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Public Procurement Measures proposed within the conditionality mechanism won’t fix systemic flaws

orsivin // 2022.10.17.

Címkék: english EU conditionality

In the wake of the conditionality mechanism, the Hungarian Government has committed to implement major reforms in the Hungarian Public Procurement System in order to reduce the number of single-bid procedures and eliminate systematic deficiencies – however, the ultimate goal is to simply gain access to EU-funds and most of the proposed measures tend to overlook the flaws related to the public procurements realized from the domestic budget. It is questionable whether a substantive reform could be achieved without a complex approach. This is all the more evident when looking at the powers delegated to the newly created Integrity Authority, which will essentially only be able to act in cases of irregularities in public procurement financed by EU funds.

 

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 Source: https://www.facebook.com/orbanviktor

 

K-Monitor welcomes the introduction of the new conditionality mechanism as it complements existing measures to safeguard the EU’s financial interests, especially by creating ex-ante checks.

However, the entire conditionality procedure lacks a basic level of transparency and does not include opportunities for external stakeholders, such as civil society to react to the position of the parties involved. The proposed measures and bills were published without any meaningful stakeholder consultation, practically at the last minute before their adoption. Due to limited transparency, external experts and NGOs involved in public procurement monitoring were not given the opportunity to access or react to the Commission's concerns and the Hungarian proposals, or to make substantive suggestions to contribute to the identification of problems and to develop appropriate measures.

 

K-Monitor finds it important to publicly discuss the most serious concerns formulated by the EC and contribute to the debate between the EC and the government of Hungary. Therefore we analysed a number of issues connected to the distribution of EU funds and reforms proposed regarding the prosecution of corruption crimes in various publications over the last year. 

 

According to the Commission proposal for a Council Implementing Resolution published last month, a third of the measures covered within the mechanism were related to the lack of substantive competition and corruption in public procurement. This is why we decided to dedicate a separate analysis to this topic. This post is compiled based on a detailed expert study provided by public procurement expert  Anita Németh and aims to summarize the main issues that were raised by the Commission and a couple of more that should have been covered by the proposed measures as well, as they demonstrate a number of systemic problems.

According to K-Monitor’s previous assessments the public procurement system was a key tool for the Hungarian government to channel public funds to its economic clientele over the last decade in order to convert their political power into economic capital. The graph below illustrates well how the positions of the most well known government cronies changed over this period, as a result of political interference into the procurement system.

 

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The companies of Mr. Simicska (former Fidesz treasurer) experienced an unprecedented growth on the procurement market after Viktor Orban won the elections in 2010. His winning streak lasted until a conflict with PM Orbán that took place after the 2014 elections. Then a new group of government cronies stepped in and benefited from state investments worth billions of Euros often including EU funds. 

 

Public procurement expenditure in Hungary amounts to around 7.5% of the country’s GDP, with a record amount of HUF 4222 bn (EUR 10.5bn) in 2021. However, compared to 2015 when the amount spent was only half of that, the number of procedures went down by almost 50% (from 14127 in 2015 to 7676 in 2021). This shows the significant concentration of the market in recent years. According to our view this concentration arose from the combination of numerous factors, including practices, such as the increased use of framework agreement and gigantic tenders that left no avenues for SME-s to directly submit application but adjust to the practice of establishing good relations with the market leaders in order to benefit from their success as subcontractor. Below we summarized key indicators and institutional causes for Hungary’s distorted procurement market.  

 

Single-bidding and lack of competition

One of the very objective indicators of competition is the number of bidders. According to the  official figures published in the Public Procurement Authority’s annual report the share of single bidding procurement procedures above the EU threshold is 24.1% (and 16.3% below the national threshold). This seems to contradict a much higher ratio of 39% published in the Public Procurement Market Scoreboardby the European Commission. The discrepancy is caused by the Authority’s specific approach to statistics. According to the report the PPA “does not take individual contracts into account when reporting statistical data, but rather the entire procedures, the statistical method used by the Authority is therefore procedure-based rather than contract-based.” In practice, this means that if a procedure is divided into different lots, even if there is only one bidder for each lot, it does not appear as a single-bid procedure in the PPA’s official statistics, despite the fact that there is no competition at all in case of individual lots. As the share of single-bid procedures should function as an indicator of the actual level of competition, the method used by the PPA clearly only serves to cover up the depressing numbers.

It is also worth noting that according to the latest Annual Report, the ratio of single-bid procedures are a lot more favourable in case of the procurements below the  EU thresholds – this is probably not only caused by the higher entering costs and capital requirements of higher value procurements under the EU regime but also as the Public Procurement Act (§ 115.) allows the contracting authorities to use deviation from the general rules and allowing them to invite five bidders directly to submit an offer without a truly open procedure (invited bidders are not obliged to submit an offer, however it is widely known that the role of invited bidders is often to fake competition). It is clear how easy it is to abuse this procedure in order to restrict competition (e. g. inviting not available or not capable bidders, not rotating invited tenderers etc.). While the § 115 procurements are widespread in our public procedure system (making up 35% of all below-the EU threshold procedures), no wonder that a 2020 amendment of the Public Procurement Act excluded the use of this type of procedure in case of EU-funded projects – therefore this procedures are not subject to stricter EU control. 

It has to be noted that neither the Public Market Scoreboard nor the Annual Report of the Public Procurement Authority includes framework agreements in their statistics – their extensive usage may also restrict competition in certain sectors for 4-5 years as they enable contracting a limited group of service providers once an agreement is signed. 

The new measures of the Government formulated as a response to the conditionality mechanism, aim to address some of these issues: One of the commitments was to develop a Single-Bid Reporting Tool by 30 September 2022, which is based on data subtracted from the Electronic Procurement System, and which follows the methodology of the Public Market Scoreboard. (As this tool is not public, it is impossible to assess the implementation of the commitment.) The Government has also adopted a resolution on the development procurement performance measurement framework by 30 September.

Another key commitment of the government is to reduce the share of single bidder public procurements financed from Union funds below 15% by 31 December 2022. However, it is unclear how the Government aims to reach this ambitious target as there are no specific interventions or measures planned for October—December that aim to enhance competition and could impact the ratio of single-bid procedures. (Note also that as of 3rd October the base figures are also unknown.) Obligatory market consultations for above the threshold procedures introduced this Spring can hardly be considered as measures that are capable of fundamentally transforming the procurement market. Somewhat more realistic are the commitments that aim to gradually decrease the share of public procurement tender procedures financed from the national budget with single bids below 15% by 31 December 2024. The deadlines for a number of specific soft  interventions that would support the intention to reduce single bidder procedures are also scheduled for the following years, such as training and capacity building for SMEs  and the development of action plans by public authorities.

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Framework agreements

While the Commission raised concerns about framework agreements, the remedial measures proposed by the government  practically do not deal with this area. There would be reason enough to intervene: a great share of framework agreements that were audited by the EU had serious shortcomings while the government did not implement any specific measures to increase the integrity of these types of tenders in the last years. Although the Electronic Procurement System (EPS) now provides access to contracts signed within framework agreements the data on individual contracts or spending data will not be available even after the development of the EPS. 

The Commission criticised the duration of framework agreements – compared to the general maximum of four years, framework agreements are often concluded for five years. It is important to note here, that the EU regulation (Art. 33(1) of Directive 2014/24/EU) allows deviation from the general rule “in exceptional cases duly justified, in particular by the subject of the framework agreement”. One of the main issues here is that while the Hungarian law is in line with the EU law, the justification for exceeding the four-year term is not necessarily published in a transparent way: an amendment of the Hungarian regulation (in particular the Art. 104 (6) of the PP Act) allows contracting authorities to disclose justification in the “public procurement documents” instead of the call for tenders. While these documents are generally available in the Electronic Procurement System the notices are hardly available in a machine-processable format, not to mention the fact that this regulation creates a harmonisation issue as well: Article 49 and Annex V C 10(a) of the relevant Directive explicitly states that it is the contract notices that shall contain “(...) In the case of a framework agreement, indication of the planned duration of the framework agreement, stating, where appropriate, the reasons for any duration exceeding four years(..)” 

Another issue arises from the quality and the rather generic use of these justifications: this is the concern the Commission raised in case of particular procedures. The justification was indeed at least laconic in the call for tenders by the Digital Government Agency: they basically stipulated that just because of the fact that DGA is a central procurement agency, exceeding 48 months is simply necessary in order to meet the procurement requirements of the relevant organisations. (Note also that they stipulated that the last 12 months of the agreement is reserved for the performance and settlement of the contracts.) Easy to see that this hardly qualifies as an exceptional case or a proper justification.   

Unfortunately, it is typical that while the Public Procurement Act is in line with the EU rules, contracting authorities refer to exemptions extensively and requirements for justification are only formally fulfilled – in several cases the legislator itself authorises contracting authorities to apply the exceptional rules without substantial limits. A prime example of this is the increasing number of certain investments where the government allows the use of negotiated procedure without prior notification based on extreme urgency.

 

Negotiated procedure without prior publication of contract notice  

The relevant provisions of the Public Procurement Act basically echoes the strict rules formulated in the Procurement directive as it stipulates that “negotiated procedures without prior publication of a contract notice should be used only in very exceptional circumstances”. Extreme urgency is considered as an exceptional circumstance in case  “the extreme urgency is brought about by events unforeseeable for and not attributable to the contracting authority”.

From 2015 on, the government (and the Parliament) has started to authorise contracting authorities to use ‘negotiated procedure without prior notice based on extreme urgency’ generally in case of the creation  and initial operations of certain government agencies (the Digital Government Agency, the Defence Procurement Agency, the National Data Asset Management Agency, the Food Rescue Centre) and in case of certain events and investments of popular interest (Hungarian participation at Expo Dubai, Hungarian MotoGP and the construction of the race track, FINA World Championship). This, in effect, simply means that laws and government decrees simply override (and undermine) the EU and Hungarian procurement rules. It is also clear that in the above-mentioned cases the strict conditions for the application of this special procedure were indeed not met – otherwise it would not be necessary to enact the authorisation in separate legislation.

Legislation of this kind could be considered abusive and entails risk of corruption. Another example of this is the issue of the so-called ‘exempted procurements’ related to the health crisis.

 

Exempted procurements related to health crisis

During the wake of the pandemic in 2020, one of the first actions of the government was to introduce a set of new provisions in order to speed up the purchase of goods and services related to the prevention of mass disease. The related Government Decree simply allowed contracting authorities to claim exemption from the public procurement act in case of procurements related to the coronavirus. Contracting authorities had to check beforehand whether their needs could be met through centralised procurement (using a framework agreement or other framework contract) – and an important, but also revealing detail: while there was no financial limit on the value of the contract (procurements could be exempted both below and above EU threshold), exemptions could not be claimed for purchases financed from EU funds. Once again, we see here an attempt to circumvent the EU regulations and strict oversight.

The claims (in many cases, direct purchases) could be approved by a minister appointed by the Prime Minister (technically the Minister of Interior) upon the recommendation of the Operative Group (which is also headed by the Minister of Interior). The regularity of exempted procurements were subject to ex-post control by the Minister of Finance – thus the control of these purchases was managed entirely ‘in-house’. Interestingly enough, once the first wake of the pandemic was over, instead of simply revoking the legislation, the provisions were incorporated into the general text of the Act on Healthcare, creating a new regime for procurements related to the management ‘health crisis’. 

Thus, the fundamental principles of public procurement were simply abandoned: the provisions lack the very basic requirements of effectiveness, oversight and transparency – there is no publicly available list of exempted purchases, and even the Public Procurement Authority has no oversight on these procurements. Neither has the public: no summary of information on the beneficiaries of exempted procurements have been published ever since (while K-Monitor has launched several freedom of information requests, the Ministry of Interior did not provide the requested data).

Instead of introducing a strict regime designed for the exceptional situation (or simply applying the above-mentioned ‘negotiated procedure without prior publication of a contract notice’ for COVID-related procurements), the government has opened the door wide to corruption, profiteering and irresponsible and wasteful use of public money.

In a similar issue, the Commission has already launched an infringement procedure – it is the extensive use of exemptions from public procurement regulations as regards security reasons. (Note also, that an amendment to the Act on Asylum in 2015 has also enabled exemptions from the public procurement act. Following an infringement procedure the relevant provision was repealed in 2021.)

 

Exempted procurements as regards security reasons 

Obviously, there are valid arguments for limiting the transparency of certain contracts in the fields of defence and security. Defence and security contracts (procurement of military and sensitive equipment and their maintenance and works and services for specifically military purposes or sensitive works and sensitive services) are governed by the 2009/81/EC Directive, and in Hungary, they are regulated by a separate piece of legislation

However, there are contracts that do not fall under the scope of the Defence and Security Procurement Directive, but, if awarded under the normal procurement system, would jeopardise national security interests – therefore the 2014/24 EU Directive allows exemptions when e.g. the essential security interests of a Member State cannot be guaranteed by less intrusive measures’ or when the strict rules of the Directive “would oblige a Member State to supply information the disclosure of which it considers contrary to the essential interests of its security’. 

In Hungary, it is the National Security Committee of the National Assembly that may grant exemptions from the rules of both the Public Procurement Act and the Act XXX of 2016 on Defence and Security Procurement – according to the assessment of the European Commission the Hungarian law allows for more extensive application of exceptions than the EU rules and thus a broader share of contracts are excluded from the EU-regulated regimes. 

Moreover, there is no oversight of or remedy against the decision of the National Security Committee granting exemption and related decision-making material is classified. It is easy to see how these provisions are paving the way for abusive practice and corruption. In 2021, for example, it turned out that the Committee has even allowed the whole reconstruction of an Art Nouveau building owned by the Hungarian National Bank to become exempted on this ground. (The building now hosts several departments of the Bank and also a ‘Money Museum’). To add one more illustrative detail on how this technique is used to cover up corrupt practices: the exemption even included the procurement of furniture, which were directly purchased from a company owned by the son of the President of the National Bank.

 

Conflicts of interests

It should be added here that even in case of a standard procurement procedure – the adult son of the President of the National Bank would not have been excluded necessarily. According to the current Public Procurement Act only ‘relatives living in the same househols' of executives and owners of Contracting Authorities and other public dignitaries are excluded. It is important to note here that the ‘living in the same household’ clause was introduced into the Public Procurement Act only a few weeks after the original law came into force. While in case of contracting authorities, however, there is a general clause that might create a conflict of interest situation for other relatives from entering a competition, in case of dignitaries the list is strictly taxative: it is solely dependent on the goodwill and modesty of the relatives of the dignitaries whether they submit tenders or not.

This is clearly an example of legislation tailor-made for cronies, and it waters down the very essence of the concept of conflict of interests – it is obvious that close personal ties and family connections may very well distort the competition and the outcome of a procurement even in case where family members don’t live in the same household.

Moreover, it is interesting that while the issue of conflict of interest in public procurement procedures has not been raised by the Commission apart from the lack of due conflict of interest check processes, an amendment was tabled in the very last minute to the B/1260 bill (which deals with the creation of the Integrity Authority and the Anti-Corruption Task Force) that completely rewrote whole section of conflict of interest rules of the Public Procurement Act. While the re-regulation of the area is indeed important, the end result is at least mixed. The proposal may also need further clarification in a number of sections – probably not unrelated to the hectic law drafting driven by the negotiations with the EC. The proposed provisions aim to prevent conflicts of interest on the side of the contracting authority (and those acting on its behalf) – which is in line with OECD-rules, but it is still unambiguous who counts as a “relative” or a “member” of a company. A clear reference to the UBO provisions and the Civil Code could clarify the interpretation issues. However, it should be noted that the new conflict of interest rules would provide a broader exemption for persons involved in conflict of interest situations than before – and the Act still does not provide at all for checks and measures to identify false declarations (contrary to the explanatory memorandum of the amendment) and dismisses the issue of structural and institutional biases. 

 

Public interest trusts and procurement regulations

It is widely known that one of the core concerns of the Commission was related to the newly-founded public interest trusts. Apart from lack of transparency and adequate conflict of interest rules, it was also questionable how public interest trusts are subject to the public procurement act (PPA), especially as a provision has been removed from the PPA in 2020 that explicitly said that “trust foundations established by the state and legal entities maintained by such foundations are obliged to apply the PPA even if they are not otherwise subject to its personal scope.” The 2020 amendment clearly aimed to exclude trusts (notably the trusts managing the Mathias Corvinus Collegium and Corvinus University) from the personal scope of the PPA (unless the procurement was to be carried from with EU funds). While the legislative changes in 2021 already aimed to repeal all these rules, the legislation in force can be interpreted in various ways. 

The Commission also contested whether these trusts could be regarded as ‘bodies governed by public law’, because there is no explicit rule that would clarify if we should consider such trusts’ operations financed by the state in case the organisation finances its operations from the returns on the capital received from the State. Moreover, there are also questions arising when examining the  ‘activity’ of these trusts: the related provision of the PP Act (in accordance with the directive) stipulates that legal entities fall under the scope of the Act only in case they are established for the specific purpose of meeting needs in the general interest AND not having an industrial or commercial character –it is questionable if the latter criteria is met in all cases, as even the Act on Public Trusts says that economic activities should be carried out in accordance with the private market investor principle, which indeed may involve commercial character of activities. Note also that the legal uncertainty could be detected as well if we examine the official register of contracting authorities: while most public interest trusts declare themselves ‘bodies governed by public law’, e.g. the Dunaújvárosi Egyetemért Alapítvány is registered as a contracting authority on “voluntary basis” and the Neumann János Egyetemért Alapítvány as a “subsidised entity”. Note also that – in line with the EU-rules – state and EU-subsidised procurements do not necessarily fall under the scope of the Act. 

After all, at least this issue has been settled satisfactorily by the corrective measures: a new amendment on the scope of the Public Procurement Act that now explicitly stipulates that public interest trusts and the institutions managed by them fall within the personal scope of the Act. 

 

Concessions instead of procurement procedures

In the past year, the recently established National Concession Bureau has launched two concession procurement procedures under the Public Procurement Act, which would outsource the performance of the public tasks in question for a maximum period of 35 years, as set out in the National Property Act. One of these cases is the so-called single waste management concession (concession notice EKR000969592021, EHR ID: 15149/2021), the other is related to the design, renovation, construction, operation and maintenance of Hungary’s highway network (ca. 2000 km motorways and expressways) as well as the financing of these activities.

Transparency International Hungary referred the matter to the Public Procurement Authority and the European Commission, as well as initiating a public interest inquiry, regarding certain conditions of the opening notice, including the 35-year concession period. Transparency International Hungary argues in its relevant analysis that in case of the motorway concession the contractual arrangement misses key elements of the definition of concession, namely the transfer of the right to exploit the works and the services and the transfer to the concessionaire of an operating risk in exploiting the works and services, therefore it is in fact not a concession, but a covert public procurement, and consequently it constitutes an infringement of both the Concession Directive and the Public Procurement Directive. (Note also, that in case the concession was duly considered as a procurement, a 35-year restriction of the competition would be a clear infringement of the procurement principles.) 

In case of the waste management concession it is even more blatant that the government is not in fact conducting a genuine competitive procedure, but  a pre-arranged transaction. A few months prior to the concession procedure the Act on Waste Management was amended so that the State is entitled to assign the right to exercise the public waste management task to a single concessionaire in a single procedure (therefore the procedure couldn’t be divided into lots), thus creating an artificial monopoly. Meanwhile, Mol Plc. (the largest company in Hungary active in oil and gas) has expanded its strategy to include waste management. The concession notice also used a number of other methods to restrict competition -- for example, requiring the purchase of the shares representing 100 % of the ownership of the National Waste Management Coordination and Asset Management Limited Company and the National Waste Management Services Ltd. at a fixed price, and setting an unreasonably short deadline for the submission of bids. To no one's surprise, the only bidder (and winner) in the concession procedure was MOL. 

In both cases, the duration of the concession is extremely long – and while this would require detailed justification, the baseline impact studies are not yet public (however, TI Hungary has just recently won the related FOI request case). 

 

Other minor issues regarding the scope of the Act

It should be also noted that in relation to the prohibition of the subdivision of the procurements of lots with the intention of circumventing the Public Procurement Act (and the PP Directive), the Hungarian regulations are slightly at odds with EU case law. According to the Hungarian Act, where “(..) a public service contract, which is aimed at the same direct purpose (...) is divided into lots and realised through more than one contract, the value of all lots shall be taken into account for the establishment of the estimated value of the public procurement. (...) When determining the existence of the same direct purpose in case of works and public service contracts the technical and economic functional integrity of each service shall be taken into consideration.” It is important to stress here that according to the EU case law the economic and technical integrity is not a conjunctive but an alternative condition – if either the technical or the economical functional integrity is fulfilled, the same direct purpose could be determined. The wording of the Act may result in a handful of public procurement procedures falling outside the scope of the law. 

In relation to the procurements to be realised using subsidies attention has to be drawn to the fact that according to the Hungarian Act, the definition of ‘subsidies’ excludes tax and other incentives. According to the communication of the Commission in an ongoing infringement procedure, this exemption may lead to a broader exclusion of contracts from the obligations under the EU public procurement directives.

Lack of adequate oversight

In addition to the issues discussed so far, which mainly concerned the scope of the laws, another important problem is the oversight and review of procurements. Currently, there are two (almost parallel) regimes for this, one is the more general control by the Public Procurement Authority (see below), while the EU-funded procurements are also subject to audit by a separate department within the ministry responsible for territorial development. (Note also, that EU-funds are also audited by the EUTAF, a directorate-general which operates within the framework of the  Ministry of Finance.) While this means a stricter control, outsourcing the department’s audit capacities may also raise concerns (this is discussed in detail in the EU audits.) According to several new reports, these were also among the key concerns raised by the Commission’s original notification recently and the Hungarian government has adopted measures in order to improve the oversight, such as the extended use of Arachne, the creation of a Directorate of Internal Audit and Integrity, the rotation of employees in the sensitive positions, the improvement of conflict of interest rules in the managing and audit authorities.

In any case, we can add here that as far as the main objective of the Hungarian Government and the ministry responsible for the allocation of EU-funds is to absorb as much EU-funds as possible, it is questionable if we can expect that the audit will go beyond the bare minimum agreed by the EU. 

External control of public procurements (and related EU tenders) by researchers, investigative journalists and citizens were also problematic, as neither the electronic procurement system nor the EU tender site allowed the bulk downloading and connection of data. While the newly-introduced development of the EPS allows bulk downloads, this option is limited to information related to award notices. A link to information on the EU project involved in financing the tender remains missing. Moreover, while the portal now allows for more complex filtering, including on unique identifiers of bidders and provides information on subcontractors and number of bids, an API to the entire database including the text of notices is still not provided, while it remains unclear why the reform only commits to quarterly updates. At the same time a number of data types are still unavailable for  bulk download, the name and identifier of unsuccessful bidders, the justification for the use of exceptional procedures, deadlines and  information on direct purchasing orders based on framework agreements. Full access to the procurement database for the public is inevitable to ensure that commitments to improve the levels of competition are evaluated by independent actors.  

 

Autonomy of the Procurement Authority and the Public Procurement Arbitration Board

According to the Public Procurement Act, the Public Procurement Authority (PPA) is an autonomous public administration body under the supervision of the Parliament, within the framework of which the Council and the Public Procurement Arbitration Committee (PPAB) operate, the latter as the authority in charge of public procurement infringements, whose decisions may be challenged before the administrative court. The autonomous status of the PPA and thus its independence from party politics and central government policy and its guarantees (institutional, personal and professional guarantees) are essential. The PPA (and most notably, the Chairman of the PPA) have official oversight authority, and he is the only one who may initiate ex officio appeal; while the PPAB, which operates under the PPA has adjudicative and sanctioning powers. Although there is a right of appeal (judicial review) against decisions taken by the PPAB, the PPAB can also be considered a quasi-judicial body (a body exercising judicial functions) in the EU legal sense, as the PPAB is granted the right to refer a preliminary ruling to the Court of Justice of the European Union (CJEU). 

However, the independence of the Chairman of the PPA is questionable, as he is elected and employed by the Public Procurement Council, which was originally set up as a tripartite body, with an equal number of delegated members to promote (1) the public interest objectives, (2) the interests of contracting authorities and (3) the interests of tenderers. This approach has been changed by the 2015 Public Procurement Act – currently 5 of its 15 members are delegated by different ministries and 3 more are by other leaders who themselves are appointed or selected by the Prime Minister (the leader of the National Tax and Customs Administration, the Government Control Office and the Hungarian Competition Authority – the latter is an autonomous organization, though). The leader of the State Audit Office, who is elected by the current (government-party) Parliament also has the right to appoint a member. On the other hand, chambers of commerce and engineering/architects, local authorities and accredited procurement consultants can nominate a total of 6 persons to the Council. Thus it is easy to see that the former equilibrium was overturned and in fact, decisions may be dominated by persons directly or indirectly appointed by the government. It is also important to note that the rules on the composition of the Council are not stable, regulations have been amended several times – further reducing the proportion of members independent of the government. One of the remedial measures implemented by the government could improve the balance slightly by including the chairman of the newly created Integrity Authority as a member of the council.

Apart from the election of the President of the Authority, the situation is all the more problematic as this council is responsible for electing the head of the Public Procurement Arbitration Board and procurement commissioners, especially as the level of professional qualifications for the former position has been seriously reduced in 2016 (no judicial or procurement experience is  required for appointment, if the candidate has three years experience of public leadership).

 

High fees for accessing remedies

While the composition and independence of the Public Procurement Authority and the Arbitration Board is institutionally undermined, other factors may also play a significant role for not seeking redress despite perceived irregularities in a certain procurement procedure. Currently, if the Chairman of the PPA does not initiate a procedure ex officio, the fee for other interested parties initiating such a procedure is 0.5% of the estimated value of the public procurement, but in case of multiple claimed elements in the application, this could be as much as double, i.e. 1%. However, the minimum fee is HUF 200,000, the maximum is HUF 25,000,000 in case of procurements above the EU threshold, and 6,000,000 in case of procurements below the EU threshold. In case of an unfounded application, the applicant loses the whole administrative fee, but even in case of a successful application, the Public Procurement Authority withholds HUF 300,000 as the “cost of the procedure”. It is important to note here that in fact, between 2011 and 2015 the administrative fee was even higher, 1% of the procurement’s estimated value (with the same maximum values) – this was explicitly implemented in order to discourage tenderers from submitting unfounded  applications in bad faith.

 While the number of appeals have significantly dropped in 2012, we can argue that the current fee rate is still a major deterrent for interested parties to launch such a procedure – especially for small and medium-sized enterprises and more generally for other interested parties. The level of fees is still high in comparison with domestic litigation. (Note here, that while the Public Procurement Authority claims that these fees could be considered extremely low in EU-comparison, an EU-study suggests that there are at least 4 member states where there is no fee at all, and the maximised fee in Hungary is indeed high compared to other member states.)

While it is true that the applicant 'loses' the full fee in the case of an unfounded application, there is no equivalence between unfounded applications and bad faith initiatives – and there are concerns about the 'passing on' of the consequences of evolving, often unpredictable or contradictory case law in this way. The still high level of redress fees therefore limits the effective investigation of infringements and runs counter to the principle of effective judicial protection. It is important to stress here that ensuring the access to review processes go beyond individual interests: the detection, establishment and sanctioning of public procurement infringements also serve the public interest. 

The Public Procurement Authority operates an anonymous whistleblowing channel (Public Procurement Anonymous Chat), however, information shared on this channel do not oblige the PPA to conduct a control procedure or launch a legal review at the Public Procurement Arbitration Board, as such data do not qualify as a complaint or notification of public interest. The Authority also receives several so-called “public interest disclosures” – according to the data published in the Annual Report, the PPA has received a total of 52 notifications of public interest, 42 of which were closed without further action. The insufficient protection of whistleblowers and the pending implementation of the relevant EU directive may impact procurement oversight as well. As part of the remedial measures, in the future, in case of EU-funded procurement irregularities, however, the chairman of the Integrity Authority may also seek the ex officio procedure of the PPAB.

 

One could argue that the majority of these problems are rather technical, occur in other member states as well or could be addressed through infringement procedures, audits. While this is partly true, it is alarming that these issues prevailed over the last decade despite regular flagging in EU reports (anti-corruption, semester) and major audits involving EU procurements. Their effect on the procurement market even worsened the situation, which is clearly indicated by the increasing concentration that we referred to at the beginning of this post.

The very high share of procurements under the EU regime shows well that these long lasting, structural problems of the Hungarian public procurement system not only restrict the access to procurement for local businesses but has an effect on the EU procurement market as well. Moreover, they also affect the EU budget as a high percentage of procurement includes EU funding. Furthemore the procurement culture shaped by a rigged procurement system has a negative effect on procurement even in cases where the legal and institutional framework complies with EU directives. The non-action of the government in the last years makes us doubt how credible recently proposed measures are. Especially taking into consideration how the government reacted to the unprecedented corrections it had to pay after audits by the EU. It acknowledged the systemic problems by agreeing on corrections, but instead of fundamental reforms it rather withdrew cases from EU funding where the interests of its clientele were endangered.

 

K-Monitor is a non-profit public funds watchdog based in Budapest, Hungary. It was founded to improve the levels of transparency, accountability and the rule of law in Hungary. Civic participation and technology driven solutions are among the organizations key instruments.


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