f Ministries, local authorities and State-owned enterprises. A number o f these have been privatized, although many still have a significant State participation. Duringthe privatization programs, there i s also a concem that such companies will be "looked after". Under this provision, where persons in the procuring entity has a financial interest in such a legal entities, that entity may not, quite properly, participate in procurement procedures. However, sine all o f these entities are rather specialized in the business o f their former "parent" Ministries, this effectively cuts them o f f from their primary source o f work. It is Azerbaijan Country ProcurementAssessment Report June 2003I Annexes difficult to see how such a practical difficulty will be resolved in a manner consistent with the PPL. ! Recommendation: Given the uncertainty over the status of many former public works departments, the SPA should consider providing guidelines which set out the permitted activities in the case o f procurement procedures. For example, that any remaining works departments may be given works orders without any procurement procedures but that once they are corporatized and exist as separate legal entities, they must be treated as private companies. Where the State or a government official retains a participation, those companies may not bid on works contracts let by their former "employers", though they may bid for contracts let by other Ministries, authorities or State-owned enterprises. 6 FORMATION TENDERCOMMISSION OF Before commencing a procurement procedure, the procuring entity must form a tender commission (TC), prepare tender documentation and announce the tender. The members o f the TC will include specialists from the procuring entity and will be chaired by a member o f the procuring entity's managerial staff. The other members o f the TC will be approved by the head o f the procuring entity. At the previous suggestion o f the World Bank, there is n o longer a requirement for the composition o f the TC to be approved by any higher executive authority. On the other hand, the new draft Charter o f the SPA gives the SPA the authority to supervise the process o f establishment o f a TC. If this i s used as a method o f approval, then the Bank's previous recommendation will be ignored, notwithstanding the terms o f the PPL. Where the estimated value o f the contract exceeds AZM 5 billion, or AZM 1.5 billion in the case o f budget organizations, the T C will also include representatives o f the Ministries o f Finance and Economic Development. Under the previous law, the SPA could also be invited to sit on a TC in highvalue contracts. Thisparticipationhasnow beenremoved inthe PPL. 7 ESTIMATED PRICES Prior to a procurement procedure, the procuring entity must prepare a cost estimate. This is, in any event, necessary in order to obtain budget, at least in the case o f budget organizations. The resulting estimate is to be kept confidential and used only for evaluation purposes. This is, o f course, right and welcome. The inclusion inthe tender documents o f such a price estimate, a flaw pointed out by the World Bank, has now been deleted. However, Article 27.4 maintains that the procuring entity may reject tender proposals which are significantly different to the estimated cost. This may be useful where (1) the prices submitted exceed the budget available (based on the estimated cost) or (2) the prices submitted are abnormally low (such a procedure i s permitted under the EU and GPA rules although the Bank does not, under its own guidelines, accept the rejection o f abnormally low prices). However, it i s more appropriate to include specific provisions to deal with such situations. The provision as it stands is dangerous because it leads to a comparison o f competitively priced bids with an often arbitrarily calculated estimated cost. The tender procedure will result in the actual market prices (which may differ considerably in the case o f differentiated products) at a given point in time whereas the estimated cost i s not based on the actual prices available in the marketplace at the time o f the tender and under the conditions o f the tender. Azerbaijan Country Procurement Assessment Report June 20031 Annexes ! Recommendation: The SPA should issue guidance on the way in which prices are determined ina market economy (and, therefore, in a competitive biddingsituation) in order to educate procuring entities as to the value and significance o f the prices they will receive following a competitive biddingprocedure and the futility o f expecting such prices accurately to reflect any estimated prices they may have calculated. This should also be an important part o f the training conducted by the SPA. There i s excessive reliance on the use o f estimated market prices and the Ministry o f Finance also conducts an expost review based on such estimated prices. IIrefusing !Recommendation:The Ministryof Finance should be encouraged to abandon its policy of 1 payment where bid prices substantially exceed their supposed estimated market price. I 8 OPENTENDER AND OTHER METHODS OF PROCUREMENT The PPLprovides for a range o f UNCITRAL-inspiredprocedures: open tender, two-stage tender, closedrestricted tender, request for proposals, request for quotations and single source procurement. Methods other than open tender may only be used ifcertain conditions set out inthe PPL are met. Notwithstanding an earlier recommendation by the World Bank, there continues to be a requirement in Article 17.3, as inprevious drafts, that use o f alternative procurement methods be approved by the relevant executive authority (inthis case, the SPA). Inpractice this would mean that each procuring entity would need to seek the authorization o f the SPA each time it wanted to tender other than by way o f open tender. This i s mere duplication since the conditions for the use o f alternative methods are set out inthe PPL and the added level o f bureaucracy is likely to create delays. The inclusion o f this authorization procedure may arise from reliance in the PPL on Article 52 o f the UNCITRAL model which permits exclusion from the right to review o f the selection o f procurement methods (also excluded from the PPL). Recent experience inthe EU, for example (but this i s a common occurrence in other systems), shows that a significant source o f abuse in the procurement process i s precisely in the choice o f the method o f procurement with procuring entities using less competitive procurement methods on spurious grounds. The PPL seeks to redress this imbalance by requiring prior authorization by the SPA. As a transitional measure, this may be acceptable as a means o f familiarizing procuring entities with the application o f provisions which permit the use o f procurement procedures other than open procedures. However, it is, inthe longer term, a wasted effort and unnecessarily bureaucratic and the practice should be abandoned as soon as possible. !Recommendation: Consideration shouldbe given to extending the rightofreview to include the selection o f procurement methods in order to both decrease excessive bureaucracy (by removing the prior authorization requirement) and guarantee adherence to the PPL's conditions for the use o f alternative methods o fprocurement. 8.1 Two-Stage Tendering And Requests For Proposals' 'Terms such as "tender", "requests for proposals" and other similar terms are used with the meaning attributed to them inthe PPL and UNCITRALModel law. They do not necessarily have the same meaning as that attributed to them by the Bank. Azerbaijan Country ProcurementAssessment Report June 20031 Annexes The conditions for the use of these two procedures are identical to the provisions o f the UNCITRAL model, with some minor exceptions. The PPL allows an RFP to be used incases o f urgency where adherence to the normal tendering procedures i s impractical provided that the circumstances giving rise to the urgency were neither foreseeable nor the result o f undue delay on the part o f the procuring entity. Inthe UNCITRAL model, that i s a condition which gives rise to competitive negotiation (which does not require advertising), not an RFP. This i s o f little consequence and, in any event, tends to reinforce the use o f competitive biddingeven in cases o f urgency by givingthe possibility o f using RFPs. The only inconvenience i s that an RFP requires advertising, albeit without the strict time limits o f open or restricted tenders. This, therefore, creates a simplified and accelerated tendering procedure to be used when time i s short. In the event that there i s too little time, recourse may be had to single source procurement. It should be pointed out that two-stage tendering is a form o f open bidding to be used in the appropriate circumstances. It i s not, as such, an alternative method o f procurement as suggested in the PPL. The conditions for using two stage tendering are appropriate. However, it may be worth making this clear in any future amendments to the PPL and certainly in the training and guidance notes. The procedures to be used for two-stage tendering and RFPs are identical to the provisions contained in the UNCITFUL model. They are so similar that there has been an apparent oversight: the advertisement for the RFP i s to be published (Article 48.2) in a newspaper o f wide intemational circulation. This is probably meant to read an official newspaper (as i s the case with open and closedrestricted tenders) since it will generally apply to contracts o f all values, most o f which will not benefit from intemational advertising. IIremediedto !Recommendation:Ifthisreferenceto advertisinginternationallyisanoversight, itshouldbe I 1 make clear that advertising i s required in an official newspaper. 8.2 Restricted and ClosedTender A closed tender and a restricted tender are the same procedure save that, inclosedtendering, there is no advertising requirement. It i s simply that the special term "closed tender" i s used to describe tenders conducted for defense procurement in contradistinction to the restricted tender used for non-defense goods, works and services. The conditions for the use o f a restricted tender and the procedures to be used are identical to the conditions and procedures set out in the UNCITRAL Model. The notice shall be published in an official newspaper. Article 19.2.2 provides that this procedure may be used where the cost o f conducting the tender i s disproportionate to the value o f the contract. !Recommendation:TheBankwouldrecommendsettingathresholdvalue for suchasituation inorder to avoidabuse. 8.3 Request for Quotations The conditions for the use of a request for quotations and the procedures to be used are identical to the conditions and procedures set out in the UNCITRAL Model. The Ministry o f Finance will establish the threshold below which this procedure may be used. Annexes 8.4 Single-source Procurement The conditions for the use o f single-source procurement and the procedure to be used are identical to the conditions and procedures set out in the UNCITRAL Model with the addition that, in order to assist with the evaluation o f the price offered, the procuring entity will calculate the estimated market price. Single-source procurement may only be used with the approval o f the SPA but there i s no longer to be any "public notice and adequate opportunity to comment", a provision in a previous draft which caused some concern to the World Bank. Despite a previous recommendation by the World Bank to remove the reference, the condition relating to exclusive rights continues to refer to works contracts. It should refer only to supplies contracts. ! Recommendation: The condition relating to exclusive rights should not refer to works contracts . 9 Tender Documents The contents o f the tender documentation are enumerated exhaustively and are largely identical to the provisions o f the UNCITRAL Model. Following an earlier recommendation by the World Bank, Article 24.1.7 i s now in line with the UNCITRAL model and includes in the tender documentation the terms and conditions o f the procurement contract and contract form to be signed by the parties. The tender documents will no longer contain any reference to preliminary cost estimates, a previous inclusion which caused concern to the World Bank. The provisions relating to clarifications and modifications o f tender documents contained in Article 30 are consistent with the UNCITRAL Model. 10 Procedures for Soliciting Tenders For open tenders, the invitation i s to be published in an official national newspaper as well as in publications with a wide international circulation. It i s to be publishedat least twice, 30 days and 20 days respectively, before the date for the opening o f tenders. Inthe case o f large scale works and complex equipment those time limits are 60 and 40 days, respectively. It i s not clear whether invitations should always be publishedinpublicationswith international circulation or whether that applies only incertain circumstances. It i s to be questioned whether advertisingtwice i s going to achieve anything other than increasing the costs o f the procuring entity, particularly where advertisements are to be placedwith publications o f international circulation. !Recommendation:The SPA shouldconsider issuingguidance onwhen itis appropriate to advertise inpublicationswith international circulation. Inall other cases (other than open procedures) save inthe case ofa closedtender, the procuring entity will prepare a list o f not less than three potential candidates to whom it will send out invitations. These invitations must contain the same type o f information as the published invitations. Azerbaijan Country Procurement Assessment Report June 2003I Annexes L"' ' ' ~ "' " ' ' Despite the previous suggestion o f the World Bank, there is no indication o f the date on which the procuring entity must be ready to issue tender documents, other than the general requirement in Article 22 that tender documents should be prepared in advance o f the tender proceedings. The contents o f the invitation to participate in an open tender and in a pre-qualification procedure are the same as those listed in the UNCITRAL Model. The only difference would appear to be that whereas in the UNCITRAL Model the price o f the tender documents must be included, the PPL indicates that the amount o f the "participation fee" i s to be included. This i s probably not an error o f translation because Article 29 provides for the payment o f a participation fee to cover the costs o f the tender procedure. See below. 11 QualificationCriteria The qualification criteria set out in the PPL are consistent with international best practice and include criteria relating to financial capacity, economic standing and technical ability and competence. All qualification criteria to be relied upon must be set forth in the tender documents and the procuring entity may rely only on such disclosed criteria. Other than in cases where a domestic preference i s to be applied, procuring entities may not adopt a qualification criterion which discriminates against or among tenderers. On the recommendation o f the World Bank, procuring entities shall not disqualify a tenderer on the ground o f the submission of incomplete information which i s not critical to determine the qualification o f the tenderer provided that such deficiencies are satisfactorily eliminated by the tenderer at the request o f the procuring entity. This effectively introduces the concept o f substantial responsiveness. As with the case o f the cancellation o f tenders, below, tenderers may be disqualified where they "have been found guilty" o f "misrepresentation". It is not clear which authority is able to make a finding o f guilty but, inthe hands o f the procuring entity, this may be a dangerous power open to abuse. !Recommendation: For the avoidance of doubt, the SPA should issue guidance setting out how misrepresentation may be proven and by whom, although this may be better in the PPL 12 Pre-qualification The PPL permits the use o f a pre-qualification procedure in the case o f not only works contracts but also goods and services contracts. Pre-qualification may only take place on the basis o f the qualification criteria set out in the PPL. Article 7.8 also makes provision for post-qualification against the same criteria. The PPL has re-inserted text identified by the World Bank inArticle 7.4 (formerly Article 9.2.2) to the effect that responses to inquiries regarding pre-qualification shall be communicated "without identifying the source o fthe inquiry". ! Recommendation: Given that pre-qualification may be used for all works, goods and services contracts, thought should be given by the SPA to explaining to procuring entities, those circumstances in which pre-qualification might be most appropriate, rather than allowing a situation to arise inwhich recourse i s had to pre-qualification as a matter o f course. ~~~~~ Azerbaijan Country Procurement Assessment Report June 2003 \ Annexes For the sake o f clarity, the Bank recommends including, at the end o f Article 7.1, a sentence to the effect that Article 6 applies to pre-qualification proceedings. 13 Technical Specifications The PPL requires that any specifications, plans, drawings, designs or descriptions o f goods, works and services be based on their relevant objective technical and quality characteristics. Though not as extensive as comparable provisions inthe EUdirectives, the GPA or UNCITRAL, the provision o f Article 15.2 i s satisfactory in that it prohibits the use o f specifications etc., including requirements concerning testing and test methods, packaging, marking or labeling or compliance certification, symbols or terminology that create obstacles to participation (including those based on nationality) o f tenderers. However, it does not allow flexibility in the sense that where there is no meaningful way o f defining technical specifications without reference to specific makes, products or processes, these may be used subject to the acceptance o f equivalent products. The SPA's position i s that it will always be possible to define technical specifications without making such references. This i s not the Bank's experience nor the experience o f the draftsmen o f the EU rules, the GPA or the UNCITRAL Model. Even if it were possible effectively to rewrite the technical specifications o f complex or technologically advanced equipment without favoritism, the time and cost involved in such an exercise would be counterproductive. I !Recommendation: Notwithstanding the SPA's position, therefore, the Bank recommends 1 that the SPA might consider providing guidelines which state that where it i s necessary and unavoidable to define such specifications in a non-objective way by reference to particular makes, products or processes, then it may exceptionally be permissible to do so provided that the words "or equivalent" are used. From a practical standpoint, Gost standards, developed by former Soviet Gostandard are recognized as Azeri standards. The Law on Standardization has provisions to allow the introduction o f other standards. The time limits applicable to Gost standards have been temporarily lifted pending revision by one o f the technical departments o f the newly established State Agency for Standardization, Metrology and Certification (formerly the Azeri Center for Standardization and Metrology) as a result o f the imminent membership o f the WTO. There i s a move to harmonize the revised standards with those o f the EU. Thus, all standards issued since 1992 have a corresponding reference to international standards such as ISO. The L a w lists mandatory standards (re. safety, environmental health and oncology safety). Inaddition, it allows voluntary standards that are regulated by contractual obligations between parties. Interms of certification, the State Standards, Metrology and Certification Committee, certifies that goods are in compliance with safety and technical requirements o f applicable standards. Many local manufacturers submit sample for certification on a voluntary basis (not related to biddingprocess). Specialized certification departments cover all sectors o f the industry.Rates for certification are approved by the MED and MoF. There i s an approved list o f types o f imported goods that require certification. Ifsuchproducts are not certified, they cannot be imported. Goods must be certified as complying with the relevant standards before they may be entered as part o f a tender. The tender documents will require the production o f documents certifying the safety and quality o f the goods and, ifthey are not certified, the goods cannot be tendered. There is a practice o f recognizing foreign certificates where there i s a bilateral agreement recognizing foreign certificates. There are such bilateral agreements currently with all CIS countries and Turkey, a draft agreement with Iran and negotiations underway with Bulgaria (the major Annexes importers). Ifthere i s no bilateral agreement and therefore no recognition o f foreign certificates, the bidder may specify the protocol o f foreign certification for approval by the Committee. In these instances, a delegation o f the Committee may be sent to confirm that the certificate from the foreign certification institute i s acceptable. 14 Tender Documentsto be Submittedby Bidders Tenderers must submit the application to tender, a bank certificate confirming payment o f the tender fee (this i s the participation fee, not tender security) and other documents relating to the tenderer (identity, qualifications, financial information) a full seven banking days before bid opening. This i s to enable completion o f any missingdocuments before bid opening. Inclusion o f the "soliciting letter" was abandoned at the suggestion o f the World Bank. The tender must be submitted one banking day before bid opening. They must be sealed in two envelopes. Any proposals received after this deadline will be returned unopened. It i s not clear why these documents need to be submitted separately and a strong suspicion that this opens the procedure to abuse. It would be preferable to have all documents submitted at one and the same time. The Bank recommends that express provision should be made concerningthe delivery by hand or mail o f original tenders. 15 ParticipationFee Despite the previous recommendations o f the World Bank to limit such a fee to the cost of reproducing the solicitation documents, the PPL contains an Article (29) which requires the payment o f a nonreimbursable participation fee by tenderers. The purpose of this fee is to cover the costs and expenses o f the tender proceedings including advertisement, announcement, rent of facilities for bid opening, financing o f the tender commission, preparation o f tender documentation and delivery to bidders as well as any other expenses. The level o f the participation fee shall not exceed 0.5 percent o f the estimated price o f the contract and may not exceed 1.5 times the expenses. This latter provision presumably means the total o f the fees collected, although there i s no mechanismfor such a calculation. Such a payment i s not, as indicated previously by the World Bank, desirable. It serves to deter participation and, therefore competition and also fails to recognize the benefit o f competitive bidding.The point o f conducting biddingprocedures i s that the savings made in terms o f lower prices will be considerable. This offsets any added expenditure in conducting the procedure. Further, it shduld not be supposed that such additional costs are neutral vis-A-vis the tenderers. It i s inevitable that these additional transaction costs will be factored in to the tender prices which will be increased as a result. The practical consequence o f imposing such costs is simply that the procuring entity will pay higher prices - they will ultimately be paying these fees themselves. This defeats the object o f the competitive bidding exercise. Moreover, participation in tender commissions i s part o f the function o f procuring officers - that i s one o f the reasons they receive a salary. There i s no need either to rent Government property inorder to conduct bid openings. !Recommendation: Participation fees should be abandoned as soon as possible. Any fees should be restricted to the cost o fproducing tender documents. Annexes 16 Periodof Tender Validity The provisions relating to the period o f validity o f tenders are largely identical to those in the UNCITRALModel. 17 Tender Securities These are to be fixed at a between 1percent and 5 percent o f the value o f the bid. The provisions relating to tender securities are largely identical to those in the UNCITRAL Model. They appear to be permitted in the case o f works, supplies and services contracts. Unlike the case o f the participation fee whose payment and time o f delivery i s clearly identified, there i s no mention in the PPL o f the form o f security nor o f the time it must be submitted or verified. !Recommendation:The SPAshouldissueguidance onthe standardformoftender securities and on the procedures for their submission. The previous suggestions of the World Bank inrespect o f the reimbursement o f tender securities have been taken into account. Inpractice, tender securities are always requested and their value is generally between 1and 2 percent o f the bid value. There i s a certain demonstrated lack o f confidence in the degree o f confidentiality attached to bank securities. This i s not necessarily a generalized concern but it i s one that was voiced on a number o f occasions. Inits own procurement, for example, the National Bank has, as a precautionary measure, a practice o f setting the bid security as a fixed figure equal to between 1and 2 percent o f the estimated bid value. Inthis way, no unauthorizeddisclosure o f the level o f bid security would result in disclosure o f the bid price. This is, o f course, always a danger where the tender security i s based on a percentage o f the bidprice. 18 BidOpening The provisions relating to bid opening are largely identical to those inthe UNCITRALModel. 19 Examination,Evaluation and Comparison of Tenders The provisions relating to examination, evaluation and comparisono f tenders are largely identical to those in the UNCITRAL Model. The drafters o f the PPL have made a choice, offered by UNCITRAL, inthe award criteria: the successful tender shall, subject to any margin o fpreference applied, be the one with the lowest evaluated tender price, the addition o f the word "evaluated" bringing it more into line with World Bank procedures. The weighting provisions are those o f UNCITRAL. It would be preferable to make clear that clarification sought by the procuring entity should be in writing. 20 DomesticPreference Article 36.9 provides that a domestic preference may be applied where that has been stipulated in the tender documents. Despite a previous recommendationby the World Bank, there is no further Azerbaijan Country Procurement Assessment Report June 2003I Annexes article which sets out in the PPL the basic principles o f any preferences to be applied or the mechanisms o f application. Article 36.10 refers to determination o f the margin of preference and the rules o f its application by the Council o f Ministers. The SPA has prepared implementing regulations on this issue which are currently before the Cabinet o f Ministers. !Recommendation:It is important that margins for domestic preference and their rules of application be set out as soon as possible ina clear and precise manner and, where possible in order to achieve the objectives sought by the application o f such preferences, taking into account the market relevant conditions on a product-by-product basis. . Under the previous legislation, according to the SPA in its completed CPAR questionnaire, domestic preferences were inpractice 15 percent for goods and 7.5 percent for works. 21 Post-tenderNegotiations N o negotiations are permitted between the procuring entity and tenderers in relation to the submitted tenders. 22 Decisionofthe Tender Commission The TC makes the final award decision with a minimum% quorum. TC members who disagree with the majority view shall record their opinion in the minutes. A copy o f the minutes will be sent to the SPA within 3 days. Article 37.3.3 permits the TC to take a decision on splitting the tender among two or more bidders to ensure efficiency if no proposal covers the full implementation o f the proposed contract. This i s not a question o f awarding lots but o f splittingan otherwise single contract. The previous World Bank recommendation was to delete this provision from the draft. This was not done. !Recommendation:Theprovisionallowingthesplittingofacontract shouldbedeleted. 1 The TC and its membersare made explicitly responsible for any infringements o f the PPL. 23 Signature ofthe Contract Following notification o f the award to the successful tenderer, the successful tenderer must submit a performance security and sign the contract within the time limits set out inthe tender documents. Under Article 40.4 a procurement contract enters into force upon being signed and i s governed by the terms o f the Civil Code. Article 40.8 provides that, if the solicitation documents stipulate that the contract is subject to approval by a higher authority ( this may be the Ministryo f Finance, for example), the procurement contract shall not enter into force before approval is obtained. Annexes 24 Post-award Notice By Article 5.3 o f the PPL, information regardingprocurement contracts signed as the result of a tender i s to be published, within 5 banking days, in the publication in which the tender was announced. Article 40.9 ensures that a notice i s sent to the unsuccessful bidders which will include the name and address o f the successful bidder and the contract price. The Bank would recommend, however, that this notification take place before contract effectiveness in order to give unsuccessful bidders the opportunity o f seeking a meaningful review in appropriate circumstances. Despite the requirement on the procuring entity to notify unsuccessful candidates for pre- qualification promptly (Article 7.6) and the possibility o f making notifications regarding a failure to qualify by electronic means (Article 9.2), there appears to be no general requirement to notify unsuccessful bidders o f their failure to qualify in a timely fashion. Such a provision should be includedinthe PPL, possibly, under Article 5. 25 Price Adjustments Article 51 o f the PPL provides that the rules for price adjustments that will apply to the implementation o f the contract shall be provided in the solicitation documents. However, the operative provision should be a contractual provision and, contrary to the suggestion in this Article, price adjustments would be made on the basis of the contractual price adjustment clause. The method o f calculation o f the price adjustments is to be determined by the Council o f Ministers. There i s currently an SPA proposalbefore the Cabinet o f Ministers. !Recommendation: It is imperative that the price adjustment formulae be completed and adopted as soon as possible and included inthe procurement contracts. It should be added that the State Statistics Committee prepares a series o f price indexes. They prepare a monthly consumer price and production price index and an annual index of consumer and manufacturer prices. The monthly price index must be requested from the Committee and i s not published in a readily available newspaper or periodical. The annual index i s published in a yearbook (Prices in Azerbaijan). There are also further annual indexes o f wages (The Labor Market) and construction prices (Construction in Azerbaijan). This latter i s fairly detailed and covers all usual construction materials. For consumer products, staff from the Committee will collect price data by visiting shops to collect the prices. For industrial products, manufacturers are requiredto submit their prices on a monthly basis. 26 Services Procurement The PPLprovides a separate Chapter V on the methodto be used for the procurement o f services. This is based on the UNCITRAL model's procurement methods for services. This tends to lay emphasis on consultancy services or services which require a high level o f technical ability and expertise which may justify the use of the method proposed. Inthis, it i s closer to the provisions governing the procurement o f consultancy services by donor organizations. As a result, the PPL adopts the technical minimum qualifying mark approach which requires attainment o f a certain quality/technical to be met before beingconsidered for price comparison. There are, however, no further details. Azerbaijan Country Procurement Assessment Report June 2003 -7 ~~~~ Annexes !Recommendation:The SPA must issue guidelines on where the technical minimummark approach i s adopted and on operating such a system indicating the desired weighting and threshold levels. However, in addition to technical consultancy services, the PPL applies to the procurement o f all services and the definition i s even broader than the definition in the EU directives (which allows an exception for certain services). Thus, the PPL could apply to the procurement o f such things as window cleaning services, waste disposal services and landscaping, for example. To that extent, there i s no compelling reason why the procedures chosen for the procurement o f services should be any different to those applicable to other procurements. Article 16 o f the PPL correctly, therefore, states that notwithstanding Chapter V, procuring entities may rely on the use o f open tendering procedures where that i s appropriate taking into account the nature o f the services to be procured and where it i s feasible to formulate detailed specifications. They may also rely on the alternative methods o f procurement provided the relevant conditions set out in the PPL are met. These provisions, however, are not clear or sufficiently detailed to allow procuring entities to make the correct assessment. Whilst the SPA is currently worlung on guidance documents to clarify the conditions on usingthe different procedures, these conditions should best be provided inthe PPLitself. !Recommendation:To ensure a sensible approach, the SPA needs to finalize guidance on when the nature o f the services are such that they may be procured on the basis o f open tendering or other procedures rather than on the basis o f Chapter V, which should address intellectual services only. Ultimately, the PPL should be amended to reflect the criteria for malung the decision. 27 Cancellation of Tenders The PPL contains provisions concerning the cancellation o f tenders and the consequent liabilities which are largely consistent with international best practice. There are, however, two comments. First, under Article 11.1,where the number o f bidders is less than three, the procuring entity "shall" terminate the tender proceedings. Whilst this serves to protect the primacy o f competition inthe biddingprocess, it does appear to be rather inflexible given that there may be many valid reasons for having less than 3 bidders. It may simply be that there are less than three bidders able or prepared to bid for a particular contract. In such cases, it i s futile to cancel the tender and to start again. It is, o f course, different if the lack o f competition i s attributable to poorly drafted specifications, for example, which might require correction followed by re-tendering. Nonetheless, the apparent inflexibility i s a concern. It also begs the question o f what is the appropriate response inthose circumstances. !Recommendation:SPA should provideguidelines to clarify the situations inwhich such an automatic cancellation o f tenders i s the correct response and identify the course o f action to be followed in such an event, for example, re-tendering with new specifications or use o f the restricted procedure. Second, there i s one reason for terminating the procedure which, although used in practice in many jurisdictions, i s rarely made explicit: the tender may be cancelled if it i s discovered that at the time o f tender proceedings tenderers have negotiated among themselves with a view to raising Azerbaijan Country Procurement Assessment Report June 2003I Annexes prices. This is, in effect, an anti-cartel provision which gives to the procuring entity the opportunity to terminate a tender where cartel behavior i s discovered. Whilst this may be useful inlight o f the lack o fpowers possessedby those authorities responsible for antitrust enforcement (see 4.4.1 o f the Report), the danger i s that the procuring entities themselves have no additional powers to discover, verify or prove anti-competitive behavior on the part of bidders. Cartel behavior i s notoriously difficult to prove and, without proper investigation and the appropriate powers to conduct such an investigation, procuring entities are in no position to make the assessment foreseen in Article 11.2, whatever suspicions they may have. Further, the ability to cancel tenders on such grounds provides a flexible tool capable o f abuse inthe wrong hands. !Recommendation:A thevery least, the SPA shouldprovideguidance onwhenthisprovision regarding price fixing should be used, preferably only when cartel behavior has been identified and proven by the relevant authorities. As a corollary, efforts should be made to strengthen the investigatory powers o f the Anti-Monopoly Committee in the MOED to deal with such situations. An analogous situation arises under Article 12PPLunder which the procuring entity may reject a particular proposalkender where it determines that the tenderer has been engaged in fraudulent practices in order to influence adoption o f a procurement decision. In this case, the procuring entity's determination must be confirmed by the SPA. This i s preferable to the situation above but it is imperative that the SPA has procedures inplace to be able to carry out such a confirmation objectively and expeditiously. !Recommendation:SPA should put inplace a specific procedure aimed at verifying the existence o f fraudulent mactices under Article 12. Article 12 also permits the procuring entity to prohibit a tenderer determined to be fraudulent from participating in future procurement procedures for a fixed period o f time fixed by the SPA or for an indefinite period o f time. This latter penalty would appear to be excessive and should be used sparingly, if at all. ! Recommendation: SPA should set out clearly the bases for exclusion from future procurements and the level o f penalties in terms o f exclusion, preferably sequential. Provided the system i s objective and transparent, leaving no room for abuse, blacklisted firms could be posted on the Web site ~~ ~~ Azerbaijan Country Procurement Assessment Report June 2003I Annexes ANNEXI11 TOR FORPROPOSEDTA TO THE STATE PROCUREMENTAGENCY Consultants' Terms of Reference Background From 1997, procuring entities inAzerbaijan have been conductingprocurement on the basis o f two legislative documents: the Procurement Regulations o f 1997 and the Law on Tendering o f 1998. Since 1997, implementation o f these legislative acts has been carried out by the State Procurement Agency whose Charter dates from 1997. These texts are currently the subject o f consolidationand extensive amendment contained inthe new Public Procurement L a w which i s currently before the Parliament. It i s anticipated that this Law will be adopted by the end o f 2001 and will enter into force immediately thereafter. Objective Implement the Public Procurement Law by assisting and providing to the Government the means to carry out the tasks required by the Law to inform, educate, advise, monitor, supervise and enforce the L a w through appropriate and effective institutional arrangements and thereby to guarantee the effective implementation o f the Law. The TA will consist o ftwo consultants: (i)LeadProcurement Consultant; (ii)local IT a a consultant The Lead Procurement Consultant will be responsible for the overall implementation o f the TA and will have specific responsibility for the devising and implementing the work plan for the proper and effective implementation o f the Public Procurement Law. The local IT consultant will be responsible for designing and implementing a management information system for use by the Agency and for designing and bringingon line an information website for the Agency. The local IT consultant will work closely with the leadprocurement consultant and Agency staff to ensure that the system conforms to the needs o f the Government and to develop and subsequently maintain the computer the management information system and website. Scope of Work A LEADPROCUREMENT CONSULTANT The consultant will: 1. Incooperation withthe StateprocurementAgency ("SPA") andthe Counterpartteam identified by the Ministryo f Economic Development, discuss and review the newPublic Procurement Law ("PPL") with a view to developing a work plan for its proper and effective implementationby all procuring entities within its scope, including central and local government and State-owned enterprises as defined inthe PPL. 2. Assist the SPA and Counterpart team inprogressing the work plan. The work plan will, in the first place, include a review o f "implementing mechanisms". These implementing mechanisms are expected to be adoptedby Presidential Decree simultaneously with the Annexes adoption o f the PPL (to be signed by the President following adoption by Parliament). To the extent that refinements are still necessary or possible, the consultant will discuss with the SPA the possibility o f making any desirable amendments. The implementing mechanisms currently envisage, among other things, identification o fthe relevant executive authorities involved inpublic procurement and the determinationo f the threshold values to be applied for the application o f the various methods o fprocurement foreseen inthe PPL. 3. Consider with the SPA its current Charter and organizational structure with a view to improvingand strengthening its ability to perform its designated functions inan efficient and suitably objective manner. Inparticular, this exercise should consider: e the division o f functions and responsibilities between the various departments o f the SPA; e working procedures o f the SPA; e the extent to which the SPA does and should participate inthe TC establishedby the procuring entities pursuant to the PPL with a view to ensuring that the SPA does not itselfbecome part o fthe procuring entities' decision-making process; e the needto ensure that the SPA, as the second tier o f the complaintsreview procedure establishedby the PPL, has (i) an appropriate department capable o f carrying out this function sufficiently independent from, for example, any SPA department givingtechnical advice to the procuring entities or participating inany TCs and (ii) qualified members capable o f conducting technical and suitably objective reviews o f complaints; the extent to which the SPA requires for the fulfillment o f its tasks increased manpower and improved facilities; the possibilitiesfor the printing, publication and dissemination o f hard copies o f all relevant documentation to boththe public and private sectors; the possibilities open to expand the existing bulletin to include also all procurement notices to be publishedpursuant to the PPL; the desirability and likely effectiveness o f improving worlungpractices as well as dissemination o finformation through the establishment o f (i) a local area network ("LAN")withinthe SPA and(ii) creationofaprocurementwebsite whichwould the provide access to all relevant documents (at least the PPL, implementing mechanisms; guideline documents and standard form biddingand contract documents); e given that one o f its functions i s to establish and maintain, pursuant to the PPL, a blacklist o ftenderers who have been found guilty o f fraudulent or corrupt practices, the development and establishment o f appropriate procedures for blacklisting capable o f taking into account the number and gravity o f offences so as to provide sequential and increasing penalties rather than a simple and indefinite suspension o f eligibility. 4. Followingthis exercise, assist the SPA and Counterpart team inthe search for and recruitment o f additional appropriate technical, management and legal human resource slulls needed to staff the existing and enhancedprocurement functions o f the SPA. 5. Identifyand assist inthe procuremento fthe required additional facilities interms o f computers, servers, LAN,printers, copiers etc. 6. Assist, where appropriate, inthe identification andrecruitment o f suitable internationaland local consultants for the creation and maintenance o f an information website. Azerbaijan Country ProcurementAssessment Report June 2003 1 Annexes ~ 7. Devise and develop a training strategy to (i) and train procurement staff within all educate relevant procuring entities inthe implementation o f the PPL and (ii) to inform contractors, suppliers and service providers o f the system and to increase awareness o f procurement opportunities presentedby the PPL and demonstrate how such opportunities are to be achieved. 8. Conduct, in close cooperation with the SPA and the Counterpart team, an initial series o f workshops for at least the three levels o f procuringentity envisaged by the PPL (central and local government and the State-owned enterprises) and public awareness seminars/workshops for government departments ingeneral (i.e. Not necessarily procurement officers), tenderers and the general public. 9. Establish, by way o f benchmarking mechanisms, a comprehensive system for the assessment and monitoring of compliance with the PPLby procuring entities with a view to assisting the SPA inthe preparationo f its annual report, such system to be based on the existing and, to the extent necessary, improved reporting requirements set out inthe PPL. 10. Carry out, on the basis o f the benchmark mechanisms above, a series ofrandom procurement audits on at least 2-3 contract procedures at each level o fpublic authority covered by the PPL. 11. Make recommendations onpossible improvements o f either the legislative or institutional framework based on the results o f the random audits above. 12. Generally, liaise, together with the SPA, with other donor agencies active inAzerbaijan with a view to avoidinga multiplicity o f conflicting advice. B LOCAL IT CONSULTANT The consultant will: 1. Assist inthe development of the applications and website, assuring its long-term sustainability. 2. Assist the procurement consultant to define the necessary system inputsand outputs. 3. Design, develop and supervise the development o f the management information system and website. 4. Procure and manage the installation o fthe computer hardware and software required to develop the applications and website. 5. Provide training to the users o f the system and website inits operation and maintenance. 6. Assist inprocurement o fthe necessary computer hardware and software. Azerbaijan Country Procurement Assessment Report June 2003I I 5 W d 6 L 5 W 6 d v) E .-S d 0 Y m 0 0 p1 .-2 2 n I L t m c 3 u 3 .- . N IW m 3 v3U6x n 3 N m wb m 0 0 N E Pb 9 E? VI B 5 W E Y Annexes ANNEXV SUPPLEMENTAL LETTER NATIONAL ON COMPETITIVE BIDDING (NCB) PROCEDURES Inconnection withthe DevelopmentCredit Agreement ofthis date betweenthe Republic o f Azerbaijan and the Intemational Development Association (the Association) for the above- captioned Project, I[ insert name ], the undersigned, am authorized to act on behalf o f the Republic and to represent that the procedures to be followed for national competitive bidding under the Loadcredit Agreement shall be those set forth in the Public Procurement Law o f December 27, 2001 subject to the clarifications enumerated in the following paragraphs and required for compliance with the provisions o f the "Guidelines for Procurement under IBRD Loans and IDA Credits" (the Guidelines). 1. There will be no eligibility restrictions based on nationality of bidder and/or origin o f goods. 2. Pre-qualification shall not be usedfor simple goods and works procurement and shall be conducted only for large works projects. 3. Entities inwhich the State or a State official owns a shareholding o f whatever size shall not be invited to participate intenders for the Government unless they are and can be shown to be legally and financially autonomous and they operate under commercial law. 4. Nonationalpreferencesmay be applied on the basis o fthe origin o fproducts or labor. 5. Joint venture partners shall bejointly and severally liable for their obligations. 6. No "participation fee" shall be required o fbidders for the purchase o fbidding documents. The only charge shall be equivalent to the cost o fproducing (copying) the biddingdocuments. 7. Inthe evaluationofbids, bidsmaynotberejectedwhere they differ substantially from the estimated prices calculated by the procuring entity, except where the bid prices exceed the available budget. 8. Rebidding shall not be carried out without the Bank's prior approval. 9. Works contracts o fmore than 18 months' duration shall include appropriateprice adjustment provisions. 10. Advance Bank approval i s required for any modifications in the contract scope/conditions duringimp1ementation. AzerbaijanCountry Procurement Assessment Report June 2003