Controversial Public Procurement Act Passed Second Reading
The processing of the draft act that has caused many controversies has been delayed more than expected and within the year, the nature of the draft act has significantly changed. However, in our opinion, there are still some deficiencies in it.
The Chamber has made several proposals regarding the draft Public Procurement Act. The proposals concerning disclosure of the data of bids, measures against under-bidding and distribution of legal costs in dispute proceedings are still topical in the current stage of processing the draft act.
After the second reading, it has been decided to supplement the draft act with provisions that prevent declaring the entire content of a bid a business secret. Although the Chamber found that in order to increase the transparency of the procurement proceedings, it would be necessary to disclose all indicators that characterise the bid in relation to the assessment criteria, the draft act makes it obligatory to disclose to the competitors only the numeric indicators related to the assessment criteria.
However, the draft will be supplemented with the Chamber’s proposal to make it obligatory for the tenderer to give reasons why the information in the tender is indicated as a business secret. Furthermore, provisions foreseeing distribution of legal costs in dispute proceedings similarly to judicial proceedings were added to the draft – the losing party will be paying the legal costs of the other party. In the opinion of the Chamber, the currently applicable system, according to which each party is required to cover their own costs of dispute proceedings is not reasonable, because it hinders the opportunities of the companies to prevent their interests. Hopefully, with the change the system of compensating legal costs will become more fair and as an important addition, the costs on using a contractual representative, to a reasonable and justified extent, can be considered among the compensated costs in addition to the state fee and expert fee.
Measures for Excluding Under-Bidding
As the most remarkable initiative by the Chamber, the measure against under-bidding has been included in the Public Procurement Act. It was decided after the second reading to add to the draft act the contracting authority’s obligation to check the cost of the bid declared successful in case of procurement and concession contracts concluded in the field of construction. The contracting authority has two measures for identifying under-bidding.
In case of proceedings with at least three bids, the most successful bid must be compared against the bid with the next lowest cost or the average cost of all bids that have been declared compliant. If the cost of the bid that is declared successful is over 10% cheaper, in the first case or over 20% cheaper, in the second case, the contracting authority will be required to ask for explanations regarding the difference. If the explanations of the tenderer are not convincing, the contracting authority will have the right to reject the bid due to an unreasonably low cost.
As the second measure, the contracting authority is required to check the salaries of the employees of the tenderer. If the tenderer pays to the employees who are participating in the performance of the procurement contract salaries that are less than 70% of the average salary of the respective area and it appears that the reason for it is the artificial decreasing of labour costs and tax avoidance, the contracting authority must reject such bid.
The first measure is applicable for cases where at least three bids have been declared compliant. The obligation to check labour costs is extended to all procurement and concession contracts concluded in the field of construction, irrespective of the number of bids declared compliant.
Although the said measures can be applied by a contracting authority for the procurements of other areas of activity, they have been made obligatory for construction tenders, where the submission of under-bids is a significant problem. Bids with cheap prices are often achieved on the account of labour costs and therefore the measures included in the draft act should help controlling this tendency in the future.
Protecting Subcontractors Limits the Rights of the Tenderers
Unfortunately, after the second reading the draft act has been supplemented, among other amendments, with the regulation that caused unified opposition in different interest groups. First, the contracting authority will be obliged to check the background of the subcontractors used for the performance of the procurement contract by the main contractor – it will be obligatory to check the existence of grounds for removal from the procurement procedure for all subcontractors and in case there are such grounds, the contracting authority must demand from the main contractor that such subcontractor is replaced. In practice, it will mean for the contracting authority a considerable obligation to check and the main contractor must present to the contracting authority the data of all subcontractors involved in the performance of the procurement contract by no later than the time of commencing the performance of the contract, and if necessary find replacement for the subcontracts, if there are grounds to remove. The aim of the measures is to remove from the performance of the procurement contract dishonest subcontractors over whom there currently is no control.
Additionally, the subcontractors will have the right to obtain information from the contracting authority on how much the contracting authority has paid to the tenderer for the works performed by a specific subcontractor. In such case, the contracting authority is required to disclose the contents of the procurement contract to a third party, which in turn may bring up the issue of the protection of the tenderer’s business secret. Additionally, the contracting authority may, on the basis of a reasoned application from the subcontractor, refuse to pay the fee for work to the tenderer, if there is a dispute between the subcontractor and the tenderer and the subcontractor has not received its contractual fee from the tenderer. The contracting entity’s delay with the payment of the fee is not considered breach of the procurement contract, which means that the tenderer has no legal possibility to protect themselves against the activities of the contracting authority.
The aim of these measures is to allow subcontractors to protect their interests against the main contractors who have failed to pay the promised fees for work. In practice it really is a serious problem, but the provisions added to the draft act will probably not improve the situation. The Chamber together with other interest groups have pointed out to the Economic Affairs Committee as well as the persons who have drafted the draft act, that in addition to the questionable benefits, the regulation for the protection of the subcontractors contains serious conflicts with legal principles. For example, a contracting authority, as the administrator of justice must assess a legal relation between the tenderer and subcontractor that is completely independent of it, in order to decide if the subcontractor’s intent to not to pay to the tenderer is justified.
Although according to the draft act, the contracting authority is not considered to be in breach of the procurement contract if they fail to pay to the tenderer, the tenderer has no opportunity to apply legal measures against the contracting authority’s activity. The legal contradiction here is that generally the court gives its opinion on the disputes between two private persons. Furthermore, in case of any breach of contract, the parties have the right to turn to the court to protect their interests, and limiting such right with the Public Procurement Act is very questionable.
Entry into force of the Act
The third reading of the draft act has not started yet and should take place on 3 May 2017. If the draft act is passed, the date of general entry into force of the act will be 1 September 2017 (some of the provisions that require additional preparations for entry into force are to enter into force on 1 January 2018 and 1 January 2018, respectively). Although no significant changes are made in the draft acts after the second reading, we would still like to emphasise that the described provisions have not yet become the law and the final form of the new law as well as its contents will become clear after the third reading.