Position paper of

Transparency International Hungary on

Bill No. T/3502.

(New Public Procurement Act)

In our position paperour corruption-related reflections are presented primarilyfrom a conceptualand critical viewpoint.The Bill contains several positive provisions;however these are not discussed in the present position paper.

  1. General remarks:

The complexity of the topic, the amount of public funds spent through public procurement procedures in addition to diverse interests,justifiedanextensive consultation process. Nevertheless, substantive consultations on the substance of the bill did not take place. The Ministry of National Development has only formally fulfilled the provisions of the Act on legislation and social consultation.

On the other hand, it should also be noted that some of our comments regarding provisions related to transparency that were delivered to the Ministry havegottransferred toBill submitted to Parliament.

The publicly released draft, however, had not yet included the intention to significantly change the institutional system,while the Bill has contained it. Changing the Public Procurement Council (PPC), which is currently under the supervision of the Parliament, into an Authority subordinated to the Government puts an end to the institutional independence of this body.The reconsideration of the functions and powers of the Council is by all means justified; nonetheless, the Bill literally transposes the currently effective provisions. The establishment of an authority however, places the first instance review under the Government andso compromises independence.

One of the major shortcomings of the bill is that, with reference to the “framework regulation” structure,a number of priority areas are not coveredbecauseseparate laws, to still be passed, will regulate theseareas later on. This is contrary to one of the key objectives of the Bill, namely, its simple applicability, since procedural rules will be part ofdifferent supplementary laws. The legislative approach to remove a portion of complex issues concerningthe public procurement act is of concernsince itwill result in several key areas, such as the rules of procedure for public services, not being regulated at the level of acts.

A critical element of the Bill is the misinterpretation of the principle of flexibility, namely which allows aspecific procedural regime to be created and used for national procedures. Given that three-quarters (in 2010, 73.8%) of the procedures, the value of which is 26,5% of all the public procedures, were conducted by the contracting authority under the EU threshold, yearly ca. HUF 400-500billion, theextremelyflexibleregulationmakesthe possibilityof abuse likely toincrease.

In additionto enforcing the principle of flexibility, the Billdoes not address theissue ofcontrol. Thusflexibility, which is justified for many reasons,but withoutadequate controldoes not reduce corruption, but even to the contrary, it is able to generate corruption enhancingeffects.

Anothershortcoming ofthe Billisthat it does notaddressthe meritsof implementation regarding e-procurement, for the reason thatthis issuewill be covered by aseparategovernment regulation. Thishas againdelayed thelaunching of functionalities related to the implementation ofe-procurement.

  1. Specific remarks:
  • Fundamental principles

We support granting a more powerful role to principles, which isalso able to increase the efficiency of law enforcement. The proposal, however, does not separate the essentially normative principles from the declarative type of expectations.

  • Art.6 -The definition of the contracting authority

The Bill simplifies the definition regarding the scope of entities and ignores, among other things, the legal developments in EU case law, the functional approach, thus it mayagain become a fundamental issue who is actually subject to the provisions of the act.

  • Par 3 of Article 9 – The duration of in-house contracts

The Bill increases the longest possible duration of in-house contractsfrom the previously applicable three years (up to that time: one year) to five years, and at the same time removesthe provisions functioning as warranties that require the contracting partyto carry out impact assessment every three years in case of contracting without public procurement.

Additionally, we propose that contracting partiesshall inform the Authority aboutthese contracts and make these contracts available on their websites as well.

  • Article 24 -New provisions governing conflicts of interest

Theconflict of interestrule has become more flexible with reference tothe “distortions of competition”, but for the objective of preventing abusive behaviour, it may be necessaryto set upan objective system of criteriaas well.

  • Article 26 -Mandatory certification as joint tenderers in case ofthe 25%-participation of the sub-contractor

Thejustification of the proposal links these provisions with theabolition ofthe so-called10%-rules onsub-contractors.On the one hand, the certification of joint biddersmay become an excessive administrativehazard;on the other hand, one may abuse its privileges asa bidder in case of a conflict between the subcontractor and the main contracting party. According to our opinion, this provisionis alsoproblematicbecause itdisproportionatelyintervenes in the relationshipbetweenplayers inbiddingmarkets- in the broadsense -, and so in the free forming ofcontractual relations.

  • Article 30andArticle 31–The rules ofdisclosure

It is a positive point that the Bill, as opposed to the previously planned, does not intend to specify the disclosure rules in a piece of law passed later on, but it has all the requirements spelt out in detail already.

Nonetheless, the provisions on amending a contract and on the obligation to publish the rules of the procedure are still missing. In addition, we take objection to the removal of the provisions about the obligation to publish an information notice about the performance of the contract. The publication of this information notice - in particular,the requirement that such an information notice shall contain details with regard to the amount included in the public procurement contract and the actually paid amount –providesthe Public Procurement Council as well as to the general public withthe opportunity to check the legal compliance of fulfilling such public procurement contracts.

Nevertheless, for the sake of productive applicability, a strict system of effective sanctions is to be established. Therefore, we recommend that the PPCshall be able to impose finesof predetermined statutory amounts against the violation of disclosure rules.

  • Point k) of Par. of Article 156–The grounds of disqualification in the event of non-transparent ownership structure

The ‘Kálmán Széll Plan’has identified as one of the most important objective of the new law on public procurement the importance of excluding “offshore” companies from public procurement. Transparency International has also indicated it on several occasions that the transparent use of public funds is jeopardized when the winner of the bidding process is an entity witha non-transparent ownership structure enters into a public procurement contract with the contracting authority.

However, until this issue is resolved within corporate law at the Community level and until it is inconsistent with the principles of the public procurement directives of the EU and the principle of national treatment, remedying the problem on legislative levels is not feasible.

The present attempt of the legislature is reasonable, but the proposed solution is problematic because of several aspects and because it prescribes such exclusion obligations that are hard to be implemented in practice.

The condition prescribed under Point k) of the given Article is impossible to be controlled and it is unfeasible. According to the referred point of law, the contracting entity who would be obliged to pay taxes under more favourable conditions in the country of its tax residence with regard to its proceeds stemming from the public procurement contract than an economic entity would pay its taxes based on its domestic proceeds stemming from the given country should be excluded.The applicability and the certification of the exception is also a further question, according to which an economic entity does not have to fulfil the above detailed condition if it performs its obligations thorough its branch office registered in Hungary and the received remuneration should be recognized as the proceeds of the branch office received based on the public procurement contract.

•Par. 4 of Article 62–Presentation of the coverage amount prior to opening

According to the Bill, this measurewasintroduced with the purpose toreducecorruption, according to which the contracting authority publicly presents what financial coverage is available for the fulfilment of the public procurement contract prior to the opening of the submitted bids. Thismeasure reallyreduces thepossibility ofabuses on the side of the contracting authority, but the risk is much greater in the event of a repeated procedure if the bidding entities prepare their offers already being informedof the coverage available.

  • Par. 7 of Article 69 – Unrealistic price

The paragraph –as a new rule –allowsthe contracting authority to request further data from bidders not affected by unrealistic offers with the purpose of being able to establish the value of bidding elements for the purposes of comparison.

In our view, this option may give rise to serious misuse since typically confidential data qualifying as business secrets are required and compared under this option. Furthermore, the grounds of an offer shall not be judged in the light of other offers.

•Par. 4 of Article 75–The disqualification of a bidder

This new legal institution may lead to unforeseeableconsequences, according to which the Government may come to a decisionwith regard to budgetary agencies and state-ownedeconomic entities controlled and supervised by the Government that the contracting authority shall be obliged to disqualify the bidder who should not be granted national treatment to, and / or who offers such products in its bidding that should not be granted national treatment to.

It is not unambiguoushow the Governmentwilldefine thecompulsorily applicable purchasingcriteria in practice –and not only in writingby law!

•Article 120–A wider range of exceptions

We recommendthatexceptionsshall be taken under reviewbecause the circle of exceptions defined for hotel andrestaurant services,foodprocurement(Points c and e) is not reasonable.

•Par. 7 of Article 122 -The three-bid negotiated procedures

Allowing the organization of three-bid negotiated procedures, which do not actually entail real competitionwith the publication of a notice, may jointly lead to that such public procurement activitiesfall out of scope, or may fall under the scope of a three-bid public procedure that should be initiated with the publication of a notice.

We recommend the elimination of the ‘three-bid’ mock-procedure in order that contracts essentially agreed under non-competitive circumstances do not qualify the same as contracts resulting from regular public procurement procedures.

•Par. 9 of Article 122–The inappropriate favouring of small businesses threatens the efficient use of public funds

We sustain our concern about that it unduly restricts competition that the contracting authority may reserve the right to participate in a public procurement procedure for tenderers not reaching in the previous year in the case of public supply and public services a revenue HUF 100 million, in the case of public works a revenue of HUF 1 billion.

Reserving the small value procedures only for small- and medium sized enterprises is distortive to competition; furthermore, it opens gates to bidders and contracting authorities to bilk. Consequently, it attracts, in particular, bidders acting less in accordance with good faith. Moreover, thresholds are neither based on preceding calculations, nor is their use recommended in case of procurements financed with EU sources.

In this case, it is also another additional concern that the Government may determine the conditions applicable compulsorily and the scopeof factors to be considered in relation to the above legal provisions with regard to budgetary agencies and state-owned economic entities both of which are controlled and supervised by the Government.

  • Par. 4 of Article 123–By-passing the application of the suitability test with regard tothe rules of procedure that can be freely established

The Billallows it;nevertheless, in our opinion,it is contrary to one of the fundamentalprinciples included in the Bill – namely, the principle of efficient and responsible use of public funds – to sign a contract without the application of the suitability test.

  • Par. 3 of Article 131–The direct payment of sub-contractors by the contracting authority in certain cases

The Bill tries to introduce a new alternative for the appropriate and timely payment of subcontractors since the previous amendments did not result in the desired effect. Fortunately, the bill,as oppose to the draft, indicates direct rewarding only as apossible alternative. However, this new alternative would also be applicable with putting certain rules of civil law aside and with regulating details separately (in a governmental regulation that is also not known yet).Consequently, we do not deem this idea of regulation well established, and Article 131 does not seem to ensure its consistency with other legal provisions (e.g.: Bankruptcy Act).

  • Article 132–The amendment of the agreement

With regard to the lawful amendment of the contract and the re-regulation of the restrictionsonamendment, we are on the opinion of that it is concerning that the prohibition included under Point a) of Paragraph 1 is limited to a narrower scope than it would be reasonable on the grounds that it shall not be allowed to modify the elements of the assessment criteria later, in case no significant unforeseen circumstances have occurred, there was no consequential significant breach of law. Points b) and c),indeed, do not exhaustall these cases, although the Bill does not recognize any amendment lawful in those cases.

In comparison to the draft, we welcome that the exact meaning of the expression of “changes in the economic equilibrium of the agreement”has got clarified; however, the “5% rule” does not give clear guidelines to determine when the agreement is out of its equilibrium. The Bill, however, has still not prohibited the tilting of the equilibrium to the advantage of the contracting authority.

  • Article 155–Ensuring the consistency of the decisions of the PPC

The proposed solution raises concerns because of several reasons; therefore, it should be taken under review again, although the consistent application and the consistent interpretation of the law, as intended, are welcome. The Bill includes such provisions as if it was only about the top bodies of the legal remedysystem; on the other hand, it makes an effort to apply and interpret the lawconsistently “in-house” “only”. The solution is also controversial: although the Bill does state that the acting council is not bound by the guidelines, the position of the college (the latter one is not even binding, since they are not laws); at the same time it introduces mandatory rules of procedure, and makes it mandatory to wait for the position paper of the college (which cannot result in exceeding the time restrictions of the procedural). Furthermore, it provides for that diverging from theposition of the joint college is only allowed in the cases identified in Article 155.

  • Article 160–There is no time restrictions in case of the judicial review of the decision of thePPC

The procedure of the Public Procurement Arbitration Committee is subject to binding deadlines according to the Public Procurement Act. On the contrary, in case of the judicial review of the decision of the PPC,there are no such mandatory deadlines. The main characteristics of the judicial reviewis thatthe parties usually request the court to hold a hearing and consequently, the first hearing takes place within 30 days. However, in case the court requires the completion of documentation, or allows further measures forcase-in-chief and under the frame of this, further hearings take place, the duration of the procedure can hardly be predicted.

  • Article 167 - Procurement Authority

Transparency Internationalhas highlighted the problems of the institutional system of public procurement in its research ( especially the problems regarding public procurement policy, the application of law and the facilitation ofinspections.

Therefore, reviewing the system and rethinking thefunctions and powers are necessary by all means. However, the solution contained in the Bill, according to which the functions of the Council are almost literally taken over from the text of the law in force at the moment, except forthat the all of it should be implemented in the frames of an Authority subordinated to the Government, is unacceptable.

If a governmental agency is set up instead of the Council that exercises the employer's rightwith regard to the Commissioners, it results in that the executive power may be able to exert influence on the first level of remedy.

Paragraphs 7 and 8 of Article 171 of the Bill do not mean sufficient guarantee for ensuring the professional independence of the Arbitration Committee.

  • Indent 3 of Par. 1 of Article 174–The level of regulating the amount of fines

The minimum and maximum level of fines that can be imposed by the Public Procurement Arbitration Committee, the principles of imposing fines– in our opinion –shall not be regulated in a government regulation, but must be regulated by an act.

The Bill compared to the draft does not only take the amount of the fines out, but it also removes the detailed rules of sanctions applied by the Public Procurement Commission from the Act, which is planned to be included in a later regulation.

  • The control of Public Procurement

TheBillis not consequent with regard to exercising control, although this is one of the most important subjects from the aspect of corruption. The only way of control appearing in the Bill is the so called “control in-process” appearing only indirectly [see Paragraph 7 of Article 83]. Referring to the latter solution is important but not sufficient regarding the matter.

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