Public Procurement: A Brake or a Step Forward in the European Integration of Serbia

Serbia needs to comply with the EU acquis and standards in regard to public procurement, and in many other areas. Transparent process, equal opportunities for all, non-discrimination and respect for legal procedures are necessary from the perspective of citizens, as it is in their interests that public funds are managed responsibly. According to the Public Procurement Law, the acquisition of goods, services and public work from business entities by one or more public bodies realized based on contract, represent public procurement. Information about all public tendering is available at the Public Procurement Portal which was established in 2020 with the aim to secure transparency and which is under the jurisdiction of the Public Procurement Office (PRO). After the adoption of the revised enlargement methodology by the European Commission (EC), Chapter 5 regarding public procurement was placed in the Cluster 1 – Fundamentals, together with the functioning of democratic institutions, public administration reform, and the rule of law. Bearing in mind the strategic orientation of Serbia towards the EU, the legitimate question is whether public tendering is a brake for the European integration of Serbia or just another inevitable step towards the country’s path to membership?

Public procurement is a domain highly susceptible to corruption according to the assessment of the Organisation for European Cooperation and Development (OECD), which translates to potentially high costs in direct loss due to misuse, mismanagement, circumventing procedures, etc., thus it requires special attention in order to reduce corruption risks. The United Nations state that on average 10-25% of the contract value in public procurement can be lost due to corruption. Although governments are trying to combat corruption in public procurement through legislature, the latest research shows that more attention should be placed on the practice of public procurement (Bosio et al.). This text provides an overview of the key challenges of public tendering in Serbia from two perspectives: first, a review of the current legal regulation in this area, and second, practical implementation of this regulation and observed deficiencies during the realisation of public procurement.

The first instance when discussing legal regulation of public procurement in Serbia is the Public Procurement Law (PPL) adopted in 2019, which entered into force in July 2020. According to the assessment of the European Commission in its yearly report on Serbia from 2021, this law was described as in principle complying with EU acquis. This becomes even more important because compliance with the EU acquis contributes to better domestic legal regulation, but it is also a legal obligation which Serbia needs to fulfil in order to eventually join the EU. The Law alone provides for important principles which are crucial for public procurement, such as the principle of efficiency and effectiveness, securing competitiveness, transparent procedure, equality of all business entities, and proportionality. The introduction of the principle of non-discrimination and the principle of proportionality represents an improvement over previous legal solutions, which has improved the current legislation overall. Additionally, the new legislation introduced further compliance with the EU Directives, while its implementation envisages significant reduction and simplification of public procurement procedures, reducing the administrative burden by introducing electronic communication and digitalisation of the entire process. This results in a  reduction of the costs of participation in public procurement procedures for small and medium enterprises that may not have administrative and professional capacity.

However, the legal regulation of this area in Serbia shows certain weaknesses that need to be eliminated. Namely, although the Commission is of the opinion that the Law on Public Procurement is satisfactory according to EU standards, it also notes certain shortcomings in the legal framework that deviate from the European standards. First of all, it is necessary to adopt amendments to the existing law in the field of public-private partnerships and concessions in order to harmonize this law with the EU Concessions Directive. What additionally raises concerns is the Law on Special Procedures for the Implementation of the Project of Construction and Reconstruction of Line Infrastructure Structures of Particular Importance to the Republic of Serbia, which allows the Government to exempt certain infrastructure projects of special importance for the state from the PPL, thus creating opportunities for manipulation. In this way, not only are the regulations on public procurement in Serbia bypassed, but  EU directives are bypassed as well, which is a problem for Serbia’s European integration and a practice that should be abandoned as soon as possible. Identical shortcomings were identified in the SIGMA Annual Report on Monitoring the Principles of Public Administration in Serbia. It confirms that Serbia’s legislative framework is largely in line with EU directives, but also identifies the possibility of exceptions to the law, based on the aforementioned Law on Special Procedures and Bilateral Agreements with Other Countries, as a major risk. These exceptions, as well as the lack of full compliance with EU directives, pose a serious threat to the integrity of the country’s entire public procurement system.

Besides obstacles that concern the legal framework, attention should also be paid to the challenges of practical (non)implementation of the Public Procurement Law and potential problems that arise from it. These practical problems negatively influence public procurement to an equal if not greater extent than the deficiencies in the legal framework. The average number of bids per signed contract in public procurement procedures records has declined several years in a row, from 3 in 2017, to 2.6 bids on average in 2020. Having in mind that in 2018 and 2019 there were 2.5 bids on average, it could be assumed that the implementation of the new Public Procurement Law potentially influenced this improvement in the first six months of its implementation. Naturally, a fewer number of bids on tenders represents weaker competition, and as such can be an indicator of other issues, such as insufficient market research by public bodies which ordered procurement, as well as composing technical specifications of the subject of public procurement that narrow the circle of potential bidders.[1] On the other hand, the thing that further burdens the process of public procurement in Serbia is the overuse of the criterion of the lowest price (in 94% of cases) at the expense of the criterion of the most economically advantageous offer. The consequence of using this criterion is that subjects of the public procurement can in the long-term become more expensive due to lower quality, cost of exploitation, and higher energy consumption. The basic assumption is that the quality of goods and services in the process of public procurement can be improved with higher competitiveness and more frequent application of the principle of the most economically advantageous offer.

Figure 1 Average number of bids per concluded contract 2013-2020, source: Public Procurement Office

During the public procurement procedure, the Law on Public Procurement is often circumvented and evaded. Giving detailed technical specifications that suit only one bidder is one way to prevent competition and make it easier for one bidder to win a contract. Discrimination by setting technical specifications in favour of certain products or manufacturers, or by labelling names of products or manufacturers, represent some of the most common types of irregularities which were identified by Transparency Serbia back in 2017. One of the examples of violating the principle of ensuring competition in public procurement is the case of acquisition of vehicles for illegal parking control – “Oko sokolovo” (eng. Eagle’s Eye), which was included in the Alarm Report on the situation in the field of public procurement in Serbia in 2021. Namely, in the tender documentation of the subject procedure, the contracting authority determined the technical characteristics that correspond to only one car model (“Land Rover Discovery Sport”)[2], bearing in mind that there is only one official distributor of “Land Rover”[3] vehicles in Serbia, it can be concluded that the principle of competition in this case was significantly limited. Another characteristic example of restricting the principle of competition is the equipping of the Clinical Center of Serbia (KCS) in 2021, where the contracting authority determined the procurement of as many as 602 items of various functions and purposes – including medical and non-medical equipment. The fact that the subject of procurement was shaped as a whole, and not divided into several parties, was characterized by the Center for Applied European Studies as a restriction of competition that resulted in only one bidder.

Here it should be pointed out a problem that is common, but not necessarily illegal. This is certainly the fact that the PPL does not apply to procurements concluded through international agreements as well as infrastructure projects of special importance, which is not in line with best practice. This becomes increasingly important in a situation when 17 of the 20 most valuable public procurements concluded by the public sector in Serbia in 2020 were concluded on the basis of international agreements that are exempt from the application of the LPP. The fact that only 1.27 bidders competed in the 100 most valuable procurements in 2020 speaks in favour of that. As already mentioned, the SIGMA report cites these two cases – procurement based on international agreements and a special law on important infrastructure projects – as a serious threat to the integrity of the entire public procurement system. Therefore, Serbia needs to adjust its practice to the acquis communautaire of the EU and ensure the application of the principles of public procurement even in the most valuable cases.

Finally, when we look at public procurement in Serbia in the long run, the recurrence of the same problems from year to year is evident. Very few bids per procedure, especially in high value procurement, the increase in the value of public procurement contracts exempted from the application of the LPP and insufficient control in public procurement procedures are challenges that must be overcome in the future. This is supported by the fact that although the country opened Chapter 5 on public procurement in the process of negotiations for EU membership, Serbia failed to close this chapter even after five years, and key recommendations of the European Commission are repeated report after report. The two key transitional criteria defined in this chapter in 2016 are the full harmonization of Serbian national legislation with the European acquis in the field of public procurement, including legislation on concessions and international agreements that exclude certain tasks from the framework of public procurement law on the basis of international agreements do not restrict competition unjustifiably and respect the basic principles of public procurement in accordance with national and EU legislation. Thus, the European Commission repeatedly recommends the completion of these two transitional criteria year after year.

Serbia’s inability to meet the interim benchmarks for Chapter 5 for more than 5 years indicates a lack of readiness for EU membership. Although the Commission itself in its latest report assesses the degree of readiness in this chapter as “moderate”, it is not enough to close the chapter because Serbia is stagnant in terms of implementation. So, another consequence of the longevity of these problems, in addition to a waste of resources, i.e. non-transparency of the procedure and low competition, is stagnation when it comes to the entire process of Serbia’s accession to the EU. Therefore, the key recommendations for the Government of Serbia would be to further adjust the legislation in this area to the acquis communautaire without delay, to ensure better control of the process itself, as well as respect for the principles of competition and non-discrimination in public procurement.

[1] These problems were also identified by the former Public Procurement Administration in its annual report on awarded public procurement contracts for 2019, p. 39.

[2] In this particular case, the subject of the public procurement was an all-wheel-drive off-road vehicle, manufactured in 2019, with a maximum length of 4600 mm, a minimum height of 1670 mm, wheelbase of 2700-2800 mm, and minimum ground clearance of 200 mm. In addition to these key technical characteristics, the contracting authority provided other characteristics (engine displacement, engine power, gearbox, door number, colour, etc.), as well as the minimum accessories that the vehicle should have.

[3] “British Motors” d.o.o. Belgrade is the only distributor of “Land Rover” vehicles in Serbia.

The blog was prepared within the Regional Platform for Public-Private Partnership for Good Governance (R2G4P). Analysis on this topic will be included in the Report on Good Governance in Southern and Eastern Europe (SEE), which will be published on the R2G4P website.

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