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Public procurement: challenging aspects and development prospects for construction companies in Ukraine
Author: Oleg Boichuk and Mariia Novyk
Source: Lexology

The scale and nature of the destruction caused by the Russian invasion of Ukraine means that public procurement will be one of the key tools for Ukraine's reconstruction. Ukraine's clear and undeniable vector of movement towards the EU and its relatively new status as a candidate for EU membership also significantly increases the importance of public procurement.

Construction companies will be one of the main participants in the recovery process and, therefore, consumers of public procurement. We have already had interest from our clients in this field. It is worth noting that foreign companies which are not yet present in Ukraine are acting rather cautious: they are asking, watching and waiting for success stories. There are many factors influencing this, in addition to security. For example, licensing, which remains a major uncertainty at the moment due to the impossibility of obtaining a new building license or recognizing a foreign license, etc.

But let's focus on procurement

The issue of Ukrainian public procurement is often raised in narrow professional circles and at the international level. Everyone understands its importance and the need for improvement.

Novelty

Under Ukrainian law, when a project is financed by international financial institutions, the respective institutions may apply their own procurement procedures. In practice, internationally financed construction projects have usually been carried out based on the standard procurement procedures of the respective financing organizations, as these are the most familiar and comfortable standards for international bidders. But this is changing.

Due to the increasing number of projects funded by foreign institutions, Ukraine and the World Bank, aim to harmonize local and international procedures. The World Bank has already recognized the compliance of the Prozorro e-procurement system with its standards, and now all implementers of the Bank's projects in Ukraine are recommended to use the system.

Thus, from 01 August 2023 to 31 August 2024, an experimental project has been launched in Ukraine, where procurement for projects with international financing will be carried out through Prozorro. In this case, the adapted World Bank rules will apply.

Although it remains to be seen how the above novelty will work in practice, we see it as a positive scenario as it should gradually eliminate or minimize the differences between the two procedures and facilitate the preparation of various tenders.

However, our cooperation with the bidders has also highlighted problematic issues of Ukrainian public procurement, which, as it turned out during the analysis, differ to a greater or lesser extent from procurement under EU rules. Below, we will discuss the main ones in more detail.

Joint participation

Public procurement for Ukraine's reconstruction projects will require significant resources and complex decisions, and joint participation will often be a practical necessity for both Ukrainian and foreign participants.

Ukrainian law currently provides two opposing approaches to the participation of associations in public procurement. If residents, or residents and non-residents join their forces, a separate legal entity must be established.

If non-residents join forces, it is not necessary to establish a separate legal entity; it is sufficient to sign, for example, a memorandum of understanding, consortium agreement etc. However, a seemingly simple and straightforward consortium agreement or memorandum of understanding for foreign companies may hide complex structuring issues that are not formally required for participation in procurement but play an important role at later stages. This may entail signing and registering local joint venture agreement, etc. This makes implementation more complex and requires additional time and effort to arrange.

Joint procurement

Ukrainian legislation does not currently provide for the possibility of joining forces and carrying out joint procurement, which would seem logical for large projects. Joint procurement has long been used in the EU.

Mixed procurement

In most cases, the reconstruction of Ukraine will require procurement of design services and construction works. Currently, Ukrainian law distinguishes between such procurements, even though they relate to the same object and requires two separate tenders.

The law explicitly allows only the procurement of goods with related services which value does not exceed the value of the goods themselves. This approach is often surprising to foreign bidders, who are used to entering the project as a whole and building what they have designed. Mixed procurement is common practice in the EU.

Non-price criteria

Ukrainian law provides that the share of the price criterion cannot be lower than 70 per cent. Accordingly, the price is currently the main criterion for selecting the winning bidder. This approach is rather formalistic and outdated. Cheaper does not always mean better.

This approach is also contrary to the EU rules. It sets more progressive criteria and evaluates participants comprehensively.

Pricing and overruns issue

Any major construction, especially in the context of Ukraine's recovery, is a potentially long, complex and costly affair that requires flexibility. In general, the price of construction works in Ukraine is fixed in the estimate, which (for purposes of public procurement) is prepared according to local standards and further becomes an essential part of the bid and, if winning, of the contract. The unforeseen costs often arise during construction. It is difficult or impossible to estimate them at the tender stage.

However, the contract price, based on the initial submitted estimate / bid, is essentially a fixed amount, with only a very limited and exceptional grounds for revision (mostly downwards). Therefore, under Ukrainian public procurement law it is mainly the contractor side that bears the risk of overruns with almost no solutions available. While this is clearly set to protect budget from uncontrolled spendings, lack of flexibility appears detrimental to real-life project performance.

There are many other issues to be considered and amended. We have limited this overview to the most common ones that are directly related to procurement for Ukraine's reconstruction and that complicate such processes.

In general, public procurement is a complex issue that regulates participation of all parties and is fundamental for beginning of the reconstruction process.

As we have already mentioned, there is increased attention to public procurement on the part of construction companies and other potential participants, our government, foreign countries and institutions. A new draft law on amendment of public procurement is currently being developed and is intended to improve the public procurement procedure, eliminate the fundamental differences between procurement under Ukrainian and EU rules. We hope that the drafters will be able to adopt the best and improve the existing law, including the issues described above.

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