Over 40% of public procurements in Hungary may involve single bidder, says TI’s Gabriella Nagy

January 5, 2017

“This means that there is absolutely no competition in these public procurement procedures . . . we suspect that [the proportion of Hungarian single-bid public procurements] may be even higher than 40 percent.”

The Budapest Beacon recently sat down with Gabriella Nagy, director of the public procurement program at Transparency International Hungary. Over the course of our discussion, Nagy spoke about TI’s recent 10th anniversary celebration, the Hungarian government’s “sad” and “unexpected” decision to quit the Open Government Partnership, and the high risk for corruption that exists with Hungary’s public procurement procedures.

Hungary withdraws from the Open Government Partnership

In early December 2016, the Hungarian government suddenly withdrew from the OGP, a multilateral initiative to promote transparency, empower citizens, fight corruption, and harness new technologies to strengthen governance.

According to Nagy, the OGP in 2015 issued an action plan for the Hungarian government, calling on it to engage in an institutionalized dialogue with civil society organizations in the country. The action plan went on to urge the government to introduce an e-procurement system.

The timing of Hungary’s withdrawal, Nagy says, may have to do with the fact that the OGP’s general assembly was scheduled to meet the following day where these issues would have been addressed.

“Basically, [the government] did not fulfill any of the items on this action plan,” she says. “They were probably expecting serious criticism as a result.”

But according to the government, “instead of discussing good governance practices, the Open Government Partnership has become a place where certain countries lecture others and where genuine dialogue does not take place, facts are misrepresented, and one-sided reports are prepared. The reports feature the opinions of so-called civil organizations that continually judge our country, while it neglected the government’s response. There is no point to maintaining our membership in such an organization which has completely drifted away from the objectives set out at the time of its founding.”

Nagy dismisses these claims and says the public can easily access all the documents concerning Hungary’s partnership in the OGP on the internet.

“It is completely untrue that the Hungarian government’s position was not present in these papers,” she says. “OGP’s position papers and preparatory papers can be found on their website. Everyone can see that the government was asked and its opinion and position was also present,”

Is Hungarian public procurement the strictest in the EU? The proof is in the pudding.

In September 2015, the National Assembly of Hungary adopted a new Public Procurement Act, claiming would make public procurement regulations much stricter. In November 2016, a number of modifications were introduced to the act. The government claimed the newer provisions would tackle serious problems with the existing act, such as the high proportion of procedures without prior notification, and high proportion of single bids.

“What is worrisome in the new provisions is that the government can grant exemptions from this obligation,” Nagy continues.

Furthermore, the wording of this provision is so vague that it is difficult to understand in precisely which cases the exemption can be used, she says. “Even if the government does not apply this exemption in an abusive manner, the fact that this exemption exists in the law is a serious corruption risk. We are very curious to see which companies get this exemption and what the justification will be for applying it.

“These provisions actually made the situation worse.

Other serious problems

“In Hungary, the proportion of public procurement procedures without prior notification – which means that these procedures are not based on open competition – are really high. It amounts to around 13 percent of all public procurements,” Nagy says.

It is important to note that there are legitimate instances in which exemptions can be used for normal public procurement procedures. Such exemptions include the procurement of copyrighted technologies and procurements for emergency situations. However, these exemptions are stipulated in EU regulations.

What makes Hungary stand out in this respect is that the proportion of such public procurements is more than double the EU average of 5 percent.

According to Nagy, the European Commission has been critical of this discrepancy in Hungary for quite some time.

Normally, a contracting authority (the entity which issues the public procurement) simply invites a handful of companies to bid on a project as opposed to making an open call for tenders. Nagy says the contracting authority usually already knows which company it wants to award the public procurement to. Other companies are invited to submit tenders simply so that the conditions under which the public procurement is issued are technically lawful.

This situation is what the government claimed to address with its recent changes to the public procurement law.

“[The law now] abolishes these types of procedures in the cases of purchasing good and services, which is good, of course,” says Nagy. “But in the case of construction, which is inherently more prone to corruption than in the case of purchasing goods and services, they increased the threshold from HUF 100 million to HUF 300 million. This means there are much more situations in which [the contracting authority] can opt for the type of procedure that does not require prior notification. This is why we can say that the government took one step forward and two steps back.”

Furthermore, Nagy says that based on the data of public procurement, it is evident that the same companies are invited to provide bids, but the winners rotate from year to year.

“It appears there’s an agreement between them,” she says, referring to apparent collusion between the bidders and contracting authority.

According to Nagy, there exists no shortage of techniques which have been employed to capitalize on loopholes in these regulations.

While on one hand the government has made gestures to NGOs such as Transparency International to offer policy recommendations on improving public procurement procedures, these recommendations are often not taken into consideration.

There have, however, been cases in which the government has considered and even utilized such recommendations.

One such instance occurred when the government agreed to publish the names of the companies that were granted exemptions in public procurement procedures.

“But normally we have quite limited ability to have an influence on government policy,” Nagy says. “For example, there was a meeting where we said that increasing the threshold from HUF 100 million to HUF 300 million was unacceptable, and various chambers and business interest groups representing the construction sector immediately said this provision is a very good provision.

“On the one hand, as someone who used to work in public administration, I see that the government has to balance or weigh the concerns of different interests, but it seems the aspects of corruption-free procurements or making the situation better is not always the primary goal of the government.”

Another issue Nagy raises is the high proportion of single-bid procurements in Hungary, which is about 40 percent of all procedures, double the EU average.

“This means that there is absolutely no competition in these public procurement procedures. But we suspect that [the proportion of Hungarian single-bid public procurements] may be even higher than 40 percent.”

Nagy says she spoke to an official of the Hungarian Competition Authority who had detected an interesting trend. According to this official, many cartels had certainly taken part in public procurement procedures prior to 2009/2010. But after 2010 the number of these cartels dropped significantly.

In an effort to understand what caused the sudden drop, the official approached the companies and asked why. According to the official, representatives of the companies said cartels were not necessary anymore because everyone on the market knows who will win a certain contract.

“So, when all the companies know who will a contract, why would anyone else bother taking part in the public procurement?” Nagy asks. “Why would they spend money and time preparing the very money- and labor-intensive public procurement offer?”

According to her, even if companies try to compete but fail, they are unwilling to seek legal remedies if the cost of doing so is very high and they simply don’t trust the institutions that should safeguard the rectitude of these procedures. The arbitration board that would decide the cases is controlled by individuals linked to the government.

“What we see is that the market doesn’t really trust the institution that would provide them with a legal remedy,” Nagy says.