Public Contracting System

Roles of institution as a pillar of the NATIONAL INTEGRITY STUDY

Given the huge amounts of money involved and the lack of strong public oversight, public procurement is perhaps the most corruption-prone of all fields of Hungarian life. It is estimated that systemic corruption adds as much as 20-25 per cent to the costs of government procurement, and frequently results in the purchase of inferior or unnecessary goods and services.

To prevent the misuse of public resources, the Hungarian Parliament has passed very extensive and complicated legislation on public procurement. The first public procurement law came into force in 1995. Before that date there had only been rather loose regulations on ‘competitive negotiations’, stipulating no precise rules and referring vaguely to terms like ‘certain questions which need clarification’. The new Act on Public Procurement (hereinafter referred to as the PPA) was the outcome of long and heated debate and was subsequently subject to many alterations to bring it into line with EU harmonisation requirements.

The new Act is very long, and has been amended 21 times since 2004. Not only the provisions of the Act itself but the relevant articles of 21 pursuant executive decrees must be complied with during public procurement proceedings. More than 400 articles and numerous amendments make it difficult to apply the new procurement system and are the cause of a number of misunderstandings.

The Act divides all types of public procurement procedures into regimes defined by the value of the procurement. The general idea is that the higher the value of the procurement the more stringent, exhausting and detailed are the rules that apply to it. Public procurements reaching European community thresholds are governed by the most stringent regime. At the next level down, public procurements of lesser value reaching on the so-called national thresholds are subject to fewer and looser regulations.

While general rules provide for open bidding as the main type of procedure, in each regime there are many different types of public procurement procedures, such as open procedure, procedure by notice of invitation, negotiated procedure, etc. It would seem reasonable to assume that ‘procedure by notice of invitation’ is the category in which corruption is likely to be the most widespread, but experts believe that participants ready to engage in corruption will always find ways of subverting the procurements process no matter which form of tender applies. In addition to the main types of procedure, Hungarian law has introduced a dynamic electronic procurement system, but this has only been in use since 1 January 2007, and so has had little if any impact on the big picture as yet.

There are plenty of exceptions to the main rules set out in the PPA (i.e. cases where general public procurement procedures do not apply). Some of these are based on internationally accepted principles, such as the exception for proceedings that concern a state secret or a service secret or the fundamental security and national security interests of the country, or that need to be accompanied by special security measures. What is more questionable and shows the impact of purely political interests is that the power to initiate an exception of this kind is vested in the competent parliamentary committee, which does so by adopting a preliminary resolution. This leaves the exemption vulnerable to significant manipulation, since it is very easy to find connections – however distant or specious – between public funds and special security questions. Other exceptions (e.g. with regard to procurement of broadcasting material) are only partially justified, since most of the contracts signed in this area go well beyond issues of special artistic ability.

The legal regulations are fairly massive in quantity and absolutely binding, leaving no exceptions unless explicitly stated by law. This is to ensure objectivity, but since it is impossible to provide for every little stage in the whole procedure, some room is left for subjectivity. This is inevitable, but so long as there is no local industry protection policy in place this subjectivity offers distinct possibilities for favoured local businesses.

The PPA explicitly prescribes the detailed content of bids and other related documents such as certificates. This is supposed to provide a formal, open environment for tenderers and so to ensure equal chances for competition, just like the rule that all communications, clarifications and addenda must sent to each and every bidder. Whenever a public procurement procedure is to be initiated, the party awarding the contract has to set up an operational ‘working body’ and a small committee to award the contract in question.

Fairness and legal order is also ensured by law after a contract has been awarded. A control mechanism is in place, its main ‘weapons’ being the documentation and publicising of fulfilment of the contracts, including any modifications (which are only acceptable under special rules).

Structure/Resources

According to the statistics provided by the Public Procurement Council (hereinafter referred to as the Council), we are talking about a 1,450 billion HUF (cc. 5.8 billion EUR) procurement market which depends mainly onto government plans and political decisions. In Hungary the public procurement market is still very significant although in recent months it seems to have shrunk somewhat. In the first 6 months of 2006 the total value of public procurement procedures was approximately 840 billion HUF (3.36 billion EUR). In the same period of this year, 2007, the figure was only 623 billion HUF (cc. 2.5 billion EUR). Researchers are still seeking to identify the reasons for the decrease. The Chairman of the Council, Mr Lajos Berényi, believes that 2006 was a boom year in the public procurement market. The New Hungary Development Plan may still contribute greatly to the public procurement market figures for 2007.

The Council is composed of nineteen members headed by an independent full-time Chairman (as a civil servant). Six members represent the public interests, six the general interests of the contracting authorities and six the general interests of the bidders. The members serve for an a minimum two-year term and receive no fees for their work from the budget of the Council.

The Secretariat of the Council (staffed entirely by civil servants) is responsible for co-ordination, preparation of the Council’s resolutions, data collection, recording and administration activities. The Secretariat prepares binding resolutions and non-binding recommendations for the Council. The Secretariat provides legal information in response to approximately 250 to 300 written enquiries annually, and 30 to 40 verbal queries daily.

The Council monitors the application of the law and comments on draft legislation, makes recommendations (without binding force), collects and publishes statistical data on public procurement, edits the official journal of the council (the Public Procurement Bulletin) verifies and publishes the notices related to the procedures for award of contracts and design competitions, maintains relationship with international organisations, and organises education and training etc.

The Council has the right and the obligation to issue recommendations to facilitate the application of the law. In fact, it sometimes seems to go beyond its authority and create new law, and its recommendations are in some cases at odds with the decisions of the Public Procurement Arbitration Committee (hereinafter referred to as the Committee). The result is that contracting authorities and bidders cannot be sure how to apply the law. In some cases the recommendations of the Council are opposite to the legal practice of the Committee. The legal status of the Committee is clearly defined in the Act. On the one hand there is a horizontal relation between the Council and the Committee, but on the other hand the independence of the Committee may be questioned because the Council has several rights over it.

The Editorial Board is responsible for publication of notices related to public procurement. The notices received are checked to ensure that they comply with the relevant public procurement rules.

Government may order the organisations under its control to execute any public procurement procedure as a centralised procedure, thus determining the persons to be involved and the material scope of the procurement, the organisations entitled to invite tenders and the conditions of participation. Detailed rules pertaining to the centralised public procurement exercise are determined by separate decree. Local government bodies are also allowed to conduct an analogous centralised procurement procedure in connection with institutions under their control.

Accountability

The wide range of discretionary powers in prescribing special provisions or setting out special conditions in invitations to tender, leaves ample room for the manipulation of the procurement procedure, although the PPA has declared that the use of these powers does not result in unjustified discrimination for or against particular bidders. The contracting authority has the right to require bidders to comply with a number of formal and material requirements. If the bidders fail to fulfil the conditions they must be excluded from the tender. It is well known that Hungarian contracting authorities use this method to reduce the number of bidders, and that an authority can easily (and without fear of sanction by another body) set special requirements at the start of the proceedings which it knows can be satisfied only by one of the bidders.

One person interviewed in research on the problem also highlighted the potential for corruption in the application of the so-called formal requirements of a tender. He had the impression that the requirements laid down by the Act for the form in which tenders should be submitted are not always applied in fair and reasonable ways. In his experience there were cases when several participants had been excluded from a procurement procedure on grounds of essentially trivial formal problems. It would therefore be advisable for further precise regulations to be issued on whether bids can be turned down merely for failure to comply certain types of formal requirement, and for the proper application of such regulations to be overseen and monitored by the Council.

Several mandatory and optional grounds for exclusion from public procurement proceedings are stipulated by Articles 60-61 of the PPA. The optional grounds may offer contracting authorities convenient ways of excluding bidders with whom they do not intend, for dubious reasons, to conclude contracts. In these circumstances it seems counter-productive to allow the contracting authorities free discretion on whether to invoke these optional grounds. It is especially difficult to see why they have been allowed to give contracts to bidders who have committed an offence and have been subject to fines under Article 11 of Act LVII of 1996 on the prohibition of unfair market practices and restriction of competition.

Another vulnerable point in regulations concerns situations in which a bidder favoured by the contracting authority does not submit the best tender in the competition. Under the PPA, if the contracting authority is unable to conclude or fulfil the contract it can declare the procedure inconclusive, and if the higher authority withdraws financial support, the contracting authority is by definition unable to conclude or fulfil the contract and therefore has to declare the procedure inconclusive. A new procedure may be started if the upper authority provides the necessary financial support again, however, this is typically one of the methods by which a contracting authority makes it possible for the favoured bidder to take part in a new procedure.

Integrity

Acceptance of gifts by public officials in exchange for illegal advantages is an act expressly penalised by criminal law as bribery or trading in influence. Extensive interpretation of the law by the Supreme Court has established the principle that persons having a decision-making role in public procurement proceedings should be regarded as public officials, and if accepting bribes should be punished accordingly. Other kinds of illegal conduct in public procurement proceedings (e.g. illegal agreements to distort competition) are now covered by special criminal law provisions. The new regulations came into force at the end of 2005, and so there is as yet no data on investigations for this offence.

The law on public procurement has quite a strong link to the criminal law: no one who has been convicted for certain types of criminal offence may make a tender in any public contracting proceedings.

Civil law plays a negligible role here, since anti-corruption clauses are set out in invitations for public procurement procedures. Nor do codes of conduct play an active role in the prevention of corruption in public procurement procedures.

Transparency

Contracting authorities are obliged to produce an honest and well-established information plan for public inspection. This is quite a useful practice in that it helps potential bidders to plan ahead and allows some retrospective monitoring of procurement, but in fact the plan has no binding force on authorities, and deviations from the awards and procedures advertised are permitted and usual in practice. While we accept that the changing financial situation of authorities may necessitate alterations, we should still note that the wide range of permissible deviations from procurement plans significantly reduces the possibility of public supervisory control.

The law stipulates that all documents not containing business secrets should be made public. This rule applies especially to the final decision of the contracting party and to any contract concluded at the end of the process. It must be noted that there are still cases in which these publicity obligations are ignored.

Statistics and registers of contracts form part of the annual report by the Council to the Parliament and can be viewed on the Council’s website. Theoretically all public contracts are accessible with the exceptions of national and business secrets and most can be viewed and copied at the offices of the contracting authority. Despite this, it is not always easy in practice to obtain information about public contracts.

In order to reduce corruption and ensure transparency, there is a serious need to enhance the monitoring system for public procurement procedures and to impose high fines in cases of violation of the law. The present monitoring system is not effective enough, since the monitoring organisations are not appropriately equipped in terms of powers or resources.

Complaints/enforcement mechanisms

All disputes arising from public procurements fall within the exclusive competence of the Committee, which has a peculiar legal status. As we have already mentioned, the Committee cannot be considered fully independent of the Council. In some important inspects it is inferior to the Council because it makes its decisions in the name of the Council. Proceedings on complaints before the Committee must be completed within 40 days.

The appeals process is as follow: Committee – Administrative Court of 1st Instance – Administrative Court of 2nd Instance – Supreme Court (in certain cases). The company appealing may only sue in the civil courts if it has already won its case at the administrative level. In this case the company that should have won the tender can turn to the Metropolitan Civil Court – Court of 1st Instance – Court of 2nd Instance – Supreme Court (in certain cases). It is obvious that even if the company wins every lawsuit it may take three or five years to obtain a final decision. By then the original winner will have fulfilled the contract and gained the right to use this reference in the future. The extreme length of legal proceedings is well known, and so most losing companies do not even bother to turn to the Committee or subsequently to the courts. Every bidder knows that it is almost impossible to recover damages in practice. It can be concluded that there are almost no prospects for legal reparation, a situation which is hardly a deterrent to corruption.

Public contracting is believed to be a matter of governmental or state interest and so civil or social control mechanisms are not to the fore. Nonetheless, some slow but positive change is evident in this context, especially with the establishment of the Club and Foundation for the Culture of Public Procurement, which is active in organising professional meetings to disseminate European achievements and the requirements of fair public procurement.

Relation to other sectors

The legislative and executive authorities on the one hand, and business organisations on the other, are closely connected to public contracting proceedings as actors in its bipolar system. This means the judiciary has a fundamental role in deciding on legal remedies against the decision of the Committee. Measures are needed to educate law enforcement officers to be competent to carry out effective investigations in cases of serious breach of public procurement regulations.