Where Are the Continued Public Procurement Deficiencies Leading Serbia?

On October 12 2022, the European Commission (EC) adopted the annual Enlargement Package comprising several documents, while naturally, the most expected outcome was the detailed assessment of reforms implemented by each candidate and potential candidate country over the last year. Besides assessing either progress or deterioration on their path towards full-fledged membership, the EC provides them with recommendations and guidance on the reform priorities and compliance with European acquis. Although the ongoing dispute with Kosovo and unwillingness to fully distance itself from the Russian Federation dominated the interinstitutional debate on the EC’s outputs regarding Serbia, corruption and public procurement deficiencies did not go unnoticed in the report.

Apropos of the latest report assessing the progress of Serbia in the accession process, the EC was not a herald of good news. Besides limited progress in the areas of the rule of law, no progress was noted in Chapter 5 – Public Procurement – a crucial component of the Fundamentals. Despite the early opening of this chapter in 2016, Serbia stayed moderately prepared throughout the years. Considering the limited progress reported in 2021, the latest report shows an unwelcome downgrade in addressing corruption and routing of the overall integration process. Moreover, as the report indicates, the rising number of exemptions and irregularities within public procurement might even lead to backsliding in this area. Concerning public procurement as a policy area of high importance, together with the strategic goal of Serbia to become a full-fledged member of the EU, such a scenario would represent a notable step backwards. The following analyses whether the further inability of Serbia to fulfil the EU’s requirements in this chapter can potentially endanger the overall pace of accession negotiations.

Public procurement under the microscope 

Public procurement, a pivotal instrument for implementing government budgets, is widely susceptible to corruption or misuse of public finance. Via public procurement, the state and local authorities materialise their ideas through the final purchase of works, goods, or services to maximise value for money. Since 14% of the EU’s GDP is spent on purchasing services, works, and supplies by public authorities yearly, the susceptibility of public procurement to corruption and malpractice represents a high risk for misuse of the EU’s finances. According to the EC, improving the process can yield massive savings, whilst only by 1% efficiency gain could save 20 billion euros per year. Moreover, public procurement is closely linked to the Single Market principles, making it a highly important policy area. Thus, the European Union (EU) pays considerable attention to this policy area, not only in order to prevent the misuse of EU funds but also to protect the Single Market. In this context, the necessity to ensure compliance with critical principles such as equal treatment, non-discrimination, transparency, efficiency, and proportionality have been correspondingly translated into accession conditionality.

Due to risks related to the harmful practice in public procurement, the EU introduced minimum harmonised rules primarily to prevent the misuse of EU funds, secure adherence to Single Market principles and ensure a level playing field for business entities across its territory. The legal basis for public procurement in the EU Member States is regulated by the Directive on public procurement and repealing. The Directive falls within EU acquis, hence, compliance with the EU standards in public procurement also became an integral part of the enlargement process and accession negotiations. Along with the need to align with general public procurement principles, the acquis specifies review rules, regulations and the availability of remedies. Moreover, it envisages the strengthening of administrative capacities and the creation of specialised implementing bodies. The European Commission regularly monitors the performance of the member and candidate states in this area and provides them with precise recommendations on improving public procurement practice.

The EU’s high emphasis on public procurement is visible in the Revised Enlargement Methodology (also known as New Methodology). In fact, public procurement acquired an elevated status, as it was introduced as part of the Fundamentals, together with other essential chapters and policy areas. In order to reinforce the credibility of the accession process, Fundamentals emerge at the centre of accession negotiations. As the new methodology reaffirms, the negotiations on the Fundamentals will be opened first and closed last, while the progress in these areas will determine the overall pace of negotiations. While the rewarding progress was improved, the EU also introduced the sanction mechanism. The latter enables suspending or reversing the accession process in case of extended/long stagnation or backsliding in reform implementation and compliance with the acquis.

Serbia struggles with addressing public procurement deficiencies

The last report on Serbia repeatedly pointed out the severe shortcomings related to public procurement. While the EC had acknowledged limited progress in the 2021 report, within the latest reporting period, Serbia did not address any EC’s recommendations, and hence it did not show any progress. Although Serbia adopted the revised legislative framework in 2019, which essentially corresponds to the aims and standards of the EU defined under the Directive on public procurement, experts report that Serbia has not managed to address major issues in practice. Additionally, Serbia’s current level of preparedness in Chapter 5 has not changed in the past five years. For Serbia to close the chapter, it will need to address the interim benchmarks, which seems very precarious at the moment since so far it has failed to fulfil any of them. If the trends in this area remain unchanged in the following period, the lack of compliance and inability to address recommendations creates room for further estrangement from EU integration.

A detailed overview of Serbia’s obligations showcases that a new approach will be needed for Serbia to get closer to closing Chapter 5 anytime soon. Namely, the EC repeatedly articulates the same reservations related to public procurement year by year. According to the EC, in the case of Serbia highly problematic seems to be the Law on special procedures for linear infrastructure projects due to the lack of clarity on selection procedures and transparency, while it undermines the revised law on public procurement and needs to be repealed. In this context, the most concerning issue raised by the EC is the high value of procurement decisions exempted from the law regarding projects of strategic importance. The latter is often associated with intergovernmental or interstate agreements, which the Law envisages. Moreover, the essentials of such procurements (such as design or related documents) exempted from applying the Law are frequently made confidential. It may result in a lack of transparency and hypothetically lead to malpractice. After all, it might be translated into a loss of accountability which can cause an overall decrease in the public procurement procedure’s credibility.

Furthermore, experts alert that Serbian authorities tend to overuse exempted procurement procedures also in cases where is no legal ground for that. that. The evident rise of urgent and closed procedures was observed in connection with the outbreak of COVID-19 pandemic. Even though Serbia has stated the cease of the state of emergency in relation to the pandemic, these procedures are still frequently used without satisfactory justification. Exemptions from applying the public procurement law represented 67% of the cumulative value of public procurement contracts in 2021. The value of such exempted procurements rocketed by 88% compared to 2020. Therefore, it might be seen as a systematic and conscious effort to avoid applying procedures embodied in Law on public procurement and to favour direct contracting instead which is not in accordance with EU acquis and principles of fair competition and transparency, however, the current legal framework offers the legal basis for these exemptions.

Shortcomings in the public procurement process not only may lead to high costs of loss due to misuse of public finance or its mismanagement but also contradict to EU acquis. It includes ensuring adequate implementation of activities based on essential principles in public procurement, such as securing competitiveness, transparent procedure or equal access of all business entities. According to the report, Serbia recorded a significant increase in public procurement in terms of the total value of contracts by 48% between 2020 and 2021 as well as in its share of GDP. Simultaneously, the number of irregularities and discrepancies increased as well. For 2021, the State Audit Institution of Serbia in its annual report revealed irregularities related to public procurement in 1359 cases for 53.46 billion. Adherence to legal procedures and basic principles in public procurement is in the interest of both Serbian citizens and the EU, especially when EU funds are included, but also when considering the potential access of the country to the single market.

Besides proven avoidance of applying the Law on public procurement corresponding to the EU standards and detection of numerous irregularities within the process, there is a downward trend in the number of bids per tender. Ensuring a sufficient level of competition is a vital part of public procurement. Along with the transparency increase, it also secures better control of the process by the participants themselves. In addition, fair competition is desirable when choosing the best offer regarding price, quality and other relevant criteria. The average number of bids per tender decreased from 2.6 in 2020 to 2.5 in 2021, which is the lowest value in the past 5 years and displays a significant decline from 3 bids per tender in 2017. While the 2019 law has revoked the obligation for requesting at least three bids in case of‚ small value purchases‘, the threshold for bidders was significantly increased and thus notably reduced the number of procurements. According to the experts, Serbia, with its more than 50% share in public procurement when only one bidder participates, is significantly behind member states and countries in the Western Balkan region. Concerning the notable amount of money spent via public procurement yearly, a lower number of bids may reflect the overall low credibility of the authorities and the process itself. This may also show the common practice of setting irrelevant criteria or numerous technical specifications of tenders in order to restrict competition and discourage other potential participants in favour of a particular tenderer.

At the same time, the primary aims of public procurement are not followed either. For instance, to maximise value for money. While utilising the best price-quality ratio criterion has remained low at 10%, the lowest price criterion remained dominant in about 90% of cases which might negatively affect the quality of the outcome and ultimately lead to higher product lifecycle costs for citizens due to lower quality or for example higher energy consumption. Excessive utilising the lowest price criterion might raise concerns since it has several risks, as already indicated. Besides higher costs of the procured goods lifecycle signifying cost-inefficiency, it can imply a waste of resources in general and, in the end, unsound public finance management. On top of that, it also offers more opportunities for malpractice. For example, contracting with a preferable bidder or any misbehaviour can be covered up by saving public finance. Civil society has already alerted that all these indicators are vital in assessing the risks of corruption and unfair treatment of bidders in public procurement. All mentioned above implies Serbia’s inability or rather unwillingness to ensure sufficient transparency, efficiency, competitiveness and equality of business entities by the requested level, which contradicts the EU’s essential principles of public procurement.

Conclusion

Given the moderate preparedness over the years and considering no progress reported in 2022 with the high risk of future backsliding, the Government of Serbia should be more transparent regarding the commitments to fulfil interim benchmarks embodied in Chapter 5. Although the legal framework regulating public procurement in principle seems to comply with the EU standards, in practice, the legal regulations are often bypassed, thus the EU law too. Any notable stagnation and backsliding within the Fundamentals cluster endangers the overall speed of the accession process. Persistent deficiencies in the practice of public procurement procedures jeopardise the closure of the chapter. Thus, the Government is advised to further adjust the legislation in this area to the acquis without delay and to ensure a better control mechanism of the process with emphasis on compliance with essential principles of fair competition, non-discrimination and transparency. Besides ensuring full implementation of the revised legal amendments to public procurement law into practice and its full alignment with the Directive, it is necessary to secure more effective control mechanisms and apply standard public procurement procedures in as many cases as possible.

Civil society also highlights the importance of safeguarding this area. One example of a notable initiative in that direction is the Regional platform for Public-Private Partnership for Good Governance (R2G4P), as it provides policymakers and accountable institutions with tangible recommendations on how to improve the process of public procurement and prevent the misuse of public finance based on good practice. On the one hand, the Government has practical tools to overcome severe issues resulting from the insufficient implementation of the legal framework into practice and maintenance of discriminatory and non-transparent practices in public procurement. On the other hand, however, civil society might offer its capacities for expertise and efficient control. Thus, the closer cooperation of these subjects is highly desirable.

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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.

The author is currently an intern at the European Policy Centre – CEP.