Report No. 49975-AM Republic of Armenia Country Procurement Assessment Report June29, 2009 Operations Policy and Services Unit Europe and Central Asia Region Document of the World Bank Armenia .Country Procurement Assessment Report REPUBLIC OF ARMENIA COUNTRY PROCUREMENT ASSESSMENT REPORT Table o f Contents Abbreviations and Acronyms ........................................................................................................... i Acknowledgments ............................................................................................................................ iv EXECUTIVE SUMMARY .............................................................................................................. 1 Background ............................................................................................................................ 1 May 2004 CPAR Action Plan - Status o f Implementation ................................................... 1 Summary o f Benchmarking Using OECD-DAC/World Bank Methodology ....................... 3 Case Studies and their Recommendations ............................................................................. 4 Key Recommendations.......................................................................................................... 7 Implementation o f Action Plans ............................................................................................ 8 . 1 INTRODUCTION ........................................................................................................................ 9 Background ........................................................................................................................... -9 Objective O f CPAR Update................................................................................................... 9 Assessment Methodology .................................................................................................... 10 Scope and Outputs ............................................................................................................... 10 . 2 GOVERNMENT ORGANIZATION. ECONOMIC CONTEXT. and PUBLIC FINANCIAL MANAGEMENT . . ................................................................................................ 12 Government Organization .................................................................................................... 12 Country Economic Context ................................................................................................. 12 Public Procurement and Expenditure on Goods. Works. and Services ............................... 14 Donor Support for Public Procurement Reform .................................................................. 15 Country Partnership Strategy and Linkage to Public Procurement ..................................... 15 . 3 PUBLIC PROCUREMENT REFORM SINCE the 2004 CPAR ........................................... 16 Key Findings and Recommendations .................................................................................. 16 Status o f Implementation o f 2004 CPAR Action Plan ........................................................ 17 Studies o f Public Procurement by Other Donors ................................................................. 18 . 4 BENCHMARKING PUBLIC PROCUREMENT USING OECD-DACWORLD BANK METHDOLOGY ........................................................................................................................ 20 Benchmarking against International Standards ................................................................... 20 Benchmarking Results ......................................................................................................... 21 Assessment o f the Procurement System Using OECD-DAC/World Bank Indicators ........21 . 5 CASE STUDIES - SUMMARIES OF FINDINGS AND RECOMMENDATIONS ............35 E-Government Procurement ................................................................................................ 35 Public Procurement in Health Sector ................................................................................... 36 Public Procurement in Transport Sector .............................................................................. 37 Mitigation and Management o f Corruption in Public Procurement ................................... -37 . 6 PROPOSED ACTION PLAN for further improvements ....................................................... 41 Strengths and Weaknesses ................................................................................................... 41 Action Plans for Further Improving the Public Procurement System ................................. 41 Public Procurement at Country Level. ................................................................................. 95 11 Armenia .Country Procurement Assessment Report FIGURES Figure 1 .Armenia's Procurement System Compared to International Best Practice ..........3 Figure 2 - Summary o f Procurement Performance by Twelve Indicators for the Four Pillars ............................................................................................................................................... 4 TABLES: Table 1 .Public Expenditure on Goods. Works. and Services. 2006-08 ............................ 14 Table 2 - Summary o f Benchmarking Scores by Pillar ....................................................... 21 ANNEXES: Annex 1 .Prioritized Action Plan for Further Improvements in Public Procurement System ............................................................................................................................................. 45 Annex 2 - Current Status o f Implementation o f Actions Recommended in 2004 CPAR ...48 Annex 3 - List o f Persons Met ............................................................................................. 67 APPENDIX: Appendix 1 .Report on Benchmarking o f Public Procurement against International Standards................................................................................................................................ 1 Appendix 2 .Base-Line Indicators ........................................................................................ 4 Appendix 3 .Case Studies ................................................................................................... 64 CASE STUDY I ELECTRONIC GOVERNMENT PROCUREMENT (E-GP) .............64 . CASE STUDY I1 .PUBLIC PROCUREMENT IN HEALTH SECTOR .......................... 84 CASE STUDY I11 - PUBLIC PROCUREMENT IN TRANSPORT SECTOR .................. 93 CASE STUDY I V - MITIGATION AND MANAGEMENT OF R I S K S OF LEAKAGE . AND CORRUPTION IN PUBLIC PROCUREMENT ....................................................... 99 CASE STUDY V - PUBLIC -PRIVATE PARTNERSHIP I PUBLIC PROCUREMENT N ........................................................................................................................................... 113 iii Armenia - Country Procurement Assessment Report Acknowledgments The World Bank acknowledges the excellent cooperation, support and assistance received from the Government o f Armenia (GOA) in updating the Country Procurement Assessment Report (CPAR) o f May 2004. Special thanks to Mr. Tigran Davtyan, Minister o f Finance, for his leadership and guidance. The team would like to thank Mr. Karen Brutyan, Head o f the Authorized Body, and Mr. Artur Arakelyan, Deputy Head o f the State Procurement Agency, for contributing to the assessment with high professionalism and cordiality. The CPAR benefited from substantial inputs from the representatives o f government agencies, private sector, civil society, academic institutions, and donor partners, and the Bank team would like to express i t s gratitude to them. They included, among others, Mr. Hakob Beglaryan, Head o f the State Procurement Agency, Mr. Hovik Hovhannisyan, Ministry of Agriculture; Mr. Grigor Mnatsakanyan, Department o f Project Development and Investments, Ministry o f Transport; Mr. Armen Karapetyan, Ministry o f Health; Mr. Vardan Torosyan, Ministry o f Urban Development; Mr.Mushegh Burnusouzyan, Yerevan Municipality Authorities; Mr. David Hovsepyan, Road Design Institute; Mr. Armen Ashrafyan, Head o f Department, Prosecutor General's Office; Ms. Emma Atoyan, and Ms. Arpine Meliksetyan, Armenian-European Policy & Legal Advice Center (AEPLAC); Ms. Gohar Musaelyan, ADB; Mr. Varuzhan Hoktanyan, Transparency International; Mr. Ashot Grogoryan, Director, Spyur Information Center; Mr. Yura Gevorgyan, Road Machinery; Mr. Gagik Makaryan, Union o f Manufacturers & Businessmen o f Armenia, (UMBA); Mr. Gagik Galstyan, Union o f Builders. The team would also like to express i t s gratitude to several representatives o f private sector f i r m s and government agencies who are not listed here for their invaluable feedback on the functioning o f the public procurement system. The team wishes to acknowledge the guidance received from Donna Dowsett-Coirolo, former Country Director for Armenia; Devesh Chandra Mishra, Regional Procurement Manager; Anthony Cholst, Lead Country Officer for Armenia; Aristomene Varoudakis Country Manager; Arman Vatyan, Senior Financial Management Specialist; Susana Hayrapetyan, Senior Health Specialist; and the peer reviewers, especially S.M. Quamrul Hasan, Senior Procurement Specialist. Regional Vice President : Shigeo Katsu , ECAVP Country Director: Asad Alam, ECCU3 I Sector Director: I Theodore 0 .Ahlers. ECSPS I Leipold, Senior Procurement Specialist, OPCPR; El Cid Task Team: Butuyan, Counsel, LEGIA; Alexander Astvatsatryan, Procuement Specialist, ECSPS; and iv Armenia - Country Procurement Assessment Report EXECUTIVE SUMMARY BACKGROUND This assessment reviews the current status of public procurement in Armenia and makes recommendations for further improvements. I t also provides an update of the Country Procurement Assessment Report (CPAR) carried out in M a y 2004. The report includes an action plan to assist the Government o f Armenia (GOA) in moving the procurement reform agenda forward. The assessment was carried out jointly with the counterpart team appointed by the Minister o f Finance. The major procurement legislation and other procurement-related laws and decrees, and documents were analyzed and interviews were conducted with procuring entities, suppliers, contractors, consulting firms, civil society, and government officials. The team benefited from the involvement o f other donors currently active in the country. It utilizes the framework o f the recently developed OECD-DAC/World Bank methodology in order to benchmark the Armenian public procurement system and practices with indicators o f best practices and international standards. The benchmarking report provides a reference point for the GOA to monitor and measure improvements in the public procurement system, and to formulate a capacity development plan to move towards a sound procurement system that leads to economy and efficiency in public expenditure. Donors can use these results to develop strategies for assisting in procurement capacity building and to mitigate risks in their individual operations. I n order to further broaden the perspective on the public procurement functions in Armenia and also to focus on certain specific areas of concern, case studies have been carried out on public procurement in health and transport sectors. In light o f the GOA'S interest in introducing e-GP, the team has also prepared a special study on the subject, using the readiness assessment guide o f the Multilateral Development Banks' e- GP Working Group. Case studies have also been prepared on anti-corruption measures, and public-private partnership, given the importance o f these topics to public procurement. 2004 CPAR ACTION PLAN- STATUS OF IMPLEMENTATION MAY The GOA has implemented several recommendations from the M a y 2004 CPAR action plan.The public procurement legislative framework in Armenia includes the Public Procurement Law (PPL) in effect since January 2005 and several GOA and Ministry of Finance (MOF) decrees. The PPL and the decrees that currently govern the conduct o f procurement were established according to principles o f international practice using the UNCITRAL model law, relevant European Union directives, World Bank procurement guidelines, and some advanced countries' procurement systems. Public procurement i s primarily organized through the MOF, which serves as the Authorized Body (AB). The MOF-affiliated State Procurement Agency (SPA) i s 1 Armenia - Country Procurement Assessment Report responsible for conducting procurement in coordination with procuring entities, including line ministries. The system i s essentially centralized. Procuring entities' role i s limited to providing technical specifications, setting up tender committees, and supervising contract performance. Through i t s representative in tender committees, the SPA exercises full control over finalization and distribution o f bidding documents; receipt, opening and evaluation o f bids; and signing o f contracts. A few elements o f public procurement are decentralized-for example, procurement carried out by non-commercialized bodies remains delegated to those entities without SPA'S intervention. Estimated contract prices are no longer disclosed in tender notices, and the use o f the single-source method has been significantly (though not sufficiently) reduced. The role o f procuring entity in bidding process has been enhanced, although it i s s t i l l limited to preparation o f technical specifications, establishing tender committees, and supervising contract performance. Public disclosure policy o f procurement processes was introduced and included in the widely published M O F Official Procurement Bulletin. An e-GP action plan has been developed and approved. There i s general agreement among stakeholders that the Authorized Body in the M O F should lead the e-GP agenda in Armenia. A government decree on e-GP strategy was approved in January 2006. Besides enhancing the website www.procurement.am to advertise procurement opportunities, e-GP has been initiated to develop e-tendering and e-purchasing systems, which are in the early stages o f development. Nevertheless, the progress in the introduction o f e-GP has been slow compared to original plans. The current CPAR assessment has identified several key recommendations from the M a y 2004 CPAR Action Plan, which have not been implemented. The most important are: the scope and coverage o f the PPL; further decentralization o f procurement authority to procuring entities; clearer provisions in the PPL relating to bid evaluation criteria and shortlisting o f consulting firms; further reduction in the use o f single-source procurement; alignment o f budget formulation and execution to strengthen the competitiveness, effectiveness,, and transparency o f public procurement; collection, analysis and maintenance o f procurement statistics; and improvement in internal and external audit ' mechanisms. The M a y 2004 CPAR action plan included recommendations for building procurement capacity in line ministries, which remain to be implemented. The M a y 2004 CPAR recommendation to establish an independent complaint review mechanism i s yet to be implemented. The current PPL provides for a complaint review mechanism both for bid and contract disputes. The AB performs the review functions. Remedies allow for the possibility o f redirecting award, granting interim r e l i e f through suspension o f actions and correcting the decision. Damages can also be awarded if decisions are rendered against the procuring entity. However, the AB, because o f i t s current location and structure, i s not considered an independent entity that would inspire confidence and ensure transparency in the conduct o f the review. A review body should have no direct interest in the procurement process, should not report to the procurement agency and should ideally be a separate body. It should have a degree o f autonomy that assures freedom from interference and conflict o f interest. This i s crucial as confidence in 2 Armenia - Country Procurement Assessment Report the procurement system i s a great incentive for more participation and enhanced competition. SUMMARY OF BENCHMARKING USING OECD-DACNORLDBANKMETHODOLOGY The Armenian public procurement system was benchmarked against international standards using "The Methodology for Assessment of National Procurement Systems - based on Indicators from OECD-DACWorld Bank Methodology". This methodology i s based on four "pillars" o f sound procurement operations-(i) the country's legislative and regulatory framework; (ii)t s institutional framework and management i capacity; ( i i i ) purchasing operations, and market practices; and ( i v ) integrity and transparency o f the public procurement system. Each pillar includes several baseline indicators (BLIs) and subindicators that describe formal and functional features o f the system. A score o f 0 to 3 i s assigned to each subindicator. A zero indicates failure to meet the standard; 1 indicates the need for substantial work; a 2 indicates less-than-full achievement; and a 3 indicates full achievement o f the standard. The public procurement in Armenia scored 2.0 for Pillar I , 1.7 for Pillar 11, 1.5 for Pillar I11 and 1.7 for Pillar IV. These scores show that some progress has been made- but much remains to be done. The legislative framework for procurement (Pillar I has ) evolved towards aligning with international standards in recent years. On the other hand, the summary scores for the other three pillars show that substantial improvements are s t i l l needed. In Figure 1, the outer diamond represents the international good practice, while Armenia's actual performance against this standard i s represented by the inner diamond. From the figure, it i s clear that substantial improvements needs to be made in procurement management capacity, procurement operations and market practices, and integrity and transparency. - Figure 1 Armenia's Procurement System Compared to International Best Practice Figure 1: Procurement perfomtam under each pillar Armenia - Country Procurement Assessment Report The relatively lower composite scores on Pillars 11, I11 and I V reflect generally weak subindicator scores in each o f these areas. These are detailed in Appendix Io f this report. Figure 2 below provides the summary o f the procurement performance by the twelve indicators for the four pillars. It indicates the relative strength and weaknesses o f the public procurement system in Armenia. The score for each o f the twelve indicators are compared against each ideal situation. Figure 2 - Summary of Procurement Performance by Twelve Indicators for the Four Pillars Figure 2: Procurement perfomrrnceby Indicator CASE STUDIES AND THEIR RECOMMENDATIONS Besides benchmarking, case studies were carried out to obtain an insight into the functioning of the public procurement system. These included Electronic Government Procurement (e-GP); public procurement in the health and transport sectors; mitigation and management o f corruption in public procurement; and public-private partnership in procurement. These case studies are provided in Appendix 3. Each case study includes an action plan. Summaries o f these case studies are given below. Electronic Government Procurement (e-GP) Building on the GOA'S strong interest and commitment in this area, it i s recommended that the M O F continues to take the lead in e-GP adoption. The study recommends an updated strategy with a less ambitious implementation approach. The implementation plan should be managed in phases with clearly defined actions, roles, and milestones. I t should also address the need for capacity building among procuring entities and private sector. The e- 4 Armenia - Country Procurement Assessment Report GP component under the Public Sector Modernization Project should be limited to the design and implementation o f an e-tendering component. Public Procurement in Health Sector The case study reviewed the procurement institutional arrangements, capacity and practices in the health sector. Since the procurement process (preparation and distribution o f bidding documents, receipt, opening and evaluation o f bids, contract award and signature) i s centralized in the SPA both for periodic (framework) and targeted tenders, the M O H and other procuring entities in the health sector has l i t t l e or no incentive to develop their own procurement capacity. Particularly, at the Marz and community levels, there i s a lack o f awareness o f the requirements o f the PPL, which has led to uneconomic and inefficient procurement. Use o f poor quality technical specifications for the procurement o f pharmaceuticals combined with the lowest price as the major award criterion, i s resulting in procurement and distribution o f poor quality and ineffective medicines. Finally, internal and external controls, including the AB oversight o f procurement, are weak which adversely affects accountability o f public officials involved in procurement. The case study recommends that procurement authority should be decentralized to the MOH and other health sector procuring entities which should develop their own capacity to conduct procurement. There i s need for clarity in procurement audit rules and for strengthening audit bodies' capacity to conduct procurement. In light o f users' complaint about the quality o f pharmaceuticals, the study recommends that a more detailed review o f the procurement o f pharmaceuticals should be carried out. Public Procurement in Transport Sector O n procurement capacity, this case study has findings similar to those for the health sector (See above), Le., due to centralization o f procurement in the SPA, the transport sector, including the MOTC, has not adequately developed i t s procurement management capacity. The main recommendation therefore, i s that the procurement authority should be decentralized to the M O T C and other transport sector procuring entities. Procuring entities like the MOTC, which have large volume o f procurement work, should establish a procurement unit staffed with qualified and experienced procurement specialists, while procuring entities with small procurement volume could use advisory services o f the SPA but should nevertheless be fully accountable for their procurement decisions. The case study also recommends streamlining o f procurement audit rules and regulations and strengthening the capacity o f the relevant audit bodies to carry out procurement audit in a more effective manner. Finally, given the keen government interest in moving forward with i t s e-GP agenda, it i s recommended that the M O T C should design and implement a pilot for introducing e-GP in the transport sector. The pilot can begin with advertisement o f transport sector procurement notices and contract awards, and for dissemination o f procurement regulations and good practices. Mitigation and Management o f Corruption in Public Procurement The case study recommends that a network or council o f interested parties and stakeholders be established in order to encourage feedback, confidence, civil society's participation, and oversight. A review o f the PPL provisions on civil society engagement 5 Armenia - Country Procurement Assessment Report i s also needed. I t i s recommended that an appeals system be set up which i s totally independent o f the MOF, AB, SPA and government entities, operates in an environment free from a perception o f conflict o f interest, builds confidence from participants, and would be efficient, i s effective in providing timely and meaningful remedies. Portals are needed where allegations o f fraud and corruption can be reported and followed up. Code o f Ethics, asset reporting and disclosure and conflict rules should be implemented in the procurement sector. Appropriate information systems and freedom o f information regimes are needed to be vigorously implemented to promote transparency. There i s need to tighten requirements for sole sourcing on the basis o f urgent need or emergency, including the use o f registry o f the State Commission for the Protection o f Economic Competition (Anti-Monopoly Commission) as a proxy for justifying sole sourcing on the basis o f lack o f competition. Rules o f accountability need to be clearer. References should be included in the PPL to criminal laws and to setting out responsibilities and accountabilities o f persons involved. Tender, contract and other model documents should be developed and should include provisions which address corruption, fraud, conflict o f interest and unethical behavior. The relevant provisions should also set out the consequences and sanctions for such behavior. Debarment and blacklisting system under the PPL needs to be clarified with articulation o f applicable procedures and principles to ensure fairness and prevent abuse. Capacity building and awareness-raising on fraud and corruption in procurement i s also essential. This will ensure that employees engaged in procurement have practical understanding o f fraud and corruption schemes. The effectiveness o f audit mechanisms i s questionable in most cases, undermining the intent o f the PPL provisions. Furthermore, having undifferentiated, and multiple entities performing "audits", with no clear demarcation o f responsibilities, might provide possibilities for multiple facilitation payments. Similarly, there is generally confusion or overlap o f what i s considered "audit" and what i s "control", which further undermines the quality and effectiveness o f audit. It i s recommended that functions o f various bodies be reviewed and redefined to exclude unwarranted interference in the procurement process and that pertinent laws or regulation be amended accordingly. The government must devise a systematic and targeted policy and enforcement mechanism for detection and prevention o f certain practices (e.g., collusion, pre-determined winner, anti-competitive behavior, bogus disqualifications). Among others, procurement officials should be trained to focus on red flags indicating unusual bid patterns such as: distinct bids by a systematic or uniform percentage; bids inexplicably too close or too far apart; losing bid prices are rounded or o f unnatural numbers; unexplained inflated bid prices; losing bidders become subcontractors; apparent rotation o f losing bidders; unusual repeated extension o f bid security; delay in completing BER or contract award signing indicating efforts to negotiate corrupt terms; cartel like behavior in the market; and a general scheme o f coordination o f preparation o f bids by designated winner. Overlapping and excessive audits and control mechanisms should be streamlined and made more effective with meaningful follow-up enforcement measures. Public-private partnership in public procurement 6 Armenia - Country Procurement Assessment Report The study recommends the following: (i) the short term, adopt a public-private in partnership (PPP) act and incorporate PPP provisions in the public procurement law; design a PPP strategy and action plan; establish a PPP unit in one o f the ministries, such as the Ministry o f Economy, with qualified personnel to develop policies, procedures and monitor the implementation o f the strategy and action plan; (ii) the medium term, create in an enabling environment for the development o f an association o f private sector and citizen groups to function as independent oversight institutions over all aspects o f public procurement; design and implement a continuous public awareness, education and training program in PPP for the staff o f the PPP unit as well as the private sector and institutionalize the training program in a recognized national universityhraining institutions. KEYRECOMMENDATIONS The M a y 2004 CPAR updated action plan and a prioritized action plan based on the findings o f this assessment are included in Annexes 1 and 2, respectively. The key recommendations are summarized below. 9 In the short term and as a priority, there i s need for an amendment to the current PPL to address, among others, the following issues identified in this report: Expansion o f the PPL's application to public enterprises and utility companies; Reduction in the use o f Single Source method o f procurement through better definition o f criteria for i t s use; procurement o f civilian goods for defense and security purposes through open tenders; and discontinuation o f the use o f certificates issued b y the Anti-Monopoly Committee for justifying Single Source procurement; Redefinition o f the AB'S oversight and support role; Decentralization o f procurement function to procuring entities; Establishment o f an independent complaint review system that i s free from real or perceived conflict o f interest and that would build confidence as a result o f i t s transparent, efficient and responsive resolution o f complaints and provision o f meaningful remedies; Inclusion o f provisions relating to rules o f ethics in procurement, asset reporting and disclosure, and conflict o f interests. In this regard, clear references to the other laws, such as the criminal law, anti-corruption law, should be included in the PPL. Establishment o f a council representing public procurement stakeholders, such as procuring entities at central and local levels, oversight bodies, civil society, to ensure their engagement in public procurement. 9 Immediately after the adoption o f the PPL, a comprehensive implementation regulation and standard bidding documents for goods, works and services should be finalized and widely disseminated for mandatory use by procuring entities. A comprehensive implementation regulation providing more details on important 7 Armenia - Country Procurement Assessment Report subjects, including preparation o f bidding documents, technical specifications, evaluation criteria, etc., should be developed P Based on the revised PPL, a capacity building plan should be designed and implemented for procuring entities both at central and local levels as well as for providers o f goods, works and services with a view to raising their awareness o f the requirements o f the PPL. This will improve economy and efficiency o f public procurement, and would lead to improved competition and better quality o f bids and increased response from domestic and international bidders. P In order to ensure public officials' accountability, existing rules o f internal and external audit o f procurement should be examined and improved, and capacity o f audit bodies to carry out effective audit o f procurement needs to be strengthened in the short term. P The action plans included in the case studies on e-GP, procurement in health and transport sector, anti-corruption measures in public procurement, and public and private partnership in procurement should be initiated with the prioritized actions included in each o f these studies. IMPLEMENTATION OF ACTION PLANS The AB should implement the remaining actions in the Updated Action Plan o f May 2004 CPAR and the recommendations o f this assessment. The recommendations contained in the case studies should also be implemented by AB, except for the case studies on public procurement in the health and transport sectors, which need to be implemented by the Ministry o f Health and the Ministry o f Transport and Communication in close collaboration with the AB. In addition to seeking budgetary funds for implementing the action plans, the AB would need to explore with multilateral and bilateral donors active in Armenia the possibility o f obtaining financial support for this purpose. As a first step, the MOF has expressed i t s interest in applying for an IDF grant from the World Bank for implementation o f the short term recommendations o f this assessment. 8 Armenia - Country Procurement Assessment Report . 1 INTRODUCTION BACKGROUND 1.1 Public procurement of goods, works and services in Armenia constitutes a major proportion of the total government expenditure, at around 15 Percent o f GDP, estimated at US$12 billion equivalent in 2008, and i s expected to increase in coming years. Making public procurement transparent, economic, efficient, and competitive have been the key elements o f Armenia's country assistance strategy and reform agenda. 1.2 The Government launched its public procurement system with independence and the transition from a centralized to a market economy in 1991. Reform began in earnest in 2000 as emphasis shifted toward improving the overall business environment and creating an enabling framework for domestic and foreign investment. The transparency, efficiency, and competitiveness o f public procurement emerged as a key element in the World Bank's country assistance strategy for Armenia (2004-2008) and the corresponding agenda for reform. 1.3 The World Bank completed a detailed Country Procurement Assessment Report (CPAR) in M a y 2004. This first CPAR set forth an action plan to transition Armenia to best practices in international procurement. An Institutional Development Fund (IDF) Grant o f US$247,000 was provided to the government for procurement reform in August 2003. The objectives o f this Grant were, first, to initiate an e-Government Procurement System (e-GP) and, second, to build capacity in procurement in state bodies and among bidders. An e-GP strategy and an action plan were developed, including catalogues with technical specifications for goods, works and services that are commonly procured. A strategy was devised for training and accrediting procurement specialists. 1.4 The Armenia Country Financial Accountability Assessment Report (CFAA) was completed in M a y 2005. The CFAA included several recommendations on bringing the public financial management system in line with international standards and practices. The Programmatic Public Expenditure Review (PPER) in 2006 dealt with procurement in Public Financial Management (PFM). OBJECTIVE CPAR UPDATE OF 1.5 The objective of the present CPAR Update i s to provide the Government with feedback on how well the public procurement system (including e-Government Procurement) i s functioning, with recommendations for corresponding improvements. The Update includes a review o f the progress on procurement reforms since May 2004; based on the results o f this review, a prioritized action plan for further changes in the legislative framework, institutional arrangement for the implementation o f the PPL; procurement practices; role o f procuring entities; and measures that ensure integrity o f the procurement system. The Update also includes a study o f the current status o f the introduction o f e-GP in Armenia recommendations on moving forward with this important public procurement tool taking into considerations the achievements so far. The 9 Armenia - Country Procurement Assessment Report Minister o f Finance fully endorsed the need for updating the assessment, and established a counterpart team' to make it collaborative. METHODOLOGY ASSESSMENT 1.6 A systematic assessment methodology was adopted. Procurement legislation and procurement-related laws and decrees were analyzed as a first step. The progress made in public procurement since the M a y 2004 CPAR was studied. Interviews were then conducted with procuring entities, suppliers, contractors, consulting firms, civil society, and government officials. The team benefited from involvement o f other donors. The team used the recently developed OECD-DAC/World Bank methodology in order to compare the Armenia public procurement system with international standards. The methodology includes capacity development as a core objective and the process i s dependent on country ownership and commitment to manage the capacity development plan. 1.7 This assessment provides a basis upon which the country can formulate a capacity development plan to improve its procurement system; donors can use the results o f the assessment to develop strategies for assisting the capacity development plan and to mitigate risks in individual operations that they decide to fund; and the country can use the information to monitor the performance o f i t s system and the success o f the reform initiatives in improving performance. SCOPE AND OUTPUTS 1.8 Based on consultations with the government agencies, donors, and private sector, the assessment included the following tasks: a) Review of progress since the M a y 2004 CPAR, and update of i t s action plan; b) Measurement o f progress in the area o f public procurement reform under each o f the four key pillars:(i) legislative and regulatory framework; (ii) institutional and management capacity; (iii) procurement operation and market practices; and (iv) integrity and transparency o f public procurement system; c) Elaboration o f an action plan including next steps that the G O A should take to move towards the use o f the public procurement system in Bank-financed projects. d) Assessment o f overall risk o f public procurement environment in Armenia; e) Review o f current e-GP status and recommendations on actions for the continued implementation o f e-GP; The counterpart team comprised the following: ' Karen Brutyan, Ministry o f Finance, Head o f department o f procurement process regulation and budgets implementation methodology; Karen Arustamyan, Control Chamber, Head o f Department of Methodology; Tigran Kankanyan, Chief Specialist, Supervision Department o f Administration o f the President; Vardan Barsekhyan, Chief Specialist o f the Department o f Economy, Administration o f Government; Vanik Manukyan, Head o f Division o f Economy, Ministry o f Urban Development, Anna Mxitaryan, Head o f the Division o f Procurement Process Regulation, Ministry of Education and Science; Manya Mxitaryan, Chief Specialist o f the Department o f Economy, Ministry o f Health, Artur Arakelyan, Deputy Head of the State Procurement Agency; and Hayk Galstyan, Head o f Finance, Economics, Programming and Analysis Department, Ministry o f Territorial Administration." 10 Armenia - Country Procurement Assessment Report f ) In order to obtain an insight in the actual functioning o f the public procurement system at different levels o f government, the following case studies were carried out: . E-Government Procurement; Organization, procedures and processes being . used in public procurement in the health and transport sectors; Mitigation and Management o f Corruption in Public Procurement. In view o f persistent concerns and perception challenges in the area o f integrity, the team conducted a short study o f the pressing issues and possible mitigation measures for and management o f risks o f leakage, waste and corruption in . the procurement system; and Public-private partnership with reference to public procurement. 1.9 This report summarizes the findings and recommendations o f the assessment o f the public procurement system carried out using the OECD-DAC/World Bank benchmarking methodology, and the case studies referred to in paragraph 1.10 above. 11 Armenia - Country Procurement Assessment Report 2. GOVERNMENT ORGANIZATION, ECONOMIC CONTEXT, AND PUBLIC FINANCIAL MANAGEMENT ORGANIZATION GOVERNMENT 2.1 The Government has a two-tier structure with most administrative powers exercised by the central government. The marzes (regional units) are subdivisions o f the central administration, not separate tiers o f government. Marzes lack elected officials, independent assembly bodies, or separate budgets. The marzes are governed through a system o f central administration. The Government appoints and dismisses marzpets (regional governors) to carry out defined duties with the assistance o f marzpetaran (regional administrations). Armenia i s divided into ten marzes. The capital city i s Yerevan, which has the status o f a marz. Marzes are further divided into hamainkner (rural and urban communities) while Yerevan i s divided into districts. Marzes vary greatly in terms o f their territory, population, number o f communities, and level o f economic development.. ECONOMIC COUNTRY CONTEXT 2.2 Armenia has benefited from several years of sustained reforms in transitioning from a centrally planned to a market oriented economy. The World Bank has supported the reform process in public procurement, governance, social policy and spending, regulation and competition, and the rural economy through a series o f four Poverty Reduction Support Credits (PRSCs, 2004-07) and investment projects. The Bank i s preparing a series o f development policy operations that w i l l start in mid 2009. For the past several years, Armenia has led the policy reform rankings among all I D A countries. 2.3 Economic growth has averaged above 12 percent per year during the period 2004 to 2008, which has been a result o f a highly favorable external environment, macro- economic stability, and improvements in economic governance. Poverty has fallen from 55 percent to 25 percent over the past decade. Inflation remained in the single digits despite fuel and food price shocks, which was assisted by a prudent fiscal stance (deficits averaged 1.5% o f GDP over the period 2004-2008), but the underlying structural fiscal position did not show improvement due to weak tax administration. 2.4 Since the last quarter o f 2008, the economy i s facing a marked slowdown in remittances, especially from Russia, weakening export revenues due to sharp declines in world prices o f non-ferrous metals and falling external demand due to global recession. Unemployment has risen sharply in recent months with the closing o f several gold and molybdenum mines, construction industry has slowed down, and migrants are returning back to Armenia due to lack o f unemployment opportunities outside the country Agricultural growth also slowed substantially toward the end o f 2008. GDP growth rate for Armenia i s expected to decline significantly in 2009. Income per head i s projected to 12 Armenia - Country Procurement Assessment Report decline from about US$3980 in 2008 to about US$2980 in 2009, before picking up in early 20102. PROCUREMENT IN PUBLIC FINANCIAL MANAGEMENT 2.5 s Procurement i s often seen a separate from core Public Financial Management (PFM). Procurement i s more than a process for executing transactions; it constitutes an integral part o f the mechanism through which budget entities use public money. Procurement l i n k s directly to service delivery (since budgets get translated into services in large part through the operation o f the procurement system). Procurement, therefore, i s a key element o f the resource management process within any P F M system. 2.6 Reforms to develop internal controls and audit systems are closely linked with procurement reforms in Armenia. The decentralized internal audit system adopted in the public sector will significantly improve the procurement system. The Chamber o f Control (the Armenian Supreme Audit Institution), another key P F M element, i s moving toward more professional auditing delivery and increased coverage over procurement. The Chamber o f Control as an independent audit institution provides important assurance on how public money i s being spent. 2.7 Inadequate planning (especially during budget formulation) and unavailability o f funds until late in the fiscal year seriously impedes efficient, economic and transparent procurement. Budgets therefore are not effectively translated into goods, works and services. The PER o f 2006 concluded: ``,. .Armenia's procurement systems s t i l l do not facilitate the level o f competition and transparency considered `critical' in a P F M system. It i s no wonder that the systems also fall short o f characteristics one could ascribe to more strategic settings where procurement processes are controlled, but also allow strategic engagements between government purchasers and private sector providers. There are weaknesses with regard to the adherence to procurement procedures in Armenia-in particular a large number o f agencies are not subject to procurement regulations and there i s no effective audit function to ensure adherence to procedures. The procurement system i s also falling short o f facilitating cost and time efficiency in procurement dealings. I t s most serious weaknesses relate to deficiencies in procurement planning and the lack o f incentives for efficient and accountable procurement.. ." This situation described in 2006 essentially remains unchanged in 2009, and therefore puts the public procurement environment in mid to high risk category. 2.8 The Public Financial Management Performance Report o f 2008 assigned a strong (A) rating to public procurement for competition, value for money, and controls in procurement (Indicator 19). Deeper analysis in this area carried out during *World Bank. 13 April, 2009. Country Partnership Strategy for the Republic o f Armenia for the period of FY 09-FY 12. Draft. South Causcasus Country Department, Europe and Central Asia Region. Armenia - Country Procurement Assessment Report this assessment (See Section 4 on benchmarking) points to shortcomings in public procurement legislation and in practices that undermine competition and lead to higher bid prices. Although comprehensive data are not available, the use o f single-source procurement appears to be higher in Armenia than generally accepted international norms (norm: 10% in number 5% in value). Similarly, the present mechanism for complaint resolution needs to be made more independent, effective, and trustworthy. PUBLIC PROCUREMENTAND EXPENDITURE GOODS, ON WORKS, AND SERVICES 2.9 T h e public procurement legislative framework in Armenia includes the Public Procurement L a w (PPL) o f January 2005 and several Government and Ministry o f Finance decrees. Public procurement i s primarily organized through the Ministry o f Finance (MOF), which serves as the Authorized Body (AB), and affiliated State Procurement Agency (SPA). The public procurement system i s essentially centralized. The SPA procures goods, works, and services in coordination with line ministries. The role o f line ministries is, however, limited to providing technical specifications, setting up tender committees, and supervising contract performance. Through i t s representative in tender committees, the SPA exercises full control over finalization and distribution o f bidding documents; receipt, opening and evaluation o f bids; and signing o f contracts. A few elements o f public procurement are decentralized. For example, procurement carried out by non-commercialized entities remains delegated to those entities without SPA intervention. 2.10 Public procurement o f goods, works, and services constitutes a m a j o r share o f the total government expenditure. About 15 percent o f GDP (estimated at over US$9.2 billion equivalent in 2007 and US$12.0 billion equivalent in 2008) was spent on public procurement, and this amount i s expected to increase in coming years. The table below shows the expenditure on goods, works and services during the last three years. Table 1 - Public Expenditure on Goods, Works, and Services, 2006-08 AMD AMD AMD Y O Y O O Y millions millions millions Goods 14,586 23.5 23,485 12.3 20,426 18.4 Works 45,026 72.9 100,122 77.6 86,039 77.7 Services 2,173 3.6 5,324 4.1 4,293 3.9 Total goods, 61,785 100 128,931 100 110,758 100 works, services Total budget 481,183 634,734 822,054 14 Armenia - Country Procurement Assessment Report SUPPORT FOR PUBLIC PROCUREMENT REFORM DONOR 2.1 1 Bilateral and international donors have actively supported Armenia's efforts to improve public procurement. Donor organizations helped to review the draft PPL and subsequent decrees relating to public procurement. They also financed study tours for the A B and SPA to visit Italy, Poland, Slovakia, South Korea, the United Kingdom, and the United States. Donors' observations and recommendations are contained in the following documents: . "Assessment o f Institutional Standing in the field o f Public Procurement," . Armenian-European Policy and Legal Advice Centre .(AEPLAC), July 2007. "Monitoring Report, 2007, on M C A Armenia Procurement" and "Mapping the . Procurement System in Armenia," Transparency International Armenia, 2007. "Overview o f Public Procurement in Armenia" and "Analysis o f the Armenian Public Procurement Law and Implementing Decree vis-a-vis the EC Public Procurement Directives and Agreement on Government Procurement," OECDEIGMA under financial assistance o f the European Union, December 2008. In addition, USAID financed (i)development o f the official procurement web site, (ii) seminars and workshops to introduce the PPL to the officials from line ministries and other procuring entities, and (iii) preparation o f the Draft Implementation Strategy in 2005. COUNTRY PARTNERSHIP STRATEGY AND LINKAGE PUBLIC PROCUREMENT TO 2.12 Support for a sound public procurement has been a key element of the World Bank's past and current country assistance strategy and reform agenda. Following the initial transition period from a centralized system to a market economy, public sector procurement reform began in earnest in 2000, when the emphasis shifted to improving the overall business environment and creating an enabling framework for domestic and foreign investment. The jointly formulated Country Assistance Strategy (CAS) o f May 2004 (2004-2008) supported these initiatives. The CAS identified several procurement-related issues that hindered Armenia's ability to achieve i t s long-term goals. These, among others, included: (i) lack o f transparency in public procurement system; (ii) high rate o f single- source contracts; (iii) and lack o f predictability and transparency in decision making processes on awards o f contracts. The Bank has been supporting the GOA through financial and technical assistance to resolve these issues and to improve competitiveness, transparency, and efficiency in public procurement. 2.13 A t the time o f this writing, the Country Partnership Strategy (CPS) for 2008-2012 was under preparation. The CPS focuses on two main goals-first, reducing vulnerability, and second, improving competitiveness and growth. Continuing support to improvements in the PFM in general and public procurement in particular are key element o f the CPS. 15 Armenia - Country Procurement Assessment Report 3. PUBLIC PROCUREMENT REFORM SINCE THE 2004 CPAR KEYFINDINGS RECOMMENDATIONS AND 3.1 The first comprehensive assessment o f Armenia's public procurement system was completed in May 2004. The CPAR made several recommendations for improving the procurement system. The main areas covered were: (i) degree o f centralization within the SPA; (ii) gradual transfer o f experience and authority for procurement from Project Implementation Units to the line ministries; (iii) potential for electronic catalogues for periodic procurement and a strategy for other e-procurement uses; and (iv) introduction o f open bidding procedures for civilian goods and works used for security and defense purposes. The CPAR made the following specific recommendations: a Include in the PPL and implementation regulations (and decrees) clear provisions on qualification and bid evaluation criteria. Clarify that the PPL applies to all state entities using public funds. Use single-source procurement solely for urgent and emergency needs. Frequent delays in approving and providing budgetary allocations (related to poor budget and procurement planning) should be addressed by making funds available in a consistent flow from the first o f the year, by revising the description o f items to be purchased when the cost i s changed, by making provision for carryover o f funds from one quarter to the next within a fiscal year, and by developing a rolling multi-annual budget allocation plan. a Discontinue the creation o f monopolies through monopoly certificates. (Single- source procurement was justified b y licensed providers or holders o f monopoly certificates. Monopoly certificates could easily be obtained even by f i r m s that did not qualify as sole providers). Empower procuring entities to prepare technical specifications. Limit SPA intervention to providing a secretariat for tender committees. Convert the current print catalogue for framework contracts o f commonly purchased items into an electronic catalogue. Support the conversion to an electronic catalogue through introduction o f automated internal systems for contract administration, management, and purchase order and payments. a The AB should focus on i t s review function and refrain from involvement in approvals at the time o f decision-making over awards. "Republic o f Armenia-Country Procurement Assessment Report," Report number 29246-AM. Operations Policy and Services Unit. Europe and Central Asia Region, the World Bank. May 2004. 16 Armenia - Country Procurement Assessment Report STATUS OF IMPLEMENTATION OF 2004 CPAR ACTION PLAN 3.2 The Government has implemented several recommendations o f the May 2004 CPAR prioritized action plan. The action plan included in the M a y 2004 CPAR was also discussed at length in the Public Expenditure Review o f 2006. The introduction o f a new PPL, which came into force on January 1, 2005, was the main achievement following the M a y 2004 CPAR. Annex 2 shows the current status o f implementation o f the 2004 action plan. 3.3 The current PPL and decrees governing the conduct o f procurement have been largely based on the principles o f international practice. Sources include the U N C I T R A L model law on procurement, relevant European Union directives, the World Bank procurement guidelines, as well as review o f systems in countries such as Poland, Slovakia, United Kingdom, and USA. Estimated contract prices are no longer disclosed in tender notices; and it appears that the use o f the single-source method has significantly decreased, although further reduction i s needed. Public disclosure policy o f procurement processes was introduced and included in the M O F Official Procurement Bulletin which i s published and distributed to state government and to local self-government bodies. 3.4 An e-GP action plan has been developed and approved. There i s general agreement among stakeholders that the AB in the M O F leads the e-GP agenda. A Government Decree (137-N) on e-GP strategy was approved in January 2006, providing a roadmap for the implementation. Besides using the website www.procurement.am to publically advertise procurement information, e-GP has been initiated to develop e- tendering and e-purchasing systems. An initial consultant assignment to design a full- fledged e-GP system under the Public Sector Management Project (PSMP) was cancelled because o f the Government's delayed approval o f the underlying procurement regulation. 3.5 Training programs were conducted. The programs improved procurement capacity o f about 800 procurement specialists. Participants came from the line ministries, departments, marzes, the Yerevan district, urban communities, courts, and other bodies established under the law o f private organizations. 3.6 The current assessment has identified several recommendations from the May 2004 CPAR Action Plan that have not been fully implemented. These include the scope and coverage o f the PPL; decentralization o f procurement; clearer provisions in the PPL relating to bid evaluation criteria and shortlisting o f consulting f i r m s ; mechanisms for bid dispute resolution; further reduction in the use o f single-source procurement; alignment o f budget formulation and execution to strengthen the competitiveness, effectiveness, and transparency o f public procurement; collection and maintenance o f procurement statistics; and improvement in internal and external audit mechanisms. The recommendations relating to building procurement capacity o f line ministries (see items 40-42 o f the Updated Action Plan, Annex 2) are yet to be implemented. Some o f the non- implemented recommendations are also discussed in the context o f the benchmarking o f the system in Section 4. 17 Armenia - Country Procurement Assessment Report STUDIES OF PUBLIC PROCUREMENT BY OTHER DONORS 3.7 The Armenian-European Policy and Legal Advice Center (AEPLAC) with EU support in 2007 and SIGMA (Support for Improvement in Governance and Management, a joint initiative o f the OECD and the European Union) carried out reviews of public procurement in Armenia. Transparency International Armenia (TI) prepared a 2007 report entitled "Mapping Procurement System in Armenia." Findings and recommendations o f these studies, briefly discussed in the following paragraphs, have been taken into consideration in designing the action plan presented in this document. The recommendations o f this assessment are consistent with those o f the OECD/SIGMA and other studies discussed below. 3.8 The AEPLAC study (2007) was carried out in the context o f the National Program (2006-2009) for implementation o f Partnership and Cooperation Agreement between Armenia and the EU. The study cited the January 2005 PPL being based on the UNCITRAL Model Law and WTO Government Procurement Agreement (GPA). Procurement methods and procedures described in the law were analyzed, as well as the organizational structure o f the AB, the SPA, and other bodies responsible for public procurement. The AEPLAC study's key recommendations were to: (i) adopt a training strategy for skills development and certification o f procurement specialists; (ii) introduce e-procurement system; (iii) establish a permanent and independent complaint review body in the AB; (iv) prepare and disseminate a user-friendly procurement guide; and (v) improve interaction and partnership with the private sector. 3.9 Transparency International (TI) assessed the Armenian public procurement system with a methodology comprising 139 indicators. Representing an "ideal" system, the indicators are grouped in four categories-institutional arrangements, perception, performance, and context. Compared to this ideal, the study concluded that public procurement in Armenia was at medium risk in institutional arrangements, primarily because o f the high risk o f corruption in this area. Context and perception were assessed as at "high risk". The key T I recommendations were to: (i) improve procurement planning and transparency o f budgetary processes, especially at the early stages; (ii) identify red flags signaling possible corruption; (iii)avoid conflicts o f interests; (iv) prohibit preferential treatment in which some bidders have selective access to state-owned information such as geological or seismological data or maps; and (v) make proper use o f all procurement methods. 3.10 The OECD/SIGMA reports4(December 2008) made recommendations aimed at improving the public procurement system in Armenia and alignment with E U directives. Key recommendations, among others, were to: (i) amend (or adopt a new) public procurement law to harmonize with EU, including in i t s scope all entities (including private) operating in the utilities sectors on the basis o f special or exclusive rights granted by competent authority.; (ii) establish an independent review body; (iii) redefine SPA'S 4 "Public Procurement in Armenia-Overview," December 2008; and "Analysis o f the Armenian Public Procurement Law and Implementing Decree v i s - h i s the EC Public Procurement Directives and the Agreement on Government Procurement," WTO. 18 Armenia - Country Procuremeht Assessment Report role for sharper focus on assistance and less direct involvement in actual conduct o f procurement; (iv) empower procuring entities to carry out their own independent procurement; (v) restrict centralized procurement (periodic tenders) to the relatively few items where benefits o f aggregation have been widely accepted; (vi) build capacity within SPA and AB; and (vii) prepare manuals, guidelines, and standard bidding documents that include contracts and technical specifications. 3.11The recommendations included in this assessment are consistent with those o f the OECDBIGMA and other studies discussed above. 19 Armenia - Country Procurement Assessment Report 4. BENCHMARKING PUBLIC PROCUREMENT USING OECD-DACWORLD BANK METHDOLOGY ECMRIG B N H A KN AGAINST INTERNATIONAL STANDARDS 4.1 The World Bank and the counterpart teams, including the AB and the SPA, jointly analyzed the Armenian public procurement system. They benchmarked the system against international standards as described in the July 17, 2006, "Methodology for Assessment o f National Procurement Systems Based on Indicators from OECD- DAC/World Bank."' In carrying out i t s assignment, the joint team reviewed the PPL o f January 2005 and other procurement-related decrees and documents in depth; consulted with relevant government agencies; and interviewed private firms, including construction contractors, consulting f i r m s , and suppliers. o f goods. The benchmarking exercise was expected to provide all parties with a more objective assessment o f actual performance by the public procurement system, while establishing a framework for measuring progress toward reform. 4.2 The assessment provides the GOA with information to monitor the performance o f its procurement system and the success o f reform initiatives in improving performance. Identifying weak links in the current system also provides donors with information to better determine risks to the funds they provide to a partner country. This benchmarking has been conducted using the baseline indicators (BLIs) related to the formal and functional features o f the existing system. The compliance/performance indicators (CPIs) that deal with monitoring to determine the level o f compliance with the formal system have not been used because procurement data was lacking. 4.3 The OECD/DAC methodology i s based on four pillars. These support sound procurement operations through ( i ) the country's legislative and regulatory framework; ( i i ) i t s institutional framework and management capacity; (iii) purchasing operations, and market practices; and (iv) integrity and transparency o f the public procurement system. Each pillar includes several baseline indicators (BLIs) and subindicators that describe formal and functional features o f the system. A score o f 0 to 3 i s assigned to each subindicator, with 0 indicating failure to meet the standard, 1 indicating the need for substantial work, 2 indicating less-than-full achievement with need for improvement, and 3 indicating full achievement o f the standard. Appendix 1 to this report provides detailed information on the 54 subindicators that comprise the composite scores in each o f these four areas. This methodology also includes compliance/performance indicators (CPIs), which require monitoring data to determine adherence to the formal system. The CPIs were not used in this assessment because o f insufficient data. 20 Armenia - Countw Procurement Assessment Reuort BENCHMARKING RESULTS 4.4 Benchmarking o f the Armenian public procurement system uses the BLIs discussed above. This benchmarking provides a snapshot that compares a country's actual system o f procurement against an "ideal" picture defined by international standards o f best practice. Summary scores for the four pillars the Armenian public procurement system, are shown in Table 2. Table 2 - Summary o f Benchmarking Scores by Pillar Overall Pillar Interpretation score ' Pillar 1: Legislative / Regulatory Substantial but less than full 2.0 Framework achievement Pillar 2: Institutional Arrangements 1.7 Needs substantial improvements Pillar 3: Procurement and Market Practices 1.5 Needs substantial improvements Pillar 4: System Integrity and Transparency 1.7 Needs substantial improvements 4.5 These scores show that progress has been made but much remains to be done. ) The legislative framework for procurement (Pillar I has evolved toward achieving international standards in recent years. O n the other hand, the scores o f the other three pillars show that substantial improvements are needed to achieve these standards. ASSESSMENT THE PROCUREMENT SYSTEM USING OECD-DAC/WORLD OF BANK INDICATORS 4.6 The following paragraphs include a detailed discussion o f the findings and recommendations for each Pillar. Pillar 1: Legislative and regulatoryframework (Overall score: 2.0) Scope o f coverage 4.7 The PPL i s applicable to all procurement carried out with budgetary resources, but it i s unclear whether private entities receiving fiscal resources (grants and subsidies) should also be subject to i t s provisions. The PPL does not have specific provisions on concession contracts, rent, and lease; utility companies are not specifically mentioned in the PPL; and procurement o f civilian items for national security and defense, i s excluded from open tendering. The PPL includes vague references to other procurement-related laws and decrees, such as the civil code and the criminal code. 21 Armenia - Country Procurement Assessment Report > Recommendation. The PPL needs amendments to include provisions for public enterprises, such as utility companies, (in accordance with international best practice. See, for example, the EU Directive which provides coverage for private utilities which operate on the basis o f special or exclusive rights granted b y a competent authority); procurement o f civilian items for national security and defense procurement (such as uniforms, boots, food, medicine, capital construction, etc); and concession contracts and public-private partnership agreements. The amended PPL should contain all procurement rules and references to other laws and decrees should be specific. Implementing regulation 4.8 Government Decree No. 853N dated June 3, 2008, constitutes the implementing regulation in support o f the PPL, but this decree i s not comprehensive and focused. For example, it includes contract conditions. > Recommendation. A single comprehensive implementation regulation should be prepared and issued to further explain the topics not adequately covered in the PPL. Use o f single-source method 4.9 Unjustified use o f Single Source (SS) procurement continues under the pretext o f lack o f competition and from those holding certificates (registry system) issued by Anti- Monopoly Commission. There i s no clear distinction between "emergency" and "urgent" needs resulting in the use o f SS. Late disbursement o f budgetary funds does not allow use o f competitive procurement methods as procuring entities must use the funds before the end o f a fiscal year, Le., December 31 or lose them. Allegation exists that technical specifications are tailored for a specific manufacturer which leads to de facto SS. > Recommendation. The PPL should include clearly defined criteria for the use o f SS. The practice o f use o f registry o f the Anti Monopoly Commission as a proxy for justifying SS on the basis o f lack o f competition should be discontinued. The current l i s t o f items subject to SS should be reviewed and periodically updated to reflect market changes. Extension o f existing contracts must be justified on economy and efficiency reasons, and only those contracts initially concluded through competition should be considered for extension. Budgetary funds should be made available early in the fiscal year so as to allow time for use o f competitive procurement method. Requirements for sole sourcing on the basis o f urgent need or emergency needs to be tightened. I t s use should be allowed only in extreme and exceptional circumstances, limited in application and duration, and only if such circumstance did not result from lack o f foresight, poor planning or negligence on the part o f the entity concerned. The framework should identify the state body responsible for determining urgent need or emergency and the legal basis on which such determination can be made. Impediments to participation by foreign bidders 4.10 Although nationality i s not a basis for exclusion from participation in competition for public tenders, except for national security and defense procurement, impediments to 22 Armenia - Country Procurement Assessment Report foreign bidders' participation in these tenders exist. These, among others, include: access to tender information, bidding documents, and absence o f procedures for formulation o f joint ventures. Furthermore, participation o f state-owned enterprises in public tenders creates a non-level playing field both for national and foreign bidders. > Recommendation. In addition to introducing procedures for formulation o f joint ventures both among domestic bidders and between foreign and domestic bidders, for facilitating access to tender information and bidding documents, the AB should identify and remove any impediments to foreign bidders' participation in public tenders. It should also develop and implement an outreach program for bidders to improve their understanding o f the requirements o f the PPL. The PPL or implementation regulation should include clear provisions (including conflict o f interest rules) which ensure a level playing field for all bidders. For example, SOEs participating in public tenders should be legally and financially autonomous, operate under general commercial law, and are not government dependent agencies. They should not receive any preferential treatment or enjoy undue advantage on account o f subsidies or tax exemptions. Standard bidding documents and technical specifications 4.1 1 Standard bidding documents are yet to be finalized, although samples are in use. Bidders' access to bidding documents i s difficult. A bidder must apply in person in Yerevan for bidding documents after making the payment for them. Bidding documents are, however, made available in two days which effectively reduces the bid submission time. After applying to the SPA for the bidding documents, a bidder has to contact one o f the print shops with which the SPA has a contract to obtain the bidding documents, resulting on additional burden on the bidder. 4.12 Procuring entities lack capacity in preparation o f technical specifications resulting in poor quality technical specifications, which, combined with the use o f the lowest price as a major selection criteria, leads to poor quality procurement o f goods, works and services. > Recommendations. Model bidding documents, along with user guidance, should be formally approved and widely disseminated to procuring entities. Bidding documents should include clear and detailed evaluation criteria. Bidders should be given the choice o f either obtaining bidding documents by mail, courier, or in person, immediately upon submission o f their written request along with the proof o f payment. They should also be provided different options for making payments for bidding documents, Le., cash, check or bank account. Bidding documents should be made available to bidders at the SPA, and not at print shops. For this purpose, the SPA should strengthen i t s capacity in terms o f staff and equipment. Bidding documents should also be made available on the procurement website so that those who have the means to download them can do so. > Quality o f technical specifications should be improved through training o f concerned staff and preparation o f model technical specifications wherever feasible. The SPA Armenia - Country Procurement Assessment Report should be made responsible to ensure quality o f technical specifications, Le., that these are clear, concise, neutral and broad enough to elicit adequate competition. Bid submission and opening 4.13 Bidders are required to submit bids in person. Bid opening i s seemingly transparent but concerns exist that (i) the number o f documents required to be submitted along with the bid i s excessive; (ii) bids are rejected if any o f these documents are not included with the bid, and if these documents are found "defective" regardless o f the significance o f the deficiency. In one case a bid was rejected as the date on the bank statement required had a date one day before the bid submission deadline. There i s public perception that tender committees intentionally reject bids with a view to selecting a predetermined winner. Bid opening takes place in two stages. In the first stage tender commission reviews the availability o f the required documents and rejects the bids which have not included all the documents and have submitted defective bids. In the second stage, only those bidders who have submitted all the required documents are allowed to be present, and from among those the one with the lowest bid price i s announced to be the winner. 4.14 Government Decree No.853N provides for participation o f civil society representativesas members with an advisory vote. This i s tantamount to their participation in decision making and does not preserve the independence and oversight roles o f these observers. > Recommendation. The AB needs to re-examine the l i s t o f documents that bidders are required to submit and retain only the most essential ones. Reasons for rejection o f bids should be reviewed with a view to improving the evaluation procedures so that bids are not rejected for trivial reasons. In order to properly determine a responsive bid to be selected for contract award, bid evaluation should take place only after bid opening has been completed and closed. Evaluation o f bids should be carried out in three stages: first, bids should be compared to the requirements included in the bidding documents and bids not substantially meeting these requirements should be rejected; in the second stage substantially responsive bids should be compared with each other using price and non-price criteria as disclosed in the bidding documents in order to determine the lowest evaluated responsive bid. Finally, the lowest evaluated responsive bid should be post qualified to ensure that i t has the required qualifications and experience for performing the contract. > Representatives from civil society should remain as observers or monitors and not as participants or advisers in decision-making process. A mechanism needs to be developed to obtain their feedback and observations. Membership o f tender committees should be expanded and changed as needed to promote transparency and ensure checks and balance. Evaluation of bids 4.15 The PPL does provide for the use o f non-price criteria but these have not yet been developed. Consequently, the lowest bid price alone i s used as a major criterion for 24 Armenia - Country Procurement Assessment Report contract award. There i s no provision in the PPL or a decree on how to evaluate bids submitted by joint ventures. The PPL (Article 34(c)) provides that rejection o f a bid may be based on ". , .other cases envisaged by law". The formulation in the PPL on this subject i s vague and may lead to subjective results. > Recommendations, The PPL or a decree should include detailed evaluation criteria using non price factors which can be quantified in monetary terms for evaluation o f bids. The SPA and procuring entities should be required to use these criteria, wherever applicable, and determine the lowest evaluated responsive bid using these criteria rather than the lowest bid price. The PPL or decree should specify the rules on how evaluation i s conducted when bidder i s a joint venture or a consortium, which can leverage combination o f their capacity, experience, and financial strength, to bid on contracts. Criteria for rejection o f bids must be disclosed in bidding documents. Consulting services 4.16 The PPL lacks clear provisions relating to the selection o f consultants. The same procedures as applicable to prequalification o f contractors have to be applied for shortlisting consulting firms. Criteria for evaluation o f qualifications are subjective as a point system i s stipulated in the PPL. Section 5 o f the PPL covers procurement o f consulting services on the basis o f non-price conditions. However, it does not provide the basis for using quality alone, price alone or a combination o f both. In case o f selection o f consultants, the PPL or Government Decree 853N does not provide for carrying out evaluation o f technical proposal before price proposal in order to ensure quality o f services. Design contracts are defined as works rather than consultant services contracts. P Recommendations. The PPL or decree should clearly define the evaluation . methodology where using quality alone, price alone, or a combination o f both are appropriate. For evaluation o f proposals for consultancy assignments, the PPL or a decree should provide detailed evaluation procedure which takes into consideration quality o f technical proposals o f participating f i r m s before evaluating their prices. Qualifications and experience o f bidders should be evaluated on a pass fail basis rather than using a subjective point system. Criteria for rejection o f bids must be objective and disclosed in bidding documents. Design contracts should be defined as consultant contracts rather than works contract as these involve intellectual services. Complaints and Review System 4.17 The PPL requires the establishment o f a standing unit in the AB to perform review functions o f complaints which may engage representatives o f stakeholders who are not procurement entities or NGOs, on an unpaid basis (A1 6(2)(3)). Currently, the AB performs such functions and has resolved around 50 appeals cases in 2008, approximately 50% o f which have been decided in favor o f the appellant and against the procuring entity. This, however, raises issues o f potential or perception o f conflict o f interest b y the AB which i s simultaneously involved in organizing, regulating, and coordinating procurement procedure, dispensing advice, and reviewing an appeal or complaint. The AB and the SPA being under the MOF's supervisory authority raises issues from the conflicts perspective. 25 Armenia - Country Procurement Assessment Report Under OECD-DAC/World Bank methodology, even though the first review may normally be carried out by the procuring entity, there should be an administrative/judicial review body which i s independent from the procuring agency. 9 Recommendations. Institutionalize an appeals and complaints system that i s independent and free from real or perceived conflict o f interest and that would build confidence as a result o f i t s transparent, efficient and responsive resolution o f complaints and provision o f meaningful remedies. Any review body should have no direct interest in the procurement process, should not report to the procurement agency and should ideally be a separate body. I t should have a degree o f autonomy that assures freedom from interference and conflict o f interest. This i s crucial as confidence in the procurement system i s a great incentive for more participation and enhanced competition Pillar 11: Institutional framework and management capacity (Overall score: 1.7) Budget cycle and procurement planning 4.18 Procurement plans are prepared as part o f the budget formulation process. However, these do not contain important pieces o f information, such as contract description, procurement method, and key dates. The Medium Term Expenditure Framework (MTEF) provides for multi-year contracts but their effectiveness i s conditioned upon availability o f funds. Budgetary funds are generally not available beyond the first year o f such contracts; consequently contractors do not perform in a consistent manner leading to poor quality o f delivered goods and completed works. Substantial amount o f procurement i s carried out in the last quarter o f the year because due to poor planning procuring entities do not use budgetary funds in a timely manner during the year. This does not allow them enough time for carrying out a transparent and competitive procurement. Consequently, procuring entities resort to Sole Sourcing based on poorly prepared specifications and inadequate contract conditions. 4.19 A procuring entity can initiate the procurement process and sign a contract prior to earmarking o f funds. This adversely affects bidders' interest in public tenders considering the unilateral power o f a procuring entity to cancel a signed contract. This practice also distorts budget prioritization and planning process. 9 Recommendations. Procurement planning and contents o f a procurement plan should be improved. As soon as information about budget approval becomes available to a procuring entity, it should prepare a detailed procurement plan, in line with para. 6 Annex 1 o f GD853N, including contract package description, estimated budget, procurement method, key dates, including contract signature and completion dates. Budget execution processes should be improved with a view to (i)making new budgetary funds available to procuring entities in a timely manner to avoid bunching towards the end o f the fiscal year; and (ii)ensuring availability o f funds for multi-year contracts. Advance contracting and effectiveness o f contracts contingent on availability o f funds should be discontinued. If this i s retained, the circumstances allowing i t s use should be restricted and specified in the PPL: 26 Armenia - Country Procurement Assessment Report Authorized body's role in actual conduct of procurement 4.20 Review o f evaluation reports and contracts by the AB constitutes i t s direct involvement in the actual conduct o f procurement. I t creates a situation o f potential conflict o f interest because the AB i s also responsible for oversight o f public procurement and resolution o f bid complaints. Lack o f clear rules about the scope and extent o f AB'S oversight authority and function may be attributable to this situation. > Recommendation, The AB should discontinue direct involvement in the procurement process related to the reviews o f evaluation reports and signed contracts to avoid conflict with i t s oversight role and the role o f review and resolution o f bid complaints. Furthermore, the PPL or the implementation decree should include clear rules regarding the oversight function o f the AB. Organization o f procurement 4.21 The public procurement organization in Armenia comprises the AB, the SPA and procuring entities. The Procurement Process Regulation and Budget Execution Methodology Department o f the M O F serves as the AB and i s responsible for procurement policy and regulation. The SPA, which also reports to the MOF, i s responsible for the actual conduct o f procurement in collaboration with procuring entities. Procuring entities are budget spending units. Procuring entities' role in procurement i s limited to preparation o f technical specifications, delivery schedule; payment terms; establishment o f a tender committee; and supervision o f contract performance and for contractual payments. Procurement process i s organized by the SPA through a secretary appointed to each tender committee. The SPA secretary possesses considerable power to cause suspension o f the procurement process, and to effectively negate the tender committee's decision. The SPA also signs all contracts concluded through open tenders. This i s effectively a centralized procurement system which provides no incentive for procuring entities to build their own procurement capacity, besides leading to segmentation o f responsibility and dilution o f accountability. > Recommendations. Procuring entities should be made responsible for their own procurement including the procurement process, and contract signature. For this purpose, procuring entities' capacity should be strengthened with the AB and SPA's support. SPA's procurement capacity and experience should be used to conduct periodic tenders, where central purchasing through aggregation results in clear efficiency gains. I t should also support procuring entities through technical assistance and training. SPA's role in targeted tenders should be limited to providing advice to procuring entities and their tender committees. Stakeholders' involvement in procurement policy making and oversight 4.22 Perception exists that procuring entities at all levels o f government are not adequately involved in the formulation o f procurement policy and regulation. This perception i s shared b y the civil society and NGOs, and i s evidenced b y little interaction 27 Armenia - Country Procurement Assessment Report between the AB and procuring entities at Marzpetaran and community levels. Involvement o f civil society i s also limited. P Recommendation, A procurement advisory council should be established, involving the major procuring entities not only from Yerevan but also from Marzes and local communities, to ensure stakeholders' participation in improving and overseeing the public procurement function. This council should also have representatives from civil society, including NGOs, Chamber o f Commerce, etc. Collection, maintenance and dissemination o f procurement statistics 4.23 The AB has a semi-computerized system for collection o f procurement data and information managed with the support o f SPA. While tender invitations, requests for proposals and contract information are adequately disseminated, procurement information system i s not well integrated among procuring entities. There i s no sustainable strategy in this regard. Procedures, guidelines and standard formats do not exist for collecting and maintaining procurement data, including information on monitoring compliance with the procurement legislation. N o periodic reports on performance o f public procurement are prepared and made available to public. 9 Recommendations. Develop a sustainable strategy for collecting, maintaining, and disseminating procurement statistics. Also design and implement a system for monitoring procuring entities' compliance with the procurement legislation. Prepare periodic report on the performance o f public procurement and make these available to the public through the public procurement website. Develop a simple excel based procurement monitoring information system for procuring entities. This system can eventually be integrated into the web-based e-GP. Procurement capacity building 4.24 The AB i s responsible for procurement capacity building but it lacks capacity for fulfilling the country's capacity building needs. There i s unmet demand in training both in public and private sectors. Some procuring entities' staff have received short training only once in two years. In November 2008, the GOA approved a training strategy for professional development o f public financial management specialists, including procurement, through higher education and other training institutions. However, the strategy i s yet to be implemented. P Recommendations. The AB should carry out a procurement training needs assessment and skill gap analysis in order to determine training needs both in the public and private sectors, including Chamber o f Commerce, universities, etc. Within the framework o f the recently approved training strategy, the AB should design long and short-term training programs and use both public and private sources o f training for implementing these training programs. It should also implement the testing and accreditation program included in the training strategy. 28 Armenia - Country Procurement Assessment Report 1: Pillar 1 1 Procurement operations and market practices (Overall score: 1.5) Procurement profession in Armenia 4.25 Procurement i s not a recognized profession in Armenia. Procuring entities have procurement specialists but procurement i s just one among their many tasks. There are no full-time procurement specialists in line ministries. The level o f knowledge and familiarity with procurement norms, principles and processes, including the mandatory requirements o f legislation in Marzes i s unsatisfactory. i+ Recommendation. Concurrently with the delegation o f procurement responsibility to procuring entities (See recommendation under Pillar I1 above), each procuring entity (especially large ones) should appoint qualified and experienced procurement specialists with the conduct o f procurement in compliance with the procurement legislation as their main assignment. The AB should implement the recently approved training' strategy and develop programs for building procuring entities' capacity through training and accreditation o f public officials appointed as procurement specialists. Weak contract administration 4.26 Spot inspections by independent organizations have revealed the quality o f construction under several contracts to be poor, especially in Marz. I t appears that the contract administration procedures and processes, and oversight mechanisms are inadequate and do not ensure quality o f goods, works and services procured. The contract management weaknesses are also attributable to lack o f clear contract administration provisions, including contract dispute resolution, division o f risks, termination, etc, in contract conditions. There i s lack o f technical capacity in procuring entities to administer contracts. i+ Recommendations. The AB should carry out an in-depth review o f the current contract administration mechanism, and, based on the findings o f the review, prepare a user friendly contract administration manual. In addition, i t should design training programs in contact administration for procuring entities' staff, and make arrangements to implement these programs. Contract dispute resolution 4.27 Public contracts have dispute resolution reference, but no provision relating to national or international arbitration. Disputes are currently resolved by the AB or in a civil court o f general jurisdiction. The PPL combines procurement review with contract implementation disputes. Implementation mechanisms to enforce the results o f contract dispute resolution are weak and need to be strengthened. Arbitration system has not been introduced yet. Industry groups, including association o f contractors, Chamber o f Commerce, etc., have expressed a keen desire to have in place a robust and well functioning arbitration system. 29 Armenia - Country Procurement Assessment Reuort > Recommendations. The PPL should not combine procurement complaints system with contract dispute resolution. A clear reference to how contract disputes are to be resolved during implementation should be included in the legal framework. The specific terms should be reflected in the modal contract documents. The model bidding documents should include clear provision on mechanisms and substantive rules that apply in case o f disputes Private sector 4.28 Since the M a y 2004 CPAR, Armenia has made progress in reducing administrative barriers for business and investment. The steps taken include, inter alia, consolidating, downsizing, and clarifying mandates o f various government inspections; enacting the new law on business registration; streamlining licensing procedures; issuing new accounting recommendations for small and medium-sized enterprises; establishing a regulatory framework that allows privatization o f urban land by business entities; and adopting simplified procedures for obtaining site development and construction permits. The recent business surveys o f Armenian entrepreneurs suggest that these efforts have already resulted in a more positive private sector perception o f the business and investment environment. For example, the average time necessary to obtain construction and building renovation permits was reduced from 310 days in 2001 to 112 days in 2006. However, competition under procurement has remained less than adequate. Participation o f foreign bidders in public procurement tenders in Armenia is insignificant. 4.29 Bureaucratic documentary requirements and procurement processes are perceived as subjective and seriously affect competition for public tenders and result in higher prices for government tenders. These requirements, among others, include a large number o f documents that must be submitted along with the bid, bid securities and performance securities - for which contractors and suppliers must provide collateral, poor technical specifications, unclear evaluation criteria, and use o f price as a major factor o f contract award decision. Consequently, construction contractors and suppliers appear to be more interested in private sector contracts and contracts financed by international and bilateral donors. 4.30 Given the limitations o f the manufacturing industry o f Armenia, required goods are generally imported. Suppliers o f goods are mostly local traders who participate in bids. Perception o f collusion among them also exists. Contracting industry comprises large, medium and small contractors. Large contractors are concentrated in Yerevan while some medium and small contractors (especially specialized ones, e.g., road construction) operate in different Marzes. The number o f contractors in Marzes and communities i s small as evidenced by small competition for construction contracts in regions. Tendency exists among contractors to participate in contracts only in their regions and not to bid for contracts in other regions. Two reasons were cited for this situation: cost o f mobilization; and resistance by local contractors to those from other regions intending to operate in their area. > Recommendation. Implement the recommendations o f this report especially with regard to improving the procurement processes. Revisit the l i s t o f documents that 30 Armenia - Country Procurement Assessment Report bidders are required to submit with their bids and reduce i t to the essential ones; encourage participation o f foreign bidders by improving their access to tender information and provision o f bidding and other documents in English; reconsider the need o f requiring a bid security in every contract by substituting it where feasible with a bid security declaration under which a bidder agrees to be disqualified for a defined period (for example two years) from participation in public tenders; promote national bidding rather than regional tendering by encouraging bidders from across the country to participate in tenders. Establish and maintain a regular dialogue with suppliers and contractors to improve their awareness o f not only the requirements o f the PPL but also their rights (e.g., right to participation in any public tender regardless o f i t s location) under the PPL and other relevant pieces o f legislation. Pillar I K Integrity and transparency o the public procurement system (Overall Score f 1.7) Internal and external controls o f procurement 4.31 There are multiple internal and external audit bodies carrying out audit o f public procurement. Major line ministries have internal auditors but their roles do not appear to be effective. The effectiveness o f audit mechanisms i s questionable because o f excessive bureaucracy and lack o f clarity o f audit rules and audit capacity. Generally, i t i s difficult to assess whether follow-up on procurement audit findings i s sufficient because o f inadequate data showing evidence o f such follow up. Also, there i s limited evidence o f sanctions for non-compliance. Auditors are not sufficiently informed about procurement requirements. There i s need to design and implement regular training programs for audit bodies to improve their knowledge o f procurement requirements. Several supervisory bodies are involved in supervising, inspecting and monitoring the procurement processes in procuring entities, in general, and in the SPA, in particular. These bodies include the President's supervisory service, Prime Minister's supervisory service, Prosecutor's Office, Chamber o f Control, Ministry o f Finance, etc. There are, however, no clear rules for auditing procurement, and the supervisory bodies discussed above reportedly do not prepare any reports about their activities. P Recommendations. Strengthen internal audit in procuring entities through improving auditors' accountability. Improve auditors' knowledge o f the requirements o f the PPL through regular training in procurement. Furthermore, introduce reforms in order to align, streamline and clarify principles, processes and functions o f internal and external procurement audits. Data on the results o f audits carried out by different audit bodies should be collected with a view to ensuring follow up on adverse findings. Clear regulations for procurement audit should be prepared and implemented. The responsibility o f auditing procurement should be assigned to relevant bodies such as the Chamber o f Control. At the same time the procurement audit capacity o f such bodies should be strengthened. In addition, the rules for the AB to implement i t s public procurement oversight functions should be set out in detail, including the authority that it would need to require procuring entities data and records. Similarly, rules should be clarified for other bodies, such as the Prosecutor's Office, to investigate 31 Armenia - Country Procurement Assessment Report procurement processes only when there are concrete allegations o f fraud and corruption, and violations and crime. Complaint review mechanism and blacklisting of firms for non-performance 4.32 The PPL provides for a complaint review mechanism both for bid and contract disputes. Remedies allow for the possibility o f redirecting award, granting interim relief through suspension o f actions and correcting the decision. Damages can also be awarded if decisions are rendered against the procuring entity. The AB, which performs the review functions, i s required to make a decision on a complaint within 10 to 20 working days. Firms are blacklisted from participation in public tenders because o f their failure to perform contracts. The absence o f a due process for blacklisting may lead to abuse. > Recommendation. An appeal system should be set up that i s totally independent o f the MOF, AB, SPA and government entities, that operates in an environment free from a perception o f conflict o f interest, which builds confidence from participants, and which would be efficient, timely and responsive to procurement needs and effective in providing meaningful remedies. The architecture and configuration o f this body has to be organic to Armenia and will ultimately rely on the domestic legal structure. But a varied membership from persons o f known probity and independence such as members o f NGOs, media, academia, retired jurist or judges, industry and private sector representatives will inspire confidence in terms o f fairness and transparency. The practice o f blacklisting f i r m s because o f non performance o f contracts should be discontinued (and should be limited to clear grounds o f misconduct) and contractual parties treated in accordance with the relevant provisions o f their contract, i.e., application o f imposition o f liquidated damages and contract termination for default. Tender notices and contract award information 4.33 Tenders and contract awards are currently publicly advertised on the website as well as in the media. However, there i s need o f further improvement. The M O F website needs upgrading, especially with regard to making it accessible to English speakers. The website should also be used for posting bidding documents and relating information, including hosting an interactive help or information desk and reporting portal. P Recommendations. The current practice o f publication o f tender notices and contract award information should be continued in order to ensure that all those interested in the information throughout the country have access to it. The procurement website should be made accessible in English in order promote participation o f foreign bidders. Publication in print media, especially newspapers, should be continued in order to facilitate access to tender and contract award information to all interested parties throughout the country. Provision on fraud and corruption in bidding documents 4.34 The bidding documents do not include adequate provisions on fraud and corruption. The PPL does not provide any precise instructions on how to incorporate these 32 Armenia - Country Procurement Assessment Report provisions in the bidding documents. The media, including various articles written by investigative journalists, point to several cases o f alleged corruption in public procurement, including during contract implementation. However, there i s no evidence o f follow up. Since 2003, there are no changes in the corruption index o f the country, although the GOA has taken several anti-corruption measures, including the anticorruption strategy adopted in 2003, establishment o f an Anti-corruption Council as well as a Commission on Monitoring and Execution o f Anti-corruption Strategy. P Recommendations. Fraud and corruption provisions should be included in the model bidding documents. Findings o f audits and reports obtained through the complaint system or through the internal and external control system, including investigative reports o f journalists and NGOs, should be followed up with investigation, prosecution and other enforcement measures. Portals, including website and hotlines and mailing addresses should be made available and easily accessible for people who want to report allegations and anomalies, with awareness o f protection o f anonymity and confidentiality. Dialogue with private sector and civil society 4.35 There i s need for a more proactive and robust reaching out to the private sector, media, nongovernmental entities, and civil society. A sustained dialogue and consultation with various stakeholders i s absent. P Recommendations. Establish an informal network o f interested parties and stakeholders on consultative basis, such as a procurement advisory council, that meets regularly to discuss policy issues, reform proposals and systematic problems in the procurement process. Representatives from civil society should remain as observers, monitors or oversight agents and not as participants in the procurement decision- making process. A mechanism should also be developed to obtain feedback and observations. Code o f ethics for procurement professionals 4.36 There i s no specific code o f ethics that particularly apply to procurement profession. Government Decree 853N provides some conflict o f interest rules with respect to prospective tender committee members. P Recommendations. Rules o f ethics, a code o f conduct and conflict o f interest provisions relating to public procurement should be codified, widely disseminated, and systematically enforced. More specifically these provisions should require public officials conducting procurement, including members o f tender committees, procurement specialists, to disclose any conflict o f interest in a given procurement process. 33 Armenia - Country Procurement Assessment Report CompliancePerformance Status 4.37 The OECD-DAC/World Bank methodology also includes Compliance/ Performance Indicators (CPIs) for which procurement monitoring data are required to determine adherence to the formal system. Based on the data that was available to the team, a report performance report has been prepared and i s included in Attachment 2 to this report. The findings o f the performance report are consistent with the findings discussed above. I t i s worth mentioning here that the data provided by the Government does not appear to be complete in all respects; nor has it been possible to verify these data. 34 Armenia - Country Procurement Assessment Report 5. CASE STUDIES - SUMMARIES OF FINDINGS AND RECOMMENDATIONS 5.1 In close collaboration with the counterpart team, relevant ministries and agencies, and the sector colleagues, both at the headquarters and in Yerevan, the case studies have been prepared on Electronic Government Procurement (e-GP); Public Procurement in Health and Transport Sectors; Mitigation and Management o f Corruption in Public Procurement; and Public-Private Partnership in Public Procurement. The main objective o f these case studies, respectively, i s to ascertain the extent to which current information technology i s being used in Armenia for enhancing efficiency o f public procurement; whether procuring entities, such as the health and transport line ministries and other bodies, are appropriately organized, have adequate procurement capacity and whether their procurement practices are in compliance with the procurement legislation; and whether there i s adequate interaction between the Authorized Body and private sector (consulting firms, contractors and suppliers) which enables the latter to be informed o f the requirements of the system leading to participative and optimal competition for public tenders. The case study on mitigation and management o f corruption in public procurement looks into the transparency and accountability aspects o f public procurement and suggest measures to strengthen these. 5.2 Each o f these case studies includes a detailed action plan. A summary o f each o f the case study, along with recommendations, i s given below. PROCUREMENT E-GOVERNMENT 5.3 Given the importance o f e-GP for improving the public procurement system in general and i t s transparency and efficiency in particular, an overall assessment o f the current status o f the e-GP program in Armenia was conducted as part o f the CPAR. The e- GP assessment i s based on the MDB e-GP readiness assessment tool which was developed jointly by the Asian Development Bank, the Inter-American Development Bank, and the World Bank6. I t addresses a set o f key success factors for the introduction o f e-GP which go far beyond the mere application o f information technology. These foundations include the need o f strong government leadership and management planning, appropriate policy and legislation, extensive buyer and supplier activation, and standardization and infrastructure development. 5.4 The launch and initial phase o f the e-GP program in Armenia including the e-GP roadmap, the Government Decree on the e-GP strategy, and the development o f an e-GP application under the Public Sector Modernization Project established a promising basis for the successfil introduction o f e-GP. The Ministry o f Finance has provided great leadership in this context and i s collectively recognized as the lead agency for the implementation o f the e-GP agenda. However, the implementation o f e-GP has been delayed, mainly due to political change, lack o f capacity, an overambitious implementation approach, and the absence o f a detailed action plan. 35 Armenia - Country Procurement Assessment Report 5.5 While the current legislation addresses the use o f electronic means for public procurement, it appears desirable to include more detailed reference with regard to electronic procurement transactions in the procurement regulation. M u c h work has been done to reach out and build capacity among buyers and suppliers and it i s critical to continue these efforts to manage successfully the change from paper-based to electronic procurement and develop appropriate capacity. O n the other hand, the capacity o f the Government o f Armenia to design and implement an e-GP system appears limited thus suggesting the use o f external expertise for the systems needs analysis, design, development, and roll-out. The application o f procurement and technology' standards i s highly recommended and needs to be coordinated across the Government o f Armenia. Internet penetration improves fast and as part o f the e-GP implementation program, the Government needs to ensure accessibility to online government procurement opportunities in order not to limit competition to those f i r m s which are connected to the Internet. > Recommendations. Building on the strong will and intent o f the Government o f Armenia, it i s recommended that the Ministry o f Finance continues to lead the adoption o f the e-GP agenda based on an updated strategy and a less ambitious implementation approach. More specifically, the updated strategy should provide for an e-GP implementation plan in manageable phases with clearly defined actions, roles, and milestones. I t should also address the need o f capacity building among procuring entities and private industry. The e-GP component under the Public Sector Modernization Project should be limited to the design and implementation o f an e- Tendering component. PUBLIC PROCUREMENT IN HEALTH SECTOR 5.6 The case study reviewed the procurement institutional arrangements, capacity and practices in the health sector. Since the procurement process (preparation and distribution o f bidding documents, receipt, opening and evaluation o f bids, contract award and signature) i s centralized in the SPA both for periodic (framework) and targeted tenders, the M O H and other procuring entities in the health sector had no incentive to develop their own procurement capacity. Particularly, at the Marz and community levels, there i s little awareness o f the requirements o f the PPL leading to uneconomic and inefficient procurement. Use o f poor quality technical specifications for the procurement o f pharmaceuticals combined with lowest price as the major award criteria, i s resulting in poor quality and ineffective distribution o f medicines. Finally, weak internal and external controls, including the AB oversight o f procurement, adversely affect accountability o f public officials involved in procurement. 5.7 I t i s recommended that procurement be decentralized to the Ministry o f Health and other procuring entities which should be made fully responsible and accountable for the whole process o f procurement from identification o f needs and procurement planning, to conduct o f procurement process and contract award, signature and supervision. For taking over this responsibility the M O H and other procuring entities in the health sector should develop their own procurement capacity. The M O H should establish a separate procurement unit staffed with qualified and experienced procurement professionals and advisory services o f the SPA should be made available to all procuring entities, especially 36 Armenia - Country Procurement Assessment Report those with few contracts which would not justify full time procurement specialists. Since this case study had a limited scope and could not cover the complex area o f procurement of pharmaceuticals, it i s recommended that a detailed case study be carried out on the procurement o f pharmaceuticals. Finally, there i s immediate need o f preparing clear rules on audit o f procurement, and for strengthening the capacity o f the Ministry o f Finance, and that o f the Chamber o f Controls to conduct procurement audit in an effective manner. At the same time, the procurement oversight role o f the AB should be clearly defined with particular attention to avoid any conflict o f interest in i t s different roles. PUBLIC PROCUREMENT I N TRANSPORT SECTOR 5.8 With regard to procurement capacity, this case study has led to the same conclusion as for the health sector (See above), i.e., due to centralization o f procurement in the SPA, the transport sector, including the MOTC, has not developed i t s own capacity to carry out procurement. The recommendation, therefore, i s also the same, Le., that the procurement authority should be decentralized to the M O T C and other procuring entities in the health sector. Procuring entities like the MOTC, which have large volume o f procurement work, should establish a procurement unit staffed with qualified and experienced procurement specialists, while procuring entities with small procurement volume could use advisory services o f SPA but should be fully accountable for their procurement decisions. Just as in the health sector, the case study also recommends streamlining o f procurement audit rules and regulations and strengthening the capacity o f the relevant audit bodies to carry out procurement audit in a more effective manner. Finally, given the keen government interest in moving forward with i t s e-GP agenda, it i s recommended that the M O T C should be used as a pilot for introducing e-GP in the transport sector, which can begin with advertisement o f transport sector procurement notices and contract awards and for dissemination o f procurement regulations and good practices. MITIGATION MANAGEMENT AND OF CORRUPTION I N PUBLIC PROCUREMENT 5.9 This case study further examines the issues already highlighted in the main OECD- DAC/World Bank assessment on integrity and transparency and distills the findings with a view to further articulating the concerns about risks o f leakage and corruption. I t makes corresponding recommendations and includes an action plan. The public procurement system in Armenia appears to suffer from an acute perception o f lack o f integrity and transparency in terms o f practice and compliance with the regulatory framework and best practices. The assessment and consultations conducted have revealed that certain procurement practices in Armenia are indicative o f ongoing or potential abuse o f the legal framework. These weaknesses in the area o f integrity and transparency in the procurement system have been a result o f a defective or weak framework, non-compliance with norms, manipulation o f the market, or due to misconduct by key players. The case study also includes a discussion on related background literature or previous analytical work on the topic, on risk assessment and red flags, summary o f reported Cases and some key recommendations and action plan. 5.10 Essentially the findings during assessment and according to various reports that were gathered point to a variety o f issues relating to: weaknesses and overreliance on and 37 Armenia - Country Procurement Assessment Report abuse o f restricted tendering (mainly sole sourcing); a lack o f confidence in the independence and effectiveness o f the complaint review mechanisms; numerous reports o f poor quality o f works and services and instances o f non-delivery or non-performance; deficient rules on conflict o f interest and codes o f conduct; indications o f anti-competitive agreement prior to submitting bids (eg. collusion); abuse o f the qualification and evaluation process to favor pre-determined bidder; faulty specifications that favor certain suppliers; lack o f significant participation and oversight by civil society groups and other stakeholders; deficient mechanisms for transparency, information access and feedback systems; unclear and overlapping audit systems with no significant follow-up o f findings; lack o f integration with overall national anti-corruption strategy and reference to the appropriate criminal legal framework; abuse o f use o f "monopoly" privileges; dismally l o w level o f tender participation; and general lack o f capacity o f procuring entities. 5.11 The case study recommends that a networkhouncil o f interested parties and stakeholders be established. This will encourage feedback, confidence and civil society participation and oversight. A review o f the PPL provisions on civil society engagement in the procurement process i s also needed. There i s also need o f establishing effective portals to report allegations o f fraud and corruption and how these were followed up. Vigorous implementation o f access to information and appropriate information systems and freedom o f information regimes will also promote transparency. A need to set out clear rules o f accountability i s also required. Clear references in the PPL to criminal laws and setting out responsibilities and accountabilities o f persons involved are, therefore, necessary. Debarment and blacklisting system under the PPL needs to be clarified with articulation o f applicable procedures and principles to ensure fairness and prevent abuse. 5.12 Capacity building and awareness-raising on fraud and corruption in procurement i s also essential. This will ensure that employees engaged in procurement have practical understanding o f fraud and corruption schemes. The government must devise a systematic and targeted policy and enforcement mechanism for detection and prevention o f certain practices. Among others, procurement officials should be trained to focus on red flags indicating unusual bid patterns such as: distinct bids by a systematic or uniform percentage; bids inexplicably too close or too far apart; losing bid prices are rounded or o f unnatural numbers; unexplained inflated bid prices; losing bidders become subcontractors; apparent rotation o f losing bidders; unusual repeated extension o f bid security; delay in completing BER or contract award signing indicating efforts to negotiate corrupt terms; cartel like behavior in the market; and a general scheme o f coordination o f preparation o f bids by designated winner. Overlapping and excessive audits and control mechanisms should be streamlined and made more effective with meaningful follow-up enforcement measures. Public-Private Partnership in Public Procurement 5.13 The main purpose o f this case study i s to review the status o f public private partnership as it relates to public procurement in Armenia and to make recommendations for strengthening the relationship and involvement o f the private sector in public procurement. It i s based on a desk review o f available reports on public -private partnerships (PPP) and discussions with a few selected private sector firms and 38 Armenia - Country Procurement Assessment Report associations in Armenia. The findings and recommendations made in this report are subject to review and approval by Bank management. 5.14 Private sector constitutes about 70 percent o f the GDP in 2003 and i t s share o f employment i s about 75 percent, has been rapidly growing in recent years earning Armenia the name o f "the Caucasian Tiger". The private sector includes 2300 small, medium and large companies and organizations involved in the provision o f over 10,000 items o f goods, works and services. Private sector development i s also one o f the focus areas for the Bank's CAS. Armenia has had an impressive track record o f implementing PPPs in the infrastructure sector, especially in the areas o f Water Supply, telecommunications, energy and transport, with about $560 million in PPP investments up to 2006. However, there i s room for further development as Armenia at present lies in stage one o f the PPP market maturity (developed b y Deloitte), which i s characterized by: (i) policy and legislative framework for PPP i s being developed; (ii) Deal structures are being formulated and implemented; (iii) Process o f getting the public-private transactions right has begun; (iv) Process o f building a marketplace for PPP has commenced; and (v) lessons from PPP in sectors where this has been tried are being adapted to other sectors. Some o f the constraints inhibiting the further growth o f PPP are lack o f clarity, consistency and transparency in PPP processes and i t s administration, failure o f the legal and regulatory framework to ensure a fair and transparent competitive bidding process, protection o f public interests, insufficient capacity to conclude and manage PPP contracts, lack o f impact assessment - ex-post and ex-ante, lack o f well-developed financial institutions which makes dependency on grants and soft loans. Moreover, the development o f PPP in Armenia, however, has been stifled by two main problems in public procurement; which are (i)Pricing mechanisms do not reflect current market conditions; and (ii) continued perception o f the private sector o f public procurement not being transparent, especially in the setting o f qualification criteria and technical specifications. 5.15 The organization o f the private sector in Armenia i s at an early stage, a few o f which are the union o f employers, association o f builders' association o f investigative journalism. These need to be nurtured and developed to take an active role and increased involvement in the public procurement process and facilitate market access. There i s limited competition due to lack o f interest, procurement policies, and monopolistic or oligopolistic features, especially in infrastructure projects. N e w types o f PPP are models are being tried out, such as the housing project in earthquake affected areas led by Ministry o f Urban Development. 5.16 The business climate in Armenia for the growth in public private partnership needs further improvement as indicated by Armenia's overall ranking o f 44 out o f 18 1 countries in the ease o f doing business in 2009 and ranks 61 in enforcing contracts. There i s a lack o f interest in private companies to do business with the Government - which was also one o f the findings o f the CPAR conducted in 2004. Armenia ranks 109 in the improper procurement practices index according to Transparency International with a CPI score o f 2.9 Improper procurement practices in public procurement in Armenia occurs in a variety o f ways - such as collusion between bidders, sole source contracts, awarding contracts to non-qualified contractors, limited dissemination o f procurement opportunities, acceptance 39 Armenia - Country Procurement Assessment Report o f l o w quality works in relation to the expenditure, favoring selected contractors and suppliers for the provision o f goods, works and services, etc.: > Recommendations. The study recommends the following main actions: (i) the short In term, adopt a public-private partnership (PPP) act and incorporate PPP provisions in the public procurement law; design a PPP strategy and action plan; establish a PPP uniuagency in the Ministry o f Economy with qualified and experienced personnel to develop policies, procedures and monitor the implementation o f PPP strategy and action plan; (ii) the short to medium term create an enabling environment for the In development o f association o f private sector, and citizen groups to fbnction as independent oversight institutions in all aspects o f public procurement; Design and implement a continuous public awareness, education and training program in PPP for the staff o f the PPP unit as well as the private sector and institutionalize the training program in a recognized national universityhraining institution. 40 Armenia - Country Procurement Assessment Report 6. PROPOSED ACTION PLAN FOR FURTHER IMPROVEMENTS STRENGTHS AND WEAKNESSES 6.1 The Government o f Armenia has made commendable progress in improving public procurement since the M a y 2004 CPAR. In January 2005, a new PPL was introduced. Implementation o f several recommendations contained in the CPAR action plan has also contributed positively to an improved procurement environment. Estimated contract prices are no longer disclosed in tender notices, and single-source procurement has been significantly reduced. Policy on public disclosure o f procurement processes was introduced and has been included in the Official Procurement Bulletin o f the Ministry o f Finance and Economy, which i s distributed to state governments and to local self- government bodies. 6.2 Progress notwithstanding, significant weakness still need to be addressed. These include: lack o f clarity o f the scope o f the PPL; excessive and unjustified sole sourcing; a lack o f confidence in the independence and effectiveness o f the complaint review mechanism; reports o f poor quality o f works and services and instances o f non- performance; deficient rules on conflict o f interest and codes o f conduct; indications o f anti-competitive agreements (such as collusion) prior to submitting bids; abuse o f the qualification and evaluation process to favor predetermined bidders; poor quality and biased specifications to favor certain suppliers; lack o f significant participation and oversight by civil society groups and other stakeholders; deficient mechanisms for transparency, information access and feedback systems; unclear and overlapping audit systems with no significant follow-up o f findings; lack o f integration with overall national anticorruption strategy and reference to the appropriate criminal legal framework; abuse o f use o f "monopoly" privileges; dismally l o w level o f tender participation; and general lack o f capacity o f procuring entities. This places the public procurement o f Armenia in a mid to high risk category. ACTION PLANS FOR FURTHER IMPROVING THE PUBLIC PROCUREMENT SYSTEM 6.3 The weaknesses identified in this assessment have been summarized below and a prioritized action plan prepared. The prioritized action plan i s at Annex 1. The action plan o f the M a y 2004 CPAR has also been updated and i s included in Annex 2. Public Procurement > Establish an independent complaint review system that i s free from real or perceived conflict o f interest and that would build confidence as a result o f i t s transparent, efficient and responsive resolution o f complaints and provision o f meaningful remedies. Any review body should have no direct interest in the procurement process, should not report to the procurement agency and should ideally be a separate body. It should have a degree o f autonomy that assures freedom from interference and conflict o f interest. This is crucial as confidence 41 Armenia - Country Procurement Assessment Report in the procurement system i s a great incentive for more participation and enhanced competition. > Enhance competition, encourage participation and prevent anti-competitive behavior through efforts that: produce measurable and significant increase in number o f bidders including participation by foreign firms; prevent de facto sole sourcing due to artificial cases o f failure o f bidding or limited participation; further reduce over-reliance on sole source procurement by tightening requirements for emergency procurement (for example, sole sourcing on the basis o f urgent or emergency needs should be allowed only in extreme and exceptional circumstances, limited in application and duration, and only if such circumstance did not result from lack o f foresight, poor planning or negligence on the part o f the entity concerned), ensuring that technical specification and procurement planning are not designed to favor select bidders, preventing bogus disqualification to favor a pre-determined winner, discontinuing reliance on the registry o f the Anti-Monopoly Commission as a proxy justification for sole sourcing; detecting and preventing collusion and other anti-competitive behavior; and more generally, by reducing the significant information barrier to procurement opportunities and to aggressively reach out in a transparent manner to the private sector and interested parties to encourage participation. > Code o f Ethics, asset reporting and disclosure and conflict rules should be codified, widely disseminated and systematically enforced in the procurement sector. Rules o f accountability need to be clearer. References should be included in the PPL to criminal laws and to setting out responsibilities and accountabilities o f persons involved. Tender, contract and other model documents should be developed and should include provisions addressing corruption, fraud, conflict o f interest and unethical behavior. The relevant provisions should also set out the consequences and sanctions for such behavior. > Establish a network or council o f interested parties and stakeholders in order to encourage feedback, confidence, civil society's participation, and oversight. A review o f the PPL provisions and implementation o f civil society engagement and oversight role in the procurement process i s also needed. Appropriate information systems and freedom o f information regimes are needed to be vigorously implemented to promote transparency. Accelerating the demand side for the reform agenda i s crucial for the success o f the various initiatives. > Amend the PPL to expand i t s application to public enterprises and utility companies (in accordance with international best practice. See for example EU Directives which provides coverage for private utilities which operate on the basis o f special or exclusive rights granted by a competent authority); decentralize procurement function to procuring entities;; and to redefine the AB'S oversight role; > Prepare a comprehensive implementation regulation, and model bidding documents; > Design and implement a continuous capacity building plan for procuring entities both at central and local levels; and 42 Armenia - Countrv Procurement Assessment Reuort > Clarify rules o f internal and external audit o f procurement and strengthen capacity o f audit bodies to carry out procurement audit in an effective manner The key recommendations o f the case studies at Appendix 3 are summarized below. e-GP > Review and update the e-GP implementation strategy including the identification o f detailed action plans and next steps with cost estimates and performance indicators; > Develop a communications, training, and change management strategy to catalyze the e-GP awareness and capacity building; and > Use international e-GP expert consultancy to help implement the e-GP program, in general, and manage the contract with the selected company under the Public Sector Modernization Project in particular. Public Procurement in Health Sector > Create a procurement unit and staff it with qualified and experience procurement staff; > Design and deliver procurement training for health sector staff at all levels; and > Carry out a study on the procurement o f pharmaceuticals. Public Procurement in Transport Sector > Create a procurement unit in the MOTC; and > Design and deliver procurement training for transport sector staff at all levels. Anti-Corruption Measures > Include clearer rules o f accountability with references in the PPL to criminal laws and setting out responsibilities and accountabilities o f persons involved; > Clarify debarment and blacklisting system under the PPL with articulation o f applicable procedures and principles to ensure fairness and prevent abuse; and > Build capacity and awareness-raising on fraud and corruption in procurement to ensure that employees engaged in procurement have practical understanding o f fraud and corruption schemes. > Strengthen and streamline overlapping and weak capacity in the audit and control systems. > Portals are needed where allegations o f fraud and corruption can be reported and followed up. Public-Private Partnership for Public Procurement > Adopt a public-private partnership (PPP) act and incorporate PPP provisions in the PPL; > Design a PPP strategy and action plan; > Establish a PPP unit in the MOF (Note; Should not this be done with Ministry o f Economy?) with qualified and experienced personnel to develop policies, procedures; 43 Armenia - Country Procurement Assessment Report > Create an enabling environment for the development o f association o f private sector, and citizen groups to function as independent oversight institutions in all aspects o f public procurement; > Design and implement a continuous public awareness, education and training program in PPP for the staff o f the PPP unit as well as the private sector and institutionalize the training program in a recognized national university/training institution. Implementation Arrangements 6.4 The AB has informed the team that it would be responsible for implementing the remaining actions in the Updated Action Plan o f May 2004 CPAR and the recommendations o f this assessment. The recommendations contained in the case studies would also be implemented by AB, except for the case studies on public procurement in the health and transport sectors which will be implemented by the M O H and the M O T C in close collaboration with the AB. 6.5 In addition to seeking budgetary funds for implementing the action plans, the AB should explore with bilateral and multilateral donors active in Armenia the possibility o f obtaining financial support for this purpose. As a first step, the M O F has expressed i t s interest in applying for an IDF grant from the World Bank for implementation o f the short term recommendations of this assessment. 44 a, Y 3 E 8 M E 3 a, 6 Ccl 0 a, .L Y .d U s v) 3 ) v- W 0 0 M X X I X IX Y X X X P B u e b s P 6 * X % E 3 3 ry u 3 L, * L o E 3-0 E: X >e >e X 20 'D c E U X X - B c, 0 i U a B u X X X X X X W C 0 -0 c.' ;41 X x X x Y a 0 a c a .- A c C X 5 L L C e: i c I r: P a IL a c e L c x Y X X X x 0 x 0 Q a Y Y 4: 2 X X W W Armenia - Country Procurement Assessment Report - Annex 3 List o f Persons Met Yerevan Munici State Procurement Agency Mr. Hakob Beglaryan Head (SPA) Chamber o f Commerce & Mr. Araik Vardanyan Executive Director Industry Union o f Manufacturers& Mr. Gagik Makaryan Deputy Head Businessmen Union o f Builders o f Mr. Gagik Galstyan Chairman Armenia ~ "Road Maintenance Mr. Yura Gevorgyan Head Equipment" CJSC ~ ~~ "Road Constructionh'laintenance" Mr. Aramais Davtyan Head 67 Armenia - Country Procurement Assessment Report 68 Armenia - Countw Procurement Assessment Report - Appendix 1 Report on Benchmarking o f Public Procurement against InternationalStandards REPUBLIC OF ARMENIA BENCHMARKING OF PUBLIC PROCUREMENT SYSTEM USING OECD- DAC/ WORLD BANK METHDOLOGY OECD-DACWorld Bank Methodology A sound public procurement system built on the principles o f transparency and fair competition i s essential to increase the effectiveness and efficient use o f public funds In order to assess the effectiveness o f the national procurement systems o f Governments, the joint World Bank and OECD/DAC, together with developing countries, bilateral and multilateral donors have developed the "Methodology for Assessment o f National Procurement system^"^ This methodology provides a common tool to assess the quality and effectiveness o f national procurement systems, which has been used by the World Bank CPAR team. This widely used tool i s based on the following four pillars, each o f which i s supported by respective baseline indicators and subindicators. Pillars and Baseline Indicators (BLIs) Pillar I : Legislative and regulatory framework This pillar i s used to assess the legal and regulatory instruments from the highest level (national law, act, regulation, decree, etc.) down to the detailed regulation, procedures, and bidding documents. It uses the following two baseline indicators 0 Existence o f a public procurement legislative and regulatory framework that achieves the agreed standards and complies with applicable obligations. (This i s supported by eight subindicators.) 0 Existence o f implementing regulations and documentation. (This i s supported by six subindicators.) Pillar 11: Institutionalframework and management capacity This pillar assesses the operations in practice through the institutions and management systems that comprise overall public sector governance. Three baseline indicators are used, which are: 0 A public procurement system that i s mainstreamed and well integrated into the public sector governance system 0 Existence o f a functional normative and regulatory body. 0 Existence o f institutional development capacity. 9 See OECD, Methodology for Assessment o National Procurement System, Version 4, July 17,2006. f Appendix Page No. - 1 Armenia - Country Procurement Assessment Report 1: Pillar 1 1 Procurement Operations and Market This pillar assesses the degree o f professionalism and knowledge o f the staff responsible for implementing procurement activities. It uses three baseline indicators: Are the procurement operations and practices efficient? (This i s supported by four subindicators.) 0 Effectiveness o f the functionality o f the public procurement market. (This i s supported by three subindicators.) 0 Existence o f contract administration and dispute resolution provisions. (This i s supported by three subindicators.) Pillar IV: Integrity and transparency o public procurement systems f This pillar assesses whether the procurement system operates with integrity, has appropriate controls that keep procurement implementation in accord with the legal and regulatory framework, and can take appropriate measures to address the potential for corruption. It uses four baseline indicators: 0 Existence o f an effective control and audit system. (This i s supported by five subindicators.) 0 Efficiency o f the appeals mechanisms. (This i s supported by five subindicators.) 0 Degree o f access to information. (This i s supported by one subindicator.) 0 Whether ethics and anticorruption measures are in place. (This i s supported by seven subindicators.) The four pillars have 12 indicators and 54 sub-indicators to assess the different aspects o f procurement under the four pillars. The methodology includes two types o f indicators, the Base-Line Indicators (BLIs) and the Compliance/Performance Indicators (CPIs). The use o f the BLIs enables comparison o f the current system with the international standards defined in the methodology. The scoring system o f the OECD-DAC-WB methodology assigns scores o f 0 to 3 to each area o f performance. A zero assigned to an indicator or subindicator indicates failure to meet the standard. A score o f 1 indicates an area where substantive work i s needed to meet the standard. A score o f 2 indicates less than full achievement, with improvements needed. A 3 indicates full achievement of the standard. The Armenian public procurement system has been assessed using this methodology. A summary o f findings and recommendations discussed in this report i s provided below. The benchmarking o f the Armenian public procurement system using the BLIs discussed above present the following snapshot comparison o f the actual system with the international standards. The four pillars the Armenian public procurement system scored as follows: Appendix Page No. - 2 Armenia - Country Procurement Assessment Report Pillar 1: Legislative/Regulatory Substantial Improvements but less Framework 2*o than full achievement Pillar 2: Institutional Arrangements 1.7 Needs substantial improvements Pillar 3 : Procurement and Market 1.5 Needs substantial improvements Practices Pillar 4: System Integrity and Transparency 1.7 Needs substantial improvements These scores show that progress has been made but much remains to be done. The ) legislative framework for procurement (Pillar I has evolved toward achieving international standards in recent years. O n the other hand, the scores o f the other three Pillars show that these need substantial improvements to achieve these standards. (See also Figures 1 and 2 in the Executive Summary). Compliance/performanceIndicators (CPIs) The Compliance/Performance Indicators (CPIs) indicate how the system actually operates. They are more closely related to the application o f the regulation and to the prevailing procurement practices in the country. This requires the examination o f sample o f procurement transactions. Given the lack o f trustworthy and incomplete data and difficulty in access to actual transactions, Attach 2 to this Annex shows compliance with several (not all) Compliance/Performance Indicators, including, among others, selection o f procurement methods, publication o f tender notices, time allowed for bid preparation, complaint resolution, payments, etc. Appendix Page No. - 3 Armenia - Country Procurement Assessment Report - Appendix 2 Base-Line Indicators REPUBLIC OF ARMENIA BENCHMARKING OF PUBLIC PROCUREMENT SYSTEM USING OECD/DAC WORLD BANK METHDOLOGY Base-Line Indicators - Pillar I Legislative and Regulatory Framework A legislative and regulatory framework i s essential for laying the foundation for a sound public procurement system. This i s represented by Pillar Io f the OECD-DAC/World Bank Baseline Indicators (BLI) assessment which encompasses two indicators - a legislative and regulatory framework for public procurement that meets agreed-upon standards and complies with applicable obligations (Indicator l), the existence o f and implementing regulations and documentation (Indicator 2). Indicator 1: Public procurement legislative and regulatory framework achieves the agreed standards and complies with applicable obligations. This indicator covers the legal and regulatory instruments from the highest level (national law, act, regulation, decree, etc.) down to detailed regulation, procedures and bidding documents formally in use. This indicator i s broken down into eight sub-indicators (a-h) which are individually scored. Sub-indicator Brief Explanation Score l(a). Scope The norms o f public procurement legislative and regulatory 3 o f application framework in Armenia are recorded and organized hierarchically. The and coverage framework comprises of Constitution dated July 5, 1995, as amended o f the on November 27, 2005, the Civil Code dated May 5, 1998, with legislative amendments, the Public Procurement Law (PPL) in effect since and January 1, 2005, the Ministry o f Finance (MOF) Decree No. 426 regulatory (MFD426) of April 25, 2005, and Government Decree No. 853-N framework. (GD853N) dated June 5,2008. These are in accordance with Article 4 of the PPL (A4). All rules applying to public procurement should be consolidated in a single instrument and clear references made in the PPL to other laws and/or regulations. The PPL should contain all public procurement rules, and where it does not apply, should specifically refer to other applicable laws and regulations. Article 2 covers procurement o f all types of goods, works, and services, including consulting services. Rent and lease are defined as "purchase o f services" which i s also covered, but the law does not articulate how these will be procured. In other systems, acquisition or rental o f land or existing buildings are normally excluded from the application o f the PPL, but otherwise covered by separate legislation. Appendix Page No. - 4 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score The PPL encompasses all procurement with budgetary resources, but i s not clear whether private entities receiving fiscal resources are also subject to its provisions. The PPL does not have specific provisions that deal with concession contracts and public-private partnership type o f agreements. Utility companies are not specifically mentioned in the PPL. Public enterprises, such as utility companies, may be formally excluded from the scope o f the PPL if they operate as commercial companies, but their regulation i s perhaps governed by a separate legal framework that assures principles o f transparency, equal treatment, economy and efficiency. The EC requires coverage under the PPL for private utilities operating on the basis of special or exclusive rights granted by competent authority. Scope: The PPL applies in a modified manner and to a limited extent to state governance bodies and local self-government bodies, state or community agencies, Central Bank, state or community non-profit organizations and commercial organizations with over 50% o f shares owned by the state or communities. State non-commercial organizations and commercial organizations with over 50% ownership by the state, conduct their own procurement without mandatory involvement o f the SPA and without the mandated review and supervision authority under the PPL, to allow flexibility and respond to market demands in a timely manner. Alternatively, a system could be designed where these are covered by the procurement rules when they conduct procurement using state budget funds, provided the issues arising from the comingling of funds with those generated from i t s operations can be satisfactorily resolved. This i s also applicable to entities where the government has minority interest and state funds are provided. Coverage o f procurement that relates to national security, national defense, and protection o f state or official secrets are restricted. Procurements governed by international agreements and those outside Armenia are explicitly excluded from the application o f the PPL. Additional exclusions or carve-outs are referred to in a number o f other decrees and regulations which i s an issue to be clarified. The PPL generically stipulates that other legal acts may apply. The laws and related decrees are published and easily accessible at no cost. These are also posted on the website which i s presently available only in the Armenian language. ~~~~ Appendix Page No. - 5 Armenia - Country Procurement Assessment Report Score l(a) Recommendations: The PPL has broad and comprehensive scope and coverage which could be improved by including provisions for: (I) Concession contracts and public-private partnership type of agreements; (2) Utility companies (in accordance with international best practice. See for example EU Directives which provides coverage for private utilities which operate on the basis of special or exclusive rights granted by a competent authority);; (3) Non-core defense procurement or procurement o dual use f products should be done through open competition (such as uniforms, boots, food, medicine, capital construction for the military); (4) Omnibus provision that the PPL is based on reference to the Constitution o Armenia and deals with all public procurement except f where the PPL specijkally states otherwise; and (5) the PPL should contain all procurement rules and, where this is not feasible, should speciJcally refer to other procurement laws and regulations that would apply. Article 17 provides for the following procurement methods: open 2 Procurement tender; restricted tendering; request for quotations; competitive methods. negotiations; and single-source procurement. Tenders can be open or closed; targeted or periodic. Open tender maybe periodic or targeted. Periodic tender involves procurement of periodically used or recurrent items from a list compiled by the Authorized Body (AB). All other items are procured using targeted tender. Closed tenders are used for classified procurement such as the procurement carried out for defense purposes. The PPL prescribes the criteria for the use o f the different procurement methods (Articles 17-23, and 46-51) and defines the open tender as the preferred method (Article 17 (5)). Restrictive procedures are appropriately circumscribed based on the criteria and financial thresholds specified in the PPL. Consultant services are covered, and different methods for selection are provided. Fractioning of contracts to limit competition i s prohibited (Article 24 (I(a)). Urgent Need should be defined more precisely, to limit the use o f this iustification for continued use o f single source methods. The PPL defines "urgent need" as arising out o f "emergency" and contingency", which should be elaborated further. "Lack of competition" and sole "license" holder have also been cited i s providing opportunities for wide abuse. MFD426 sets out the Appendix Page No. - 6 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score grounds and documents to support single source procurement and Annex 6 o f GD 853N lists seven natural monopoly services, including electricity supply; natural gas; drinking water; irrigation water; technical and industrial water; water drainage and sewerage treatment service. The 2004 CPAR indicated that the Anti-Monopoly Commission was issuing certificates which were being used as documentary proof and justification for single source procurement under the 2000 law and under the MOF Decree 17 dated April 25, 2005, Past experience demonstrates that these certificates were being treated as virtual certificates of monopoly by firms and procurement bodies to justify single source procurement award to the firms in possession o f such certificates, despite the fact that actual market conditions reflect a competitive environment in the particular market. The Anti-Monopoly Commission no longer issues such certificates. The Commission however maintains a list or registry o f firms which are dominant (over 1/3 or 33% share) or which exercise virtual monopoly over certain markets, for the purpose of preserving and effectuating its regulatory and enforcement authority under Armenian legal and judicial framework. Moreover, the MOF has issued Decree 426N which requires the submission of a statement o f record from the Centralized Registry o f Economic Entities with Dominant Position, issued by the Anti-Monopoly Commission. as proof of "lack of competition" in order to justify sole source procurement, The situation described therefore under the 2004 CPAR may not have been fully addressed since firms and procuring entities may still use this record as a proxy s for claiming virtual monopoly and a justification for sole sourcing. The Anti-Monopoly Commission has indicated its position that despite possession o f such a record, the tender should nevertheless be conducted in an open and competitive manner. Late allocation (frequently in the last quarter of the year) o f budgetary funds (especially new allocations) often leads to the use o f the single source method of procurement as little time i s left before the end of the fiscal year to carry out competitive procurement. Procuring entities use this method to avoid losing the funds if not used before the end of the fiscal year. The PPL lacks clear provisions relating to the selection o f consultants. Section 5, Article 41, provides for prequalification in accordance with A6 rather than a clear procedure. Article 41 states "up to six ;onsultants, who passed the prequalification with the highest scores, zre entitled to participate in further proceedings" but at the same time, it states that "if more than six consultants have scored highest, then all Sonsultants are regarded as passed the prequalification". I t is, however, silent on whether more than six qualifying firms can be shortlisted. Para. 47 of Annex 2 GD853N elaborates further on the subject but Appendix Page No. - 7 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score does not lay down clear procedure for separating the evaluation o f technical proposal from financial proposal, and keeping the financial proposals sealed until the technical proposals have been evaluated, with a view to ensuring selection o f qualified and experienced firms. As a result, procurement o f consultants i s carried out in the same way as procurement o f goods and works. The PPL defines preparation o f designs as "works" rather than "consultant services". There are no detailed guidelines or operational manual for selection o f consultants. . While the number o f periodic contracts fell from totals o f 74 and 98 in 2006 and 2007 to 59 in 2008, the number o f targeted contracts increased from 448 in 2006 to 655 in 2007 and 865 in 2008 and also rose in value. The number o f sole source contracts has shown a decline from 703 contracts in 2006 (AMD 99,835,638,000) to 638 in 2007 (AMD 11,731,031,300), and 496 in 2008 (AMD 12,217,503,100). This does not include other exclusions from the PPL. For example, a number o f f i r m s that contracted on a sole source basis now receive resources as non-commercial entities, and are thus not covered by the procurement legal framework. There i s no specific provision which deals with International Competitive Bidding under the PPL, although the law does not unduly restrict or discourage participation by foreign bidders. Proposals are being developed to reach out and publicize information to encourage foreign f i r m s to participate. 1 (b) Recommendations: (I) For Single Source: (a) Revise MOF Decree 426 to define and clarifi, with examples, emergency and contingency situations (e.g., natural disasters) to ensure that the urgency was not a result o the act, omission or f negligence o the procuring entity. f (3) Use o registry o the State Commission for the Protection o j f f Economic Competition (Anti-Monopoly Commission) as a proxy for justifying single source on the basis o lack o competition should be f f discontinued. I n order to depart from the default rule o competitive f bidding, any such record should be supplemented by an articulation o j the actual position and market share o the f i r m , including f identijication o the other dominant and marginal players in the f specijic market, and by an explanation by the f i r m as indicated in 2004 CPAR. These provisions should be included in MOF Decree 426. Appendix Page No. - 8 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score (e) The list o 34 items in MOFD426, which are subject to the single f source method, should be reviewed and periodically updated to reject changes in market conditions and regulatory reforms. The list also includes `)procurement o goods and servicesfor the elimination o the f f consequences o natural calamities" which presently is too broad and f should be limited to disaster or emergency response related procurement, but excluding long term rehabilitation efforts. Contracts for private mass media publication and for historical design and restoration would greatly benefit from open competition, subject to rigorous technical spec ifications and evaluation to ensure highest quality standards. List offirms with exclusive licenses which are active should be updated and disclosedperiodically. (d) Extension o contracts. Any extension must be justified on f economic and eflciency reasons, including the lack o advantage to be f obtained in not using competitive methods. Additionally, it should be a pre-requisite to extension o contracts on sole source basis that the f current or original contracts have been obtained through competitive process (and not through original sole source). I n order to avoid the perception that technical specifications are tailored for a specific manufacturer or supplier, the SPA should review technical specifications upon receipt f i o m procuring entities to ensure that quality, including clarity, conciseness, and broadness. (2) Periodic Tenders- AB should consider harmonizing with the fiamework agreement models o the European Directives (including f Dynamic Purchasing) or those developed by UNCITRAL, which are: (i) Closed framework agreements without second-stage comuetition A fiamework agreement is concluded with one or more suppliers. A l l the specifications and terms and conditions o the procurement are set out in the f framework agreement. As a result, there is no further competition between the suppliers at the second stage o the procurement, and the only difference o this f f type o framework agreement procedure as compared f with traditional procurement procedures is that the items are purchased in batches over a period o time. f (ii) Closed framework agreements with second-stage competition A fiamework agreement is concluded with more than one supplier and sets out the specifications and main terms and conditions o the procurement. A firther f competition among the suppliers-parties to the framework agreement is required to award the Appendix Page No. - 9 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score procurement contract at the second stage o the f procurement, (iii) Ouen framework anreements A framework agreement is concluded with more than one supplier and involves second-stage competition between the supplier-parties. While no supplier/contractor can j o i n the framework agreement after the first stage o the procurement under the type f (i) and type (ii) arrangements, type (iii) is open to new suppliers throughout the duration o the framework f agreement, similar to the E U Directive's Dynamic Purchasing System. (3) Request for quotations: I n Article 21 o the PPL, the request for f quotation is used for procurement not covered by periodic tender and under five million drams. However, request for quotation may also be based on functional criteria on type o goods such as procurement o f f off-the-shelf goods, goods with standard specification or simple work o small value. The PPL shouldprovidefor this. f (4) Consultant Contracts: The PPL or Decree should clearly deJine the requirements when using quality alone, price alone, or a combination o both, and develop detailed evaluation procedure for f each method. Detailed shortlisting procedures should be included in the PPL which takes into account the qualifications and experience o f interested consulting firms. It should also address conflict o interest f issues which arise in consulting assignments. 1(c). Publication in a bulletinhewsletter has been discontinued, even though 2 Advertising Article 25 o f the PPL states that open tenders and contract awards are rules and announced in the newsletter. Tenders and contract awards are time limits. currently published electronically on the website, www.procurement.am, in Armenian, English and Russian and on TV/radio, but the website in English can be accessed only if someone has knowledge o f the Armenian language. The request for quotations as stated in Article 49( 1) and announcement o f competitive negotiation as stated in Article 50 are published in print media which has a circulation of at least three thousand.. Sufficient time i s allocated to bidders to respond, but the bidding documents are not made available immediately. The bid submission deadline i s set at least 30 or 40 days, from the date o f announcement for open tenders, and 10 days for Request for Quotation and Competitive Negotiation. Bid documents are only provided in two working days from the date o f request (Article 26). Moreover, these documents can only be obtained in person in Yerevan. As a result, the actual bid preparation period therefore i s effectively shorter than that envisioned in the law. For example, one prospective bidder was given only one and half day to prepare a bid was cited. AB disputes this case as it provided a shorter Appendix Page No. - I O Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score period to prepare the bid than that envisioned in the law and stated that based on its review o f the documents, the bidder was late in obtaining the bid documents, which was obtained almost near the deadline to f i l e bids, and thus resulting in the very short period to prepare and submit the bid.) Although the content o f tender announcements seems adequate as provided by law, and contains just enough information to enable interested parties to determine their ability and interest in bidding, more information about the tender should be provided to attract a larger number of potential bidders. The website www.procurement.am needs further development. At present, this i s available only in Armenian language. Bidding documents and related information, as well as interactive help desk should be made available in the web-site. As most providers o f goods, works and services in Armenia either do not have access to internet, or do not have computers and internet connectivity, or lack familiarity with the use of internet for business, publishing tender notices and contract award information only electronically would limit competition. Dissemination of procurement notices therefore should also be made using mass media to reach more potentially interested bidders. l(c) Recommendations: Dissemination o procurement information should be made using mass f media to reach more potentially interested bidders, such as TV, radio, print media. The website should be upgraded to include English language. Advertisement in TV and radio is more appropriate for rhort announcement o future opportunities and more information f could be provided in the website. A summary o planned future f arocurement opportunities, information on forthcoming contracts in the public media including newspapers should be made. Until the internet is well developed and is afordable throughout the country, publishing tender notices and contract award information in mass media, such as TV, radio, newspapers should be continued. I n addition to all these, targeted and pro-active dissemination o generally f mailable information to potential tenders, industry groups, and even Pelect foreign embassies would be helpful in generating more interest. Bidding documents should be made available to interested bidders upon request and not after two days o bidders ' application. The SPA f yhould strengthen its capacity to respond to this need o bidders. f ~ ~~ l(d). Rules There i s no exclusion from participation in competition for public 3 3n tenders on the basis o f nationality (Article 7 (1, 2)) o f the PPL, except participation. for procurement relating to national security and defense. There are no jomestic preferences. Registration i s needed in case o f a periodic Appendix Page No. - 11 Armenia - Country Procurement Assessment Report Sub-indicator efE Score tender but it does not constitute a barrier to participation in tenders and does not require mandatory association with other firms (GD853N, Annex 2). Despite these provisions, foreign participation in tenders in Armenia has been very low if not virtually absent. In 2008, foreign bidders participated only in one open periodic and one open targeted tender; and 11 single source contracts. This indicated that while there may not be any legal or regulatory barrier, there are other reasons prohibiting foreign bidders from participating. Article 5(2)(d) states that companies or representatives o f their management bodies who within the period o f the last three years were convicted of offenses against economic activities or public service; submitted false data in order to sign a procurement contract; violated obligations under procurement contract which caused unilateral termination o f the contract by procuring entity are excluded from bidding. N o special rules have been established for the participation of state owned enterprises. Cases of non-commercial entities participating and obtaining contracts, occasionally on a single source basis, from the entities to which they belong to (e.g., the road maintenance organization obtaining contracts from its owner Ministry o f Transport; and a company belonging to the Yerevan Municipality which gets large contracts from the Municipality also on single source basis) have been found to occur This illustrate the presence of a non-level playing field and potential conflict o f interest which should be addressed through introduction of detailed rules on the participation o f such entities in government tenders. Bid security i s mandatory in all cases. However, given the banking system in Armenia, bidders must provide his bank with collateral in order to obtain a bank guarantee to be used as bid security. This seriously impairs a bidder's financial strength. The list o f suppliers who do not meet the requirements under Article 5(2)(d) i s published by the AB based on the data obtained from the procurement entities and other bodies (Article 5 (6)). In practice, however, there i s very low level o f participation in tenders, and there is an urgent need for the government to take measures to increase the interest o f contractors, consultants and suppliers in public procurement. 4ccording to the information provided by the AB, in 2008, for 4 work :enders 8 bids, and for 8 services tenders 8 bids were received; for 120 ]pen targeted tenders, 20 1 bids were received; for 691 works tenders 1194 bids received; for 23 competitive negotiations for goods only 23 )ids were received; for 94 works contracts, 164; and for 7 services Appendix Page No. - 12 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score contracts 24 bids were received; there were 41 request for quotations for goods for which only 41 bids were received; 38 for works with 56 bids; and 35 for services with 190 bids. Data on closed tenders i s not available and there were no restricted and two-stage bidding tenders in 2008. This i s due to the following factors: the public procurement website requires knowledge of Armenian; the requirement that interested bidders must apply in person to the SPA to obtain bidding documents; the size and value o f contracts; and, more important, the public perception o f lack of transparency in the public procurement process. Foreign firms, similarly face significant information barriers both in accessing information about procurement opportunities and understanding the applicable rules and norms. l(d) Recommendations: The PPL should include a provision governing the participation o j joint ventures and consortia. Provide more clarity on the rules for Blacklisting or Debarment for misconduct (or for poor or non performance) to ensure fair process. Past performance can be considered during postqualijkation o the f lowest evaluated bidder. Article 5 o the PPL relates to qualification but essentially describes f the conditions for exclusion which should be clarified since the criteria for exclusion should not combine poor past performance, insolvency and misconduct. Clarify the rules which ensure a level playing field if state owned enterprises are significant participants in government procurement process or open tenders. They should be legally and financially autonomous, operate under general commercial law and are not dependent agencies. The provision should identify the situations o j conflict o interest and provide mechanismsfor their resolution. These f firms should not also be subject to preferential treatment or enjoy undue advantage on account o subsidies or tax exemptions. f The law should be amended so that tender security is not mandatory in all cases and the 2 percent requirement should not be based on the actual and exact proposed tender price to protect confidentiality o the f bid. A bid security declaration rather than a bid security should be introduced. Thus a bidder, instead o submitting a bid security, would f make a declaration that withdrawal o a bid during the bid validity f period or not signing the contract ifselected for award would result in disqualification fFom participating in future government tenders for a ereordained period, Develop mechanisms to promote participation o both domestic and f foreign bidders in tenders. The AB should establish a regular Appendix Page No. - I 3 Armenia - Country Procurement Assessment Report Brief Explanation Score f partnership private sector providers o goods, works and services, including holding regular meetings to seek their views on the f functioning o public procurement, carrying out awareness raising seminars throughout the country; partnering with NGOs to support government efforts for improving competition and for ensuring transparency in public procurement, The AB should identi3 the f impediments to participation o foreign bidders in Armenian procurement tenders, and accordingly improve procurement processes to facilitate their participation, including access to tender information and to bidding documents. ~ ~~ The PPL establishes the minimum content of the tender documentation 2 (Article 27). Article 13 (2) requires use o f neutral specifications and recognition of international standards It i s prohibited to refer to any trade mark, brand name, license, design or model, country o f origin or concrete source or producer, except in cases when it i s not possible to describe the item without such a reference. In such cases, description o f technical specifications should contain the words "or equal" AB has the obligation to approve the model document forms used in procurement procedure, as indicated in the PPL. Some model documents are currently being used, and they are in the process o f being reviewed by the cabinet and awaiting formal approval. Bidders are required to physically present themselves and submit an application along with the required payment for obtaining bidding documents from the SPA in Yerevan, and from procuring entities in other towns and cities. A bidder has to sometimes wait for three days before the bidder can obtain the bidding documents, which could adversely affect the bidders' access to bidding documents and, consequently, may result in reduced competition and higher prices. The SPA currently utilizes six printing companies to print the bidding documents and the companies are authorized to directly release the documents to potential bidders and accept the payment. I t i s unclear as to how these printing companies were selected and the type o f contractual arrangements made between the SPA and these firms, especially with regard to the payments they are authorized to collect from bidders. Proposals are being developed to make the bidding documents available on the website. While this may help large firms which have access to computer resources, small and medium firms may continue to face difficulty in obtaining bidding documents without physically i presenting themselves in the premises o f the SPA or in the sites of the procuring entities in cases where SPA i s not involved. There i s a lack of capacity in drafting technical specifications. . Poor technical specifications, combined with the lowest price being used as Appendix Page No. - 14 Armenia - Country Procurement Assessment Report Sub-indicator Score predominantly the only selection criteria in most cases, results in poor quality o f procurement o f goods, works and services. l(e) Recommendations: Model documents, along with user guidance, should be formally approved and widely disseminated. Bidding documents should include clear evaluation procedures and criteria. Quality o technical specijkations should be improved through f training o concerned staff and preparation o model technical f f speciJcations whenever feasible. Interested bidders should be given the bidding documents upon submission o application, by mail, courier or in person, rather than f the current practice o making them available only in SPA and the f printing companies authorized to produce the bidding documents. f I technically feasible, bidding documents should also be made available on the website so that those who have the means o f downloading thesef/.om the website can do so. l(f). Tender The PPL, which lists under Article 27 the content o f an invitation, 2 evaluation requires that tender documentation contain description o f procedures and award o f evaluation and selection o f winner (Article 27 (c, f)). This Article xiteria. provides for a tender commission to evaluate bids in accordance with the evaluation criteria in the bidding documents (Article 34(2)) and to select "the most highly evaluated bid" out o f the satisfactory ones (Article 34(5)). When evaluating bids to determine the most highly evaluated bidder, in addition to the proposed price, non-price criteria are also taken into consideration (Article 34(5)). However, non-price criteria have not been developed as yet. Tender commissions evaluate compliance o f a bid with the requirements as specified in the bidding documents; and examine the accuracy of calculation o f the financial indicators - the bid price and the cost price (GD853N, Annex 2, para. 29). In the absence o f a non-price evaluation methodology, decisions on contract awards are frequently made on the basis o f the lowest bid price without regard to quality, which results in poor quality o f goods, works and services. PPL covers consulting services and the Government Decree 8 5 3 N provides the methods and formula for evaluation. However, Article 13( 1) of the PPL does not provide the underlying basis when the use o f quality alone, price alone, or a combination o f both are appropriate, dthough the criteria for direct contracting or sole sourcing in Article 14 are well defined. The PPL should state clearly that the tender evaluation criteria should Appendix Page No. - I S Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score be quantifiable in monetary terms. Quantifying bid evaluation criteria in monetary terms i s the only method which leads to transparent evaluation and allows bidders to submit an effective protest or complain. For qualification criteria, these should be evaluated on a pass or fail basis. Although GD853N, Annex 2, para. 30 indicates that the assessment should be based on whether the bid i s "compliant" or "non- compliant," it i s important to clarify this point in the legal framework since the PPL seems to imply that a point or percentage system, rather than a pass or fail test, i s used for evaluating qualification (under Article 6(9), which states that "if more than six suppliers are scored highest, then all suppliers with the highest scores are regarded as having passed prequalification.") All qualified bidders should be allowed to bid. A34(c) in providing that rejection o f bid may be based "in other cases envisaged by law" raises serious issues. Generally, only the criteria specified in the bidding documents should form the basis for rejection o f bid. Unless the bidding documents are able to l i s t and specify these additional grounds, and have these sufficiently disclosed to the potential bidders, the current formulation i s vague and broad and consequently should be deleted. This i s especially crucial since in practice assessment o f qualification i s used to promote anti- competitive arrangements and to disqualify firms on non-substantive criteria. l(f) Recommendations: Evaluation criteria should be quantiJiable in monetary terms and qualification criteria should be evaluated on a pass or fail basis. The PPL or decree should specify the rules on how evaluation is conducted when the bidder is a joint venture or a consortium, which can leverage combination o their capaciv, experience, and financial strength, to f bid on contracts. Article 34(4.c) requires rejection o bid " i n other f cases envisaged by law" should be deleted since it is subject to interpretations and open to abuse. This should be specified and disclosed to potential bidders. Article 34(c), provides for the rejection o bid the words in other cases envisaged by law", should be deleted, f 1(g). The PPL has sound provisions for the submission, receipt and opening 2 Submission, o f bids. It specifies the date, time and manner of submission and receipt and requires that tenders are to be opened immediately following the opening o f closing date for bid submission (Article 33(1)). The procuring entity tenders. must submit information contained in procurement minutes, except classified information, to any person, within 5 working days after the receipt of the request (Article 9 (4)). Appendix Page No. - I 6 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score Confidentiality o f bids i s maintained prior to bid opening and disclosure o f information before the bid opening i s prohibited (GD853N, Annex 2, para. 23). Bidder's names, as well as the price are announced to those present at bid opening (Article 33(2)). The PPL requires record keeping o f proceedings (Article 33(3)). Bidders attending bid opening, should be allowed to sign the minutes and make comments. Bid opening takes place in two stages. In the first stage, the tender commission reviews the availability of the required documents and rejects the bids which have not included all the documents with their bid. In the second stage, where the winner i s announced, only those bidders whose bids have been determined to contain all the documents are allowed to be present, While the bid submission, receipt and opening, have the basic elements of transparency, bidders have expressed the following issues: Bidders are required to submit the bid in person The number o f qualification documents required to be submitted with a bid i s long and obtaining these for each bid a heavy burden on bidders. Bids are rejected if any o f the required documents are not included in the bid or "defective" in some way, regardless o f the importance or material content o f the document and to give the bidder the opportunity to submit the correct document or clarify the matter during bid evaluation. Bids are rejected for insignificant reasons such as an incorrect date (e.g., mandating that a bank statement from a bidder's bank be dated one day prior to the bid submission deadline). There i s public perception that the current bid opening practices have the potential o f allowing the tender commissions to intentionally reject bids for inconsequential reasons with a view to selecting a pre- determined winner. This contributes to the lack o f transparency in the procurement process, and limits fair competition. Suppliers or representatives are entitled to request for copies o f minutes which need to be provided within one working day (Article :5)). The minutes are provided after one day of the bid opening to the idder (Article 33(6)). 3D853N requires that the regular members o f the tender commissions should belong to the client or the procuring entity, except for the secretary o f the commission who i s provided by the SPA. The Appendix Page No. - 17 Armenia - Country Procurement Assessment Report Sub-indicator Brief E Score membership of the tender commission should be broadened and consist o f specialists from different establishments to allow for checks and balances and to promote transparency. GD853N, Annex 2, para. 4(2), provides a mechanism for others who are legitimately interested in the bidding process, including representatives from civil society, to attend In its current formulation, these "advisers" are considered "members" with an "advisory vote." This should be further clarified since the membership implies participation in the decision-making process (albeit on an advisory capacity). In designing a system o f civil society participation, consideration should be given to the value o f maintaining the independence and oversight roles o f these "observers", and measures introduced for preventing co-optation. In order to perform an effective oversight role, these "observers" should have a mechanism to note their observations and provide instant feedback. Thus, at their option, they should be allowed to note their comments in the minutes or given the opportunity to report their observations. However, this should not be made obligatory on their part in all cases. Transparency International Armenia has participated as observer in several previous tenders. l(g) Recommendations: Bid evaluation should take place on& after bid opening has been completed and closed, so that tender commissions can devote sufJicient time to the important task o determining the substantial f responsiveness o bids. After substantial responsiveness o bids has f f been established, the lowest evaluated responsive bid should be oostqualifed to ensure that the selected bidder has the required qualijkations and experience. Furthermore, in order to facilitate the bidding process, the list o required documents should be reduced to f those which are most critical to evaluate the impact on the qualification and capacity to perform the tasks and a bid clarification orocedure during evaluation o bids should be introduced during f which tender commissions, instead o rejecting their bids, can give an f gpportunity to bidders to submit correct documents without in any way rlzodifying their bids. Representatives f i o m civil society should remain as observers, wonitors or oversight agents and not as participants or advisers in the decision-making process. Mechanisms should be developed to obtain their feedback and observations. Membership o tender committees f yhould be expanded and changed as required to promote transparency 2nd ensures checks and balance. 1(h). The PPL provides for the complaints process to be initiated by any 2 Complaints. 3erson (and not just losing bidders) and to seek review, if he or she :laims to have suffered or can suffer from the actions of the procuring Appendix Page No. - 18 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score entity and (or) tender commission (Article 52 (I)). leaves room This for initiating complaints beyond the procurement process to contract disputes during implementation especially in light o f Article 56 (which seems to be the practice). Appeal i s filed and i s published in a print media without identifying the personal details o f the appellant. The subject matter o f review i s wide and i s not restricted to the award. Remedies allow for the possibility o f redirecting award, granting interim relief through suspension of actions and correcting the decision. Damages can also be awarded if decisions are rendered against the procuring entity (Article (30(5)). The PPL provides a timeframe (1 0-20 working days) for issuance o f decisions by the AB (Article 53 (4)). Article 56 provides that the actions o f the AB and (or) procuring entity and (or) tender commission can be appealed in court. Submission o f appeal to AB i s not mandatory as a condition for going to court. The PPL requires the establishment of a standing unit in the AB to perform review functions o f complaints which may engage representatives of stakeholders who are not procurement entities or NGOs, on an unpaid basis (Article 16(2) (3)). Currently, the AB performs such functions and has resolved around 50 appeals cases in 2008, approximately 50% o f which have been decided in favor o f the appellant and against the procuring entity. This, however, raises issues o f potential or perception o f conflict o f interest by the AB which i s simultaneously involved in organizing, regulating, and coordinating procurement procedure, dispensing advice, and reviewing an appeal or complaint The current practice of having both the AB and the SPA under the supervisory authority o f the MOF also raises issues from the conflicts perspective. Under OECD-DAC/World Bank methodology, even though the first review may normally be carried out by the procuring entity, there should be an administrative/judicial review body which i s independent from the procuring agency. 1 (h) Recommendations: An appeals system should be established which is fully independent o the MOF, AB, SPA, and government entities, which operates in an f environment free f r o m a perception o conflict o interest, which builds f f confidence f r o m participants, and which would be eflcient, timely and responsive to procurement needs and effective in providing meaningful remedies. The architecture and configuration o this body needs to f respond to local conditions and rely on the domestic legal structure. But a varied membership f r o m persons o known probity and f independence such as members o NGOs, media, academia, retired f Appendix Page No. - I 9 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score jurist or judges, industry and privates sector representatives w i l l inspire confidence in terms o fairness and transparency. The AB, f given its expertise and organizational advantages, may serve as secretariat. AS6 combines contract disputes mechanisms with complaint review mechanisms in the procurement processes. These should be treated separately Mechanisms for the resolution o disputes relating to the procurement f process and contract disputes that result P o m implementation o the f contract, need to be made clear and incorporated in the conditions o f contract. Note: See a more extensive discussion under Indicator 10 on the Efficiency o f the Appeals Mechanism Notes Periodic v. Targeted Tenders: Periodic tenders are listed as one procurement method in the PPL and further regulated in GD853N. Open tender maybe periodic or targeted. Periodic tender involves procurement o f periodically used or recurrent items from a l i s t compiled by the AB. All other items are procured using targeted tender. Periodic procurement method i s applied for common use goods, works, and services which are approved by the AB and specified in a catalogue o f some 13,000 items which i s available in electronic format and posted on the website www.procurement.am. Typical catalogue items include office supplies, consumables, pharmaceuticals, and maintenance services (e.g. roads). The concept o f periodic contracts, which may also be characterized as akin to framework agreements, aggregates the demand o f goods, works, and services o f general use and aims at conducting procurement in a more efficient way. Savings in transaction costs by avoiding multiple repetitive tender procedures and lower prices through bulk purchasing are typical gains from framework agreements. While it seems obvious that transaction cost savings result from the aggregation o f demand into one periodic tender rather than multiple targeted tenders for different purchasing agencies, no data was available to clearly demonstrate that lower prices are obtained under periodic tenders. For example, different views were expressed by the Ministry o f Urban Development, which seemed to be satisfied with the delivery, time and price o f periodic contract items, and the Marzpetaran o f Armavir, which provided the example o f an expensive periodic contract item (a pen for 50 Drams) as compared to the same item available in the market for a much lower price (20 Drams). In addition, the pen under the periodic contract has to be obtained from Yerevan whereas the less expensive same pen can be purchased in the Appendix Page No. - 20 Armenia - Country Procurement Assessment Report store next door. (This may be suitable for small orders - but not for large quantities). Quality issues have been reported with regard to pharmaceuticals, i.e. medicines procured under periodic contracts seemed not always as effective as expected although only certified pharmaceuticals were admitted to periodic contracts. This issue should be linked with the wider reform agenda in the health sector. In some countries, reform has been introduced, oftentimes in accordance with W H O recommendations, by limiting choice through the Essential Drug L i s t s (EDLs) o f generically named products. This l i s t aims to achieve expanded access to a smaller number o f appropriate drugs. It has been observed that the adoption o f such a l i s t has been crucial in helping some countries to increase the objectivity and transparency o f the pharmaceutical selection process and improving access to quality medicines. I t might be useful for the government to consider the preparation o f a Standard Medical Equipment L i s t with a view to ensuring that scarce res,ources are used to obtain priority or essential equipment. Purchase o f medical equipment should ensure that it i s compatible with the availability o f expertise in the public sector, servicing and maintenance i s readily available, that the equipment i s suitable for the facility environment, and that complementary equipment i s on site (e.g. generators, surge protectors) etc. In the past, periodic contracts were closed framework agreements between the SPA and one qualified firm who provided the lowest price per unit. While these agreements were limited in terms o f duration (usually 2 or 3 years) they did not indicate a maximum purchase quantity or volume over this period, which could have provided a stronger basis to bidders for their price calculations. For specific purchase orders, purchasing agencies had to submit an application to the SPA who signed an agreement with the supplier/contractor. Although the framework agreement was set up competitively, the subsequent purchase orders did not allow for additional competition since only one firm was selected as supplier/contractor for the duration o f the agreement. To this end, unit prices were fixed and there was no market-based price adjustment mechanism in place. With the recent adoption o f GD853N o f June 5, 2008, the model o f closed periodic contracts has been changed to become a model o f open periodic contracts allowing as many bidders as interested to register with the SPA at any time and to compete for the lowest unit prices on a periodic basis. While promoting competition by allowing multiple interested bidders to register and qualify during the lifetime o f the periodic contract, competition can be increased b y inviting all registered bidders to compete for each purchase order. In line with GD853N, periodic tenders will be advertised with a procurement notice, which i s valid for 3 years. Interested bidders can start the registration process by submitting to the SPA a written application together with the documents required for qualification. Bidders who are compliant with the qualification criteria will be registered and they will then sign a preliminary contract with the SPA. Those who do not qualify will be given the opportunity to re-register after having addressed the issues which led to their initial rejection. O n a quarterly (goods) or yearly (works and services) basis, all qualified bidders submit to the SPA a closed envelope with unit prices, a bid security, and a declaration ensuring their compliance with the qualification criteria based Appendix Page No. - 21 Armenia - Country Procurement Assessment Report on which they had been registered and admitted to the periodic contract. The bidder with the lowest price will be contracted by the SPA as a supplier for the next 3 months (goods) or as a contractor for the next 12 months (works and services). The prices are published in the catalogue on the website. Once purchasing agencies have submitted to the SPA, Their requests for purchase orders, the SPA signs an agreement with the respective supplier/contractor for each purchase order. The SPA does not charge any fees for i t s services. According to the SPA, procuring entities must procure the items on the MOF l i s t o f items subject to periodic tenders. The transition from a closed to an open periodic contract model i s a positive development to increase competition and adjust prices o f periodic contract items with market prices. However, the new periodic contract model i s open for competition among qualified registered bidders for every 3 (goods) or 12 (works and services) months when they are invited to re-submit their unit prices. Thereafter, the price o f the lowest bidder i s locked in and valid for all purchase orders until the next round o f price submissions. Competition could be increased by conducting a "mini-competition " for each requested purchase order rather than every 3 or 12 months. While this would require more f administrative effort, the use o electronic means for such "mini-competition " (e.g. electronic reverse auctions or electronic requests for quotations) could help to minimize such administrative effort i n the future. AB should continue to review the practices with regard to the application o f framework agreements and modify GD 853N accordingly. Examples include but are not limited to the framework agreement models o f the European Directives (including Dynamic Purchasing) or the current discussion o f U N C I T R A L about the inclusion o f three different framework agreement models in the revised procurement model law. The set up and management o f periodic contracts in Armenia could benefit from these models and the adoption o f some good practices, e.g. the definition o f terms and conditions in the initial framework agreement including the reference to a ceiling quantity or volume over the lifetime o f the framework agreement or mini-competition for purchase orders in framework agreements with multiple suppliers/contractors. In the context o f redefining the role o f the SPA for public procurement, it i s recommended to retain the setting up and management o f framework agreements or periodic contracts among the tasks o f the SPA. At the same time, the efficiency o f framework agreements could be increased by streamlining the purchase order procedures and have purchasing agencies rather than the SPA sign purchase orders directly. In the context o f decentralization o f public procurement in Armenia, the SPA would no longer be involved in the procurement process o f targeted tenders. Instead, the procurement expertise o f the currently some 50 staff o f the SPA could be used for periodic tenders and contracts. Since the SPA will also be responsible for the operation and support o f the future e-GP system, all expertise and capacity required to establish and manage such framework agreements would be consolidated in the SPA as a centralized purchasing agency for framework agreements. Appendix Page No. - 22 Armenia - Country Procurement Assessment Report I t i s recommended that the government explore the integration o f the currently available electronic catalogue in the second stage o f the e-GP system, i.e. the e-Purchasing system. Electronic means can facilitate the competitive purchase order procedures o f framework agreements, e.g. mini-competition for purchase orders through electronic reverse auctions or electronic requests for quotation. Additional features include e-ordering and e-payment modules linked to the electronic catalogue. However, the implementation o f such electronic procurement means should be subject to a detailed and phased implementation plan in line with the overall e-GP strategy and requires adequate infrastructure and capacity within the SPA and among the supply (suppliers/contractors) and buyers (purchasing agencies). Note on l(d). Participation Rules Blacklisting or Debarment Under the PPL, if during procurement process, the supplier or i t s repres nt tiv "commits" illegal acts against economic activity or public service, then the bid o f this supplier i s immediately rejected and the procuring entity advises to that effect the authorized body and the law enforcement bodies, providing the grounds for that decision to the latter and the supplier (Article 12). There i s a need for clarity on the precise legal meaning o f the word "commit" as against "convicted" which i s used in another part o f the PPL (Article 5), and the processes leading to disqualification under Articles 5 and 12, in order to ensure fair process. Alleged commission o f acts that leads to rejection o f tender should not be based on mere rumors or baseless allegations. Giving the tender committees wide discretion in this respect might open opportunities for unnecessary restriction o f competition by disqualification o f otherwise qualified f i r m s on the basis o f mere suspicions, bare allegations or even o f false charges. There i s a need to articulate the type o f offenses constituting the ground for debarment and it would be helpful to provide examples on what constitutes corrupt and fraudulent practices in the procurement processes (e.g. bribery to obtain contract, submission o f fraudulent bid securities, and collusion to award to a pre-determined winner or to establish artificial prices at non- competitive levels) The mechanism for debarment or blacklist is not prospective in effect but retrospective in the sense that it affects ongoing contracts. In other words, the effect o f blacklist i s not only to disqualify a firm from future tenders but to disqualify it from an ongoing tender or resulting in termination o f an effective contract. Article (5) includes violations o f obligations under the contract which caused the unilateral termination o f contract by the procuring entity. Therefore, poor performance i s in effect a basis for inclusion in the blacklist. This i s an inappropriate criterion to judge and enforce contractual obligations. As an alternative, the AB should consider factoring in previous poor performance as one relevant evaluation criterion that will be evaluated rather than using it as the basis for rejection o f tender. The blacklist i s published in the AB website, and i s valid for three years. The decision to include a company on the l i s t i s based on information received from the procuring entities Appendix Page No. - 23 Armenia - Country Procurement Assessment Report and other bodies. Considering the impact o f this on reputation o f firms, the uncertainty o f some o f the allegations, the severe effect on competition, and the unmediated nature o f the penalty, there i s need to articulate the procedure for receiving the allegations and for a fair opportunity to, explain, contest and appeal any initial determination. Moreover, the penalty can be more differentiated depending on the egregiousness o f the violations. For example, submission o f false data under Article 5(2)(d)(2) should refer to knowing submission o f false or fraudulent material data that was relied upon in the award decision in order to merit a severe penalty. Submission o f immaterial documents should not merit a similar penalty. However, the commission o f egregious criminal acts related to procurement, which are proven, may merit a severe penalty including permanent debarment. Firms should be able to drop in or out o f the l i s t based on assessment o f compliance with some rehabilitation and good conduct conditions, such as cooperation in the investigation, return o f proceeds, the dismissal o f the responsible official or employee, appointment o f compliance monitor within the company and promotion o f a robust compliance and ethics culture in the company. Bid Security The provision on bid security in the PPL has been amended in response to the recommendations o f the 2004 CPAR. Article 27 (k) and Article 31 suggests that bid security i s mandatory and thus required in all cases. This should allow for exceptions since the r u l e should be that security should be required only in cases where it makes economic sense and where it i s justified on the basis o f a risk assessment. Under normal circumstances, security i s not necessary in procurement o f simple goods or goods o f nominal value. Alternatively, in such cases and in l i e u o f a security, the entity may require bidders to sign an undertaking that if they withdraw or modify their bids during the period o f bid validity or if they are awarded the contract and fail to sign the contract or submit the requisite performance security before deadline, the bidder will be suspended from being eligible to bid in any contract. Availability o f bid securities from banks i s rather limited in Armenia. Such security is usually issued only upon deposit o f an equivalent amount in cash and in case collateral i s accepted, such collateral should be valued at about a third o f i t s actual value. Requiring security in all cases, even in cases o f simple and nominal goods or where risks are l o w or absent, i s therefore uneconomic and unnecessary, and may even have significant impact on competition. A31 requires a reasonable bid security requirement o f 2%, which i s based on the tender price rather than the contract value. This practice i s could be in response to the 2004 CPAR recommendations, and at present the estimated contract valuehudget i s no longer disclosed to bidders. Basing it on tender price raises the issues o f breach o f confidentiality o f the tender offer as it would be easy for a competitor to determine the exact tender offer using this information. In future amendments, the law should be amended to make bid security not mandatory in all cases and the 2% should not be based on the actual and exact bid price (for example, the bidder may be allowed the discretion to vary the amount by obtaining a security in any amount that i s not lower than 2% o f the tender price, and the exact amount being at the sole option o f the bidder. Simplified method o f calculation or formulation which addresses this concern o f confidentiality should be explored). Appendix Page No. - 24 Armenia - Country Procurement Assessment Report Note on l(f).Evaluation Criteria Article 34 o f the PPL requires that in evaluating bids, the evaluation should be based on whether the bid i s "satisfactory" or "unsatisfactory" in accordance with the requirements o f the invitation. This strict interpretation whether a bid i s responsive to the invitation i s a good feature since it prevents abuse by tender committees from exercising inappropriate and wide discretion. However, in certain cases, evaluation should take into account whether a deviation i s minor or major and whether it relates to an integral, important or substantive aspect o f the invitation. If the deviation i s minor, then depending on the nature o f deviation, this might be disregarded or the tender might receive a lower score based on the deviation, as opposed to being declared as totally unresponsive and thus rejected. However, this should be carefully designed and implemented, as it provides some discretion to the evaluation committees in going beyond a strict interpretation o f the invitation requirements. Note on 1(g). Tender Submission Varying membership o f tender committees to promote check and balance i s illustrated b y the following examples: procurement b y the Ministry o f Health in building o f hospitals may include a member from the Ministry o f Urban Development, or procurement by the Ministry o f Health o f ambulance may include a member from the Ministry o f Transport. Procurement for works on irrigation canals by the Ministry o f agriculture may likewise include a member from the Ministry o f Urban Development and a reputed faculty member in engineering from a nationally recognized university. Transparency could be further enhanced by including membership from some independent state bodies (like the State Commission for the Protection o f Economic Competition). Note on l(h) Complaints. Ideally, the complaint review body should be an independent external body, but if this i s not feasible due to national capacity constraints then, it should nevertheless be an independent procurement review panel or body. W h i l e it i s notable under the PPL that the AB i s no longer involved in the procurement decision-making process, as earlier when it was involved in the approval for the use o f single source contracts, the functions o f the AB as a review body raises issues about i t s independence. The AB in performing various functions and exercising authority-which includes regulatory, advisory, and review and enforcement responsibilities-creates opportunities for potential conflicts o f interest. The discretionary power o f the AB (or any future appeals body) under A55 to suspend the procurement proceedings until the decision i s made with respect to the appeal should be judiciously exercised to balance the risks attendant to undue delay this may cause in the procurement process. Indicator 2. Existence o f Implementing Regulations and Documentation. This indicator verifies the existence, availability and quality o f implementing regulations, operational procedures handbooks, model tender documentation, and standard conditions o f contract. Ideally the higher level legislation provides the framework o f principles and Appendix Page No. - 25 Armenia - Country Procurement Assessment Report policies that govern public procurement. Lower level regulations and more detailed instruments supplement the law, make it operational, and indicate how to apply the law to specific circumstances. This indicator consists o f six sub-indicators (a-f). Sub-indicator Brief Explanation Score 2(a). The PPL i s supported by detailed implementing regulations in the 2 Implementing form of Government Decree No. 853N of June 5,2008, approving regulations that the implementation rules. However, this decree does not provide defined comprehensively cover all aspects of the PPL and contains contract processes and conditions, some of which should be more appropriately articulated procedures not in model documents. The MOF has also issued Decree No. 426, included in dated April 25,2005 on sole source procurement. (See also la). higher-level legislation. 2(a) Recommendations: A single comprehensive implementation regulation should be prepared and issued to further articulate other aspects o the law f not covered in the current version. Decrees should not include contract conditions which should be included in the model bidding documents. ~~ ~~ ~ 2(b). Model There are no approved model bidding documents, but a set of 1 bidding mandatory items and content for tenders are specified in the PPL in documents for Article 27. Under the PPL, the AB has the authority to approve goods, works, model document forms (Article 16(2) (d). A number of standard and services. bidding and contract documents are commonly used by the SPA but these have not been formally approved nor disseminated. The non- publication and the centralization of use of these forms with the SPA constrain procuring entities in preparation of the package. These should be formally approved and made readily available on the website. The AB intends to proceed with formalization of these standard documents along with further amendments to the legal framework and implementation of the recommendations on these and other assessments. 2(b) Recommendations: Model documents and standard contract conditions should be formally developed and approved and posted on the website as soon as possible. . Model Bidding documents should provide, among others, for bid evaluation to take place only after bid opening has been completed and closed, so that tender commissions can devote suflcient time to the important task o determining responsiveness o bids. After f f f responsiveness o bids has been established, the lowest evaluated responsive bid should be postqualifed to ensure that the selected bidder has the required qualifcations and experience. Furthermore, in order to facilitate the bidding process, the list oj required documents should be reduced to the most essential needed Appendix Page No. - 26 Armenia - Country Procurement Assessment Report Sub-indicator Score for evaluation and to comply with the PPL and a bid clariJication procedure during evaluation o bids should be introduced during f which tender commissions, instead o rejecting their bids, can give f an opportunity to bidders to submit the legitimate and valid documents without in any way modifying their bids. Model Bidding documents should also include general contract conditions and provide for inclusion o special conditions or those f particularly applicable to the procurement being carried out. These conditions should be balanced, impartial and fair to the contractual parties. 2(c). Qualification criteria and pre-qualification procedures are set out in 2 Procedures for Articles 5 and 6 o f the PPL, respectively. However, there has been pre- no precedent in the use o f prequalification procedure as o f this qualification time. The PPL provides that qualification must be based on professional, technical, financial and labor resources but i s not explicit that the criteria should be based on pass or fail system. Qualification should be evaluated on a pass or fail basis. Although GD 853N, Annex 2, para. 30 already indicates that the assessment should be based on whether the bid i s "compliant" or "non- compliant", the PPL seems to imply that a point or percentage system, rather than a pass or fail test, i s used for evaluating qualification under Article 6(9), which states that "[ilf more than six suppliers are scored highest, then all suppliers with the highest scores are regarded as having passed prequalification." All qualified applicants should be invited to submit bids. Normally, pre-qualification should not be mandatory in all cases and i s usually necessary only for large or complex works or in cases where the high costs o f preparing detailed bids could discourage competition. The PPL also combines prequalification of bidders for goods and works with shortlisting for consulting f i r m s for services. 2(c) Recommendations: Pre-qualijkation should not be mandatory in all cases, except for large or complex goods or works or in cases where the high costs g preparing detailed bids could discourage competition. Standard f palijkation criteria should be developed and should be evaluated based on pass-fail basis. All those pre-qualiJied should be invited to bid. Prequalijcation should apply only to goods and works and a reparate provision on shortlisting o consultingfirms for consultant f Appendix Page No. - 27 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score assignments should be included in the Decree. I n general, the standard should be postqualification type o process. f 2(d). Section 5 of the PPL covers procurement o f consulting services 2 Procedures evaluated on the basis o f "non-price conditions." However, Article suitable for 43(1) o f the PPL does not provide the basis when using quality contracting for alone, price alone, or a combination o f both are appropriate, services or although the basis for direct contracting or sole sourcing in Article other 44 are defined. Government Decree 853N provides the procedure requirements in for evaluation o f price and non-price criteria. In standard which technical procurement of goods, works and services, the process allows for capacity i s a evaluation o f the most highly evaluated proposal which may key criterion. consider, in addition to price, non-price criteria as well. Design contracts are treated as part o f works. 2(d) Recommendations: The PPL or Decree should define clearly the evaluation methodology when using quality alone, price alone, or a combination o both are appropriate for consultant services. f Design contracts should be defined as consultancy services rather than works. 2(e). User's According to the AB, a "Methodological Guidance" which serves 2 guide or as a Procurement Manual exists. The AB has the responsibility for manual for its maintenance under Article 16 (2) (b) o f the PPL. contracting entities. 2 (e) Recommendations: The procurement manual should be updated and widely disseminated to procuring entities and interested contractors, wppliers and consulting firms. 2(Q. General The PPL under Article 27 (8) requires that the invitation should 2 Conditions o f include the draft procurement contract. There are elements o f Contract(GCC) senera1 Conditions o f Contract in the implementing regulations in for public 3D853N Annex 1, paras. 17-18 and Annex 2, paras. 1-3, and 7 sector contracts which are obligatory. All procurement contracts are also based on covering goods, :he general Civil Code. There are plans to formally approve model works and :ontract documents. Suppliers and contractors complain that the services :ems, risks and attendant obligations in the contract conditions are consistent with me-sided and favor the government. national requirements t (f) Recommendations: and, when applicable, 3evelop and formally approve fair, equitable and balanced international tandard general (and special) conditions o contract, and include f requirements. hese in model bidding documents. Appendix Page No. - 28 Armenia - Country Procurement Assessment Report Note on 2(a). Implementation Regulations Government Decree No. 853N dated June 5, 2008, covers only certain key aspects o f the PPL and annuls a list o f other subsidiary regulations. There i s need to clarify what rules apply with respect to the items that are not covered and whether certain other existing regulations which were not expressly annulled remain enforceable. An inventory o f all the other related legal acts, reconciliation o f potential conflicting aspects, harmonizing and aligning them in accordance with the provisions o f the law in order to achieve some more clarity on the scope and subjects o f i t s applicability needs to be carried out Pillar 11. Institutional Framework and Management Capacity Pillar I1 assesses at how the procurement system as defined by the legal and regulatory framework in a country i s operating in practice through the institutions and management systems that are part o f the overall public sector governance in the country. Indicator 3: The public procurement system i s mainstreamed and well integrated into public sector governance system. This indicator assesses the procurement system to (a) determine i t s suitability to discharge the obligations prescribed in the law without gaps or overlaps; (b) whether the necessary links with other sectors o f government affecting procurement exist; (c) whether procurement operations are constrained by other external institutional factors; and (d) whether the managerial and technical capacity o f the system more adequate to do procurement without unnecessary cost or delay. This indicator also measures the degree o f integration o f the procurement system with other parts o f government and particularly with the financial management system given the direct interaction between the two, from budget preparation and planning to treasury operation for payments. There are four sub-indicators (a-d) to be scored under indicator 3. Sub-indicator Brief Explanation Score 3(a). At the initiation o f the budget preparation cycle, procuring entities 2 Procurement submit a list o f proposed procurement requirements to the planning and National Standards Committee (NSC). The NSC verifies the associated submitted list and sends it to SPA for costing. After the SPA expenditures are determines the relevant costs, the budget entity includes the part o f the procurement detailshtems into a quarterly cash plan. Such plans, budget however, are not procurement plans, as foreseen by paragraph 6 of formulation GD853N, Le., these include only items (or needs) to be procured process and and their estimated costs. These documents, which are used for contribute to budget preparation purposes, do not show description of contract multiyear packages, applicable procurement method, and key dates for. planning. tender process, i.e., preparation o f technical specifications, bidding documents, issue o f bidding documents, receipt, opening and evaluation of bids, contract signature and contract completion. Within the Medium Term ExDenditure Framework (MTEF). multi- Appendix Page No. - 29 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score year contracts (for two/three years) are signed but with a provision that makes their effectiveness conditional upon availability of funds. Budgetary funds are generally not available beyond the first year o f multi-year contracts. As a consequence, these contractors do not perform efficiently in a consistent manner leading to poor quality o f delivered goods and completed works. Substantial amount o f procurement i s carried out in the last quarter o f the year when the procuring entities are provided budgetary funds. This places the procuring entities in a difficult situation as, on one hand, the funds need to be utilized before the end o f the fiscal year (Le., December 31) or forfeit them and, on the other, little time i s left to carry out transparent and competitive procurement. Consequently, procuring entities resort to quick but unjustified procurement methods, such as the single source method, based on poorly prepared technical specifications and inadequate contract conditions. 3 (a) Recommendations: Simplifv process, and align the procurement process with budget cycle to avoid bunching o contracts towards the end o the budget f f period o theJiscal year. f Improve timeliness o procurement planning and contents o f f procurement plans. As soon as information about budget approval becomes available to a procuring entity, it should prepare a detailed procurement plan, in line with paragraph 6 of GD853N including contract package description, estimated budgetfor that package, procurement method, key dates, including contract signature and completion dates. Improve budget execution processes with a view to (0 making budgetary funds available to procuring entities in a constant manner over the year; and (ii) ensuring availability o funds for f multi-year contracts. 3(b). Budget Budget legislation supports the conduct of timely procurement 3 law and procedures. The Law "On Treasury" o f July 27, 2001, regulates financial financial procedures. Payment i s made after 5 days o f submission procedures o f all necessary documents by procuring entity to the Treasury, support timely and verification by the AB (See sub-indicator 3(b) below) that the procurement, procurement process i s in compliance with the PPL. Since 2002??, contract payments have been conducted on time and according to the terms execution, and znd conditions of public procurement contracts, there were no payment. :omplaints submitted to the MOF regarding delays in payment; nor contractors and suppliers raised any issues concerning getting Appendix Page No. - 30 Armenia - Countw Procurement Assessment Report Sub-indicator Brief Explanation Score the payment on time. 3(c). N o The PPL has no mandatory requirement that procurement action 2 initiations o f should be initiated only after ensuring relevant budget procurement appropriations are in place. A procuring entity i s entitled to initiate actions without the procurement process and sign a procurement contract prior to existing budget the earmarking o f financial resources with the fulfillment o f the appropriations. condition that the contract i s in effect and valid (Article 15 (4) and as long as funds are available for it. Article 15(5), however, cautions the procuring entity that it can undertake financial obligations for procurement subject to availability o f funds allocated to the contract. AB contends that the general rule remains that sufficient funding i s assured before commencement o f procurement process. This arrangement raises issues regardingthe waning o f bidders' interest in participating in tenders and transferring the risks to the private sector, considering the unilateral power o f procuring entities to cancel a signed contract and costs incurred, and opportunity costs for a potential participant. This may contribute to the bidders' low level o f interest in government contracts and inadequate level o f competition. This practice also distorts the budget prioritization and planning process. 3 (b) Recommendations: Advance contracting and eflectiveness o contracts contingent on f availability o funds should be discontinued. If this is retained, the f circumstances allowing its use should be restricted and speciJied in the law. 3(d). Systematic There i s requirement that every public procurement contract must 1 completion be registered with the Treasury. According to the AB and as reports are provided under the law governing the Treasury, all transactions prepared for are registered with MOF, including cost overruns and unpaid certification o f invoices. A9 o f the PPL also requires submission to the AB copy budget execution o f the evaluation report, within ten working days o f contract and for signature or cancellation of a tender. reconciliation o f delivery with The AB carries out a review o f evaluation reports and signed budget contracts, and provides feedback to the SPA if it determines that programming. the PPL provisions have not been followed. If the PPL has been complied with, the AB provides the Treasury with i t s positive opinion on the basis o f which the Treasury makes contractual payments. These reviews by the AB do constitute direct involvement o f the AB in the procurement process, and creates conflict o f interest situations because the AB i s also responsible for oversight o f public procurement and review and resolution o f Appendix Page No. - 3 I Armenia - Covntry Procurement Assessment Report Sub-indicator Brief Explanation Score bid complaints. 3(c) Recommendation The AB should discontinue direct involvement in the procurement process related to the reviews o evaluation reports and signed f contracts to avoid conflict o interest with its role o review and f f resolution o bid complaints. f Indicator 4: The country has a functional normativehegulatory body. Although this indicator refers to a normativehegulatory body, the roles and functions o f various institutions within the public sector, and degree o f coordination between them (i.e. one agency responsible for policy, another for staff training and another for statistics) i s o f utmost importance. When the assessment criteria below refers to the "regulatory body", this may imply "regulatory function" if applicable to the particular assessment. The assessment o f the indicator will focus on the existence o f the function, the independence o f the regulatory function, the effectiveness o f performance and the degree o f coordination between responsible organizations. There are four sub-indicators (a-d), which are measured. Sub-indicator Brief Explanation Score 4(a). The status The public procurement organization in Armenia i s complex. It 2 and basis for the comprises the Authorized Body (AB), the State Procurement normative Agency (SPA), and procuring entities. The MOF acts as the /regulatory body Authorized Body (AB) through i t s Procurement Process i s covered in the Regulation and Budget Execution Methodology Department. I t s legislative and main role i s to regulate, coordinate and oversee public regulatory procurement. The SPA, which also i s a unit o f the MOF, i s framework. responsible for conducting procurement in collaboration with procuring entities. The SPA i s headed by a Director and Deputy Director. I t has a staff o f 50 organized in two departments: the Procurement Organization Department (1 6 key staff), and the Legal Department (10 key staff). Procuring entities' role comprises o f the preparation o f technical specification; delivery schedule, and payment terms; establishment of a tender commission comprising 3 to 5 members; and supervision o f contract performance. The PPL defines the powers and authority of the AB and procuring entities, which are further elaborated in GD853N. It identifies the SPA but does not provide the functions and responsibilities, except for stating that it shall perform functions Envisaged by law. (Decree N1904-N dated December 12, 2002 which predates the PPL). However, in Article 57, the PPL provides for the SPA to organize open tender and to sign :ontracts on behalf o f the procuring entities'. GD853N further Appendix Page No. - 32 Armenia - Country Procurement Assessment Report Sub-indicator 3core elaborates in various provisions the role o f SPA. However, there i s need for further clarifying and streamlining the role and responsibilities o f the SPA through updating and elaborating the decree on SPA. The public procurement function appears to be decentralized to procuring entities. However, there are significant and residual functions that remain centralized to the SPA. Structurally and in practice, the framework adopts a significant central coordination of procurement which allocates responsibility to the AB for policy and regulation and coordination o f procurement. The AB performs functions that relate to monitoring compliance with the requirements of the procurement legislation. Article 57 o f the PPL gives significant authority to the SPA to organize and sign open tenders, thereby significantly centralizing a l l procurement activities and separating the signatory o f the contract from the party responsible in its implementation. While the procuring entities are made responsible for carrying out procurement, this role i s limited to (i) preparing technical specifications; (ii)establishing a tender commission; and (iii) supervising contract performance. The PPL further provides that SPA staff serve as secretaries to tender commissions and can also serve as members (in periodic tendering). The SPA-appointed secretary to the tender committee possesses considerable power to cause suspension o f the procurement process, which could effectively negate the decision o f the tender committee. Unlike other procurement systems in the region, this centralization o f functions involves the SPA not just with coordination but with the specifics o f the conduct o f open tenders. While this has certain advantages in terms o f economies o f scale and ensuring compliance with the requirements o f the PPL, the current organization severely constrains building the capacity o f the procuring entities and in promoting clear lines o f accountability, as the responsibilities are fragmented. There i s an urgent need to align responsibilities, outline clear line of accountabilities, promote ownership and develop capacity in procuring entities. Procuring entities are state governance bodies, local self- government bodies, state or community agency, the Central Bank, state or community non-profit organizations and entities with over 50% o f shares owned by the state or communities as authorized by the Constitution and other relevant laws. There are 47 government entities; 11 Marzpetarans; 926 local communities. Both Marzpetarans and local communities comprise o f a large number o f procuring entities. Appendix Page No. - 33 Armenia - Countrv Procurement Assessment ReDort Sub-indicator Brief Explanation Score 4 (a) Recommendations: The roles o the SPA need to be redefined in light o the f f f introduction o E-Government procurement to accelerate reform and the decentralization o the procurement process to procuring f entities. Procuring entities should be made responsible for their own procurement, including the .procurement process and contract signatures, while the SPA'S role should be reoriented to provide technical assistance and advice, including procurement capacity building. This should be accompanied by clear rules o f accountability, checks and balances, and oversight mechanism and regular training and capacity building activities The SPA should continue to be responsible for the development and management o periodic contracts. At the same time, the f f eflciency o periodic contracts could be increased by streamlining the purchase order procedures, including authorizing procuring entities rather than the SPA to sign purchase orders directly with the firms selected for periodic f contracts. Furthermore, the list o items subject to periodic tenders should be limited only to the items o common and f recurrent use. I n the context o decentralization o public procurement, the f f SPAS expertise should be used for periodic tenders and for supporting procuring entities in conducting tenders for targeted contracts. Since the SPA w i l l also be responsible for the operation and support o the e-GP system, all expertise and f capacity required to establish and manage such fiamework agreements could be consolidated in the SPA as a centralized purchasing agency for fiamework agreements. 4(b). The body The AB functions are specified in Article 16(2) which broadly 1 has a defined set consists o f authority in regulating and coordinating procurement. o f responsibilities The functions include policy making and drafting o f legal acts; that include but organizing management method in procurement; training; are not limited to approval of model forms; providing methodological support to a set o f 8 procuring entities in the organization of procurement; approving identified publication; coordinating collaboration with international functions. organizations; reviewing procurement minutes; and supervising observance o f procurement legislation by procuring entities. AB also considers complaints filed against the procurement process. It also resolves contractual disputes, though less frequently. The current regulatory and normative framework contains Appendix Page No. - 34 Armenia - Countrv Procurement Assessment ReDort Sub-indicator Brief Explanation Score residual and significant features o f conflict of interest. This situation arises from the fact that the MOF i s both the overseer (through the AB) and "doer" o f public procurement (through the SPA). 4 (b) Recommendations: An independent body, and not the AB, should serve as a complaints review body. As the procurement is decentralized to procuring entities, the SPA should not be involved in specijk procurement processes as a signatory to contracts. The roles and responsibilities o both A B and SPA should be f reviewed and redefined with a view to eliminating potential conflict o interest, f 4(c). The body's The Procurement Process Regulation and Budgetary Process organization, Methodology Department o f the MOF carries out the functions o f funding, staffing, the Authorized Body in public procurement. Its Procurement and level o f Process Regulation Division consists o f 10 employees who are independence and inadequate to carry out the responsibilities under Article 16. The authority (formal current institutional structure o f AB and the SPA, both under the power) to supervisory authority o f the MOF, perform functions which exercise its duties relate to regulation and coordination o f procurement, should be organization o f periodic and targeted procurement, review o f sufficient and compliance with legal requirements, perform advisory functions consistent with its and conduct review of procurement complaints or enforcement responsibilities. issues contribute to overlapping functions and potential conflicts o f interest. Perception also exists that procuring entities at all levels of government are not adequately involved in the formulation o f procurement policy and regulation, which i s shared by civil society and non-governmental organizations. This i s evident by the fact that there i s little interaction between the AB and procuring entities especially at Marzpetran and local levels. 4 (c) Recommendations: Same as 4(a), 4@), 4(c) above a Procurement Advisory Committee should be established involving major procuring entities, not only fFom Yerevan, but also @om Marzpetarans and local communities to improve public procurement law and regulations, This Committee should also have representation fFom civil sociev, including non- governmental organizations, Chamber o Commerce, etc. f ~~ ~ 4(d). The Although the AB i s specifically proscribed from being a party to responsibilities procurement contracts, the SPA, which i s under the jurisdiction Appendix Page No. - 35 Armenia - Country Procurement Assessment Report Sub-indicator fEx n Score should also o f MOF, signs all contracts for a procuring entity but does not provide for participate in supervision o f these contracts. separation and clarity so as to The review process performed by the AB, instead o f an avoid conflict o f independent review body, raises issues o f conflict o f interest. interest and direct involvement in the execution o f 4 (d) Recommendations: procurement Same as 4(a), 4@), 4(c) above transactions Indicator 5: Existence o f institutional development capacity. The objective o f this indicator i s to assess the extent to which the country or agency has systems to support and monitor the performance o f the entire system, and to formulate and implement improvement plans. This requires among other things the availability o f information systems, a capacity for analysis, feedback mechanisms and planning capacity for implementation o f improvements. It i s very important that responsibilities are clearly assigned and are being performed. This indicator has four sub-indicators (a-d) to be measured Sub-indicator Brief Explanation Score 5(a). The country There i s a semi-computerized system for collection o f 3 has a system for procurement data and information managed by AB with the collecting and support o f SPA. However, the procurement information system i s disseminating not well integrated among the different line ministries and procurement procurement entities. This makes it difficult to obtain real time information, information on the status o f all procurement contracts by goods, including tender works and services. The MOF supports a website, invitations, www.procurement.am, which provides the current status o f requests for legislative normative acts, public procurement advertisements proposals, and and publication of contract awards but procurement plans are not contract award yet available on this website. I t i s easily accessible to all information. interested parties at no cost. Procurement opportunities are also telecast and broadcast by two TV channels as well as published in the newspapers. 5(a) Recommendations: Develop a simple procurement monitoring information system which can eventually be integrated into the web based E- Government Procurement System. 5(b). The country There i s no sustainable strategy, procedures, guidelines and 1 has a sustainable standard formats for the collection and maintenance o f data on strategy and public procurement, and for collection of information on procedures for monitoring compliance with the procurement legislation. The collecting and SPA collects and maintains these statistics. There i s no Dractice Appendix Page No. - 36 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score monitoring o f regular dissemination of procurement statistics. national procurement 5(b) Recommendations: statistics. Develop a sustainable strategy for collecting and disseminating procurement statistics. Also design and implement a system for monitoring procuring entities ' compliance with the procurement legislation. See 5(a). 5(c). A One o f the functions o f AB i s organization o f professional 1 sustainable training, assessment of qualifications and development o f strategy and retraining system for the procurement staff of procurement training capacity entities and establishment o f an accredited procurement cadre exists to provide (Article 16 (2, c)). The MOF, at least once in three years, ensures training, advice, the participation o f procurement staff in training or retraining and assistance to programs and evaluates their qualification (Article 16 (5)). In develop the 2003 the US Treasury helped to organize a Training Centre (TC) capacity o f under the umbrella of the MOF which provides training once a government and month to about 25 civil servants and potential bidders. Training private sector materials are developed by MOF. TC provided training to 245 participants to civil servants and bidders in 2006, 700 in 2007. The priority i s to understand the train the staff o f those procuring entities which have large rules and procurement volumes. However, there i s still an unmet demand in regulations and training both in public and private sectors. how they should be implemented. In some procuring entities procurement staff were trained only once in two y ears. Staff (auditors and inspectors) of some o f the government state bodies which conduct external public procurement audit did not receive any procurement training. A decree "On approving the strategy for introduction o f the system o f training, continuous professional development, and qualification o f public financial management specialists" was approved by the GOA on November 20, 2008. The strategy deals with training and continuous professional development for the government officials responsible for finance and procurement. To achieve these objectives the strategy envisages the use of higher education and other training institutions, and specialized xganizations. The strategy also provides for assessment and :ertification o f government officials. However, the strategy i s yet :o be implemented. j(c) Recommendation: Carry out a realistic training needs assessment and skill gap znalysis o staflinvolved in public procurement at all levels in the f line ministries, procuring entities, project implementation units, m d the private sector. Develop mechanisms for the sharing and transfer o procurement f ;kills and experience gained by procurement specialists in - Appendix Page No. 37 Armenia - Country Procurement Assessment Report rSub-indicator 5(d). Quality control standards are disseminated and used to evaluate staff performance and Brief Explanation international procurement procedures in externally funded project implementation units to the corresponding line ministries. Design and implement a sustainable institutionalizedprogram for short term, medium and long-term term training program in public procurement. Attestation o f civil servants takes place once in three years. There are no quality standards to evaluate staff performance in terms o f procurement processes and products. N o standards for processing procurement actions are disseminated and there are no staff performance evaluation systems in place. Score 1 address capacity There i s no performance assessment o f procurement staff and development accreditation mechanism to qualify candidates for procurement issues. functions in the SPA as well as in line ministries. Capacity building i s carried out on an ad-hoc basis. 5(d) Recommendation Recognize procurement as a profession; develop quality standards for evaluating performance o s t a g in AB, SPA and f procuring entities involved in the conduct ofprocurement. Pillar 111. Procurement Operations and M a r k e t Practices This Pillar assesses the operational effectiveness and efficiency o f the procurement system at the level o f the implementing entity responsible for issuing individual procurement actions and the degree o f professionalism and knowledge o f the staff responsible for implementing procurement activities. It examines the role o f the market as one means o f judging the quality and effectiveness o f the system when putting procurement procedures into practice. This Pillar i s distinguished from Pillars Iand I1 in that i t s focus i s not o n the legalhegulatory or institutional systems in a country but more on how these operate. It uses three baseline indicators: 0 Are the procurement operations and practices efficient? (This i s supported by four sub indicators.) 0 Effectiveness o f the functionality o f the public procurement market. (This i s supported by three sub indicators.) 0 Existence o f contract administration and dispute resolution provisions. (This i s supported by three sub indicators.) Indicator 6: T h e country's procurement operations and practices are efficient. This indicator examines the efficiency o f the operations and operational practices as implemented by the procuring agencies. Efficiency i s considered to mean that the operational practices result in timely award o f contracts at competitive market prices as determined b y effective and fair implementation o f procurement procedures. There are four sub-indicators (a-d) to be rated under this indicator. Appendix Page No. - 38 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score 6(a). The level o f Every civil servant has a job description. The Law "On civil 2 procurement service" establishes general minimal requirements for the level o f competence competence of civil servants. The MOF, at least once in three among years, ensures the participation o f procurement staff in training or government retraining programs and evaluates their qualification (Article 16 officials within (5)). the entity i s consistent with Procurement skills are mostly concentrated in the SPA, with their procurement backgrounds in technical, legal and administrative areas. There i s responsibilities. neither a procurement cadre nor a career stream for procurement specialists to pursue. The officials in charge of procurement in the line ministries (e.g. Ministry of Urban Development and Health) have combined responsibilities for both procurement and financial management, which needs to be demarcated. Concentrating the procurement capacity in SPA has been a constraining factor in building capacity in the procuring entities. For example, a line Ministry i s responsible only for preparing technical specifications and appointing a tender commission. The procurement process, including the preparation o f bidding documents, receiving, opening and evaluating bids, and awarding contracts i s managed by SPA through i t s "non-voting" secretaries in the tender commissions. As a result, there i s l i t t l e incentive for a line Ministry to develop its procurement capacity beyond the preparation of technical specifications. Article 16(4) requires procuring entities to establish a procurement section. However, each Ministry decides how to structure procurement units for its operations. For example, the Ministry o f Defense has a significantly large procurement unit compared to the Ministry o f Agriculture, because defense procurement i s classified and external bodies are not involved. Procuring entities have "procurement specialists" but procurement i s one of many tasks that they are responsible for. There are no full-time procurement specialists in line ministries. In Marzes there i s unsatisfactory level o f knowledge and familiarity with procurement norms, principles and processes, including the mandatory requirements of legislation. Non- commercialized bodies, such as hospitals, at Marz and community levels, which carry out their procurement without the intervention o f the SPA, have little familiarity with the requirements o f the PPL. 6 (a) Recommendations: Develop and implement a decentralization strategy o f vrocurement functions which w i l l develop capacity in line ministries and procuring entities so that they can be fully responsible for their procurement activities. Appendix Page No. - 39 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score 6(b). The There i s no regular and systematic training of public 1 procurement procurement. However, short-term training courses in public training and procurement and management are provided but not on a regular information basis. A training strategy has also been developed. The training programs for programs are not sufficient in terms o f their duration and government frequency for government participants. Training programs' officials and for design i s not based on a skills gap inventory to match the needs private sector o f the system. However, the issues faced by procurement staff at participants are work are discussed during training. There i s little interaction consistent with between the AB and private sector in terms o f improving latter's demand. awareness o f the requirements o f the PPL. 6(d) Recommendation Implement training strategy for procurement stafl Design training programs and procurement skills testing and certification. 6(c). There are A procuring entity must submit information contained in the 2 established norms procurement minutes, except classified information, to any for the person, within five working days after the receipt o f such request safekeeping o f (Article 9(4)). The PPL establishes a list o f the procurement records and records that must be kept and available for public access (Article documents 9 (1)). The Law "On Archive" stipulates a document retention related to policy. After expiration o f this period the documents are kept in transactions and archive. There are no established security protocols to protect contract records - either in physical or electronic form. management. 6 (c) Recommendations: The introduction o E-GP should be accelerated, which would f facilitate the electronic storage and retrieval o procurement f documents and make them easily accessible. Norms and standards should be developed for the retention, security and access o all procurement documents and procurement trail, f which are compatible with the procurement law. 6(d). There are Procuring entities delegate to one o f their corresponding 2 provisions for departments or staff to oversee and organize procurement for the delegating entity. The SPA organizes tenders and concludes public authority to procurement contracts on behalf o f procuring entities, although others who have procuring entities have all rights and obligations under the the capacity to contract. The secretary of tender commission i s accountable for exercise observance of public procurement legislation by the members o f responsibilities. tender commission. The SPA retains the sole power to annul a procurement process and to sign contracts on behalf o f procuring entities. 6(d) Recommendations: In order to align accountability and promote capacity, responsibilities, including the signing o procurement contracts, f yhould be significantly decentralized to procuring entities, with vpropriate controls and oversight. Appendix Page No. - 40 Armenia - Country Procurement Assessment Report Indicator 7: Functionality o f the public procurement market. The objective o f this indicator i s to assess the market response to public procurement solicitations. This response may be influenced b y many factors such as the general economic climate, the private sector development environment and politics, the existence o f strong financial institutions, the attractiveness o f public system as a good reliable client, the kind o f goods or services being demanded, etc. There are three sub-indicators (a-c) to be measured. Sub-indicator Brief Explanation Score 7(a). There are There i s a lack o f effective and sustainable mechanism for the 1 effective development o f public private partnership (PPP), and lack o f mechanisms for adequate knowledge o f the various types o f PPP models and partnerships complexities. New types of PPP models are being tried out, such between the as the housing project in earthquake affected areas led by public and private Ministry of Urban Development. There i s a need to establish sectors. clear guidelines for PPP and provisions incorporated in the Procurement Law There i s no comprehensive legal framework for such partnership, although the TC provides training programs to help build capacity among private companies including small businesses. The Government encourages open dialogue with the private sector through meetings and discussions and seeking feedback on public procurement related legislation. 7(a) Recommendations: Develop a legislative fi.arnework on public-private partnership. Reference may be made to the WCITRAL model legislative provisions on privately financed infrastructure. (See reference. WCITRAL. 2003 Model legislative provisions on privately financed inpastructure projects). Also, the E U Directives 2004118 and key interpretative documents on PPP issued by the EC would be relevant for purposes o Armenia's efforts to f harmonize with EU and WTO requirements. Prepare an operational manual for procurement using PPP (Examples o f PPP in World Bankfinancedprojects could be used as a model). 7(b). Private Organization of private sector enterprises and organizations i s at 1 sector institutions an early stage, such as the union o f employers, union of builders, are well association o f investigativejournalism and citizen groups. These organized and need to be nurtured and developed to take an active role and able to facilitate increased involvement in the public procurement process and access to the facilitate market access. There i s limited competition due to lack market. o f interest, procurement policies, and monopolistic or oligopolistic features, especially in infrastructure projects. New types o f PPP are models are being tried out, such as the housing project in earthquake affected areas led by Ministry of Urban Development. 7(c). There are Private sector has been rapidly growing in recent years (the 2 no major business directory (2008) includes 2300 small, medium and large companies and organizations involved in the provision of over Appendix Page No. - 41 Armenia - Country Procurement Assessment Report Sub-indicator score constraints (e.g., 10,000 items o f goods, works and services). Growth has been inadequate access especially in the construction and services sub-sector fueled to credit, mostly by remittances by the Diaspora. Overall, the business contracting climate needs further improvement as indicated by Armenia's practices, etc) overall ranking o f 44 out o f 181 countries in the ease o f doing inhibiting private business in 2009. Armenia ranks 61 in enforcing contracts. Data sector's capacity on number o f firms which have bid for government contracts, to access the winners and losers by contract size and value by goods, works procurement and services should provide a more accurate picture o f the level market. o f domestic competition by the private sector in public procurement. Indicator 8: Existence o f contract administration and dispute resolution provisions. The objective o f this indicator i s to assess the quality o f contract administration practices which begin after contract award and continue to i t s acceptance and final payments. This i s an area that many procurement systems fail to consider, and where many issues arise that can affect the performance o f the contract and impact on service delivery. This indicator covers three sub-indicators (a-c) to be scored. Sub-indicator Brief Explanation Score 8(a). Procedures Procedures for undertaking contract administration including 1 are clearly defined inspection and acceptance procedures and quality control for undertaking procedures are defined in the GD853N (Paras. 21-123, Annex contract 1,). Supervision o f civil works i s carried out by independent administration engineering firms. Each Ministry has a responsible unit for responsibilities monitoring contract implementation, but professional capacities that include in Ministries are weak. There are no formally approved model inspection and contracts or documents. Supervision o f civil works i s carried acceptance out by independent engineering firms which are selected by way procedures, quality o f tender. Amendments to public procurement contract are control regulated in paras. 19 and 20 o f Annex 1 o f GD853N. Changes procedures, and in a procurement contract are not allowed as it would result in an methods to review artificial alteration o f the volumes o f procured goods, works, and issue contract and services, or o f the Contract Price. Final payments are amendments in a processed promptly as stipulated in the contract. timely manner. Quality o f procurement i s compromised due to the stipulation o f awarding the contract on the basis of lowest bid price in relation to an estimated price, which may not reflect current market conditions. Spot inspections by independent organizations have found the quality of construction to be poor, especially in Marz, e.g., poor construction o f kindergartens in the village o f Getaazat in the Ararat Marz - contract value o f 15 million Drams (US$50,000 equivalent)). Contract administration procedures and processes, and oversight mechanisms need strengthening to ensure quality of goods, works, and services being procured under public procurement. Appendix Page No. - 42 Armenia - Countrv Procurement Assessment ReDort Sub-indicator Brief Explanation Score 8(a) Recommendation The AB should carry out an in-depth review o the contract f administration procedure and prepare a manual for strengthening contract management procedures. 8(b). Contracts Public procurement contracts have dispute resolution reference, 1 include dispute but no provision on arbitration. N o standard contracts have been resolution formally approved. Disputes are currently resolved by MoF or procedures that in a civil court o f general jurisdiction. In practice, very few cases provide for an are submitted to courts as cases are amicably resolved. The PPL efficient and fair combines procurement review with contract implementation process to resolve disputes, which should be treated separately. Provisions for disputes arising Alternative Dispute Resolution (ADR) are not standard in during the contracts. There i s a Law "On Arbitration". There are no performance o f the provisions for international arbitration for international contract. competitive bidding, although Armenia i s party to the New York Convention. 8(b) Recommendations: Law should not combine procurement complaints system with contract dispute review. A clear reference to how contract disputes are to be resolved during implementation, including a contract dispute clause should be included in the legal pamework. The specijk terms should be reflected in the model contract documents. 8(c). Procedures Civil executive procedures exist and are regulated by the Law 2 exist to enforce the "On execution o f courts' decisions" which enable the winner in outcome o f the a dispute to seek enforcement o f the outcome. Armenia i s a dispute resolution member of the New York Convention on enforcement of process. international arbitration awards. Armenia does not have a process to monitor this area o f contract administration and to address performance issues. Implementation mechanisms to enforce the results o f dispute resolution are weak and need to be strengthened. 8(c) Recommendations: The model documents should be made clear on what mechanisms and substantive rules apply in disputes. Industry groups have expressed a keen desire to have in place a robust and well-jiunctioning arbitration system. Pillar IV. Integrity and Transparency o f the Public Procurement System Pillar I V covers four indicators that are considered necessary to provide for a system that operates with integrity, has appropriate controls that support the implementation o f the system in accordance with the legal and regulatory framework, and has appropriate measures in place to address the potential for corruption in the system. I t also covers Appendix Page No. - 43 Armenia - Country Procurement Assessment Report important aspects o f the procurement system that include stakeholders as part o f the control system. This Pillar takes aspects o f the procurement system and governance environment and seeks to ensure that they are defined and structured to contribute to integrity and transparency. Indicator 9: T h e country has a n effective control and audit system. The objective o f this indicator i s to determine the quality, reliability and timeliness o f the internal and external controls preferably based on risk assessment and mitigation. Equally, the effectiveness o f controls needs to be reviewed in terms o f expediency and thoroughness o f implementation of auditors' recommendations. The assessor should rely, in addition to their own findings, on the most current Country Financial Accountability Assessment (CFAA) or other analysis including PEFNPFM assessment that may be available. This indicator has five sub-indicators (a-e) to be rated. Sub-indicator Brief Explanation Score ~~ 9(a). A legal The AB, in accordance with Article 16 o f the PPL i s designated 1 framework, to supervise compliance with the procurement legislation, organization, including review o f evaluation reports, and resolution of bid policy, and complaints. In addition, there are multiple internal and external procedures for audit bodies. These include: the Chamber o f Control (CC), internal and Financial Supervision and Internal Audit Assessment Department external control o f the MOF, which carries out control over execution o f the state and audit o f budget, Supervision Service under the President; and Supervision public Service under the Prime Minister's Office. procurement operations are in In 2004, the GOA issued Decree No. 1376-N "On Approving the place to provide a Strategy for the Development o f the System o f Internal Audit for functioning the RA State and Local Bodies, Organizations Reporting to Them control and State and Local Non-Commercial Organizations." The framework Financial Supervision Department of the MOF was renamed to "Financial Supervision and Internal Audit Assessment Department" which carries out audits of procurement as well. Many large procuring entities also have internal auditors but their roles do not seem to be effective. The CC was established by and operating under the law "On the Chamber of Control", dated January 9, 2007, should conduct external audit. The CC i s the Supreme Audit Institution of Armenia. I t s Chairman i s appointed by the Parliament. I t carries out financial, compliance, and performance audits. It operates based on the obligatory annual program o f control measures approved by Parliament and submits it reports to it. The CC i s entitled to conduct audit at central and local levels. The CC has about 140 staff, 100 o f which are auditors. I t has an ethical code and manual for financial audit. Although the CC has a training strategy, i t s auditors have received inadequate training in public procurement. Appendix Page No. - 44 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score Some findings of the CC audits are as follows: (i)procurement planning, including cost estimates, i s weak; (ii) there i s a discrepancy between procurement plans and factual outcome o f procurement tenders; (iii) procured goods often do not comply with technical specifications; (iv) prices obtained through public procurement processes are higher than prevailing market prices for the same goods and works; (v) payments are made for works and services that either never take place or are under-delivered; and (vi) procuring entities frequently violate the provisions o f the public procurement legislation. The effectiveness o f audit mechanisms i s questionable in most cases, undermining the intent o f the provisions. Furthermore, having undifferentiated, and multiple entities performing "audits", with no clear demarcation of responsibilities, might provide possibilities for multiple facilitation payments. There i s overlap of what i s considered "audit" and what i s "revision", which further undermines the quality and effectiveness o f audit. Armenia has too many control/supervision bodies involved in controlling procurement on regular and irregular intervals. This control environment i s inefficient because o f excessive bureaucracy and lack o f clarity of audit rules and audit capacity. Based on the cases o f non-compliancereviewed, the audit system i s ineffective and needs streamlining. Several supervisory bodies are involved in supervising, inspecting and monitoring the procurement processes in procuring entities, in general, and in the SPA, in particular. These bodies include the President's supervisory service, Prime Minister's supervisory service, Prosecutor's Office, Chamber o f Control, Ministry o f Finance, etc. There are, however, no clear rules for auditing procurement, and the supervisory bodies discussed above reportedly do not prepare and f i l e any reports about their activities. 9(a) Recommendations: Strengthen internal and external audit in procuring entities through improving internal auditors ' accountability. For this purpose, it would be necessary to apply internal and external audit standards. Improve knowledge o audit bodies' staff through regular f training in procurement. Appendix Page No. - 45 Armenia - Country Procurement Assessment Report Sub-indicator Brief Explanation Score Introduce reforms in order to align, streamline and clarij) principles, processes and functions in the area o internal and f external procurement audits. The responsibility o auditing procurement should be assigned to f relevant bodies such as the Chamber o Control. At the same f time the capacity o such bodies should be strengthened to carry f out an effective audit o procurement in a timely manner. I n f addition, the rules for the AB to implement its public procurement oversight finctions should be set out in detail, including the authority that it would need to require procuring entities procurement data and records. Similarly, rules should be laid out for other bodies, such as the Prosecutor's Offlce to investigate procurement processes only when there are concrete allegations offiaud and corruption, and violations and crime. 9(b). Audits, which are basically revisions as these are not based on 1 Enforcement and any generally accepted audit standards, are carried out, and follow-up on response to or implementation o f the auditors' recommendations findings and takes different periods of time depending on the character of the recommendations recommendation. Periodic reports are posted on website of audit of the control bodies, although the AB does not regularly receive reports from framework some procuring entities for follow up. provide an environment that 9(b) Recommendations: fosters Internal and external audit practices must be improved. These compliance. are currently lacking in substance and influence or impact, provide no comments on ineflciencies in procurement, and on adherence to or divergence with plans (as indicator o f eflciency). 9(c). The internal There are established reporting procedures for reporting to I control systems management throughout the year and reporting forms. Article 9 provide timely establishes the list o f the documents which are submitted to the information on MOF after the contract i s signed. If these documents are not compliance to submitted, the Treasury will not carry out payments. In addition, enable before the Treasury makes payments, it obtains the AB management confirmation o f compliance with procurement legislation. action. Managers also provide details o f procurement activities in their quarterly financial reports (procurement are closely tied to cash and commitment records). Generally, it i s difficult to assess whether follow-up to procurement audit i s sufficient because of limited data showing evidence o f follow-up on procurement audits and limited evidence of sanctions for non-compliance. Appendix Page No. - 46 Armenia - Counby Procurement Assessment Report Sub-indicator Brief Explanation Score 9(c) Recommendations: Data on the results o audits carried out by diyerent bodies f should be collected with a view to ensuringfollow up on adverse findings. 9(d). The internal The current internal audit establishment and practice appear 2 control systems deficient. A detailed manual for internal audit was approved by are sufficiently MOF, in active collaboration with the World Bank. N o training defined to allow has been conducted as yet in accordance with the manual; nor i s performance it apparent that the manual i s being followed for internal controls. audits to be A draft law on internal audit i s under preparation. I t i s expected conducted. that by 20 10, the framework and compliance systems for internal audit will significantly improve. 9(d) Recommendation Design and implement regular training programs for audit bodies to improve their knowledge o procurement requirements. f 9(e). Auditors Auditors are not sufficiently informed about procurement 1 are sufficiently requirements. The staff o f the Financial Supervision and Internal informed about Audit Assessment Department of the MOF receive training but procurement there are significant issues about capacity in audit bodies, requirements and including in the CC. External audit, as already noted, suffers from control systems to lack o f clarity in the exercise o f "audit" and "control" functions conduct quality by multiple entities audits that contribute to 9(e) Recommendation compliance. Design and implement regular training programs for audit bodies to improve their knowledge ofprocurement requirements. Indicator 10: Efficiency of the appeals mechanism. The appeals mechanism was covered under Pillar 1 with regard to i t s creation and coverage by the legal regulatory framework. I t i s further assessed under this indicator for a range o f specific issues regarding efficiency in contributing to the compliance environment in the country and the integrity o f the public procurement system. There are five sub indicators (a-e) to be scored. Sub-indicator I BriefExplanation Score 10(a). Decisions Under the PPL, the AB serves as a complaints body whose 2 are deliberated decisions may be subject to review by courts. The courts may based on likewise review decision by procuring entities and tender available committees. Any person i s entitled to seek review, if he claims to information, and have suffered or can suffer from the actions o f the procuring the final decision entity and (or) tender commission (Article 52 (1)) o f the PPL. can be reviewed Based on the procurement legislation, the MOF, not later than 20 and ruled upon by days after the receipt of the appeal and not earlier than in 10 a body (or working days, makes a decision with respect to the appeal. The Appendix Page No. - 47 Armenia - Country Procurement Assessment Report Sub-indicator Score authority) with decision o f the MOF i s final, unless a court ruled otherwise enforcement (Article 53 (4)). If a supplier (contractor) i s not satisfied with the capacity under decision made, it has the right to appeal to a court o f general civil the law. jurisdiction. There i s a need to further articulate and elaborate to rules o f procedures o f a complaints body. The PPL and Annex 4 of GD853N entitled, "Rules for activities o f the unit considering complaints to the authorized body and supervising the procurement process", regulate the process o f handling complaints at MOF. There are terms and timeframes established for resolution of complaints. The MOF issues within 20 days a written decision with explanations concerning the complaint; the court o f general jurisdiction proceeds according to the timeframe stipulated by the Civil Procedure Code. Mechanisms and authority for enforcement o f decisions are carried out according to general provisions of the Civil Procedural Code. 10(b). The There are terms and timeframes for resolution o f complaints. The 2 complaint review MOF considers complaints based on Annex 4 o f GD 853N called system has the "Rules for activities o f the unit considering complaints to the capacity to handle authorized body and supervising the procurement process". The complaints PPL i s notable in opening up the complaints process to any efficiently and a person (and not just losing bidders) to seek review, if he or she means can claims to have suffered or can suffer from the actions o f the enforce the procuring entity and (or) tender commission (Article 52 (1)). remedy imposed. There i s some ambiguity if this i s so broad as go beyond the procurement process and likewise cover even contract disputes during implementation, especially in light o f Article 56 (this seems to be the practice). Also worth noting i s also the wide subject matter o f review which i s not restricted to the award. Remedies allow for possibility of redirecting award, granting interim relief through suspension o f action and correcting the questioned decision. (There i s some clarification needed on the conflicting implications of Article 53(3)(a) and 15(3)d). Damages can also be awarded if decisions are rendered against the procuring entity (Article (30(5)) PPL provides a timeframe (10- 20 working days) for issuance o f decisions by the AB (Article 53 (4)). Article 56 provides that the actions o f the AB and (or) procuring entity and (or) tender commission can be appealed in court. Any person i s entitled to seek review at MOF before the conclusion o public procurement contract. After expiration of f this period complaints are not taken into consideration by MOF and must be submitted by bidders to the court. (Note: The AB sonfirmed, and as also stated in Pillar 1, i t has dealt with contract implementationissues part o f the complaint process. Appendix Page No. - 48 Armenia - Countn, Procurement Assessment Report Sub-indicator Brief Explanation Score lO(c). The The PPL provides that the decision making process should be 2 system operates based on procurement legislation (Article 53 (4)). The MOF in a fair manner, decisions are subject to review by courts o f general jurisdiction. with outcomes of decisions The PPL requires the establishment o f a standing unit in the AB balanced and to perform review functions on complaints which may engage justified with representatives of the stakeholders who are not procurement available entities or NGOs, on unpaid basis.(Article 16(2)(3). Currently, information. the AB performs such functions and has resolved around 50 appeals cases in 2008, approximately 50% o f which have been decided in favor o f appellant and against the procuring entity. 1O(c) Recommendations Need for speciJic procedure and standards for the conduct of proceedings including articulation o f the evidentialy requirements, burdens o proof and speciJic parameters for f resolution of disputes. 10(d). Decisions As a result o f considering a complaint, the MOF compiles a 3 are published and written recommendation, which i s posted on the website o f the made available to MOF once approved by the Head o f the Authorized Body (Para 5 a l l interested o f Annex 4 o f GD 853N). The fact that an appeal i s filed i s also parties and to the published in a print media without identifying the personal details public. of the appellant. lO(e). The The MOF, being the complaint review body, i s in principle 1 system ensures independent and autonomous with regard to resolving that the complaint complaints. However, there i s a general perception that the review body has current appeals systems i s not trustworthy and lacks full authority and independence. independence for resolution o f The current set-up raises issues o f potential or perception of complaints. conflict o f interest by the AB which i s involved in organizing regulation and coordination o f procurement procedure, advisory functions and at the same time reviewing an appeal or complaint. The current set-up o f the AB and the SPA being under the MOF also raises issues from the conflicts perspective. Under OECD- DAC, even though the first review may normally be carried out by the procuring entity, there should be an administrative/judicial review body that i s independent from the procuring agency. 10(e) Recommendations An appeals system be set up that is totally independent o thef MOF, AB, SPA and government entities that operate in an environment f r e e from a perception o conflict o interest, which f f builds confidence from participants, and which would be eflcient, timely and responsive to procurement needs and effective in providing meaningfkl remedies. The architecture and Appendix Page NO. - 49 Armenia - Country Procurement Assessment Report 1 Sub-indicator Brief Explanation Score configuration o this body has to be organic to Armenia and will f ultimately rely on the domestic legal structure. But a varied membership fFom persons o known probity and independence f such as members o NGOs, media, academia, retired jurist or f judges, industry and private sector representatives w i l l inspire confidence in terms o fairness and transparency. The AB, given f its expertise and organizational advantages, may serve as a secretariat. Indicator 11: Degree of access to information. This indicator deals with the quality, relevance, ease o f access and comprehensiveness o f information on the public procurement system. I Sub-indicator I Brief Explanation I score I 1 l(a). Article 25 states that open tenders and contract awards are 2 Information i s announced in the newsletter. (Articles 25 (1) and 11)). However, published and publication in a bulletirdnewsletter has been discontinued (need distributed to confirm). Tenders and contract awards are currently publicly through available advertised electronically on the website, www.procurement.am, media with Information on procurement i s easily accessible on the MOF support from website. It i s centralized and includes public procurement information legislation, procurement advertisements, procurement awards, technology when decisions on complaints. It i s planned that procurement plans will feasible. be also placed on this website starting in 2009. For bidders, however, must have knowledge o f Armenian to access the I website. 10(a) Recommendations I / The website needs upgrading. At the time o the writing o this f f Report, one needed familiarity with Armenian language to navigate the diyerent sections o the website. The website would f also be a good place to post bidding documents and related information, including hosting an interactive help or information desk and reporting portal. Publication in mass media such as TV, radio, print media should be continued Indicator 12: The country has ethics and anticorruption measures in place. This indicator assesses the nature and scope o f the anti-corruption provisions in the procurement system. There are seven sub-indicators (a-g) contributing to this matter. Sub-indicator Brief Explanation Score 12(a), The legal The legal framework does not establish a clear requirement to 1 and regulatory include fraud and corruption, conflict o f interest and unethical framework for behavior references in the tendering documentation but makes procurement, fraud and corruption punishable acts under the legislation (PPL including tender calls these offenses against economic activities or public service). and contract There i s also a need to link these aspects o f the PPL to the overall Appendix Page No. - 50 Armenia - Country Procurement Assessment Report documents, anti-corruption strategy of the government. The PPL should includes provide a direct reference to specific offenses under criminal laws provisions and illustrate what constitutes corruption and fraud in procurement addressing processes (e.g., collusion, falsified bid security, fraudulent corruption, fraud, documents, bribery, etc.) conflict of interest, and Under Article 5 (2)(d), there i s exclusion o f companies or unethical representatives o f their management bodies who within the period behavior; it sets o f the last three years were convicted of offenses against out (either economic activities or public service; submitted false data in order directly or by to sign a procurement contract; violated obligations under reference to other procurement contract which caused unilateral termination o f the laws) the actions contract by procuring entity. (See previous comments on this that can be taken blacklisting and debarment mechanism) with regard to such behavior. There are likewise conflict o f interest provisions with respect to members o f tender committees, disqualifying members who are "related" with potential participants in the procurement process. This rule needs to be expanded and aligned with the general formulation found in model corruption legislations. The provisions on Consultant Services should also address issues o f conflict of interest, which are bound to arise in relation to conflicting consulting assignments, so that these will be addressed by lining up appropriate incentives, requiring appropriate disclosure and/or applying disqualification rules in bidding for upstream-downstream activities. (e.g., consulting firm which designed the specifications are oftentimes conflicted, in the absence o f appropriate safeguards, in competing for downstream contracts that utilize the design which it developed) The PPL (Article 5 (6)) provides for disqualification of bidders/contractors/suppliers that have engaged in offenses against economic activities or public service; submitted false data in order to sign a procurement contract; violated the obligations under procurement contract which caused unilateral termination of the contract by the procuring entity. The bidding documents do not include adequate provisions on fraud and corruption. The PPL does not give precise instructions on how to incorporate the matter in tendering documents. 12(b). The legal The Criminal Code provides legal provisions that define 2 system defines fraudulent and corrupt practices and set out the responsibilities responsibilities, and sanctions for individuals or firms indulging in such practices. accountabilities, Annex 1 (Points 5, 2) and 7, 3), c) of the Criminal Code includes and penalties for conflict o f interest rules applying in public procurement. individuals and Provisions related to bribery o f officials and applicable sanctions firms found to are stipulated in the Criminal Code. have engaged in fraudulent or corrupt practices. Appendix Page No. - 51 Armenia - Country Procurement Assessment Report 12(b) Recommendations The PPL should include a direct reference to speciJic offenses under criminal laws and illustrate what constitutes corruption and fFaud in procurement processes (e.g., collusion, falsijed bid security, JFaudulent documents, bribery, etc.), and accordingly set f out responsibilities and accountabilities o persons involved in the procurement process. 12(c). Evidence There has not been a precedent of a civil servant charged with 1 o f enforcement o f criminal offence in the sphere of public procurement. Some cases rulings and are reportedly under active investigation. Press releases have also penalties exists. been made about findings in the conduct o f audits by certain government agencies with indication of intention to bring the matter to prosecution. The media, including various articles written by investigative journalists, point to several cases o f alleged corruption in public procurement, including contract implementation. These cases relate to incorrect investment decisions, including the installation of pipes for water supply in a community while no main source of water supply existed, acceptance o f poor quality o f goods and works at high prices. 12(c) Recommendations Findings o audits and reports obtained through the complaint f system or through the internal and external control system, including investigative reports ofjournalists and NGOs, should be followed up with investigation, prosecution and other enforcement measures. 12(d). Special Since 2003, there are no changes in the corruption index o f the 2 measures exist to country. The Anticorruption Strategy adopted in 2003 i s currently prevent and being revised. , which i s being financed by USAID, UNDP and detect fraud and OSCE. An Anticorruption Council (AC) led by the PM has been corruption in established under the office o f the President. I t comprises o f the public different ministers, vice speaker o f the Parliament, Head o f the procurement. Central Bank and state agencies and meets once every quarter. There i s no implementation unit with staff assigned for this task. .Anti-corruption law i s yet to be formulated. The Criminal Code stipulates sanctions for criminal offences. A Commission on Monitoring and Execution o f Anticorruption Strategy headed by the Advisor to the President has also been established, consisting o f are representatives o f NGOs, and members of Parliament. I t does not work on a permanent basis and meets once every 3 months and less frequently in practice. The Criminal Code (CC) does not have a separate chapter on anticorruption criminal offences. There are sanctions stipulated for bribes, offences against the civil services, theft, economical offences, zmbezzlement, etc. These offences are referred in various sections in CC and are not grouped together as anticorruption offences. The Office o f Prosecutor does not have any statistics on inticorruption in public procurement. Separate articles of CC were innounced as corruption offences by the Order o f the Office of Appendix Page No. - 52 Armenia - Country Procurement Assessment Report Prosecutor. There are no special measures for detection and prevention o f corruption associated with public procurement, special anticorruption courts and dedicated investigative bodies that are responsible for investigating and prosecuting cases o f corruption. Corruption cases are dealt in courts of general jurisdiction. 12(d) Recommendations: Portals, including website and hotlines and mailing addresses, should be available and easily accessible for people who want to report allegations and anomalies, with assurances o protection o f f anonymity and confidentiality. 12(e). There i s a need for a more pro-active and robust reaching out to 2 Stakeholders the private sector, media, non-government entities and civil (private sector, society. A sustained dialogue and consultation .with various civil society, and stakeholders needs to be put in place, which could be achieved by ultimate the establishment o f an informal network of interested parties on beneficiaries o f consultative basis or a formal council that meets regularly to procurementlend- discuss policy issues, reform proposals and address systemic users) support the problems. creation o f a procurement PPL provides a platform for civil society engagement in the market known for procurement process. The PPL requires the establishment o f a i t s integrity and standing unit in the AB to perform review functions o f complaints ethical behavior. and has the authority to engage representatives o f the stakeholders who are not procurement entities or NGOs, on an unpaid basis.(Article 16(2)(3). GD853N, Annex 2, para. 4(2), provides mechanism for any party who are interested in the bidding process, including representatives from civil society, to attend. In i t s current formulation, these "advisers" are considered "members" with an "advisory vote." This should be further clarified since the membership implies participation in the decision-making process (albeit on an advisory capacity). In designing the system, consideration should be given to the value of maintaining the independence and oversight roles of these "observers", and measures introduced for preventing co-optation. In order to perform an effective oversight role, these "observers" should have a mechanism to report their observations and provide instant feedback. Thus, at their option, they should be allowed to make their comments in the minutes or be provided with some formal vehicle to report their observations. This should not be made obligatory on their part in all cases. Transparency International Armenia has participated as observer in several previous tenders. The architecture o f complaints and appeals system should be reformed in terms o f increasing i t s independence. Appendix Page No. - 53 Armenia - Countrv Procurement Assessment Reuort 12(e) Recommendations Consider establishment o an informal network o interested f f parties and stakeholders on consultative basis or aformal council that meets regularly to discuss policy issues, reform proposals and systemic problems in the procurement process. Representatives from civil society should remain as observers, monitors or oversight agents and not as participants or advisers in the procurement decision-making process. A mechanism should be developed to obtain feedback and observations. An appeals system should be established which is absolutely independent o the MOF, AB, SPA and government entities, which f operates in an environment p e e from a perception o conflict o f f interest, which builds confidence from participants, and which would be eficient, timely and responsive to procurement needs and eflective in providing meaningful remedies. The architecture and configuration o this body has to be organic to Armenia and f w i l l ultimately rely on the domestic legal structure. But a varied membership from persons o known probity and independence f such as members o NGOs, media, academia, retired jurist or f judges, industry and private sector representatives w i l l inspire conJidence in terms o fairness and transparency. The AB, given f its expertise and organizational advantages, w i l l serve as a secretariat. 12(f). The The police authorities and investigators maintain a hotline for 2 country should reporting general criminal violations. Recent amendments" to the have in place a Criminal Procedure Code provides for protection of persons secure participating in a criminal trial but the legislation does not address mechanism for the protection of whistleblowers or informants, who voluntarily reporting provide information about allegations of corruption to relevant fraudulent, authorities. Under the current institutional structure of corrupt, or procurement, complaints and allegations are received through the unethical complaints process to the AB. behavior. 12(Q Recommendations Portals, including in the website and hotlines and mailing addresses, should be made available and easily accessible for anyone interested in reporting allegations and anomalies, with assurances ofprotection o anonymity or confidentiality. f 12(g). Existence There are laws and regulations on civil servants which include 0 of codes of elements of code of ethics, but there i s no Code of Ethics ConductKodes of specifically with provisions for those involved in public financial Ethics for management, including procurement. There are no specific codes o f ethics that particularly apply to the procurement profession. GD loLaw Amending the RA Criminal Procedure Code, May 25,2006 Appendix Page No. - 54 Armenia - Counhy Procurement Assessmenr Report are involved in 853N provides some conflict of interest rules with respect to aspects o f the prospective tender committee members. public financial management 12(g) Recommendations systems that also provide for Ethics rules, codes o conduct and conflict o interest provisions f f disclosurefothose relating to public procurement should be Codified, widely in decision- disseminated and systematically enforced. I making positions.I I Attachment 1 to Appendix 2 - Pillars and Indicators - Summary o f Scores Indicator Avg. Pillar Score Score Avg. Pillar I- Legislative and Regulatory Framework 2.1 Indicator'1. Public procurement legislative and regulatory framework achieves the agreed standards and complies with applicable obligations. Subindicator 1(a) - Scope o f application and coverage o f the legislative and regulatory framework. 3 l Subindicator 1(b) Procurement methods Subindicator 1(c) - Advertising rules and time limits 2.4 - Subindicator 1(d) Rules on participation Subindicator 1(e) - Tender documentation and 2 technical specifications Subindicator 1(0 - Tender evaluation and award 2 criteria 2 (see - Subindicator 1(8) Submission, receipt, and Appendix opening o f tenders Daze 17) Subindicator 1(h) - Complaints 2 Indicator 2. Existence o f Implementing Regulations and Documentation. Subindicator 2a) - Implementing regulation that provides defined processes and procedures not 2 included in higher-level legislation 1.8 Subindicator 2(b) - Model bidding documents for 1 goods, works, and services Subindicator 2 ( c) - Procedures for 2 prequalification Appendix Page No. - 55 Armenia - Country Procurement Assessment Report Indicator Avg. Pillar Score Score Avg. Subindicator 2(d) - Procedures suitable for contracting for services or other requirements in 2 which technical capacity i s a key criterion Subindicator 2(e) - User's guide or manual for 2 contracting entities Subindicator 2(f) - General Conditions o f Contracts (GCC) for public sector contracts covering goods, works, and services consistent 2 with national requirements and, when applicable, international requirements Pillar 11. InstitutionalFramework and 1.7 Management Capacity Indicator 3. The public procurement system i s mainstreamed and well integrated into the public sector governance system. Subindicator 3(a) - Procurement planning and data on costing are part o f the budget formulation 2 process and contribute to multiyear planning Subindicator 3(b) - Budget law and financial procedures support timely procurement, contract 3 execution, and payment 2 2(see Subindicator 3(c) - N o initiation o f procurement annex actions without existing budget appropriations page 30) Subindicator 3(d) - Systematic Completion Reports are prepared for certification o f budget 1 execution and for reconciliation o f delivery with budget programming Indicator 4. The country has a functional normative/regulatory body Subindicator 4(a) - The status and basis for the normative/regulatory body is covered in the 2 legislative and regulatory framework Subindicator 4(b) - The body has a defined set o f 1 responsibilities Subindicator 4(c) - The body's organization, 1.5 funding, staffing, and level o f independence and authority (formal power) to exercise i t s duties 2 should be sufficient and consistent with i t s responsibilities Subindicator 4(d) - The responsibilities should also provide for separation and clarity so as to 1 avoid conflict o f interest and direct involvement in the execution o f Drocurement transactions (Due to Appendix Page No. - 56 Armenia - Country Procurement Assessment Report Indicator Avg. Pillar Score Score Avg. the nature o f this subindicator, scoring i s either a 3 or a 0) Indicator 5. Existence o f institutional development capacity. Subindicator 5(a) - The country has a system for collecting and disseminating procurement 3 information, including tender invitations, requests for proposals, and contract award information Subindicator 5(b) -The country has a system for 1 collecting. and monitoring procurement statistics Subindicator 5(c) - A sustainable strategy and I I I training capacity exists to provide training, advice, 1.5 and assistance to develop the capacity o f government and private sector participants to understandthe rules and regulations and how they should be implemented Subindicator 5(d) - Quality control standards are disseminated and used to evaluate staff performance and address capacity development issues Pillar 111. Procurement Operations and Market 1.5 Practices Indicator 6. The country's procurement operations and practices are efficient. Subindicator 6(a) - The level o f procurement competence among government officials within 2 the entity i s consistent with their procurement responsibilities Subindicator 6(b) - The procurement training and information programs for government officials 1 1.8 and for private sector participants are consistent with demand. Subindicator 6(c) - There are established norms for the safekeeping o f records and documents 2 related to transactions and contract management Subindicator 6(f) - There are provisions for delegating authority to others who have the 2 capacity to exercise responsibilities Indicator 7. Functionality o f the public procurement market. Subindicator 7(a) - There are effective 1.3 mechanisms for partnerships between the public 1 and private sectors Appendix Page No. - 57 Armenia - Country Procurement Assessment Report Indicator Avg. Pillar Score Score Avg. Subindicator 7(b) - Private sector institutions are well organized and able to facilitate access to the 1 market Subindicator 7(c) - There are no major systemic constraints (e.g., inadequate access to credit, 2 contracting practices, etc.) inhibiting the private sector's capacity to access the procurement market Indicator 8. Existence o f contract administration and dispute resolution provisions. Subindicator 8(a) - Procedures are clearly defined for undertaking contract administration responsibilities that include inspection and 1 acceptance procedures, quality control procedures, and methods to review and issue contract amendments in a timely manner Subindicator 8(b) - Contracts include dispute 1.3 l(see resolution procedures that provide for an efficient and fair process to resolve disputes arising during the Derformance o f the contract Page 43) 2(see Subindicator 8(c) - Procedures exist to enforce the Annex outcome o f the dispute resolution process page 43) Pillar IV. Integrity and Transparency o f the 1.7 Public Procurement System Indicator 9. The country has effective control and audit systems. Subindicator 9(a) - A legal framework, organization, policy, and procedures for internal and external control and audit o f public 1 procurement operations are in place to provide a functioning control framework Subindicator 9(b) - Enforcement and follow-up on findings and recommendations o f the control 1.2 1 framework provide an environment that fosters compliance Subindicator 9(c) - The internal control system provides timely information on compliance to 1 enable management action Subindicator 9(d) - The internal control systems are sufficiently defined to allow performance 2 audits to be conducted Subindicator 9(e) - Auditors are sufficiently 1 informed about Drocurement reauirements and Appendix Page No. - 58 Armenia - Country Procurement Assessment Report Indicator Avg. Pillar Score Score Avg. control systems to conduct quality audits that contribute to comdiance Indicator 10. Efficiency o f appeals mechanism. Subindicator 1O(a) - Decisions are deliberated based on available information, and the final decision can be reviewed and ruled upon b y a 2 body ( or authority) with enforcement capacity under the law Subindicator 1O(b) - The complaint review system has the capacity to handle complaints efficiently 2 and a means to enforce the remedy imposed Subindicator 1O(c) - The system operates in a fair 2 manner, with outcomes o f decisions balanced and 2 justified on the basis o f available information Subindicator 1O(d) - Decisions are published and made available to all interested parties and to the 3 public Subindicator 1O(e) - The system ensures that the 1 (see complaint review body has full authority and Annex independence for resolution o f complaints page 50) Indicator 11. Degree o f access to information. Subindicator 11(a) - Information i s published and distributed through available media with support 2 2.0 from information technology when feasible Indicator 12. The country has ethics and improper procurement practices measures in place. Subindicator 12(a) - The legal and regulatory framework for procurement, including tender and contract documents, includes provisions addressi,ng improper procurement practices, fraud, conflict o f interest, and unethical behavior and sets out (either directly or by reference to other laws) 1.4 the actions that can be taken with regard to such behavior Subindicator 12(b) - The legal system defines responsibilities, accountabilities, and penalties for individuals and f i r m s found to have engaged in fraudulent or corrupt practices Subindicator 12(c) - Evidence o f enforcement o f 1 rulings and penalties exists Subindicator 12(d) - Special measures exist to 2 prevent and detect fraud and improper Appendix Page No. - 59 Armenia - Country Procurement Assessment Report Indicator Avg. Pillar Score Score Avg. procurement practices in public procurement Subindicator 12(e) - Stakeholders (private sector, civil society, and ultimate beneficiaries o f procurement/end-users) support the creation o f a 2 procurement market known for i t s integrity and ethical behaviors. Subindicator 12(Q - The country should have in place a secure mechanism for reporting fraudulent, 2 corrupt, or unethical behavior. Subindicator 12(g) - Existence o f Codes o f Conduct/Codes o f Ethics for participant that are involved in aspects o f the public financial 0 management systems that also provide for disclosure for those in decision making positions, - Appendix Page No. 60 Armenia - Country Procurement Assessment Report Attachment 2 to Appendix 2 - ComplianceD'erformance Indicators Indicator Indicator Measurement Status and Performance Objective Trend Advertisement Transparency o f Number o f tenders A l l tender Satisfactory o f bids and system (%) for which bid notices and publication o f invitation and information contract contract award on contract awards information are awards i s published published in (Norm: 95% or the media more) and on the website. Time for Equal Average number o f Tender: 30 Satisfactory preparation o f opportunity to days between tender calendar bids bidders to advertisement and days; participate in tender Invitation to tenders submissiodopening quote: 10 (Norm: four weeks days. or more) Time for bid Efficiency of Number o f days 25 days Satisfactory evaluation tendering between bid process opening and publication of contract award information (Norm: 90 days or less) Bidder Level o f private Number o f bidders Average two Unsatisfactory participation sector's submitting bids in bids. confidence in each tendering the tendering process process (Norm: 5 bids or more) Method o f Competition Use by number o f Incomplete Not rated. procurement level less competitive Data. used tendering processes Direct Transparency Percent o f contracts Reportedly Unsatisfactory contracting (by number and about 10% due to use o f value) awarded on a in value but Single Source Single Source basis data Method of (Norm: 10% in incomplete procurement. number; and 5% in and value) exclusive o f procurement from monopolies and for defense purposes. Appendix Page No. - 61 Armenia - Country Procurement Assessment Report - No. Indicator Indicator Measurement Status and Performance - Objective Trend 7 Cancellation o f Trustworthiness Percentage o f N o data. Not rated. ongoing o f the tendering tendering processes tenders process cancelled - (Norm: 5% or less) 8 Number o f Fairness o f the Number o f 12 in 2006, Unsatisfactory complaints process complaints 14 in 2007 submitted and 53 (Norm: N o t less complaints than 10% and not were more than 50%) received in 2008. O f the total 39 were rejected. L o w number shows lack o f trust in the system. 9 Time to answer Efficiency and Number o f days 10 to 20 Satisfactory to complaints fairness o f the between submission days complaint and final response resolution to protects mechanism (Norm: 21 days or less) 10 Complaint Effectiveness o f Percentage o f N o data Satisfactory resolution the complaint contracts with available. resolution award mechanism recommendation modified because o f a complaint - (Norm: 5% or less) 11 Late payments Quality and Percentage o f Payments Satisfactory consistency o f payments made are made on payment process more than 45 days time. late (Norm: 10% or - less) 12 Price increase Quality o f Percentage increase Price Unsatisfactory bidding and o f final contract increases are contract amount due to frequently management zhange and made in smendments multi-year (Norm: 15% or contracts. less) 13 Restricted Quality o f Percentage o f Shortlisting Unsatisfactory competition for services process for procedure consu Itant s selection o f exists but :onsultants using needs more ]pen competition claritv and Appendix Page No. - 62 Armenia - Country Procurement Assessment Report Indicator Performance instead o f objectivity. shortlisting Few cases o f methodology consultant (Norm: 5% or less) selections during 2008. Design contracts are defined as works contracts. Selection Weight o f Percentage o f Few cases o f Unsatisfactory method for quality to price process for selection o f consultants ratio used in selection o f consultants selection consultants having but price price weighted usually more than 20% of weighted the total score more than (Norm 5% or less) 20% Appendix Page No. - 63 Armenia - Country Procurement Assessment Report - Appendix 3 Case Studies CASE STUDY I- ELECTRONIC GOVERNMENT PROCUREMENT (E-GP) Executive Summary Given the importance of e-GP for improving the public procurement system in general and i t s transparency and efficiency in particular, an overall assessment of the current status of the e-GP program in Armenia was conducted as part o f the CPAR. The e-GP assessment i s based on the MDB e-GP readiness assessment tool which was developed jointly by the Asian Development Bank, the Inter-American Development Bank, and the World Bank". It addresses a set o f key success factors for the introduction o f e-GP which go far beyond the mere application o f information technology. These foundations include the need of strong government leadership & management planning, appropriate policy & legislation, extensive buyer & supplier activation, and standardization& infrastructuredevelopment. The launch and initial phase of the e-GP program in Armenia including the e-GP roadmap, the Government Decree on the e-GP strategy, and the development o f an e- GP application under the Public Sector Modernization Project established a promising basis for the successful introduction of e-GP. The Ministry of Finance has provided great leadership in this context and i s collectively recognized as the lead agency for the implementation of the e-GP agenda. However, the implementation of e-GP has been delayed, mainly due to political change, lack of capacity, an overambitious implementationapproach, and the absence of a detailed action plan. While the current legislation addresses the use o f electronic means for public procurement, it appears desirable to include more detailed reference with regard to electronic procurement transactions in the procurement regulation. Much work has been done to reach out and build capacity among buyers and suppliers and it i s critical to continue these efforts to manage successfully the change from paper-based to electronic procurement and develop appropriate capacity. On the other hand, the capacity of the Government o f Armenia to design and implement an e-GP system appears limited thus suggesting the use of external expertise for the systems needs analysis, design, development, and roll-out. The application o f procurement and technology standards i s highly recommended and needs to be coordinated across the Government of Armenia. Internet penetration improves fast and as part of the e-GP implementation program, the Government needs to ensure accessibility to online government procurement opportunities in order not to limit competition to those firms which are connected to the Internet. Building on the strong will and intent of the Government o f Armenia, it i s recommended that the Ministry of Finance continues to lead the adoption of the e-GP agenda based on an updated strategy and a less ambitious implementation approach. More specifically, the updated strategy should provide for an e-GP implementationplan in manageable phases with clearly defined actions, roles, and milestones. It should also address the need of capacity building among procuring entities and private industry. The e-GP component under the Public Sector Modernization Project should be limited to the design and implementationof an e-Tendering component. ' ' htto:llidbdocs.iadb.ora/wsdocsl~etdocument.asvx?docnum=G4~459 Appendix Page No. - 64 Armenia - Country Procurement Assessment Report Introduction 1. On September 23-26, 2008; the World Bank organized a mission to Yerevan with the objective to: (i) Assess the current situation and status of the e-GP program implementation; (ii) Identify the key problems and reasons for the delay o f the e-GP implementation; (iii)Suggest next steps and provide advice on developing an action plan to move the e-GP agenda forward. 2. The findings and suggestions o f this case study are based on discussions between the mission participants (Knut Leipold, OPCPR, and Davit Melikyan, ECSPE) and the following stakeholders: a Ministry of Finance: Mr. Tigran Davtyan, Minister o f Finance * Mr. Karen Brutyan, Head o f Procurement Process Regulation Department Mr. Edgar Avetyan, Director o f the FFPMC PIU a Adviser of the Prime Minister: Mr. Aram Gharibyan a Ministry of Economy: '* Ms. Zhenya Azizyan, Head o f I T Development Department a State Procurement Agency: Mr. Karapet Jghalyan, Deputy Head Mr. Arthur Arakelyan, Head o f Procurement Department a Control Chamber: Mr. Ishkhan S. Zakaryan, Chairman Mr. Eolyan Levon, Deputy Chairman Private industry representativesfrom 4 government suppliers. 3. In addition, several relevant documents were reviewed: Implementation Road Map for Electronic Government Procurement finalized after the international e-GP workshop in Yerevan, June 5-7, 2005; Government Decree No. 137N on the "Strategy for Introducing the System o f Electronic Procurement'' approved on January 26, 2006; In-Depth Review "E-Government Procurement in Armenia", January 2008; Appendix Page No. - 65 Armenia - Countrv Procurement Assessment ReDort Government Decree No. 853N on public procurement rules for approving procurement specifications, prior review, procurement financing, bidding committees, procurement minutes, complaints, supervision, procurement outside Armenia, monopoly services; approved on June 5,2008; RFP on "Developing Software for the Government Electronic Procurement System" under the Public Sector Modernization Project; Aide Memoire on "Armenia E-Development and Competitiveness Enhancement", World Bank mission, May 26-30, 2008; Draft Strategy for Reforming the Procurement System, 2008. 4. During a follow-up mission as part of the CPAR on December 15-20, 2008; meetings were held with representatives from the Ministry of Finance (Karen Brutyan) and the State Procurement Agency (Arthur Arakelyan). The mission also visited several purchasing agency (Marzpetaran o f Armavir and three health care centers). 5. This case study provides some background information about the history of e- . GP program adoption in Armenia in Section I Section I1 summarizes the current status of e-GP implementationtaking into consideration the key foundations for successful e- GP implementation as described in the above-mentioned e-GP readiness assessment guide of the Multilateral Development Banks' e-GP Working Group. Section I11 identifies the key issues o f the e-GP implementation in Armenia including reasons for its delay and the need to review the current situation. Section I V suggests the way forward with recommendations on alternative scenarios and related risks. I.Background 6. Under the leadership of the Procurement Process Regulation and Budgeting Methodology Department in the Ministry of Finance, Armenia identified the use of electronic means as a key driver for increased transparency and efficiency of public procurement. As part of the procurement reform agenda, an e-GP program was launched in 2005 with the support of USAID and the World Bank (IDF grant for public procurement reform). 7. An international e-GP workshop was held in Yerevan in June 2005 to raise the awareness o f the role o f e-GP among representatives of the line ministries and other state organizations. With USAID having prepared an initial e-GP strategy, the workshop resulted in collective understanding with regard to the definition, benefits, and key success factors of e-GP program adoption based on international experience and lessons learned. 8. E-GP does not only offer a huge potential for increased transparency and compliance with procurement rules; it also reduces the opportunity for fraud and corruption and provides for efficiency in public procurement. Price transparency due to published contract award information; increased competition due to better access to and availability o f public procurement information; and considerably reduced transaction costs for buyers and suppliers due to automated and streamlined procurement processes typically result in initial price reductions and savings of 10% (e.g. Korea, India, Mexico) or even more (e.g. 20% in Romania, 25% in Brazil). Appendix Page No. - 66 Armenia - Country Procurement Assessment Report 9. However, it would be too easy to simply install computers and software to achieve these benefits. The successful introduction of e-GP depends on a set of foundations which go far beyond the mere application of information technology. These foundations include the need of strong government leadership & management planning, appropriate policy & legislation, extensive buyer & supplier activation, and standardization& infrastructure development. 10. Based on the draft e-GP strategy presented by USAID at the international workshop, the Ministry of Finance hired an international e-GP expert under the IDF grant who helped to finalize the e-GP strategy for Armenia and develop an e-GP Implementation Roadmap with clearly defined actions and responsibilities. Based on the roadmap, the Government of Armenia approved the Government Decree No. 1 3 7 N on the "Strategy for Introducingthe System of Electronic Procurements" on January 26, 2006. 11. Since then, the Ministry o f Finance has tried to use the Public Sector Modernization Project for the design and development of an e-GP software application including related services such as installation, training, and operation of the e-GP platform. To date; no such application has been developed and a Request for Proposal for the development o f an e-GP software application has been drafted by the MOF under the Public Sector Modernization Project. 12. While the new Government of Armenia shows interest in improving the transparency and efficiency of the public procurement system, there i s some concern with regard to the appropriateness of moving forward with the e-GP implementation. To this end, the Minister of Finance welcomed the Bank's suggestion to prepare this case study on e-GP as part of the CPAR. II, Current Status o the e-GP Program Implementation f 13. The overall assessment of the current status of the e-GP program in Armenia reflects findings with regard to the following key foundations for successful e-GP implementation: government leadership & management planning, policy & legal framework, buyer & supplier activation, standards & infrastructure, and systems & applications. Government Leadership & Management Planning 14. As recommended in the e-GP implementation roadmap, strong leadership at high government level i s required to successfully implement e-GP and manage the resulting legal, institutional, and procedural changes based on a collectively agreed and supported implementation strategy. The Government o f Armenia has provided leadership with a lot o f progress in the area of e-GP, e.g. the development of an e-GP roadmap; approval o f a Government Decree on the e-GP strategy; inclusion of e-GP in the procurement legislation; initial e-GP awareness raising and capacity building among buyers and suppliers; and the operation of a public procurement website. 15, The current situation provides a good and promising basis for the continuation of e-GP implementation and i s a result of the strong leadership provided by the Ministry of Finance so far. The leading role o f the Ministry of Finance in general and o f its Procurement Process Regulation Department (PPRD) in particular for the e-GP Appendix Page No. - 67 Armenia - Country Procurement Assessment Report implementationagenda in Armenia was confirmed in all meetings and discussions with the different government officials. 16. It seems that some initial concerns about conflicting roles in leading the e-GP agenda between the PPRD and the State Procurement Agency (SPA) were sufficiently addressed by the mutual agreement on gradually transforming the role o f the SPA from a central procuring agency to a central Electronic Procurement Servicing Center (EPSC). This approach follows the recommendation of the e-GP roadmap to assign the leading role of e-GP implementationto the PPRD and re-evaluate the role of the SPA in the context of decentralizing public procurement. 17. As much as the PPRD has provided strong leadership in adopting the e-GP agenda in Armenia, it appears that there i s a lack o f appropriate resources required for the successful management of the design and implementation o f an e-GP system. While the PPRD i s maintaining and operating a website with public procurement information, it could not hire staff with relevant e-GP experience due to the absence of such expertise in Armenia and due to the lack of attractive incentive schemes in the public sector. 18. In view of the recent political change and a new Government in place, it i s encouraging to see the continuation of the strong e-GP leadership by the Ministry of Finance as well as o f the collective agreement on the PPRD as e-GP lead agency and the joint commitment of the Government regarding the e-GP program implementation. Policy & Legal Framework 19. With the approval of Government Decree (No. 137-N) on the "Strategy for Introducing the System of Electronic Procurement", the Government o f Armenia has established an important component as part of the public procurement policy which promotes value for money, open and effective competition, public procurement performance, and economic development. The Government Decree provides the direction and intent to transform the public procurement system by implementing an e- GP program with the objective of decentralizing public procurement and improving its transparency and efficiency. 20. Legislation with regard to the use o f electronic means in public procurement includes two major laws: the public procurement law adopted in December 2004, and the electronic document and signature law (both in effect since January 2005). The public procurement law refers to the possibility of using electronic procurement as stipulated by the Government of Armenia and does not include a set of minimum rules and requirements for e-GP. While the Government Decree on the e-GP strategy lists the main e-GP functionalities, a secondary legislation where the government would stipulate these rules and requirements in detail has not been developed yet. Similarly, the electronic signature law refers to the use o f digital certificates issued by certification authorities; but no such authority has been established so far. 2 1. As suggested in the e-GP implementation roadmap, the use of electronic means in public procurement requires a review of traditional procurement policies and regulations with regard to the automation of rules and processes and their applicability across public agencies. The introduction of an e-GP application i s subject to the design of electronic procurement processes. Government Decree No. 853N, approved on June Appendix Page No. - 68 Armenia - Country Procurement Assessment Report 5, 2008, describes public procurement rules and procedures and refers to the use of electronic means mainly in the context of advertizing (e.g. official procurement bulletin, procurement plans, procurement notices). However, as mentioned in the last preceding paragraph, there i s no such detailed description for the electronic procurement processes in their entirety (e.g. for e-Tendering including the rules for downloading bidding documents, uploading bids with appropriate security mechanisms, or opening bids). 22. The implementation of e-GP overlaps with other electronic government initiatives, such as e-Government policies, standards, or related legislation (e.g. e- signatures). While the Ministry o f Economy i s in charge o f the broader e-Government agenda in Armenia, there i s agreement on a coordinated approach between the PPRD and the Ministry of Economy to implement the e-GP program in line with existing e- Government standards. For instance, the e-signature law requires government agencies to use digital certificates for authentication, which would need to be taken into consideration for the e-GP application. Buyer & Supplier Activation 23. The activation o f the purchasing agencies as well as o f the private industry and of the public at large i s one of the most critical success factors of the e-GP program. Transforming the traditional paper-based procurement system and structures into an innovative electronic public procurement system requires the management of change through extensive awareness raising and capacity building programs. 24. The PPRD has provided a lot o f leadership in raising the awareness with regard to the introduction o f e-GP in Armenia. Many stakeholders in the public and private sector are aware of the e-GP agenda and the PPRD should continue to play an active role in reaching out on the subject matter, not only through common communication channels, such as TV, radio, Internet, newspaper, workshops, etc; but also by producing and marketing relevant deliverables in a phased approach to demonstrate the walk of the talk. 25. For instance, the public procurement website of the PPRD provides a lot of valuable procurement information. While public agencies and larger private companies seem to use this website, there i s s t i l l room for reaching out to smaller companies on the one hand and for adding new functionalities on the other hand. In this way, buyers and suppliers can increasingly use the available electronic means and recognize the benefits for their business. 26. One of the major issues raised 'in all discussions with government and private industry representatives i s the lack of capacity with regard to e-GP. While workshops, training programs, and international study tours have contributed to developing a good understanding of e-GP among some procurement-related government officials, it appears that the capacity in terms.of designing and implementing an e-GP system and in terms of using such a system is still rather limited. 27. The lack of e-GP design and implementation capacity within the government can be addressed by using external expertise for the systems needs analysis, design, development, and roll-out. However, the PPRD should assign staff to be involved in these procedures thus creating an enabling environment and sufficient capacity for Appendix Page No. - 69 Armenia - Country Procurement Assessment Report successful e-GP implementation within the government. The planned transformation o f the SPA into an e-GP support and training center requires a change management and capacity building program by itself. While the SPA i s aware o f its future role, it has not yet been staffed with appropriate skills and expertise. 28. On the other hand, the users of the e-GP system must be involved and educated as well. Smaller purchasing agencies, such as health care centers at Marzpetaran level, do not seem to be ready and prepared to use the Internet for the procurement o f their required goods, works, and services, although they all have one or more computers, in most cases even connected to the Internet. This does not only apply to the public procurement agents, but also to the private suppliers and contractors. They will see benefits in e-GP, if it improves its confidence in the integrity, fairness, consistency, transparency and efficiency o f the procurement process and provides open access to a wider range of business opportunities. To this end, a program for e-GP training and advisory support will need to be designed and delivered. Standards & Infrastructure 29. The introduction o f e-GP requires the application o f procurement standards with regard to procedures and documents as well as o f technical standards with regard to information technology. Procurement procedures are standardized to a certain extent in the relevant legislation and can be taken into consideration when designing an automated workflow. However, standardized bidding documents, which typically provide the basis o f uniform online templates in an e-GP application, do not seem to be applied across the government in Armenia. In the absence o f government-wide technical standards with regard to information technology, the PPRD will coordinate the use o f such standards within the government in general and with the Ministry o f Economy in particular. 30. The full potential o f increasing transparency and efficiency of the public procurement system by using electronic means requires a well-developed infrastructure with regard to Internet connectivity and accessibility in Armenia. Government agencies are basically equipped with computers including Internet access and so i s the private industry. More importantly, while the Internet penetration according to Internet World Statsl2 appears very low with 5.8% of the population, the Internet use growth rate o f 476% over the last 8 years indicates an increasingly faster growing Internet usage in Armenia. 31. However, a more systematic approach needs to ensure that procuring units are appropriately equipped, connected to the Internet, and trained to use the technology. To this end, the e-GP program implementation should go along with the broader ICT agenda o f the Government o f Armenia which, among others, includes a joint initiative with the World Bank regarding ICT development in general and an ICT infrastructure component in particular. www.intemetworldstats,com Appendix Page No. - 70 Armenia - Country Procurement Assessment Report 32. For example, a recent World Bank mission to Armenia13 submitted the following recommendations in the context of developing the ICT infrastructure in Armenia: 0 Promote further development of the telecom sector regulatory framework; Develop the national broadband backbone network; 0 Develop a network of ICT tele-centers and rural broadband access facilities. 33. The latter recommendation would address the issue o f excluding those potential government suppliers and contractors from e-GP participation who do not have the s required infrastructure in place. The SPA a future EPSC could play an important role in this context. Systems & Applications 34. The level o f e-GP introduction i s often measured against the availability o f an e- GP application to conduct online procurement transactions. This, however, can only be achieved after having successfully addressed the other key foundations listed above. Some considerable work has been done in this regard under the leadership o f the PPRD which, among others, resulted in the development o f a central public procurement portal www.procurement.am. 35. The central public procurement portal i s maintained and operated by the PPRD in the Ministry o f Finance. A l l relevant information being posted on that website i s entered by the PPRD. Besides a whole range of procurement information including legislation, procurement notices, and contract award information, the website also provides a subscription facility to receive relevant information by email. The website i s available in Armenian language with English and Russian versions under construction. 36. The website also provides a link to an electronic catalogue of some 13,000 common use goods, works, and services which are subject to periodic contracts organized and managed by the SPA. While the periodic contracts so far have been similar to closed framework agreements, under which a qualified firm with the lowest unit prices was selected for a period of time (2 to 3 years) as the provider for all purchase orders, Government Decree 853-N introduced a mechanism to increase the competition under periodic contracts. The new procedure allows any interested bidder to register and qualify for a framework agreement. Every 3 months (goods) or 12 months (works, services), all qualified bidders will submit their best prices and the bidder with the lowest price will be the selected contractor for the next 3 and 12 months respectively. Since electronic means typically facilitate the procedures under framework agreements by allowing mini-competitions for each purchase order (e.g. through electronic reverse auctions or electronic requests for quotations) and subsequently online ordering and payment, the setting up and management o f periodic contracts will definitely benefit from the future e-Purchasing functionalities which are planned to be implemented after the e-Tendering system. l 3 Aide Memoire on "Armenia E-Developmentand Competitiveness Enhancement", World Bank mission, May 26-30,2008 Appendix Page No. - 71 Armenia - Country Procurement Assessment Report 37. The website i s a great achievement and the announcement and marketing o f its existence and functionalities should be intensified. In this way, all stakeholders including government agencies, private companies, and the public at large will see an initial deliverable of the phased e-GP implementation and the related benefit of improved transparency of and accessibility to public procurement information. 38. The next step includes the introduction of e-GP transactions in a phased approach as suggested in the e-GP implementation roadmap. The Government o f Armenia and the World Bank agreed to use the Public Sector Modernization Project to finance the design and implementation of an e-GP system. While a contract was awarded to the Institute for Informatics and Automation Problems of the National Academy of Sciences in January 2007 to carry out a needs analysis and detailed functional and technical design study, this contract was cancelled due to a major delay in approving the public procurement rules, procedures, and regulations, which were finally approved by Government Decree (No. 853-N) in June 2008. III.Key Issues o e-GP Program Implementation f 39. The launch and initial phase of the e-GP program including the e-GP roadmap, the Government Decree on the e-GP strategy, and the development of an e-GP application under the Public Sector Modernization Project established a promising basis for the successful introduction of e-GP in Armenia. However, the following four key issues resulted in the current delay and uncertainty regardingthe implementationof the e-GP agenda: political change, lack of capacity, overambitious implementation approach, and absence of a detailed action plan. Political Change 40. Political change typically has an impact on the implementation o f major projects within or driven by the government. Nothing i s different in Armenia than in so many other countries all over the world: a new government i s being established with new ministers who take important decisions with regard to continuing, reviewing, or stopping ongoing projects. In most of these cases, projects are delayed considerably if not cancelled. The new Government o f Armenia, which has been in place since April 2008, showed some hesitation in moving forward with the e-GP agenda and asked for a procurement reform strategy that addresses a more systematic e-GP program preparationand implementation. 41. First, considerable concern was expressed on the absence of reliable information on the cost of implementing e-GP and on the return on investment. In particular the allocation o f USD 2.3 million as co-financingto the USD 600,000 funded under the Public Sector Modernization Project for the development of an e-GP application has raised the question of what the Government of Armenia will get for that amount of money and whether this investment can be justified to all stakeholders. Price savings of 10% to 20% as reported in many countries due to increased price transparency and competition may not necessarily be achieved in Armenia, where the market i s limited and collusion among suppliers and contractors could continue independently from the use of e-GP. 42. The mission pointed out, that e-GP performance indicators should be introduced such as changes in the average number of bidders or in average prices which will help Appendix Page No. - 72 Armenia - Country Procurement Assessment Report to measure the benefits o f e-GP. In addition, e-GP will definitely reduce the cost of bidding for both government agencies and private companies. On the other hand, some non-measurable benefits o f e-GP include increased transparency and compliance of public procurement. These are basic valuable principles of a good public procurement system. 43. Second, the Government feels that not all government agencies as well as private companies would be prepared to use electronic means for public procurement. A mix of infrastructure development, capacity building, and change management provides the key to address this issue. A more proactive approach to these elements would help to increase the confidence in the e-GP program implementation approach and to move the program towards the top o f the Government's priority list. While existing initiatives for ICT development in Armenia should be used to improve computer skills and infrastructure of procuring agencies and private companies, the PPRD should extend current procurement curricula and include relevant e-GP training and change management content. 44. Third, the government would like to see the e-GP program implemented in phases based on clearly defined actions and processes. A clear definition of the procurement processes and an up-to-date action plan with roles, responsibilities, milestones, and cost estimates should provide the basis for a step-by-step implementation. At present, the e-GP roadmap and the relevant Government Decree on the e-GP strategy are outdated. 45. Taking into consideration that e-GP i s a major program which needs to address a set of key foundations (see Section I1 above), the Government of Armenia will need to invest not only in Hardware and Software to provide a tool for public procurement automation but also in establishing an appropriate environment with regard to program management & planning, policy & legislation, awareness raising & capacity building among buyers and suppliers, and standards & infrastructure. To this end and in line with a phased implementation approach to e-GP system development as suggested in Section IV, the total budget o f USD 2.9 million might not be used for the e-GP system development only; but a part o f it could be reallocatedto cover relevant important areas such as capacity building and infrastructuredevelopment. 46. As much as the political change with a new Government in place might have contributed to the current delay and uncertainty with regard to the e-GP program implementation in Armenia, it has also contributed to identifying and raising the following issues around the e-GP implementationcapacity and approach. Lack o Capacity f 47. In basically all meetings and discussions, the lack o f capacity was pointed out as one of the biggest concerns in the context of the e-GP program implementation. The majority o f representatives from smaller purchasing agencies, such as in regional health care centers, could not imagine using their existing computer with Internet connection for procurement. Besides the development o f e-GP capacity, the planned decentralization of public procurement also requires a much broader focus on public procurement capacity building. To this end, a comprehensive training and change management program could intensify the capacity building efforts with regard to Appendix Page No. - 73 Armenia - Country Procurement Assessment Report procurement and computer skills on the one hand and introduce the planned changes in the context o f e-GP introduction on the other hand. 48. In addition, effective online user training for the procurement staff in the government agencies and the private sector can only be provided when an e-GP software application has been designed and developed. However, the training program should define the modalities o f the e-GP training delivery and familiarize the key players with the e-GP application from the very beginning. 49. Besides a lack o f capacity among the potential e-GP users, the mission came to the conclusion that there i s also a lack o f capacity with regard to e-GP program management and implementation. While the PPRD lead agency was able to manage the initial e-GP program adoption including the maintenance and operation o f the public procurement website, it does not have sufficient resources and skills to design, develop, and operate the e-GP software application. Even when contracting the e-GP system design to the Institute for Informatics and Automation Problems o f the National Academy o f Sciences, the contract was not completed mainly due to a major delay in approving the public procurement rules, procedures, and regulations as Government Decree, but also due to the lack o f including appropriate e-Procurement expertise within that Institute as initially proposed and approved by the Bank. 50. ICT capacity development within the government constitutes a major problem since the private sector offers much more attractive incentives and it i s hard to retain such expertise within the government. To this end, the roadmap suggested to select an e-GP business model with an expert service provider from the private industry to develop and operate the e-GP system. The related Government Decree on the e-GP strategy assigned this role to the SPA as the future non-commercial Electronic Procurement Servicing Center. While the SPA can offer expertise in the area o f public procurement, it does neither have appropriate e-GP expertise nor the ICT skills required to operate and maintain an e-GP system. Overambitious Implementation Approach 5 1. While comprehensive e-GP systems provide multiple functionalities including e-Tendering (e.g. e-bidding, e-RFP) for the procurement o f large specialized goods, works, or services and e-Purchasing (e.g. e-catalogues, e-RFQ, e-Reverse Auctions) for the procurement o f common-use goods, works or services; their successful implementation requires a phased approach. According to this lesson learned from many countries, the e-GP roadmap and approved strategy suggests to split up the e-GP system implementation into two phases: e-Tendering and e-Purchasing including contract management. Each phase could even provide for a phased implementation approach, e.g. advertizing, download o f bidding documents, and electronic bid submission as part o f e-Tendering. 52. However, the Terms o f Reference o f the contract with the Institute for Informatics and Automation Problems of the National Academy of Sciences already included the e-GP system design including detailed functional and technical requirements for a comprehensive modern e-GP system covering e-Tendering and e- Purchasing. Besides the above mentioned two reasons (Le. absence o f approved procurement rules and appropriate e-GP expertise), the overambitious approach by the MOF to the design o f a fully-fledged e-GP system might be considered as a third reason for the failure o f the contract. Appendix Page No. - 74 Armenia - Country Procurement Assessment Report 53. After the contract for the e-GP system design was cancelled, a new Terms of Reference was planned by the MOF as part of another RFP prepared under the Public Sector Modernization Project with an even more ambitious and somewhat confusing and contradicting approach. The Terms o f Reference of this most recent RFP, which i s s t i l l pending approval by the Bank, does not only include the design o f a fully-fledged e-GP system including e-Tendering and e-Purchasing but also the implementation including application software delivery, installation, operation, and training. At the same time, the TOR refers to off-the-shelf software with customization. Typically, system design i s a separate assignment including a needs analysis which results in a more detailed definition of the functional and technical requirements of the system to be delivered as an off-the-shelf solution under a separate contract. 54. Government o f Armenia and the requirement o f designing and delivering a fully- fledged e-GP system under the same contract, the mission shared some concern that this i s a highly risky approach which might result in another contract failure. The MOF followed the mission's suggestion to review the TOR of the RFP and transform it into a manageable and less ambitious task and deliverable the successful implementation of which i s not jeopardized from the outset. Absence o Detailed e-GP Action Plan f 55. While the e-GP roadmap provides an action plan for the implementation of e- GP, the Government Decree on the e-GP strategy refers to a more general implementation plan in three phases: e-GP preparation (March 2006), e-Tendering (January 2008), and e-Purchasing (January 2009). To this end, the e-GP . implementation suffers from a considerable delay and it i s very important to review and update the e-GP implementationplan in line with the current e-GP program status. 56. The update of the e-GP implementation plan should result into a detailed e-GP action plan with clearly defined tasks, timeline, roles, and responsibilities based on the initially suggested action plan in the e-GP roadmap. To this end, several detailed plans with regard to important areas such as awareness raising efforts, training, change management, infrastructure development, and phased e-GP system project management need to be coordinated under an overall e-GP implementation plan. 57. A revised and updated e-GP implementation plan will provide'the basis for collective understanding and agreement on how to continue the transformation and reform o f the public procurement system in Armenia. It should specifically address those areas which were identified as the key issues of e-GP implementation and suggest a less risky approach including the development o f e-GP capacity in the public and private sector and the definition of a feasible implementation approach in phases. V I .Recommendations and Next Steps 58. Despite all political change and issues identified in the context of e-GP program implementation in Armenia, the most important message from the Government i s the will and intent to continue to introduce e-GP as a tool to improve the public procurement system in general and its transparency and efficiency in particular. The mission i s confident that the Ministry of Finance with the PPRD as lead agency will build on the achievements so far and update the e-GP implementation plan in manageable phases. The following recommendations result from the assessment o f the Appendix Page No. - 75 Armenia - Country Procurement Assessment Report current e-GP status in Armenia including the broader issues identified and are provided for consideration in the context of moving forward the e-GP agenda. General Recommendations 59. Government Leadership & Management Planning. The Ministry of Finance in general and the PPRD in particular should continue to lead and manage the e-GP program implementation in close coordination with the Government of Armenia and the private sector. Committees should be established with different mandates at supervisory, advisory, and working level. This approach contributes to strengthening the e-GP leadership and ownership by the Government of Armenia and supports the role of the PPRD as the lead agency for e-GP implementation. 60. Policy & Legal Framework, Based on the public procurement law of Armenia and relevant secondary legislation, e.g. Government Decree (No. 853-N), the PPRD should lead the initiative of developing the regulations for the use of electronic means in public procurement. This should include a review of current procurement rules and management processes on the one hand to identify those that can be re-engineered for the electronic environment. On the other hand, a review of the regulations subordinate to the public procurement i s recommended to ensure compatibility with electronic processes. 61. Buyer & Supplier Activation. The Government of Armenia should intensify the e-GP awareness raising and capacity building efforts based on a comprehensive and appropriate communications, training, and change management strategy. In this context, it i s recommended to ensure a balanced approach to developing in-house capacity vs. relying on external skills. The SPA should be involved from the outset as initial recipient and future provider of e-GP training. The planned decentralization o f the procurement finction combined with the use of electronic means for public procurement will require a lot of change management and capacity building initiatives among the procurement staff in public agencies as well as in the private sector. 62. Standurds & Infrastructure. The introduction and improvement of procurement standards under the leadership of the PPRD in close cooperation with the SPA should include the design and agreement on harmonized procurement procedures, templates, and standard bidding documents across all government agencies. These standardized procedures and templates would be part o f the central e-Tendering system to be used in a decentralized environment. In addition to procurement standards, the PPRD should coordinate the use o f open technical standards regarding information technology with the ICT development unit of the Ministry o f Economy to ensure compatibility with an overall IT standards framework o f the future e-Government platform in Armenia. The coordination with the Ministry of Economy should be extended to ICT infrastructure development initiatives under which the PPRD, in close collaboration with the SPA, should focus on the existence and use of computers with Internet connectivity in the procuring agencies and in the private sector. 63. Systems & Applications. The PPRD should continue to manage the introduction of the e-GP system in a phased approach. Next steps should include the enhancement of the existing website functionalities and the introduction of online procurement transactions starting with an e-Tendering system to be piloted for large contracts among selected line ministries with appropriate e-GP capacity and resources. At the same time, Appendix Page No. - 76 Armenia - Country Procurement Assessment Report the new role o f the SPA as EPSC should be institutionalizedto provide user help desk support and gradually get prepared to take over the operation of the e-GP system from the selected private provider. Specific Recommendations 64. The following specific recommendations address the identified key issues o f the e-GP program implementation in Armenia and provide detailed next steps, partly with alternative scenarios including some related risks and the suggested scenario to go with. 65. Stabilization o e-GP Leadership. The e-GP program implementation in f Armenia benefits from the fact that the new Government supports the continuation o f the e-GP implementation and considers the PPRD as lead agency in this context. At the same time, the lead agency can benefit from the fact that the new Government expressed some concern with regard to the implementation as discussed in Section 1 11 o f this case study since it helps to identify some key e-GP implementation issues. In this context, the PPRD should revise and update the e-GP implementation strategy including the identification of detailed actions and next steps with cost estimates, performance indicators, capacity development, and a manageable step-by-step implementationapproach. 66. For instance, the suggested implementation o f e-Tendering as the next phase should include a cost estimate based on the scope of work defined in the TOR of the simplified RfP and on some market research. On the other hand, performance indicators should be established which will allow measuring the efficiency (e.g. reductions in price and cost of procurement) and transparency (e.g. average number of participating bidders, number of complaints) of the electronic procurement process as compared to the traditional paper-based procurement process. In addressing the areas of concern of the new Government in the revised e-GP implementation plan, the PPRD will contribute to strengthening the basis for collective understanding and agreement on e- GP implementation in Armenia and to improving the confidence of the new Government in the e-GP program. 67. As suggested in the e-GP roadmap, an e-GP Advisory Committee should be established with representatives from the government (e.g. Adviser of the Prime Minister, line ministries, SPA, Control Chamber, etc.) and the private industry (e.g. business associations, Chamber o f Commerce, etc.). The PPRD as the delegate o f the Minister of Finance should chair the Advisory Committee which would provide advice at working level and oversee the e-GP implementation in Armenia based on an updated e-GP implementation strategy. In addition and at their discretion, the Prime Minister together with the Minister of Finance and the Minister of Economy might constitute a high-level e-GP supervisory board to support the e-GP implementation at political level and provide leadership to the Advisory Committee for mission-critical decisions. 68. Capacity Development. The PPRD should start to transform the SPA into the EPSC by establishing an e-GP support unit and an e-GP operations unit and developing respective TORS. While the e-GP support unit should design and deliver an e-GP awareness and capacity development program to the public and private sector, the e-GP operations unit should include I T staff to be involved in the design and implementation o f the e-Tendering system. In this way, the public and private sector will be trained to get prepared for the use o f the e-Tendering system on the one hand and they will Appendix Page No. - 77 Armenia - Country Procurement Assessment Report benefit from user help desk support when running into problems while using the e- Tendering system on the other hand. 69. The PPRD should continue the dialogue with the international e-GP community by actively participating in international learning events and inviting international e-GP practitioners to come to Armenia to share and learn from their e-GP experience. This will not only provide useful help to the e-GP program implementation in Armenia but also increase the visibility o f Armenia's e-GP program adoption at international level. 70. The Government o f Armenia should use international e-GP expert consultancy to help the PPRD implementing the e-GP program in general and managing the contract with the selected company under the Public Sector Modernization Project in particular. 71, In the absence o f e-GP skills and expertise within the Government o f Armenia and given some uncertainty in terms of the cost of introducing and maintaining e-GP, a business model should be selected which involves the private industry. Besides the possibility o f selecting a business model with revenue generation, e.g. by charging moderate transaction fees to the e-GP system users from the private industry, the Government o f Armenia should select a sustainable business model with regard to the development and operation o f the e-GP system. The MOF has agreed to follow the suggested scenario, Le., to select a private business provider for the delivery and initial operation o f the e-GP system components with subsequent transfer to the EPSC. Alternative e-GP business model approaches: Suggested Scenario Result Risks Scenario e-GP system development Private firm to deliver Reliance and and operation outside the and operate e-GP dependency on government system external capacity e-GP system development Private firm to deliver, Project delays due and initial operation outside operate, and transfer e- to problems the government with GP system to EPSC during the e-GP X continued operation inside system transfer the government e-GP system development Government to deliver Failure due to lack and operation inside the and operate e-GP and retention o f IT government system from the outset expertise in the government 72. Phased e-GP Implementation Approach. The e-GP roadmap and the related Government Decree on the e-GP strategy suggest an e-GP program implementation in phases. While at some point a line has to be drawn between the implementation phases, this decision should be based on the available capacity of project management as well as on the preparedness o f procuring agencies and private companies to move to e-GP. The following e-GP implementation scenarios are based on the alternative ICT Development approaches in Armenia suggested in the Aide Memoire o f a World Bank Appendix Page No. - 78 Armenia - Country Procurement Assessment Report mission on E-Development and Competitiveness Enhancement in Armenia, 26-30 May 2008. Alternative e-GP implementation approaches: 1 ~ Suggested Scenario Result Risks Scenario "All-inclusive" Delivery o f a fully- Major project delays approach: one project fledged e-GP system with and cost overruns if covering all e-GP all procurement not to failure program components functionalities "Hub-and-spoke" E-GP system Project delays approach: Multiple e- development and andor cost overruns G elements to be P implementation in are manageable anchored around a phases: e-Tendering, e- X core e-GP system Purchasing (e-catalogues, platform e-reverse auctions), e- contract management ``Let-] ,000-flowers- Development and Duplication o f effort bloom" approach: operation o f multiple e- and investment, Development o f P G systems in different interoperability decentralized multiple government agencies issues, and e-GP systems confusion among private industry 73. The failure o f the initial contract with the Institute for Informatics and Automation Problems o f the National Academy o f Sciences on designing a comprehensive e-GP system and the resulting delay in e-GP program implementation i s a fact which must be accepted by the Government should not try to compensate the project delay by asking the Bank to approve an even more ambitious TOR as part o f the currently drafted RFP under the Public Sector Modernization Project. To this end, the Government o f Armenia should agree with the PPRD to follow the suggested phased implementation also with regard to e-GP system development, delivery, and operation. 74. The suggested sequencing should include: (i) Establishment o f a user-friendly single-window public procurement portal with value added (www.procurement.am) i s already up and running and should be enhanced by releasing the English and Russian versions o f the portal on the one hand and by adding more functionalities on the other hand, such as a decentralized entry o f procurement notices with automated workflow for approval by the PPRD or a subscription facility for interested bidders to receive automated e-mail notification for sector-specific procurement notices; (ii) Introduction o f an e-Tendering system for large contracts including the automation o f the workflow for approvals within the government as well Appendix Page No. - 79 Armenia - Country Procurement Assessment Report as of the required bidding procedures and transactions with interested bidders; (iii) Introduction o f e-Purchasing mechanisms for common-use goods, works, services under small or periodic contracts. While the PPRD can address phase (i) a short-term basis, it should start in on parallel the work on the e-Tendering system under the Public Sector Modernization Project as suggested in the following paragraph. 75. Review and SimpliJication o RFP. The latest draft of the RFP followed the f mission's suggestion to scale down the scope o f the previous TOR and limit it to the design, delivery, and operation of an e-Tendering system including required training services. The mission reviewed the latest draft with the PPRD and provided suggestions on improving some functional and technical requirements based on which the selected contractor can do the design and development o f the e-Tendering system. 76. While system design and development/delivery are typically two separate assignments with potentially different procurement approaches (RFP for system design plus another RFP for software application development from scratch or ICBNCB for delivery and customization o f off-the-shelf application software, training, and operation), the second scenario in the table below i s suggested and justified by (i) the ratio of consultant-type services (e.g. system design, customization, training, roll-out, operation, knowledge transfer) vs. supplier-type products (e.g. off-the-shelf application software) and (ii) desire o f using the available budget without any further project the delays. It should also be mentioned that, if the need for the continuity for downstream work i s indicated in the RFP, the selected consultant for the e-Tendering system could continue to do e-Purchasing work as potential downstream work. In addition, a pre-proposal conference could be held to allow the shortlisted candidates to familiarize with the TOR. Alternative Procurement Approaches for e-Tendering: Scenario Result Risks 1 Suggested Scenario Cancel current RFP Separate contracts for e- Major project and separate the e- Tendering design and delay, ambiguities Tendering design and implementation in design and implementation implementation, and increased cost o f procurement Continuation o f Design and implementation Project delays current RFP with o f e-Tendering system andor cost simplified and more under one assignment overruns are specific TOR manageable Appendix Page No. - 80 Armenia - Country Procurement Assessment Report Cancel current RFP U s e o f ICB method with Major project delay and apply different two-stage bidding including and/or cost procurement e-Tendering design & overruns approach implementation 77. Development o a Detailed e-GP Action Plan. The Government o f Armenia f should develop a revised and updated e-GP implementation plan taking into consideration the e-GP roadmap, the Government Decree on the e-GP strategy as well as other Government Decrees referring to e-GP and the current e-GP program status. More importantly, the areas identified as the key issues o f e-GP implementation so far need to be addressed, Le. the development of e-GP capacity in the public and private sector and the definition o f a feasible implementation approach in phases. 78. The revised e-GP implementation plan should include the identification of deficiencies with regard to the key foundations of successful e-GP program adoption as defined in the roadmap and in Section I1of this case study. Once these deficiencies are identified, specific action plans should be developed and implemented in order to address and overcome them. For instance with regard to the key foundation infrastructure and buyer activations, an assessment o f the level of available procurement and I T skills, equipment, and Internet connectivity in the procurement units o f each line ministry and other major government agencies would provide sufficient information to develop an appropriate action plan for the development of procurement and/or I T skills as well as for the required delivery and installation o f computers with Internet access in those ministries without such resources. 79. While the PPRD should lead and manage the revision o f the e-GP implementation plan, it should identify and use additional expertise inside or outside the government to develop and implement the detailed action plans to overcome existing deficiencies with regard to the different e-GP key foundations. For instance, the SPA could play an instrumental role in terms of developing procurement expertise in the line ministries, while required I T skills development and I T equipment could be provided under a separate action plan. 80. Similarly, the current absence of detailed e-GP regulation should be addressed in an action plan o f reviewing the regulations subordinate to the public procurement law and related legislation to ensure compatibility with electronic processes (e.g. the rules and procedures for the electronic publication of procurement plans, notices, contract awards and other relevant information as well as for the authentication and accessibility to the e-Tendering system, electronic distribution o f bidding documents and amendments, electronic bid submission including tender box management and security, and electronic bid openings). 81. The PPRD should aggregate all these relevant action plans into a comprehensive detailed e-GP action plan with a clear description o f the tasks, timeline, roles, and responsibilities. In complementing the e-GP implementation plan with such detailed overall e-GP actions, the Government o f Armenia will get a better idea o f the Appendix Page No. - 81 Armenia - Country Procurement Assessment Report specific steps as well as o f the required resources for the e-GP program implementation in Armenia. 82. The following suggested timeline for the implementation of the e-Tendering system should Timeline for e-Tendering Implementation: Activity 1 Timetine 1 1 Review and scale down RFP/TOR 1 End ofApril 2009 Select firm for e-Tendering End of June 2009 Delivery and acceptance o f e-Tendering application End of 2009 Piloting of e-Tendering with selected line ministries March 20 10 Roll-out of e-Tendering in all line ministries End o f 2010 83. Based on the findings of this case study, the following Action Plan has been prepared. Implementationo f this Action Plan i s expected to strengthen e-GP. Priority Action (Imm ediateRhort Impact Collective support management of the e-GP program by Immediate and acceptance of the the MOF (PPRD) in coordination e-GP agenda with the GOA and private sector Review and update the e-GP Successful e-GP implementation strategy including the program identification of detailed action plans Immediate implementation and next steps with cost estimates, following a detailed performance indicators roadmap Establish a high-level e-GP Quick decisions with supervisory board at Minister level lower risk of delays Short Term and resource limitations Establish an e-GP advisory Collective decision committee with government and Short Term and support of e-GP private sector representatives agenda Develop more detailed regulations for I Comprehensive and the use of electronic means in public Short Term clear legal basis for procurement e-GP Develop a communications, training, Successful support and change management strategy to Immediate and use of e-GP by catalyze the e-GP awareness and all stakeholders capacity building Institutionalizethe new role of the SPA as EPSC and develop Sustainable business appropriate skills for e-GP support model operated Short Term and operations to provide user help within the desk support and Gradually get government prepared to take over the operation of Appendix Page No. - 82 Armenia - Country Procurement Assessment Report Priority Action (Immediate/Short Impact TermMedium Term) the e-GP system from the selected private provider Continue the dialogue with the Adoption o f good e- international e-GP community by GP practices; actively participating in international increased visibility o f learning events and inviting Immediate the Armenian e-GP international e-GP practitioners to agenda at come to Armenia to share and learn international level from their e-GP experience Use international e-GP expert consultancy to help implementing the e-GP program in general and Successful e-GP managing the contract with the Immediate program selected company under the Public implementation Sector Modernization Project in particular Coordinate across the Government o f Better procurement Armenia the implementation o f management due to Short Term procurement and IT standards and the standardized and I C T development initiatives integrated systems Coordinate across the Government o f Improved Internet Armenia the ICT development Short Term penetration initiatives Enhance the existing website www.procurement.am by adding an English and Russian versions and more functionality such as Increased decentralized entry o f procurement transparency and notices with automated workflow for Immediate participation in approval by the PPRD or a public procurement subscription facility for interested bidders to receive automated e-mail notification for sector-specific procurement notices Implement an e-Tendering system Increased efficiency and transparency o f Short Term the procurement o f large contracts Introduction o f e-Purchasing Increased efficiency mechanisms for common-use goods, and participation in works, services under small or Medium Term small government 2eriodic contracts contracts Appendix Page No. - 83 Armenia - Country Procurement Assessment Report - CASE STUDY I1 PUBLIC PROCUREMENT IN H E A L T H SECTOR INTRODUCTION Objective of the case study 1. The objective o f this case study i s to assess the current status of procurement procedures, practices organizational arrangements, and capacity of staff in the health sector, and to make recommendations for improvements. Provision o f timely and quality health services i s essential to improve the health and well-being of the population and a precondition for ensuring prosperity, and continuous social and economic development. Sound procurement practices help achieve this objective by ensuring economy and efficiency in the use o f public funds. Methodology and Health Sector Institutions Covered 2. This study i s based on the assessment o f Armenia's public procurement system; review of procurement procedures and -related laws and decrees applicable to the health sector; and interviews with the staff o f few health sector agencies. 3. The assessment team reviewed the existing procurement arrangements and assessed the capacity in health sector institutions at central, regional and local levels, viz, the Ministry o f Health (MOH), State Health Agency (SHA), the "Professor R. H. Yolan Center of Hematology"CJSC, the Armavir Marzpetaran Administration; one Marz hospital (Armavir MC CJSC), and one polyclinic and Primary Health Care Center. Applicable Laws and Decrees 4. The following laws and decrees are especially relevant to procurement in the health sector: Law On the human reproductive health and reproductive rights, dated December 11,2002 Law On the pharmaceuticals, dated 22 of February, 2007 The Public Procurement Law, dated December 6,2004 Government Decree No 853N, dated June 5,2008 Minister o f Finance and Economy Decree No. 426N, dated April 25, 2005 Government Decree No. 1301 dated August 15,2002, on the Charter and Structure o f State Health Agency Minister of Finance and Economy Decree No 1167N dated November 6, 2005 and amended as o f April 19,2007 (Finance Minister Decree No 393N. Appendix Page No. - 84 Armenia - Country Procurement Assessment Report HEALTH SECTOR 5. The health care system in Armenia i s a combination o f centralized and decentralized system at three administrative levels: republican, Marz and community. While State hygiene and anti-epidemic services and several tertiary care hospitals remain centralized, ownership and operations o f health services have been decentralized to communities (e.g. Primary Health Care (PHC)) and hospitals at the Marz ,level. The health sector comprises o f the Ministry o f Health, its affiliated agency the State Health Agency SHA, and health care facilities, Marzes and communities. At the regional level, all the ten Marzes and the City o f Yerevan are responsible for health care services. The financial management o f the resources allocated for health care services are managed by the State Health Agency. The Marzes are responsible for the planning and have regulatory powers for delivery o f these services. .......,.,... ...,,....,,,. .. .. , ,,. .... .. ......,,.,.,.. ,.,... , ..,.,,.,,,.,,,.,.,,.,..,.,,.,,, .,..,,. ., .,,,.,.,,,..........,,. ....,,, .., ,,,..,,.,.,,,.....,,...,..,,,,,..... .... ,..,... ,,,,.., ....,...,,.., H E A L T H SECTOR OF ARMENIA Health services State Hygiene and Drug and Technology hospitals, policlinics. Anti-Epidemic Scientific Expertise secondiuy and te*lary Inspection (SHAE) Center care - Ministry o f Social Security Hospital and Stress Center - Specialized hospitals and polyclinics esonal ( m u d and Regiondimulucipl Regionallmunicipal pnmary care facilities hospitals (polyclmcs. health governments centers and others) I I I i Rural ambulatones, Communities (hamayher) health posu, health Centers Private Sectnr ,, .,.,.,.,,,,..,. Appendix Page No. 85 - Armenia - Countrv Procurement Assessment Reuort Ministry of Health 6. The MOH i s responsible for the overall national health policy and health care strategies (See Organizational Chart above). It i s also responsible for defining national health standards and norms, and for the national health programs. The overall objective i s to enhance the effectiveness and efficiency o f the health care system. The MOH i s also directly responsible for the funding and management of 20 health care facilities which belong to it and for the country's network of State Hygiene and Anti-Epidemic Inspection facilities. The Project Implementation Unit (PIU) implements the World Bank-financed health system modernization project. State Health Agency 7. The State Health Agency was established by a Government Decree No. 1301N dated August 15, 2002. It i s responsible for the provision o f health care services for which budgetary funds are allocated, develops mechanisms for entering into annual contracts with health care providers, and for controlling quantity and quality o f services provided by health care service providers. It also finances civil works for health facilities within the framework of free healthcare services guaranteed by the state. The SHA i s based in Yerevan and has 11 branches, one in each Marz. The SHA, which reports to the MOH, has the obligation of ensuring effective and efficient use of public funds for the procurement of health care services. The SHA also participates in organization, management and financing o f health care, and in development and introduction of modern management mechanisms, norms and criteria. Other Ministries 8. Other relevant ministries in the health sector are (i)the Ministry o f Education, which i s responsible for undergraduate, graduate and nursing education; (ii)the Ministry o f Defense (iii) the Ministry of Internal Affairs, which manage health services for their employees and their families, including some PHC facilities and hospitals; and (iv) the Ministry o f Labor and Social Affairs, along with the MOH, manages the provision of health care for senior citizens, refugees, veterans and the disabled. M a n and Community Health Sector Organization 9. Marz and Community (Municipality) administrations are responsible for the health service providers, such as medical centers, hospitals, polyclinics, dispensaries, ambulances, health posts which fall under their administrative jurisdiction. The communities and municipal authorities are responsible for staffing, purchase o f equipment and building maintenance and overall management. Donors' Support to Health Sector 10. In addition to World Bank-financed projects, several international and bilateral donors are also involved in implementing programs and projects in the health sector. These donors include WHO, UNICEF, UNFPA, KfW, UNDP, World Vision, MSF, Project Nova, PHCR, USAID, CDC-America, Mission East Humanitarian Aid Organization (Global Fund HIV/AIDS). The World Bank and EU have provided Appendix Page No. - 86 Armenia - Country Procurement Assessment Report support for building capacity in public procurement at the country level, but not at the health sector level. Given the centralized nature of public procurement, the current organizational structure o f public procurement in Armenia limits the development of procurement capacity at the sectoral level. Health Sector Financing 11. The main source of financing for the health sector i s the Republican budget. Other sources o f financing for health services are donor funding, formal user charges, informal payments, and humanitarian aid. The Republican budget derives i t s funds from a variety o f taxes, including customs duties, VAT, income tax, property tax, etc. N o tax revenues are specifically earmarked for the health sector. The health budget in Armenia has been increasingby about 5.9 billion AMD annually. PUBLIC PROCUREMENT AT COUNTRY LEVEL 12. The public procurement in Armenia i s centralized in some respects and decentralized in others. While all health-related entities using public finds must procure goods, works and services according to the PPL o f January 2005, the role of the MOH and Marz Administrations i s limited to preparationof technical specifications and appointment o f tender committees. The actual conduct o f procurement, regardless of the procurement method being used (targeted, periodic or restricted tender), i s carried out by the SPA. It appoints a secretary to every tender committee and has the authority to annul the procurement process, which i s in accordance with the provisions of the PPL. Furthermore, the SPA signs all contracts on behalf of the MOH while the MOH i s responsible for contract administration. 13. This organizational setup has led to two undesirable consequences: (i) fragmentation of responsibility and dilution of accountability as procuring entities, including MOH, are inclined to believe that since the SPA actually conducts procurement, it should be held responsible and accountable for all procurement related issues; and (ii) lack o f opportunity among procuring entities of incentives to develop their own capacity to conduct procurement. PUBLIC PROCUREMENT IN HEALTH SECTOR Ministry of Health 14. The Department of Health Economy and Accounting of the MOH i s responsible for carrying out procurement. The Head o f the Department reports to the Minister of Health. The Department has eleven staff dealing with different tasks, of which only one staff has been assigned procurement responsibilities among other tasks. Training in procurement organized by the AB has been provided. 15. The procurement related problems faced by MOH are lack of timely identification o f needs which i s reflected in weak procurement planning. The MOH submits requests for procurement to the SPA once every quarter. 16. The MOH uses two types of tenders, viz., (i) targeted tenders for the goods specific to the health sector; and (ii) periodic open tenders which are used for recurrent Appendix Page No. - 87 Armenia - Country Procurement Assessment ReDort and common use items. These items are listed in MOF Decree No 1167N, dated November 6, 2005 and amended April 19, 2007. In case of both the targeted and periodic tenders, the MOH establishes a tender committee. The MOH prepares technical specifications and establishes a delivery schedule and after internal approvals passes these to the State Procurement Agency (SPA). The SPA appoints a secretary to the tender committee who guides the procurement process up to contract signature. The MOH i s responsible for contract administration. The same procedure i s applicable to the agencies reporting to the MOH. 17. At Marzpetaran levels, Marz administrations conduct procurement for their projects through the SPA, while their affiliate bodies, such as hospitals, diagnostic centers, polyclinics, have the right to carry out procurement without the involvement o f the SPA. State Health Agency 18. The State Health Agency (SHA) was established in 1998 and i s responsible for the procurement of health care services with budgetary fbnds. The Ministry of Health provides to the State Health Agency (SHA) a portion of the state health budget to contract the health service providers. SHA has a list of public and private hospitals and polyclinics (which includes almost all private and public providers, except for few private diagnostic centers/clinics) to be contracted for provision of outpatient and inpatient services. S H A contracts health facilities, included in the above mentioned list, for provision of health services, receive and verify the claims from providers. Based on approved claims, the Treasury through its local branches issues the payment. The payments are channeled through SHA and are used only for procurement of medical services which are included in the BBP. There i s no "selective contracting" (Le. no competition for above mentioned contracts). Contract prices for provision of PHC (primary health care) services by polyclinics are calculated based on the per capita cost and number of the enrolled population. 19. Hospitals are contracted by SHA using the "case based contracting method" which uses the number of treated cases in the previous years as the basis. In both the contract forms, described above, the rate i s defined by the Ministry o f Health and includes medical staff fee; pharmaceuticals; utilities; hospital building maintenance, administrative costs and etc.). The costs are subject to the annual revision by the SHA and are subject to the approval of the Ministry of Health. The contract i s signed with the provider after negotiations concerning the volume of the services being provided during the contract period. SHA through its 10 branches (one in each Marz) i s responsible for the implementation of the contract administration. The contracts are signed for a one year period, which may be amended or modified as needed. Professor R. H. Yolan Center of Hematology 20. The "Professor R. H. Yolan Center of Hematology,is a 100% state owned joint stock company. It receives 70% of its budget from the State and the remaining 30% from paid medical services. The procurement o f all goods, works and services are carried out in accordance with the PPL. The procurement activities are carried out by a trained procurement specialist. The budget for 2008 was AMD 240 millions, including AMD 90 millions for hematology services and AMD 150 millions for other clinical Appendix Page No. - 88 Armenia - Country Procurement Assessment Report services. About 60% of the budget i s used for salaries, about 30% (about AMD 70-80 millions) for the procurement of pharmaceuticals and reagents, and 10% for utilities, taxes etc. The staff of the Center expressed concern over the poor quality o f the pharmaceuticals, which were procured, which could be due to the stipulation of awarding the contract to the lowest price bidder. Armavir M a n Administration 21, Armavir Marz has a population o f 255,000 (according to the 2001 census) and i s located about 40 km from Yerevan. Medical services are delivered through two medical centers; one hospital; two polyclinics; one maternity hospital; one blood transhsion center and 58 ambulatories (8 Marz level ambulatories and 50 ambulatories are under the responsibility of communities). Coordination and supervision o f health service delivery i s carried out by supervisors in the Marz administration. Procurement o f the health supplies i s organized by the SPA and the MOH. City Hospital in Armavir 22. Armavir city hospital i s one o f the biggest in the Marz. The hospital reports to and i s under the supervision o f the Marz Administration. Out o f the 75.00 million AMD provided to the hospital for 2008, 60.00 million AMD i s the allocation for medications. The remaining amounts are used for utilities, minor repair, maintenance, etc. The city hospital also indicated that the MOH would provide medical equipment worth about 12.00 million AMD. As prescribed by the law, the hospital i s required to provide outpatient drugs for special groups o f population with prescriptions that authorize them to purchase the medicines from a pre-selected and designated pharmacy at a 50% discount. There i s no cost- sharing arrangement for the drugs needed for the hospital treatment.Ideally it should be included in the case reimbursement. However, the state reimbursement for the hospital cases i s below the real costs, which results in a situation when patients have to buy the drugs. 23. The hospitals are required to follow the PPL for the procurement o f medicines for inpatient and outpatient dugs, Le., define the list and volume of the medicines based on the needs and prepares technical specifications, and sends it to SPA for review and organizing the tender process. Potential bidders obtain this information from the SPA procurement website, obtain bidding documents from the hospital and submit their bids to hospitals. The tender committee established by the hospital selects the supplier, and the hospital provides instructions on the locations of the delivery o f the medicines. Since the majority of the hospitals have pharmacies within the hospital, they instruct the supplier to deliver the drugs to their pharmacies. A l l hospitals, however, do not follow this procedure. Furthermore, there i s no effective mechanism for cost control and verification that the patient actually received the medicines and that the pharmacy has not just used the prescription for billing the hospital. The absence o f an effective auditing practice increases the possibilities for misuse. - Appendix Page No. 89 Armenia - Country Procurement Assessment Report Polyclinic in Echmiadzin 24. Polyclinic in Echmiadzin i s located in one o f the wings o f the city hospital, which was recently renovated with the budget support from the Marz Administration. The polyclinic delivers primary health care services to 56,000 inhabitants o f Echmiadzin. I t s annual budget for 2008 was 240.00 million AMD, which consisted o f 180.00 million AMD for salary; 20.00 million A M D for pharmaceuticals; 16.2 million A M D for goods and minor repair; 4.0 million A M D for miscellaneous items. The chief accountant, who i s responsible for procurement, has not been given any procurement training. She expressed interest in upgrading her knowledge o f procurement but regretted that such opportunities were not available. As a result, the public procurement law i s not applied. 25. The mission was informed that as per the recommendation o f MOH, the local wholesale company ("Natalipharm" www.natalipharm.am/) was selected for medical supplies. The polyclinic has also contracts with two local pharmacies (holding a license for psychotropic drugs) where the patients may obtain discounted prices under the special prescriptions issued by the polyclinic. The polyclinic's manager indicated that there were several instances when the patients were not satisfied with the quality o f the medications they were prescribed and provided. Primary Health Care Center in Tairov village 26. The Primary Health Care Center (PHCC) in Tairov village (with a population o f 2800) was constructed in the framework o f the Health System Modernization Project financed by the IDA Credit. The PHCC has a "per capita financing" based contract with State Health Agency for health services delivery. PHCC has three staff, The annual budget i s 12.00 million A M D (1 -00 million A M D per month). In addition to the pharmaceuticals centrally supplied by the Marzpetaran, PHCC i s also authorized to spend 56,000 A M D per month for pharmaceuticals. The patients may get discounted prices in the pre-selected pharmacy in Echmiadzin (20 km from the village) under the prescriptions issued by the PHCC. According to the PHCC doctor, selection criteria for the pharmacy were: location; low prices; valid license for psychotropic drugs. The selection process does not appear to be transparent. The patients indicated that they were not satisfied with the quality o f medicines prescribed to them. Arrangements for Oversight o f Procurement 27. Internal controls are weak, although the M O H has a designated internal auditor. External audits are carried out by the Chamber o f Control; the Audit Department o f the Ministry of Finance. The Review Department o f the President's Administration and the Supervision Department o f the Prime Minister's Office also carry out audits in the health sector. While there are a large number o f audit bodies, it appears that the audit practices are not effective and are not consistent with international audit practices. - Appendix Page No. 90 Armenia - Country Procurement Assessment Report FINDINGS AND RECOMMENDATIONS 28. Procurement Capacity. Based on the discussions with the health officials of the agencies included in this review, it i s clear that there i s a lack of procurement capacity at'the central, provincial and local levels. Because o f the centralization o f the actual conduct o f procurement vested in the SPA, there i s no incentive for procuring entities to develop their own procurement capacity. On the other hand, the entities which have the right to carry out their own procurement, do not find it necessary to procure according to the PPL because they are not given adequate training in procurement and the oversight functions are not effective. Recommendations. Procuring entities, such as the Ministry o f Health, Marzpetaran Administrations, should be vested with full procurement authority. This authority should include not only preparation o f procurement plans and technical specifications but also drafting o f bidding documents, receiving, opening and evaluating bids, issuing contract award notifications and signing contracts to carry out their procurement in accordance with the public procurement legislation, with or without using the services of the SPA. During the period when the procuring entities are developing their own procurement capacity, they should be supported by SPA as a technical assistance provider/adviser, rather than for making decisions on their behalf; The procuring entities in the health sector, especially the Ministry o f Health should establish a procurement unit, with qualified and experienced procurement staff. The Ministry o f Health in collaboration with the AB and SPA should design and conduct periodic training in procurement for its staff, especially for the heads of departments and divisions. Specialized and more detailed training programs should be prepared for those involved in procurement, including engineers. AB should design a training program for procuring entities at Marz and local level with a view to making them fully aware o f the requirements o f the PPL, and to familiarizing them with the consequences and actions which would be taken in case o f violations o f the PPL. 29. Procurement of Pharmaceuticals. The staff of the entities in the review expressed concern about the poor quality o f medicines received from framework contracts which are managed by the SPA in collaboration with the MOH. Similar concerns were expressed about the medicines prescribed to special groups o f patients to obtain them at a discounted price from designated pharmacies. Poor technical specifications, procurement practices, including use of the lowest bid price as the main contract award criterion contributes to the poor quality. Appendix Page No. - 91 Armenia - Country Procurement Assessment Report Recommendations. (i) The MOH should review the procurement practices used for the procurement o f pharmaceuticals, including quality and relevance o f technical specifications, qualification criteria in bidding documents to ensure that only qualified and experienced bidders are selected to supply medicines, quality assurance provisions in the bidding documents and upon receipt of pharmaceuticals, and use of both price and non-price criteria, i.e., contract award decision to be made not on the basis of the lowest price alone but consideration o f other factors such as responsiveness to technical specifications, especially quality parameters, delivery period, should be included. (ii) Given the importance of procurement of pharmaceuticals and in light of the issues raised during the case study, it i s recommended that a more detailed assessment o f the procurement of pharmaceuticals be carried out. This case study should also examine the manner in which pharmacies are selected to provide medicines to special groups of patients, the cost o f which are borne by the Government. The case study should specifically review if there are any inefficiencies or potential for misuse in the current system. (iii) The Government should strengthen both the existing capacity and procedures for internal and external controls o f procurement o f goods, works and services, and use and maintenance o f these in the health sector at all levels. Appendix Page No. - 92 Armenia - Country Procurement Assessment Report - CASE STUDY 111 PUBLIC PROCUREMENT IN TRANSPORT SECTOR INTRODUCTION Objective 1. The objective o f this case study i s to assess the current status o f procurement procedures, practices, organizational arrangements and capacity o f staff in the transport sector and to make recommendations for improvements. Sound procurement procedures and practices help ensure transparency, equality and fairness and obtain the best value for public money. Methodology 2. The case study i s based on the assessment o f the public procurement system in Armenia; review o f procurement procedures and related laws and decrees applicable to the transport sector; and interviews with the staff o f the Ministry o f Transport and Communication (MOTC), Armavir Marzpetaran Administration and Yerevan Municipality. Applicable Laws and Decrees 3. The following laws and decrees are especially relevant to procurement in the transport sector, including the MOTC, Marzpetaran and Community transport entities: Law on transport, dated February 3, 1998 (amended on March 13,2001 and on December 5,2006) Law o f RA on automobile transport, dated December, 2006 Low o f RA on railway transport, dated November 28,2007 Government Decree No. 1497N on the priority measurement in the sector o f rail away transport, dated October 12, 2006 Government decree No.83N on approving o f draft o f the concession contract on transferring o f Armenian railway system to "South Caucasian railways" CCJSC (established by the Russian railways" OJSC), dated February 7,2008 The Public Procurement Law dated 06 o f December, 2004 Government Decree N o 853N, dated June 5,2008 Finance and Economy Minister Decree No. 426N, dated 25 o f April, 2005 Finance and Economy Minister Decree N o 1167 N dated 06 o f November, 2005 and amended as o f 19 o f April 2007 (Finance Minister Decree No 393N) and as o f 05 o f November, 2008 (Finance Minister Decree N908). - Appendix Page No. 93 Armenia - Country Procurement Assessment Report TRANSPORT SECTOR The transport sector in Armenia consists of public road network, railroads, civil aviation, and urban transport. The different components are presented in the following diagram. I Government o f Armenia I U R B A N TRANSPORT Transport and General Communication Department 01 Municipality 4. Armenia has a road network o f about 11,000 kilometers..The Armenian Roads Directorate (ARD) i s a non-commercial agency, which reports to the MOTC, and i s responsible for roads' maintenance including republican roads. The ARD has four divisions, viz., (i)planning and feasibility studies; (ii)procurement; (iii)construction monitoring; (iv) maintenance monitoring; and safety. The Armenian Railway operates under the concession agreement signed in June 2008 by the South Caucasian railway - a subsidiary of the Russian Railways. The office of the Prime Minister i s responsible for Civil Aviation through Civil Aviation Department. Urban transport, i s mainly concentrated in Yerevan, i s the responsibility of the Transport Department of the Yerevan Municipality (YM). The Y M has a number of affiliate bodies, such as YerevanTrans, which i s responsible for surface public transport, Lusanshan SNCO (State Non Commercialized Organization), a non-commercialized entity which manages the traffic, and Yerevan Metro which i s responsible for the metro. 5. The MOTC has the responsibility for policy, regulation and planning of roads, road transport and railways. The MOTC organizational chart i s given below. Appendix Page No. - 94 Armenia - Country Procurement Assessment Report Ministry o f Transport & Communication of Armenia Organizational Chart Minister Minister s SmR I First Deputy Minister I " ' " ' ~ ' Deputy Minister ' ' I Deputy Minirlsr t DONORS' SUPPORT TO TRANSPORT SECTOR 6. In addition to the World Bank-financed projects in the transport sector, there are a number of ongoing projects which are currently being supported by various international donor organizations such as ADB, Rural roads sector (USD 47 million), Lincy foundation, and the U Government financed MCC project (US$67 million for S rural roads rehabilitation). PUBLIC PROCUREMENT A T COUNTRY LEVEL 7. Public procurement in Armenia i s centralized in some respects and decentralized in others. While all transport-related entities using public finds are required to procure goods, works and services according to the PPL o f January 2005, the role of the MOTC and Marz Administrations i s limited to preparation of technical specifications and appointment o f a tender committee. The actual conduct o f procurement, regardless of the procurement method being used (targeted, periodic or restricted tender), i s carried out by the State Procurement Agency (SPA) which appoints a secretary to every tender committee with the authority to annul the procurement process, in accordance with the provisions o f the PPL. Furthermore, the SPA signs all contracts on behalf of procuring entities while the latter are responsible for supervising their performance. 8. This system of procurement has led to: (i)fragmentation of responsibility and dilution of accountability as procuring entities like the Ministry o f Transport are inclined to believe that since the SPA actually conducts procurement, it should be held responsible and accountable; and (ii) absence among procuring entities of the incentives to develop their own capacity to conduct procurement. The transport sector has a large number o f targeted tenders compared to periodic tenders. While it i s a good practice to procure recurrent and common use items in bulk, the large number o f targeted tenders could be better managed by MOTC and other procuring entities (e.g., Appendix Page No. - 95 Armenia - Country Procurement Assessment Report Yerevan Municipality, Marz Administrations) and therefore should be given complete procurement authority. PUBLIC PROCUREMENT IN TRANSPORT SECTOR Ministrv of Transport and Communication 9. Procurement activities are conducted and coordinated by the Deputy Head of the Financial Department. Procurement process starts with the application for budget allocation. Application should be submitted not later than December o f the previous year. The application includes description o f the items (goods, works, services) which need to be procured for the year. Reallocation o f the budget funds among procurement 5%. items should not exceed &I Main procurement activities done by the MOTC are the contracts for maintenance o f roads (international and republican roads) and infrastructure (bridges, tunnels). 10. Procurement procedure for periodic items i s used for contract awards. The periodic contracts signed by the SPA are for a three year period. Prior to starting the procurement process, the MOTC submits to the SPA the following documentation (i) technical specifications; (ii) payment schedule; and (iii) nomination of its representatives to the Evaluation Committees. Maintenance of the local roads i s the responsibility o f the municipalities and communities. The procurement o f periodic tenders i s carried out in the same manner, except that the MOTC establishes an evaluation committee to which the SPA appoints a secretary. The MOTC assigns a staff member in its Department of Accounting and Finance to be responsible for procurement. This staff has received some training in carrying out the procurement process. However, he has no practical experience o f carrying out actual procurement as this function i s the responsibility o f the SPA. 11. The budget allocation for 2008 was as follows: road maintenance 12.00 billion AMD; ; infrastructure: 1.4 billion AMD. The budget allocation for 2009 are :road maintenance 16.12 billion AM D infrastructure 0.54 billion AMD. Payment under the signed contracts i s based on the quarterly budget allocations and each contract in i t s payment conditions includes a provision that: ``.. , payment will be effected once the budget funds will be made available., ," According to the MOTC authorities there were no payment delays. Paid amount corresponds to the actual volumes of works done and stipulated in the Acceptance Certificate. Armavir Manpetaran Administration 12. The annual. transport budget allocation for Armavir Marz i s about 22 million AMD, which i s for road rehabilitation and maintenance works during the winter. I t i s up to the Marz authorities to decide which roads need to be rehabilitated. The Administration i s responsible for carrying out procurement within its budgetary allocation. Procurement o f works i s carried out in accordance with procurement legislation o f the RA. According to the legislation, Marzpetaran assigns procurement to its Department of Finance and Accounting (DFA). The DFA has a staff member whose job description also includes procurement activities. The Head o f DFA and the above mentioned specialist attended procurement training. According to the DFA Head they are familiar Appendix Page No. - 96 Armenia - Country Procurement Assessment Report with the official procurement website (www. procurement.am). and make use of it as needed. The members of the tender committee assigned by the Marzpetaran for the targeted tenders visit the SPA office for any clarifications and discussions. The Periodic tenders are implementedby the SPA. 13. Contract administration i s the responsibility of Marz Administration while any amendments to contracts must be dealt with by the SPA. Marzpetaran conducts an annual tender for passenger transportation and about ten domestic private firms compete for the operation o f 24 passenger lines in the Marz. The Marz Administration i s required to carry out procurement with the support and involvement of the SPA which, after completing the procurement process, awards and signs contracts. The functions of the internal audit are implemented by Marzpetaran's Chief of Staff, In addition, the Chamber o f Control's representative in the Marz carries out external audit. Yerevan M unicbalitv 14. The Yerevan Municipality's Transport Department i s responsible for the operation and maintenance (O&M) o f the traffic lights, which are installed in the intersections o f Yerevan. Procurement of O&M services i s funded with the state budget. The SPA, based on the technical specifications and design provided by the Yerevan Municipality conducts the bidding process. During the past two years, Lusanshan SNCO, which i s a non-commercializedentity under the Yerevan Municipality, has been the sole bidder and has received the O&M contracts. Lusanshan SNCO i s also responsible for traffic signals and road signing and marking in Yerevan. This raises conflict of interest issues as Lusanshan SNCO as an entity of the procuring entity, Le., the Yerevan Municipality, should not be allowed to participate in the O&M tenders as a supplier of services. Internal and External Controls 15. The MOTC has a designated internal auditor who i s reviews all procurement carried out by the MOTC. External audits are carried out by the Chamber of Control, the Audit Department o f the Ministry of Finance. The Review Department o f the President's Administration and the Supervision Department of the Prime Minister's Office also carry out audits in the MOTC. While there are a large number o f audit bodies, it appears that the audit practices are not effective and are not consistent with international audit practices. FINDINGS AND RECOMMENDATIONS 16. Findings. Public procurement in the transport sector i s centralized. While the MOTC has the responsibility for the preparation of technical specifications and establishment o f evaluation committee, the State Procurement Agency carries out the procurement process. This has resulted in the MOTC established little or no procurement capacity. Procurement contracts are signed by the SPA but administered by the MOTC. The current public procurement institutional arrangement results in fragmentation of responsibility and dilution o f accountability. Appendix Page No. - 97 Armenia - Country Procurement Assessment Report Recommendations. Procuring entities, such as the MOTC and Marz Administrations, should be vested with full procurement authority. This authority should include not only preparation of procurement plans and technical specifications but also drafting of bidding documents, receiving, opening and evaluating bids, issuing contract award notifications and signing contracts to carry out their procurement activities in accordance with the public procurement legislation, with or without using the services of the SPA. During the period when the procuring entities are developing their own procurement capacity, they should be supported by SPA as a technical assistance provider/adviser, rather than for making decisions on their behalf; The procuring entities in the transport sector, especially the MOTC should establish a procurement unit, with qualified and experienced procurement staff. The main task of the procurement specialist(s) in this unit should be to help the other departments of the MOTC in carrying out the procurement of goods, works and services in compliance with the PPL. The MOTC in collaboration with the AB and SPA should design and conduct training in procurement for its staff, especially for the heads of departments and divisions; Specialized and more detailed training programs should be prepared for those involved in procurement, including engineers. The AB should design a training program for procuring entities at Marz and local level with a view to making them fully aware of the requirements of the PPL, and familiarizing them with the consequences of violating the PPL. In order to initiate the implementation of the e-GP agenda, the MOTC should become a pilot in using e-GP for improving the procurement process. For this purpose an e-GP pilot project should be developed which should provide step-by-step introduction of e- GP beginning with the use of the MOTC website for publishing tender notices, contract award information, and for dissemination of procurement rules and regulations. 17. Finding. Internal and external audit procedures and practices and capacity are weak. Multiple bodies have the authority for carrying out inspections, monitoring, etc. Some of these institutions prepare reports on their activities; while others do not prepare or f i l e any reports. This makes the audit of procurement ineffective and inefficient. Recommendation. Internal and external audit of procurement in the transport sector should be strengthened by preparing clear rules of audit and designating the audit bodies, such as the Chamber o f Control, and the Ministry of Finance, to carry out such audits. Appendix Page No. - 98 Armenia - Country Procurement Assessment Report - CASE STUDY I V MITIGATION AND MANAGEMENT OF R I S K S OF LEAKAGE AND CORRUPTION IN PUBLIC PROCUREMENT Executive Summary 1. The attached Annex on OECD-DAC World Bank "Methodology for Assessments o f National Procurement Systems" already provides a framework to highlight indicators and principles pertaining to a country's legislative and regulatory framework along with indicators dealing with integrity and transparency o f the public procurement system. This case study on "Mitigation and Management o f Risks o f Leakage and Corruption in Public Procurement" further teases out the issues already highlighted in the main OECD- D A C assessment on integrity and transparency and distills the findings a with a view to further articulating the type o f concerns and corresponding recommendations and action plans. It i s worth stating at the outset that the public procurement system in Armenia suffers from an acute perception o f lack o f integrity and transparency in terms o f practice and compliance with the regulatory framework and best practices. As further discussed in the case study, the assessment and consultations conducted have revealed that certain procurement practices in Armenia have been a source o f concern and are indicative o f ongoing or potential abuse o f the legal framework. These weaknesses in the area o f integrity and transparency in the procurement system have been a result o f a defective or weak framework, non-compliance with norms, manipulation o f the market, or due to misconduct by key players. The case study also includes a discussion on related background literature or previous analytical work on the topic, on risk assessment and red flags, summary o f reported Cases and some key recommendations and action plan. 2. Essentially the findings during assessment and according to various reports that were gathered point to a variety o f issues relating to: weaknesses and overreliance on and abuse o f restricted tendering (mainly sole sourcing); a lack o f confidence in the independence and effectiveness o f the complaint review mechanisms; numerous reports o f poor quality o f works and services and instances o f non-delivery or non-performance; deficient rules on conflict o f interest and codes o f conduct; indications o f anti- competitive agreement prior to submitting bids (eg. collusion); abuse o f the qualification and evaluation process to favor pre-determined bidder; faulty specifications that favor certain suppliers; lack o f significant participation and oversight by civil society groups and other stakeholders; deficient mechanisms for transparency, information access and feedback systems; unclear and overlapping audit systems with no significant follow-up o f findings; lack o f integration with overall national anti-comption strategy and reference to the appropriate criminal legal framework; abuse o f use o f "monopoly" privileges; dismally l o w level o f tender participation; and general lack o f capacity o f procuring entities. Appendix Page No. - 99 Armenia - Country Procurement Assessment Report Background 3. The World Bank Institute's Control o f Corruption Indicator14 indicates that the control o f corruption has improved in Armenia in 2006 (-0.58), compared to previous years. In terms o f ranking, Armenia ended up in 35 percentile rank among 209 countries, occupying second place among CIS countries. Armenia's 2006 control o f corruption index i s lower than the average for ECA countries and other Central and Eastern European countries. Transparency International's (TI) Corruption Perception Index (CPI), which ranks countries based on the perceived level o f corruption, rated Armenia with a CPI o f 2.515 in 1999-2000 and at an index that fluctuates around 3.0 in the next few years (except for 2001-2002). Armenia compares favorably both to other CIS countries but ranks only 99th among 163 other countries. The World Bank in 2006 issued the report "Anticorruption in Transition 3: Who I s Succeeding., .and Why?' which indicated that Armenia was significantly worse along many dimensions o f corruption compared to 2002. 4. The EBRD-WB Business Environment and Enterprise Performance Survey (2005 BEEPS) indicates that Armenian companies consider that unofficial payments are most frequently made when dealing with tax collection and customs/imports, government contracts, business licenses and permits, public utilities (electricity and telephone), and various inspections. The number o f companies who felt this way with respect unofficial payments for the public procurement system increased dramatically between 2002 and 2005 to about tenfold. 5. In general, other assessments note that there i s a significant gap between the positive reform in the area o f legal norms and architecture as opposed to how these are implemented in practice. Although the legal and regulatory framework had been much improved, the perception o f and confidence towards public procurement remains unsatisfactory. 16 6. The Government o f Armenia has undertaken a series o f reform measures in the area o f anti-corruption in 2001-2003 when policies as well as legislative and regulatory frameworks were adopted. The Anti-Corruption Strategy and Action Plan for 2003-2007 were also subsequently developed. In April 2008, the National Assembly adopted the program o f the government which acknowledged anti-corruption as one o f the main components. The Government also undertook to implement commitments under the GRECO and OECD Anti-Corruption Network for Transition Economies, as well as the UN Convention against Corruption. Under the OECD Anti-Corruption Network (ACN) Istanbul action Plan, Armenia agreed to adopt 24 recommendations on anticorruption developed by OECD. The Control o f Corruption Indicator (CCI) o f the Word Bank Institute is based on a more comprehensive examination of governance indicators, which i s drawn from 37 separate data sources constructed by 3 1 different organizations Data i s grouped by six main dimensions of governance voice and accountability, political stability and absence o f violence, government effectiveness, regulatory quality, rule o f law and control o f corruption ''CPI scores countries on a scale o f 0 to IO, where 0 means highly corrupt and 10 means highly clean in terms o f the perceived level o f corruption See TI indicator on public perception in the field of procurement and GTZ, ProSME "Entrepreneurship Survey" 2007 Appendix Page No. - 100 Armenia - Countrv Procurement Assessment ReDort 7. Some proposed steps on the issue to corruption and civil society participation in governance and transparency o f the public administration system are also articulated in Republic o f Armenia, 200717,. "Reforms o f Governance System and Fight against Corruption." Procurement Practices: Risk Assessment and Red Flags 8. The assessment and consultations conducted have revealed that certain procurement practices in Armenia have been a source o f concern and are indicative o f ongoing or potential abuse o f the legal framework. These weaknesses in the area o f integrity and transparency in the procurement system have been a result o f a defective or weak framework, non-compliance with norms, manipulation o f the market, or due to misconduct by key players. The initial findings indicate: The architecture o f the complaint review system i s not independent and the fairness o f the system o f review i s negatively perceived by potential users. There i s overreliance on sole-source methods (although there i s a reported marked improvement from previous years). There i s dismally low level o f bid participation- a numerical average o f mere 1.5 bidders per tender. There are many reports o f poor quality o f works and services and some instances o f non-delivery or non-performance. In some instances, there were indications that participants reach an anti- competitive agreement prior to submitting bids. This was recently recognized by the AB in i t s draft strategy for procurement reform. Bidders are disqualified on flimsy and inappropriate grounds for the purpose o f leaving just one bidder at the time o f evaluation. The sole and winning bidder was allegedly previously pre-determinedas the winning bid. Same few companies have been observed to participate in certain markets, indicating possible collusion, parceling o f opportunities and even alluding to possible participation by procuring entities in the arrangements. Some Examples o f Reported Cases 9. Information has been published discussing specific cases reflective o f weaknesses or abuse o f the procurement system. Although not independently verified during this assessment, these cases nevertheless portrait a lack o f trust or confidence by users and the public in the integrity and fairness o f the system. These examples o f Reported Cases also help reveal and zero in on the typology o f cases, regulatory capture/monopoly, vulnerable sectors and need for targeted enforcement measures. " This i s part of the Government program as stated in the section on "Reforms of Governance System and Fight against Corruption", Section 4.2.1, Government Effectiveness. Republic of Armenia, page 9. Appendix Page No. - 101 ~~ Armenia - Countrv Procurement Assessment ReDort (A) Independent Reports Indications o f abuse o f the procurement process in Armenia manifests itself in other ways as discussed in a study carried out b y the Center for Regional Development, Transparency International in Armenia in 2007 18: (i) Bid preparation: use o f inaccurate bidding requirements, inadequate information was provided to the bid participants, and inconsistent data. These were specifically observed in the purchase o f vehicles; (ii) Bidding procedures: insufficient time for the preparation o f bids, disclosure o f the budget and late submission o f bids; (iii) Evaluation: the common problems were those associated with compliance with requirements set forth in the procurement guidelines and/or respective Request for Proposals. An example o f this was in the evaluation stage o f the procurement for the design and construction and supervision o f six main canals where a discrepancy between the lowest and highest prices proposed by the three bidders was more than four times, while between the two lowest ones i t was almost three times. TI has also recently provided i t s "Comments and Recommendations on the Draft o f the Procurement System Reform Strategy which also details certain practices in the public procurement that needs addressing (e.g., anti-competitive agreement and a bid submitted by single bidder; weak internal audit capacities; l o w bid price and inferior qualification criteria). (B) Government Reuorts: The Armenia Chamber o f Control (COC) has recently reported i t s findings. The COC Chairman briefed the media that a complete review o f the marz authorities, municipalities o f the cities o f Sevan, Vardenis, Gavar and the villages o f Artanis, Sarukhan, Tsovak, Noradous, Lchashen, Nerqin and Getashen revealed violations amounting AMD 597 million, including AMD 150 million in public procurement. H e stated that "[Tlhe process o f procurement does not function at all as required; thus, the COC will present more serious document on this issue to the government early next year." 0 Three cases, according to the COC, were sent to the General Prosecutor's Office. (1) The first case involves the results o f audits o f the municipality o f Vardenis. The most serious violation relates to construction works o f the water supply system in the village o f Geghamasar. Significant amount o f money was spent to connect the village and `*The study was initiated by the Millennium Challenge Corporation (MCC) which signed a $235 million compact with the Government o f Armenia. Appendix Page No. - 102 Armenia - Country Procurement Assessment Report the surrounding territories to the water system but, at the time when connection to the main pipe was to be made, it was discovered out that there was no main pipe. (2) The second case involves the city o f Sevan where two schools and a kindergarten were sold in violation o f requirements o f the law and without authority from parliament. (3) The third case relates to the lease o f land in the Sevan National Park at grossly disadvantageous terms and involving irregularities in construction works. 0 The COC also stated that a judicial reform project financed by the World Bank was allegedly subject to several procedural and payment violations. Separately, the Yerevan Municipal Development Project has also been subject o f numerous write-ups, including a published report by the Government Accountability Project (GAP), a Washington DC whistleblowing protection advocacy group. 0 In a previous meeting, the COC also decided to send to the General Prosecutor's Office other cases including one involving a Company which did not sign a contract with the community until specified deadline to implement gas connection works. During the last three years the company received AMD 57 million from the community budget, but has not completed any works. 0 The COC also reported that two companies were involved in the purchase o f substandard and insufficient apartments for children's patronage organizations despite receiving the full price payment. (C) Media Reports Investigative reports by journalists also cited numerous deficiencies in public works construction. (See for example the site ww.hetu.am). Although these were journalistic reports and not results o f official audits or investigations, they nevertheless paint a picture o f an acute lack o f trust in the efficiency, transparency and fairness o f the public procurement system that needs to be seriously addressed. Blogs and reports have also been published (including a report by the Washington -based Government Accountabilty Project [GAP] and involvement o f the UK Serious Fraud Office) regarding alleged irregularities in the World Bank funded Armenia's Municipal Development Project. One often cited example i s a case reported in Aravot daily where luxury vehicles were procured on alleged urgent basis circumventing the requirements o f transparent and competitive procedures. 0 A disturbing picture i s portrayed in another journalistic investigation report involving the fairness and transparency o f the tender process (See Hetq Online, June 25, 2007). The journalists observed the pattern o f Appendix Page No. - 103 Armenia - Countw Procurement Assessment ReDort disqualification o f other bidders on trivial and non-material grounds, such as not having submitted the original document, having the "wrong" date on one o f the non-material documents, and absence o f stamp. Most o f these documents could have been easily clarified or rectified since they do not refer to the competitiveness o f the bid or the essential qualifications o f the bidders. Some o f the disqualifications related to some alleged deficiencies in documents such as the state registration certificates, and licenses, financial reports, tax and social security documents, missing pages in bank deposit book, etc. One bidder observed that the tender committees can always find something deficient in the document in order to disqualify a bidder and to favor a pre-determined winner. In many instances, several bidders were disqualified resulting in just one bidder proceeding to evaluation. The article noted that there are clear indications that awards are pre-determined in advanced and that participants have divided the markets amongst themselves. 0 One report questioned the capability o f a company to build the 6.3 km, 700 million Drams Voskepar-Baghanis roundabout located on the Ijevan- Noyembery stretch o f the Armenia -Georgia highway. (Sargsyan, 2008). The article claims that the company lacked adequate construction equipment and manpower to carry out the works and cited the delay in completion and significant cost overruns. The same company was also awarded several other contracts for large road projects in the border areas, which included the 330 million dram project to build a 10-kilometer stretch from Koghb to Zikatar and completion o f the 25-kilometer stretch along the Georgian border. 0 One example o f poor construction o f kindergartens was reported in a newspaper article, which pointed out that 15 million drams was spent to repair the kindergarten in the village o f Getaazat in the Ararat Marz, but the result was far from satisfactory. (Nazaryan, 2008). The work was considered incomplete and unsatisfactory and the Principal was quoted as saying that "the kindergarten hasn't been completely refurbished and it i s not possible to work here". 0 Another cited irregularities in the works involving clean up o f riverbed in the Gavaraget River, including issues relating to performance certificates. Poor quality roads and repairs crucial to access to a hospital was also noted. Purchase o f mobile homes for victims o f landslides was reported to have been significantly overpriced. The water supply pipeline project in the village o f Garni was also reported to have serious irregularities, including non-completion and poor quality o f works. Key Recommendations and Action Plan 10. To enhance transparency, Armenia should focus on reforms in the areas of: mechanism for audit and control; clarity o f governance and accountability structures; reporting and whistleblowing portals and protections; access to informatiodappropriate information systems/ freedom o f information regimes, civil Society/Stakeholder/GO Appendix Page No. - I 0 4 Armenia - C o u n t y Procurement Assessment Report voice, participation and oversight; and businesshndustry role and initiatives in the promotion o f integrity and fight against corruption. The procurement system in Armenia should include stakeholders as part o f the control system and as partners in reform. A welcoming and respectful attitude o f government for civil society contributions to these efforts i s a key to a successful partnership. (A) Civil Societv/Stakeholder/GO voice, participation and oversight i) Consider establishment o f an informal network o f interested parties and stakeholders on consultative basis or a formal council that meets regularly to discuss policy issues, reform proposals and systemic problems in the procurement process. Good Practice: Procurement Watch (Philippines) Public Procurement in Philippines was faced with problems o f delays, lack o f transparency, excessive use o f discretionary criteria and lack o f competition in the late 90s. To address some o f these problems, Procurement Watch incorporated (PWI) was established as a non-profit, non-partisan civil society organization to promote good governance by addressing graft and corruption in public procurement. The Organization measures procurement irregularities by accessing public agency documents possessed by government auditors at the same time as formal government audits o f these agencies. It helped the . passage o f the Government Procurement Reform Act Number 9 184, which i s also known as the Government Reform Act (GPRA) which laid the foundation for streamlining the entire public procurement process. The most notable achievement was the standardization o f the procurement procedures which need to be adopted by all agencies o f the government requiring the issuance o f procurement manuals and standard bidding documents. The passage o f the act was followed by the creation o f an inter-agency technical working group for implementation. P W I also monitors public biddings o f various agencies. P W I i s now regarded as a legitimate and valuable contributor to the promoting governance in public procurement in the Philippines. I t s board members consist o f eminent members o f the civil society, and individuals familiar with government practices, polices and procedures. It i s independent o f the government and receives funding from external sources, including the World Bank. Its role over the years has changed from one o f advocacy and public dissemination to carrying out independent research, provision o f training, preparation o f training materials and promoting grass-roots organizations at the local level and transforming P W I to monitor and oversee public procurement policy formulation and execution. This experience i s illustrative o f mechanisms and strategies o f how to build effective reform coalition in the area o f public procurement. ii). PPL provides some platform for civil society engagement in the procurement The process. The PPL requires the establishment o f a standing unit in the AB to perform Appendix Page No. - I OS Armenia - CountM, Procurement Assessment Reuort review functions o f complaints which may engage representatives o f the stakeholders who are not procurement entities or NGOs, on unpaid basis.(Al6(2)(3). GD853, Annex 2, para. 4(2), now provides mechanism for others who are legitimately interested in the bidding process, including representatives from civil society, to attend. In i t s current formulation, these "advisers" are considered "members" with an "advisory vote." This should be further clarified since the membership implies participation in the decision-making process (albeit on an advisory capacity). In designing the system, consideration should be given to the value o f maintaining the independence and oversight roles o f these "observers", and measures introduced for preventing co-optation. In order to perform an effective oversight role, these "observers" should have a mechanism to note their observations and provide instant feedback. Thus, at their option, they should be allowed to note their comments in the minutes or be provided with some formal vehicle to report their observations. Again, this should not be made obligatory on their part in all cases. I t has been confirmed that Transparency International Armenia has participated as observer in several previous tenders. In summary, representatives from civil society should remain as observers, monitors or oversight agents and not participants or advisers in the decision-making (B) Mechanisms for Transparency, Information Access and Complaints and Feedback Systems Reporting and Whistleblowing Portals and Protections: 0Portals, including website and hotlines and mailing addresses, should be available and easily accessible for people who want to report allegations and anomalies, with assurances o f protection o f anonymity or confidentiality. Recent amendment^'^ to the Criminal Procedure Code provides for protection o f persons participating in a criminal trial but the law legislation does not address the protection o f whistleblowers or informants, who voluntarily provide information about allegations o f corruption to relevant authorities. Complaints System: 0 I t i s recommended that an appeals system be set up that i s totally independent o f the MOF, AB, SPA and government entities, that operate in an environment free from a perception o f conflict o f interest, which builds confidence from participants, and which would be efficient, timely and responsive to procurement needs and effective in providing meaningful remedies. The architecture and configuration o f this body has to be organic to Armenia and will ultimately rely on the domestic legal structure. But a varied membership, for a fixed term or on rotation basis, from persons o f known probity and independence such as members o f NGOs, media, academia, retired jurist or judges, industry and privates sector representatives will inspire confidence in terms o f fairness and transparency. The AB, given i t s expertise and organizational advantages, may serve as a secretariat with organization 19 Law Amending the RA Criminal Procedure Code, May 25,2006 Appendix Page No. - I 0 6 Armenia - Country Procurement Assessment Report and clerical functions for purposes o f supporting the appeals proceedings and for carrying out the implementation o f decisions. Armenia should promote a complaints system that inspires confidence among potential users considering that such complaints system i s a vital source o f information about fraud and corruption (although complainants may not initially use such terms in their initial allegations). Information Systems and Freedom o f Information Regimes: 0 Vigorously implement access to information and appropriate information systems and freedom o f information regimes and more importantly mechanisms that implement a meaningful culture o f compliance. A separate study with detailed recommendations should be conducted by the governments in this important area. An NGO, the Center for Freedom o f Information, has already taken some initiative by regularly publishing a l i s t o f state officials who violate individual's right to seek information. Feedback and Report Cards: 0 Introducing citizen report cards to obtain user feedback on the performance o f public services, as a systematic analysis o f user perceptions on the quality and satisfaction o f public services i s lacking in Armenia. The focus o f the citizen report card will be to determine the degree o f satisfaction o f the common citizen o f the delivery o f public services with respect to access, use, reliability and affordability. Introducing community scorecard activity to compliment the citizen report card by i t s focus on the performance evaluation o f government services, projects and administrative units. This would be used to track expenditures on important sectors; generation o f benchmark performance criteria which can be used in resource allocation and budget decisions; comparison o f performance between Marzs, developing a direct feedback mechanism between the providers and users; building local capacity and strengthening citizen voice and community empowerment. (C) Check and Balance, Control Systems and Enforcement Mechanisms Audit and Control: In 2004, the Government promulgated Decision No. 1376-N "On Approving the Strategy for the Development o f the System o f Internal Audit for the RA State and Local Bodies, Organizations Reporting to Them and State and Local Non-Commercial Organizations." The Oversight Department o f the M O F was renamed "The Internal Audit and Oversight Department". Education and training o f staff o f internal audit departments in various public administration bodies i s taking place. As for external audit, the L a w on Control Chamber, passed by the National Assembly, established a principally new, constitutionally independent body. 0 There are provisions for external audits by multiple entities, including the MOF, from the Prime Minister's Office and the Chamber o f Control. The National Prosecution Service has likewise been involved in audit and control Appendix Page No. - I 0 7 Armenia - Counny Procurement Assessment Report functions. The effectiveness o f audit mechanisms i s questionable in most cases, undermining the intent o f the provisions. Furthermore, having undifferentiated, and multiple entities performing "audits", with no clear demarcation o f responsibilities, might provide possibilities for multiple facilitation payments. Similarly, there i s generally confusion or overlap o f what i s considered "audit" and what i s "control", which further undermines the quality and effectiveness o f audit. It i s recommended that functions o f various bodies be reviewed and redefined to exclude unwarranted interference in the procurement process (along the lines recommended in the CFAA) and that pertinent laws or regulation be amended accordingly. 0 Findings o f audits and reports obtained through the complaint system or through the internal and external control system, including investigative reports o f journalists and NGOs, should be followed up with investigation, prosecution and other enforcement measures and subsequent publication or disclosure o f results. Tender Committee Composition: Consider varying membership o f tender committees to include other employees o f related and appropriate agencies in order to promote transparency and check and balance. Sole Source: 0 Tighten requirements for sole sourcing on the basis o f urgent need or emergency. I t must be used only in extreme and exceptional circumstances, limited in application and duration and only if such circumstance did not result from lack o f foresight, poor planning or negligence on the part o f the entity concerned. The framework should identify which state entity, and applying which legal framework, i s responsible in the determination o f what constitutes urgent need or emergency. 0 Discontinue use o f registry o f the State Commission for the Protection o f Economic Competition (Anti-Monopoly Commission) as a proxy for justifying sole sourcing on the basis o f lack o f competition. Alternatively, it i s recommended that in order to depart from the default rule o f competitive bidding, any such record should be supplemented by an articulation o f the actual position and market share o f the firm, including identification o f the other dominant and marginal players in the specific market, and by an explanation by the firm as suggested in the 2004 CPAR. These concerns have been identified in the 2004 CPAR but have not been sufficiently addressed by the government. 0 Extension o f contract on sole source- Further safeguards may be considered including limiting the amount and duration o f the extended contract (eg. since this i s for additional supplies,' the contract amount and/or scope and duration or period should not surpass or for a longer period than the original contract). More importantly, such extension must be justified for economic and efficiency reasons, including the lack o f advantage to be obtained in proceeding with competitive methods. Additionally, it may also be required that such extension o f contract on sole source basis would only be appropriate Appendix Page No. - 108 Armenia - Counhy Procurement Assessment Report provided that the current or original contract has been obtained through competitive process (and not through original sole source). Corruption Offenses in Procurement: The PPL will be greatly improved if it provides a direct reference to specific offenses under criminal laws and illustrate what constitutes corruption and fraud in procurement processes (eg. collusion, falsified bid security, fraudulent documents, bribery, etc.), and accordingly set out responsibilities and accountabilities o f persons involved in the procurement process for misconduct and breach o f codes o f conduct. Tender, contract and other model documents should be developed and should include provisions addressing corruption, fraud, conflict o f interest and unethical behavior. The relevant provisions should also set out the consequences and sanctions for such behavior. Design and implement government education and awareness campaigns as part o f efforts to influence behavior away from corruption and impunity. AB procurement reform strategy will be much improved if it goes beyond general principles o f anti-corruption to detailed recommendations on mechanisms to address corruption in procurement. Align and link the government's general anti-corruption strategy with the procurement system. Need for codes o f conduct, ethics rules, and conflict o f interests provisions for participants in the procurement process. Capacity building for specialized anti-corruption bodies, in line with international best practices should be pursued. The operation o f the debarment and blacklisting system under the PPL should be clarified with articulation o f applicable procedures and principles to ensure fairness. Capacity building .and awareness raising to ensure that employees engaged in procurement have a practical understanding o f fraud and corruption schemes; have harmonized set o f tools to identify red flags at each stage o f procurement cycle; have ability to articulate, in practical terms, procurement risks, and can devise mitigation strategies and conduct steps basic due diligence Collusion: As discussed above, reports and assessments indicate a prevalent and pronounced concern about collusion in the bidding process in Armenia. The government must devise a systematic and targeted policy and enforcement mechanism for detection and prevention o f such practices. Among others, procurement officials should be trained to focus on red flags indicating unusual bid patterns such as: distinct bids by a systematic or uniform percentage; bids inexplicably too close or too far apart; losing bid prices are rounded or o f unnatural numbers; unexplained inflated bid prices; losing bidders become subcontractors; apparent rotation o f losing bidders; unusual repeated extension o f bid security; delay in completing BER or contract award signing indicating efforts to negotiate corrupt terms; cartel like behavior in the market; and a general scheme o f coordination o f preparation o f bids by designated winner. Subjecting bids at close review may indicate similar offices, addresses, employees, telephone and fax numbers, bids with sequential Appendix Page No. - I09 Armenia - Country Procurement Assessment Report bid security numbers, same type face or print style used, same spelling mistakes, etc., The government should seriously look into the phenomenon and address the problem o f "state capture" in certain markets or sectors where f i r m s are able to encode preferential treatment (such as monopolistic privileges) for themselves in the basic rules o f the game in the market, and creating a wide range o f policy and institutional distortions that generate highly concentrated gains to narrow sectors and groups.. (D) Others Key Recommendations - Develop model documents, standard and objective qualification and evaluation criteria, and general and special conditions o f contracts. - Develop a robust system o f supervision with mechanisms for accountability. Action Plan: s and freedom of Appendix Page No. - I I O Armenia - Country Procurement Assessment Report Action TermMedium Term) Vary membership o f tender Immediate term Promotes transparency and committees check and balance Tighten sole source Immediateterm Reduce overreliance and requirements and use o f prevent abuse. Promotes monopoly certificates resort to competitive process PPL should refer to criminal Medium term Set out clear rules of laws and set out accountability responsibilities and accountabilitiesof persons involved; bidding documents should refer to fraud and corruption AB procurement reform Immediate term Sends a clear signal and strategy should detail allows for immediate recommendations on implementation mechanisms to address corruption in procurement Debarment and blacklisting Short term Ensures fairness and prevents system under the PPL should abuse be clarified with articulation o f applicable procedures and principles Capacity building and Medium term Ensure employees engaged awareness raising on fraud in procurement have and corruption in practical understanding o f procurement fraud and corruption schemes; have harmonized set o f tools to identify red flags at each stage o f procurement cycle; have ability to articulate, in practical terms, procurement risks, and can devise mitigation strategies and conduct steps basic due diligence Develop specific strategies Short term Promote competitive to address collusion bidding; break down cartels Appendix Page No. - 111 Armenia - Country Procurement Assessment Report - Sr# Action Priority Impact (ImmediatefShort - TermMedium Term) 15 Develop model documents, Medium term Tightens requirements and standard and objective encourage strict compliance qualification and evaluation criteria, and general and special conditions of contracts 16 Develop a robust system of Medium t e r m Promotes accountability supervision - Appendix Page No. - I12 Armenia - Country Procurement Assessment Report - CASE STUDY V PUBLIC -PRIVATE PARTNERSHIP IN PUBLIC PROCUREMENT I. Introduction 1. Armenia i s a lower middle-income country with a gross national income per capita o f $3,960 (GNI per capita, Atlas method).20 The country i s comprised o f 10 regions (marzes) and the capital city o f Yerevan, which also has the status o f a marz. The total population of Armenia i s about 3.2 million (as o f 1 January 2003), 2' o f which about one-third, nearly 1.2 million have been recorded as living in rural areas. Agriculture generates 18 percent o f Armenia's gross domestic product (GDP) and employs about 46 percent o f the labor force. The services sector, concentrated in public administration and trade, generates 32.2 percent o f GDP. As a small developing economy, Armenia depends critically on external markets for sustaining high growth and reducing poverty. II. Purpose o the study f 2. The main purpose of this case study i s to review the status o f public private partnership as it relates to public procurement in Armenia and to make recommendations for strengthening the relationship and involvement o f the private sector in public procurement. ZII. Basis o the study f 3. This case study i s based on a desk review o f available reports on public -private partnerships and discussions with a few selected private sector f i r m s and associations in Armenia. The findings and recommendations made in this report are subject to review and approval by Bank management and will then be sent to the Government o f Armenia for their comments. IV.Private sector 4. Private sector constitutes about 70 percent o f the GDP in 2003 and i t s share o f employment i s about 75 percent (see table 1). The private sector has been rapidly growing in recent years (the business directory (2008) and earned the name o f "the Caucasian Tiger". The private sector includes 2300 small, medium and large companies and organizations involved in the provision o f over 10,000 items o f goods, works and services). These are also accessible through the website: www.spyur,am. Growth has been especially in the construction and services sub-sector fueled mostly by remittances by the Diaspora. Private sector development is also one o f the focus 2o Source: World Bank. October 2008. Country Brief. Link to web-site: http://www.worldbank.org.am/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/ARMENIAEXTN/O,,conte ntMDK:20628754-menuPK:30 1586-pagePK: 14 1 137-piPK: 14 1127-theSitePK:30 1579,OO.html 2' NSSA. 2003. Appendix Page No. - 113 Armenia - Country Procurement Assessment Report areas for the Bank's CAS as well as for other bilateral and multi-lateral development agencies. In terms o f public expenditure, excluding the defense sector, education and science constitutes the largest percentage share o f about 15 percent followed by social insurance and social security; and general public services (which i s about 10 percent each) and transport, roads and communications which i s about 7 percent. Health ' expenditure i s also about 7 percent o f the total public expenditure. Table 1: Armenia: Private Sector Indicators Source: World Bank. 2005. Private Sector Indicators. World Bank. Washington DC. Link: httP://web.worldbank,org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTECAREGTOPPRVSECDE V/O,,contentMDK:20508282-pagePK:34004 173-~iPK:34003707-theSitePK:570955.OO,html K Status o Public Private Partnership f 5. Public Private Partnership (PPP) refers to a contractual agreement between a government agency and a private sector, which allows for greater private sector participation in the delivery o f public infrastructure projects and services. PPPs are being used more frequently by many countries in different stages o f development to build new and upgrade roads, power supply, water and waste water facilities, prisons, public housing, hospitals, schools, etc. As compared to traditional public procurement methods, the private sector under a PPP arrangement assumes a greater role in the planning, financing, design, construction, operation and maintenance o f public facilities. The associated risks with a PPP are transferred to the party, which i s best suited to manage the PPP. Most o f the common models o f PPP are: Design-Build, Design-Build-Maintain, Design-Build-Operate, Design-Build-Operate-Maintain, Build-Own- Operate-Transfer, Build-Own-Operate, Design-Build-Finance- Operate/Maintain, Service Contract, Management Contract, Lease, Concession, and Divestiture. These models vary in the degree o f private and public responsibility - which i s depicted in the following diagram: Appendix Page No. - I14 Armenia - Country Procurement Assessment Report Public Responsibility Prtvab Responsibility 6. Armenia has had an impressive track record o f implementing PPPs in the infrastructure sector, especially in the areas o f FIEF, Water Supply and Road Services.22 Investments in PPP in Armenia up to 2006 amounted to $560 million and places Armenia among the PPP leaders in the CIS countries. PPPs can now be found in every major part o f the infrastructure, including energy (where it has been successful - see example below), telecommunications, transport, postal service, water distribution, etc. The development o f PPP in Armenia, however, has been stifled by the following problems in public procurement: 0 Pricing mechanisms do not reflect current market conditions: Prices specified in procurement contracts do not reflect the existing average market prices. This include, in individual cases, where pricing through non-market mechanisms are used. Moreover, the Committees do not evaluate whether financial proposals o f the bidders are justified. Public procurement prices differ from market prices for some specific services (e.g. health, education, etc.), which results in the use o f non-competitive methods. Perception o f the private sector o f public procurement: The overall perception o f the private sector o f the public procurement is that the evaluation process i s not very transparent, especially in the setting o f qualification criteria and technical specifications. VI. Successful case o public private partnership - the case o the power sector f f 7. Armenia faced a severe power crisis following the collapse o f the Soviet Union, which was further exacerbated by the Nagorno-Karabakh war, economic blockade b y Azerbaijan and Turkey and cut -off o f Armenia's only source o f gas and oil for its thermal plants, shut down o f the Medzamor nuclear power plant following the massive earthquake in 1988. Power supply was merely two hours o f electricity per day, which placed severe hardship on the consumers - especially during the harsh 22Alam,Asad. 17 February, 2009. Armenia: Country Partnership Strategy - Pre-Upstream Review. Power Point Presentation. The World Bank. Washington DC. (some lessons have been learned - from CAS CR and other sources). Appendix Page No. - 115 Armenia - Country Procurement Assessment Report winter months. The Government o f Armenia took bold steps to address these problems. This consisted o f a two-pronged approach, - The first one was reform o f the tariff structure, which involved setting the tariffs for industrial, commercial, and household customers at equal levels and rebalancing o f tariffs to remove cross-subsidies - especially since subsidies to the power sector had reached a level o f 11 percent o f Armenia's GDP b y 1995. (Sargsyan, et al. 2006). - The second involved public private partnership - The first attempt to privatize the distribution system in 2001 did not receive much support, and bidding documents were flawed. Despite this the tender took place with a few major international players showing interest, which gave an additional boost to the reformers in the Government. Despite the international situation in the financing o f power projects facing severe crises in 2001 (due to the collapse o f Enron in November 2001), a management contractor, Midland Resources Holding (MRH), a UK Guernsey company, with no experience in power operations, was selected and given the control to operate the distribution system in late 2002. This led to further privatization in the generation sector, which included the ownership o f the Hrazdan thermal power plant, the Sevan- Hrazdan hydropower cascade, and financial control o f Medzamor to several Russian companies under a state debt forgiveness arrangement o f US$96 million. These public private partnership arrangements resulted in greatly improved power supply to the customers - who now had 24-hour service throughout the country, collections are at nearly 100 percent o f sales. Key lessons learnt 8. The main procurement related lessons learnt from this public private partnership in the power sector are: - Political will to reform i s o f paramount importance - and a champion to lead the reform effort and build consensus - Learning from failures: the bidding documents and legal and regulatory framework were not satisfactory the f i r s time - but subsequent revisions took into consideration the lessons learnt from the failed tender process - Need for regular communication between the bidders and owner i s crucial which i s helpful in establishing confidence. Some Governments has used a two stage bidding process for tendering private sector participation contracts - More attention should be placed on service quality o f the private operator rather than on the level o f investment an operator i s willing to commit - Governments and donors should consider adapting standard bidding requirements and procedures to accommodate new types o f PPP arrangements. Appendix Page No. - I I 6 Armenia - Country Procurement Assessment Report Which stage is Armenia in Public Private Partnership? 9. Using the PPP market maturity curve (developed by Deloitte), shown below, based on the discussions held during the CPAR mission with both public and private sector officials, Armenia could be placed in stage one o f the PPP market maturity along with countries such as Latvia, Russia and Slovakia,etc. This stage i s characterized by the following features: (i) policy and legislative framework for PPP i s being developed; (ii) Deal structures are being formulated and implemented; (iii) Process o f getting the public -private transactions right has begun; (iv) Process o f building a marketplace for PPP has commenced; and (v) lessons from PPP in sectors where this has been tried are being adapted to other sectors. Some o f the constraints inhibiting the further growth o f PPP are lack o f clarity, consistency and transparency in PPP processes and i t s administration, failure o f the legal and regulatory framework to ensure a fair and transparent competitive bidding process, protection o f public interests, insufficient capacity to conclude and manage PPP contracts, lack o f impact assessment - ex-post and ex-ante, lack o f well-developed financial institutions which makes dependency on grants and soft loans. (Polishchuk, 2008). Recommendations 10. Develop a comprehensive Public Private Partnership (PPP) strategy and a road map, which would assess the strengths and weaknesses and make practical and realistic recommendations to take Armenia to the third stage o f the PPP maturity curve. I Source: Deloitte. William Eggers and Tom Startup. 2006. Closing the Infrastructure Gap. Appendix Page No. - I I7 Armenia - Countrv Procurement Assessment Report VI. Enabling environmentfor Growth in Public Private Partnership Business climate 11. Overall, the business climate in Armenia for the growth in public private partnership needs further improvement as indicated by Armenia's overall ranking o f 44 out o f 181 countries in the ease o f doing business in 2009 (Singapore i s the top ranked economy in the ease o f doing business). See table 3 below for detailed comparison o f doing business indicators in 2008 and 2009. Armenia ranks 61 in enforcing contracts. There i s a lack o f interest in private companies to do business with the Government - which was also one o f the findings o f the M a y 2004 CPAR. The major problems cited by the private sector involved the processes used in public procurement, most important o f which were the following: Qualification criteria and technical specifications in the bidding documents were not very well defined, and were set at l o w levels which enabled poorly qualified bidders to participate with l o w prices 0 Evaluation process o f the tenders submitted were not transparent 12. Since the last CPAR, not much improvement has taken place in improving the qualification criteria and technical specifications in the bidding documents. However, there i s some improvement in the in the area o f the provision o f information about procurement opportunities in the web site as well as through bulletins and newspaper advertisements. Ease o doing business f Doing Doing Change in business 2008 business 2009 rank rank rank 1. Overall doing business 41 44 -3 Source: World Bank. 2009. Doing business in Armenia. www.doingbusiness .org Implementation guidelines o public procurement to define private sector role f 13. The implementation guidelines o f public procurement currently does not define the role o f the private sector, but provides for the expert assessment o f the design estimates o f civil works. Recommendation: The CPAR recommends: (i) changes be Appendix Page No. - 118 Armenia - Country Procurement Assessment Report made in the public procurement law to make provisions for private sector participation in the building o f infrastructure and provision o f basic services, such as health, education, etc and establishing clear procedures for public private sector participation - should be modeled along the U N C I T R A L model legislative provisions on privately financed infrastructure. (See reference UNCITRAL. 2003 Model legislative provisions on privately financed infrastructure projects). 23 Also, the EU Directives 2004/18 and key interpretative documents on PPP issued by the E C would be relevant for purposes o f Armenia's efforts to harmonize with EU and W T O requirements; and (ii) define clearly the role o f the private sector in the expert assessment o f the design estimates o f civil works and that this should be carried out by the private sector. 14. Good procurement practices which encourage public private partnership, include the following: Two-stage tender process i s recommended. First stage: First stage i s the prequalification stage, which consists o f (i) Pre-qualification to narrow down to 5 to 6 qualified sponsors and or consortium o f sponsors (ii) Pre-qualification to be done on a pass-fail basis based on objective and quantifiable criteria, which should test the financial strength, development experience, construction experience and operation and maintenance experience Second stage: The second stage i s the tender process, which consists o f (i) Technical proposal - to be evaluated on a pass-fail basis (ii) Legal statement, bid bond, accepted final project agreements (iii) Financial proposal - which should be evaluated using current market prices 15. The two-stage approach would promote transparency and objectivity, leaving little or no room for dispute. Using the pass-fail system in the pre-qualification stage ensures that all bidders have a level playing field and are equally qualified and in the technical proposal stage ensures that there are no deviations to the bid. Project agreements are pre-negotiated with pre-qualified bidders prior to bid and bidders must accept the final project agreements in tender with no material deviations. This minimizes the post bid negotiations and leaves adequate time for the signing o f the public-private partnership agreement. 23 United Nations Commission on International Trade Law. UN. Sales number E.04.V.11 ISBN 92-1- 133583-3. This can be accessed through the link: 1 http://www,uncitral.org/pdf/english/texts/procurem/pfip/modeI/annex-e.pdf Appendix Page No. - I I 9 Armenia - Country Procurement Assessment Report Private sector representation and organization 16. The organization o f the private sector in Armenia i s at an early stage, a few o f which are the union o f employers, association o f builders, association o f investigative journalism and citizen groups. These need to be nurtured and developed to take an active role and increased involvement in the public procurement process and facilitate market access. There i s limited competition due to lack o f interest, procurement policies, and monopolistic or oligopolistic features, especially in infrastructure projects. New types o f PPP are models are being tried out, such as the housing project in earthquake affected areas led b y Ministry o f Urban Development. Procurement Practices 17. Continued practice o f the award criterion applied to the local procurement on the basis o f lowest price only, often results in the Government purchasing lowest quality products and discourages serious, reputable bidders to participate in the public procurement process. There i s however, a continuing perception among the private sector that the winners are pre-determined which prevents eligible companies to participate - but this i s not a consistent practice Recommendation Evaluation criteria for the procurement o f goods, works and services should be revised to take into consideration both price (based on current market conditions) and quality Improper procurement practices and mitigation measures 18. Armenia ranks 109 in the improper procurement practices index according to Transparency International with a CPI score o f 2.9 24. Denmark, New Zealand and Sweden were ranked as number one in the 2008 improper procurement practices index with a score o f 9.3. 25 Singapore and Finland were ranked as number four and five with scores o f 9.2 and 9.0 respectively. 26 The countries with the lowest scores were Eritrea, Ethiopia, Guyana, Honduras, Indonesia, Libya and Mozambique27 with a score o f 2.6 and had a ranking o f 126 among the countries analyzed. 19. Improper procurement practices in public procurement in Armenia occurs in a variety o f ways - such as collusion between bidders, sole source contracts, awarding contracts to non-qualified contractors, limited dissemination o f procurement 24 Transparency International used seven surveys to arrive at this score and the confidence range i s between 2.6 and 3.1. 25 The number o f surveys used to determine this score was six and the confidence ranged between 9.1 and 9.5. 26 The number o f surveys used was 9 for Singapore and 6 for Finland with a confidence range o f 9.0 to 9.3 for Singapore and 8.4 to 9.4 in the case o f Finland. 27 The number o f surveys used for Eritrea, Ethiopia, Guyana, Honduras, Indonesia, Libya and Mozambique were 5, 7, 4, 6, IO, 5,and 7 respectively and the confidence ranged between 1.7 and 3.6. Appendix Page No. - 120 Armenia - Country Procurement Assessment Report opportunities, acceptance o f l o w quality works in relation to the expenditure, favoring selected contractors and suppliers for the provision o f goods, works and services, etc. Mitigation measures 20. The Government i s taking steps to reduce improper procurement practices. In this regard, the Government proposes to expand civil society participation in governance and increase transparency o f the public administration system. (Republic o f Armenia, 2007)28. Recommendations Following are some recommendations to reduce improper procurement practices in public procurement: - Development o f a comprehensive, user friendly procurement guidelines which should be publicly disseminated - Provision o f information on the schedule o f procurements being planned and the status o f previously announced bidding opportunities, - Improve the design o f the request for proposals, including specifications and the selection criteria which would ensure competition and proper evaluation o f bids - Enforcement o f the implementation o f procurement guidelines and RFP requirements during the review, evaluation and selection o f bids - Maintain consistency o f data within the procurement documents - Adopt measures to prevent conflicts o f interest at all stages o f the procurement cycle. - Introduce citizen report cards to obtain user feedback on the performance o f public services, as a systematic analysis o f user perceptions on the quality and satisfaction o f public services i s lacking in Armenia. The focus o f the citizen report card will be to determine the degree o f satisfaction o f the common citizen o f the delivery o f public services with respect to access, use, reliability and affordability . - Introduce community scorecard activity to compliment the citizen report card by i t s focus on the performance evaluation o f government services, projects and administrative units. This would be used to track expenditures on important sectors; generation o f benchmark performance criteria which can be used in resource allocation and budget decisions; comparison o f performance between ~~ 28This i s part o f the Government program as stated in the section on "Reforms o f Governance System and Fight against Improper procurement practices", Section 4.2.1, Government Effectiveness. Republic of Armenia, page 9. Appendix Page No. - 121 Armenia - Country Procurement Assessment Report Marzs, developing a direct feedback mechanism between the providers and users; building local capacity and strengthening citizen voice and community empowerment. V I I ,Action Plan to promote Public Private Partnership Key Recommendations - and Priorities ........................................................................ ..................... ............................... I Priorities 1. ............................................................................................................................................................................................................................................. i................................................................................... ,. .................................. i Key Recommendations ! /Immediate I Short IMedium 1 I ~ i Term 1 Term I I . I Legislative and Regulatory Framework , i I I i I 1 I I I I I , I Incorporate provisions for public private partnerships I i and use o f a variety o f models, such as Design-Build, ~ i Design-Build-Maintain, Design-Build-Operate, Design- Build-Operate-Maintain, Build-Own-Operate-Transfer, Build-Own-Operate, Design-Build-Finance- / OperateLMaintain, Service Contract, Management Contract, Lease, Concession, and Divestiture as applicable to different sectors, draft and adopt a public- , private partnership act , I 1 i 1 1 1 . PPP strategy and action plan + 4 Develop a comprehensive Public Private Partnership I (PPP) strategy and a road map which would assess the I i i I strengths and weaknesses and make practical and ~ /I I realistic recommendations to take Armenia to the third I ~ j stage o f the PPP maturity curve j .................................... + ...................................... .................................................................................................................................................................................................................. .............+.................................................; ~ I I I I I Carry Quta review o f procurement procedures o f small, ' I ! 1 j medium and large private sector firms involved in the provision of goods, works and services in agriculture, / I i ! i ! ! communications, education, health, power, water ! sectors and Develop a guide for PPP 1 I .....i ...................................... *I ~ i i 111. Institutional Framework and Management I I 1 Capacity t I ................................ ...,I Establish a PPP unit/agency in the Ministry o f Economy with qualified and experienced personnel to develop PPP policies, procedures and monitor the implementation o f PPP strategy and action plan. , t Develop a register o f PPP contracts and a monitoring system for the implementation o f PPP contracts r ~ I / I Design and implement a continuous education and I training program in PPP for the staff o f the PPP unit as Appendix Page No. - 122 Armenia - Countw Procurement Assessment Report * Priorities Key Recommendations Immediate ' Term Term I well as the private sector and institutionalize the 1 , I training program in a recognized national I university/training institution , I I I V . Public awareness I 1 Create the enabling environment for the development of I I association o f private sector, and citizen groups whose main objective would be to serve as an independent / 1 oversight body in all aspects o f public procurement. ' I ~ 1 Design and implement a continuous awareness raising j..,.... ....,.. ..,,,......,....,,. ..,...... ...,......................... ..................... campaign on PPP ....................................................................... ..,................ i / I / / ;' , j .............................................. j ............ ~ ~ .............. "....!. . . . . . . . . . . . . .................. , ..... .... : ./ Appendix Page No. - 123