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Challenges of public procurement reform in Armenia

Armenia has been steadily implementing broad reforms in the public procurement sector since 2006, with a view to opening the sector up to competition, and improving efficiency and economy in procurement. The public procurement legislative framework in Armenia includes the Public Procurement Law, adopted in 2010, and several decrees issued by the Ministry of Finance (together, the PPL). The current law came into force on 1 January 2011, and was developed to meet the basic requirements of the 1994 WTO GPA. It includes several legal instruments of the 2004 EU Public Procurement Directives.

Despite these reform efforts, in the EBRD’s 2010 assessment the PPL in Armenia scored 73 per cent compliance, placing Armenia in medium compliance with international best practice. In addition, an analysis of the institutional framework revealed that there are areas with significant regulatory gaps that need to be improved. The assessment also revealed that there is a shortfall in both performance and regulation: improvements in the integrity and accountability of public procurement were needed.

To help address these needs, cooperation with the Armenian government was established in 2011, when, under new primary legislation, the government decided to decentralise the public procurement system and introduce eProcurement procedures. As a result of this ambitious agenda, the public procurement regulatory authority in the Ministry of Finance found itself overwhelmed with reform implementation problems, a lack of regulatory capacity, and difficulties in developing secondary legislation and operational policies.

The EBRD-UNCITRAL Initiative prepared a detailed legal analysis of the Armenian public procurement laws in September 2011, and discussed it with the government at the policy workshop held in Yerevan in October 2011.

The Initiative experts discussed with government officials the regulatory shortcomings of the existing framework, and made recommendations about how to deal with these problems, in order to further progress the public procurement reform strategy adopted by the Armenian government in 2006. The workshop discussions focused on an action plan for finalising public procurement reforms in Armenia, and established effective cooperation among the EBRD-UNCITRAL Initiative, the World Bank, the OECD’s SIGMA and the EU delegation.

Armenian public procurement reform strategy: combine decentralisation with introducing eProcurement tools

Before the reforms, all public contracts in Armenia were procured by a specialised central purchasing agency, and were conducted traditionally, in paper-based procurement procedures, except for contract notices that were published on the web site of the Ministry of Finance. The 2006 Armenian reform strategy advocated a new institutional framework and full decentralisation, with contracting entities in full charge of their individual public budgets, and conducting their public procurement procedures in the eProcurement system. It was considered that this radical change – from total centralisation to decentralisation – would be possible due to the introduction of an eProcurement platform available to all contracting entities, and supporting the entire procurement procedure: from the preparation of the procurement, notices, selection of suppliers and contractors to be awarded public contracts, contract award, and through to contract performance review.
 

The 2006 reform strategy envisaged the adoption of the new public procurement regulatory framework, which would be compliant with the GPA standards, and the introduction of the eProcurement reform in two phases: the implementation of both e-tendering and e-purchasing tools. However, while the reform strategy described eProcurement tools as supporting the entire cycle of the public procurement process, the e-tendering and e-purchasing functionalities listed in the same strategy did not cover the entire procurement process. This omission in the reform planning caused serious problems at a later stage. Also, to allow for the phased implementation of eProcurement, the 2006 strategy decided on the optional use of eProcurement tools throughout the first two years, with mandatory use of the eProcurement procedures by all contracting entities following full implementation of the eProcurement reform strategy. Within the first two years newly appointed contracting entities could elect to either use procurement procedures available on the eProcurement platform or to conduct their procurement in paper-based format.

While this process is reasonable in principle, this decision caught newly appointed contracting entities unprepared: government entities and municipalities had never before conducted their own procurement, and their personnel had no experience in conducting procurement procedures. While some training on how to use new eProcurement tools had been envisaged in reform planning, and would be delivered to contracting entities by 2011, decentralisation of the public procurement system was not supported with a government-sponsored training scheme for public procurement officers, and, as such, contracting entities had no trained procurement officers to conduct their procurement procedures, either in paper-based or electronic format. To support decentralisation, a public procurement training unit was created in the Procurement Support Centre, working on the assumption that contracting entities would send their personnel to be trained and would self-fund this training. In 2011, when the new primary law entered into force, no official training curriculum had been developed for procurement officers, and no guidelines for contracting entities were readily available.

The reform created new regulatory institutions: a regulatory authority, a Procurement Support Centre, and a review body. However, the primary legislation left the roles of these bodies to be prescribed in the secondary legislation, and did not provide procedures for them to perform their new duties in the decentralised procurement system. In addition, newly appointed institutions, without their own capacity building programmes, were struggling to perform their functions, and did not have the regulatory capacity to fully implement the reforms or to address the operational needs of contracting entities.

In addition, while the 2006 strategy established a reasonable legal and institutional framework, it did not consider the issue of the eProcurement platform business model: whether it would be government owned, managed or a mixed system. A single point of access, government-owned platform was selected without clear planning about how the eProcurement system would be purchased and owned, or about how maintenance and future development, or the purchase of additional modules, would be financed. In the eProcurement reform process key issues relating to the selection of the software appropriate to market needs were considered, and decisions concerning the ownership of the eProcurement platform, as well as maintenance and development costs, were made.

In addition, best practice requires ensuring interoperability (a supplier registered in one country is enabled to submit tenders and proposals in another country) and publishing procurement opportunities, not only in the official national language, but also in languages of international trade (providing wider access to procurement information, including procurement opportunities, and opportunities for online tender submission). In Armenia, following cooperation with the World Bank, a licence for an e-tendering module, and arrangements for its implementation, were purchased in 2008, and this contributed to the implementation of Phase 1 of the reform strategy. However, only one module in the complete eProcurement system offered by the supplier was purchased, and the 2006 strategy did not foresee how to continue eProcurement implementation, how to purchase further modules, or how the system would be maintained and developed.

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2012 Road Map for finalising reforms

To help address regulatory gaps and shortcomings in reform planning, the EBRD-UNCITRAL Initiative team prepared an analytic report on reform implementation problems, and conducted practical regulatory training for the newly appointed regulatory authority in the Ministry of Finance and for the Procurement Support Centre. In addition to the regulatory training, the Initiative experts worked with specialists from the regulatory authority in the Ministry of Finance to prepare a road map for finalising public procurement reforms in Armenia.

The road map recommended refocusing back on the 2006 strategy and its objectives, and proposed a comprehensive action plan for the government of Armenia and IFI stakeholders to fully implement reforms within the following two years for several key operational components: electronic tendering, the introduction of procurement planning, basic framework agreements and online framework agreements with e-catalogues, reporting, monitoring, and contract management.

In particular, the road map set out the scope of the secondary legislation, and described standard documents and operational policies needed to complete the implementation of Phase 1 of the reform project, and to prepare the implementation of Phase 2 of the reform strategy. This included actions that would be necessary to upgrade the eProcurement platform purchased in 2008 to accommodate electronic procedures prescribed in the new legislation, and training and capacity building activities for stakeholders that would be necessary in a decentralised public procurement function. The road map also recommended balanced decentralisation, with central purchasing based on framework agreements – compliant with current best practice – as successfully implemented in the eProcurement environment across the EU member states.

In parallel with working on the road map, the drafting of secondary legislation for completing Phase 1 of the reforms continued, and in December 2012 draft laws covering a range of topics – procurement planning, e-tendering procedures, and framework agreements establishing the terms of use of the eProcurement platform and prescribing roles and responsibilities of the platform operator, contracting entities and tenderers in electronic procurement procedures – were ready to be circulated to local stakeholders.

While new draft laws were discussed with stakeholders, the EBRD-UNCITRAL Initiative expert team focused on working with the Procurement Support Centre in preparing an upgrade of the eProcurement platform, in order to accommodate the electronic procedures prescribed in the new legislation. To benefit from the experience of EU member states and from best practice in eProcurement, the Initiative experts suggested cooperation with the governments of Cyprus and Portugal, which had already successfully implemented structural public procurement reforms, including introducing eProcurement tools. Through the support of the EU delegation to Armenia, the EBRD UNCITRAL Initiative, in cooperation with the European Commission’s Technical Assistance and Information Exchange (TAIEX), organised capacity building sessions, and Cypriot and Portuguese colleagues shared their practical experience from eProcurement reform implementation in their countries with Armenian specialists.

At the time of writing, the preparation of the platform upgrade was being finalised, and the technical specification for the contracting for the upgrade of the platform had been completed. The World Bank agreed to provide another grant to fund an upgrade of the platform. When upgrade work on the platform is completed the ADB will sponsor a pilot of new eProcurement procedures with selected contracting entities, while the OECD’s SIGMA, USAID and the World Bank will develop a dedicated training programme for contracting entities and suppliers, to be made available from January 2014. The EBRD-UNCITRAL Initiative policy experts will continue advising the Armenian government in order to address any implementation problems with the new electronic procedures. 

Lessons learned

Through the country project in Armenia, the EBRD-UNCITRAL Initiative team learned several lessons – and tested the 2011 UNCITRAL Model Law’s recommendations – concerning framework agreements and electronic communication and submissions in particular, as well as the Multilateral Development Bank standards for implementing eProcurement reform in the public sector.

1. Policy choices in the public procurement primary legislation should be consistent, and be based on current best practice.

In Armenia the new primary law envisaged a fully decentralised system, incorporating framework agreements. However, a balanced decentralisation, with central purchasing based on framework agreements, represents current procurement best practice, which has been successfully implemented in the eProcurement environment across the EU member states.

2. Decentralisation of a public procurement function requires a new institutional framework and new, efficient, operational procedures.

Prior to the reforms – when the procurement function was centralised and was delivered by an internal department of the Ministry of Finance – there was no need for laws regulating the allocation of roles and responsibilities in the procurement process, procurement planning, or reporting on the procurement results, because all of these matters were internal matters of the Ministry of Finance, and were regulated by internal procedures. In this centralised system public procurement officers were personnel of the Ministry, accountable to the department director, and their management reported on their performance directly to the Minister.

In a decentralised procurement system secondary legislation must prescribe how contracting entities should perform the procurement function, what their planning and reporting obligations are, and how they should report to the national regulatory authority. Without these regulations the national regulatory authority has no access to information about how the procurement function is conducted. In a decentralised system the national regulatory authority does not conduct public procurement, but rather ensures that the procurement procedures of individual contracting entities are compliant with the law.

This is achieved through monitoring and audit procedures, which need to be prescribed by the law and must be efficiently implemented. The experiences of several countries demonstrated that, in a decentralised system, efficiency of monitoring is a key policy question. In order not to create unnecessary bureaucracy, delays and massive costs of human resources allocated to reviewing reports submitted by contracting entities upon the completion of procurement procedures, governments should employ more transparent and less expensive computerised systems, with real-time, online reporting conducted at the central level by a few, well-trained and well-paid analysts of the national regulatory authority.

3. Decentralisation of a public procurement system can be combined with the implementation of eProcurement tools, if newly appointed contracting entities are trained in both how to conduct procurement and how to use eProcurement tools.

There is a high risk of irregularities and non-compliance if insufficient training is provided in conducting procurement processes, and where there are no professional procurement officers at contracting entities. In addition, if the eProcurement system is not implemented in tandem with sufficient support for how to conduct procurement procedures on the eProcurement platform, the contracting entities will experience operational difficulties, since they have no previous procurement experience and skill, and are learning both how to conduct procurement procedures and how to use new IT systems with which they are unfamiliar.

The story of public procurement reform in Armenia clearly demonstrates that high-level political support is essential in order to initiate reforms in the public sector, and sufficient and well-prepared human resources are necessary to implement them. If reform is ambitious, and will affect the entire public procurement sector, it should be very well thought through, and necessary change management instruments must be put in place – and be made effective – well in advance of the entry into force of the new primary legislation. In the case of Armenia the political objective of the reforms – accession to the WTO GPA – has been accomplished, but the goal of a more efficient and modern public procurement system will take longer to achieve.



 
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