Report No. 27548-MD Republic of Moldova Country Procurement Assessment Report June 2003 Operations Policy and Services Unit Europe and Central Asia Region Document of the World Bank CURRENCY Currency Unit =Lei (MDL) US$ 1.00=MDL 14.1643(June 23,2003) FISCALYEAR January 1-December 31 ACRONYMS & ABBREVIATIONS BEEPS Business Environment and Enterprise Performance Survey CoA Court of Accounts CAS CountryAssistance Strategy CFAA CountryFinancialAccountabilityAssessment CIS Commonwealth of IndependentStates CPAR Country Procurement AssessmentReport CPPR Country PortfolioPerformanceReview EBRD European Bank for Reconstructionand Development ECA Europe and Central Asia Region EU EuropeanUnion FCR FinancialControl and RevisionUnit FDI ForeignDirect Investment FDI ForeignDirect Investment FY FinancialYear GOST State Committee of the RussianFederationfor Standardizationand Metrology GPA GovernmentProcurementAgreementof the World Trade Organization HIF HealthInvestment Fund ICB InternationalCompetitive Bidding IDF InstitutionalDevelopmentFund IF1 InternationalFinancialInstitution IMF InternationalMonetaryFund IS InternationalShopping JSC Joint StockCompany MoEC Ministryof Environmentand Construction MoF Ministryof Finance NAGP NationalAgency for Government Procurement NCB National Competitive Bidding NGO Non-Governmental Organization NS National Shopping PEMR Public Expenditure Management Review PRSP PovertyReductionStrategyPaper PSI Pre-ShipmentInspection RPA RegionalProcurement Adviser RPQ Request for Price Quotations SAC StructuralAdjustment Credit SAI Supreme Audit Institution SBD StandardBidding Documents SGS Socittt Gtntrale de Surveillance SPA1 StabilityPact Anti-Corruption Initiative SSP Single SourceProcurement TA TechnicalAssistance UNCITRAL United Nations Commission for InternationalTrade Law WTO World Trade Organization RegionalVice-president: Johannes F. Linn, ECAVP CountryDirector: Luca Barbone, ECCU2 SectorDirector: Alain Colliou,ECSPS Task TeamLeader: Shaun0.Moss, ECSPS Moldova CPAR Table of Contents TABLE CONTENTS OF EXECUTIVE SUMMARY ..................................................................................................... vi1 .. A PREFACE ................................................................................................................. 1 B.. BACKGROUND ........................................................................................................ 2 B.l HistoricalBackground ......................................................................................... 2 B.2 CountryContext ................................................................................................. 2 B.3 World BankPortfolioinMoldova ....................................................................... 3 4 C.B.4FINDINGS................................................................................................................. EBRDPortfolioinMoldova ................................................................................ 5 PUBLIC SECTOR ........................................................................................................ 5 C.l Legal andRegulatoryFramework ...................................................................... 5 C.l.l Legal Instruments Issued to Date............................................................... 5 C.1.2 7 Public Access to Legal Texts..................................................................... Scope of Application of Current Enactments............................................ C.1.3 7 C.1.4 Moldova's PlannedAccession to the WTO Agreement on Government Procurement................................................................................................ 8 C.1.5 Arbitration................................................................................................... 9 C 2. Procedures,PracticesandApplication-How GovernmentBuys ...................... 10 c.2.1 ProcurementPlanning.............................................................................. 10 c.2.2 10 C.2.3 Assessment o f Bidders' Qualifications .................................................... Eligibility o f Biddersto Participate inPublic Procurement..................... 11 C.2.4 12 C.2.5 Financial Thresholds Applicable to ProcurementMethods..................... ProcurementMethods.............................................................................. 12 C.2.6 Forms o f Communications ....................................................................... 14 C.2.7 Solicitation ofParticipation inProcurement Proceedings....................... 13 C.2.8 Technical Specifications and Standards................................................... 15 C.2.9 BiddingDocuments ................................................................................. 15 c.2.10 Time Allowedfor Preparationo fBids..................................................... 15 c.2.11 Language.................................................................................................. 16 Clarificationand Modificationof Bidding Documents ........................... 16 c.2.12 C.2.13 Bidand Contract Price and Currency ...................................................... 16 C.2.14 Bid Submission and Opening................................................................... . . 17 C.2.15 BidandPerformance Securities............................................................... 17 C.2.16 Examination and Evaluation o fBids ....................................................... 18 C.2.17 Notification o f Contract Award and Entryinto Effect o fthe Procurement Contract..................................................................................................... 19 C.2.18 Payment.................................................................................................... 19 C.2.19 Procurementof Consultant Services........................................................ Records o f Procurement Proceedings...................................................... 21 (2.2.20 21 c.2.21 BidProtest................................................................................................ 21 i Moldova CPAR Table of Contents C.3 Organization and Resources ............................................................................. 24 C.3.1 Role o f the NationalAgency for Government Procurement(NAGP) .....24 C.3.2 Organization of ProcurementinProcuring Entities................................. 26 C.4 Audit & Anti-Corruption Measures ............................................................. 29 C.4.1 Current Audit Measures........................................................................... C.4.2 Measureso f Corruption andAnti-CorruptionPrograms inMoldova......29 30 C .5 Public Sector Management Performance .................................................... 33 C.5.1 Government Expenditureon Procurement................................................ 33 C.5.2 Review of Public ProcurementOperations............................................... 33 C 6. Performance on Bank-Assisted Projects ...................................................... 41 C.6.1 Development ofthe World Bank Portfolio.............................................. 41 C.6.2 42 C.6.3 And Some Successes................................................................................ Common ProcurementProblems............................................................. 43 C.6.4 Decentralization ofProcurementFiduciaryFunctions ............................ 43 C.6.5 Procurement Post Review........................................................................ 44 C.6.6 Measures to StrengthenFiduciarySafeguardon Bank-financed Projects 45 C 7. R i s k Assessment ............................................................................................. 46 C.8 Recommended Supervision Plan .................................................................. 47 C.9 Unacceptable Practices on Bank-financed Projects ............................................ 48 PRIVATE SECTOR ...................................................................................................... 50 C.10 The National Framework for Private Sector Operations ................................... 50 C.10.1 Foreign Direct Investment ........................................................................ 50 C.10.2 Pre-shipment Inspection (PSI) .................................................................. Foreign Trade Regime .............................................................................. 50 C.10.3 5 1 C.10.4 Manufacturing ........................................................................................... 52 C.10.5 Banking Sector.......................................................................................... 52 C.10.6 The Ruleof Law and Enforceability of Contracts.................................... 53 C.10.7 Corporate Governanceand Commercial Procurement Practices.............. 55 Selected Commercial Laws....................................................................... 54 C.10.8 C.11 Private Sector Perspectiveson Public Sector Procurement ....................... 56 C.12 Construction Sector ....................................................................................... 56 C.12.1 56 C.12.2 Barriers to Growth o f the Construction Sector ......................................... Sector Size and Structure.......................................................................... 58 D. RECOMMENDED ACTION PLAN ....................................................................... 60 D.1 RecommendedActions .................................................................................. 60 D.1.1 Legislative Reform................................................................................... . . 60 D.1.2. ProcurementProcedures andPractices.................................................... 60 D.1.3 Institutional Reform................................................................................. 62 D.2 Measuresto be Taken by the Government .................................................. 63 D.3 Measuresto be Taken by the Bank and Other Financiers ........................ 63 ii Moldova CPAR Table of Contents D.4 Need for Technical Assistance ...................................................................... 63 D.5 Action Plan and Timetable ............................................................................ 64 D.6 FundingProcurement Reform ...................................................................... 67 D.7 Monitoring and Follow-up Plan ................................................................... 67 D.8 Dissemination of the CPAR ........................................................................... 67 TABLES Table 1: Moldova: Current Composition of World Bank Portfolio .......................................... 3 Table 2: Moldova: Current Composition of EBRDPortfolio .................................................... 4 Table 3:Thresholds below which Tenders may be Limitedto Domestic Bidders ..................11 Table 4:Thresholds Governingthe Application of ProcurementMethods (inMDL) ...........13 Table 5:Typical BidEvaluationCriteria for the Procurement of Civil Works ..................... 18 Table 6:Non-Payments by State Treasury for Chisinau-based ProcuringEntities. 2001- 2002 20 Table 7: Value of Contracts Approved by NAGPby ProcurementMethod. 2000.2002 ........................................................................................................................................34 Table 8: Justifications Given for Usingthe Single Source ProcurementMethod ..................38 Table 9: Utilities Services as a Percentageof SSP Contracts ................................................... 38 Table 10: DelegatedProcurementThresholds, Ukraine Country Office ............................... 44 Table 11:Applicable Thresholds by Procurement Method ..................................................... 48 Table 12: FDIPer Capita for Selected Transition Countries, 2000 ........................................ 50 Table 13: Balance of Payments, Jan-Sep 2001( US$m) ............................................................ 51 FIGURES Figure 1: Easeof Obtaining Information on Laws and Regulations. 1999vs 2002 . ................8 Figure 2: NAGPOrganization Chart ......................................................................................... 26 Figure 3: Measuringof State Capture in22 Transition Countries. 2000 ............................... 31 Figure 4: Corruption as a Obstacle to the Operation and Growth of Businesses ..................31 Figure 5: Expenditure on Procurementby State and Local Governments. 2000-2002 (uS$m) ........................................................................................................................ 33 Figure 6: Contracts Approved by NAGP .................................................................................. 35 Figure 7: Access to Finance and Cost of Finance as Obstacles to Business. 2002 ..................52 Figure 8: Ability of the Court Systemto Enforceits Decisions inResolving Business Disputes. 1999vs 2002 . .............................................................................................. 53 Figure 9: Fairness andImpartiality of the Court SysteminResolving Business Disputes 54 ... Figure 10: Sources of ConstructionIndustry InvestmentinMoldova, 2002 .......................... 59 ... 111 Moldova CPAR Table of Contents Box 1: Procurement Methods and their Conditions of Use ...................................................... 14 ANNEXES Annex A: Compatibility o f the Procurement Law of Moldovawith the GPA Annex B: Review of Republic of Moldova's L a w on Procurement o f Goods, Works and Services for Public Needs (April 2003) Annex C: Survey of Open Tendering and Request for Price Quotations Procedures Annex D: Government Expenditure on Procurement by Function, 2000-2002 Annex E: Expenditures o n Procurement by State and Local Governments, 2000-2002 Annex F: Survey of Single Source Procurement Annex G: Supplemental Letter on National Competitive Bidding (NCB) Procedures iv Moldova CPAR Executive Summary EXECUTIVE SUMMARY INTRODUCTION In the years immediately following its independence from the Soviet Union in 1991, public procurement in Moldova was characterized by an uncertain legal framework and a lack o f firm governmental control over the expenditure o f public funds on the acquisition o f goods, works, and services for state needs. While much o f the state orders and contracts systems, which the country inherited from the old Soviet central planning model, were quickly abolished, they left a legislative and proceduralvacuum that the Government began to fill on a piecemeal basis, firstly through a Resolution on State orders in 1991 and, later, by a Regulation on public works in 1993. However, neither o f these instruments came close to achieving the kind o f competitive, rules- based public procurement system that Moldova would need as an integral part o f its journey towards a market economy. By the time o f the first diagnostic survey o f public procurement in Moldova in October 1995, little progress had been made, and the Country Procurement Strategy Paper, issued in that year, found that "the regulatory and institutional framework for procurement has up until today been more or less nonexistent." The Government continued to deal with procurement by secondary legislation, issuinga further Resolution in January 1995, which introduced a blanket requirement that competitive tendering procedures should be used when practicable, although that instrument didnot provide any detailed guidance on how suchprocedures were to be executed. With assistance from the World Bank, Moldova's first significant step towards subjecting government contracts to meaningful competition was achieved by the enactment o f the Law on Procurement o f Goods, Works, and Services for Public Needs (No. 1166-XII, dated April 30, 1997), which, with several subsequent amendments, still governs public procurement today. This law provides a reasonably sound basis for the conduct o fpublic procurement (see Section C.l and Annex B for detailed commentary), albeit with weaknesses in certain provisions that detract from the transparency o f the procurement process, for example, with respect to the criteria used in the evaluation o f bids. To date, Moldova's experience with public procurement has been characterized by a low level o f compliance with the law by most procuring entities, often with unwarranted departures from the procurement law being approved by the National Agency for Govemment Procurement (NAGP). Indeed, the defining characteristic o f Moldova's public procurement system today i s the distance between good law and badpractice. Shortly after the enactment o f the procurement law, the Government established the NAGP, which together with a number o f Working Groups set up in the various procuring entities, was charged with implementingprocurement procedures on behalf o f the public institutions governed by the law. This highly centralized organizational model-unusual among Eastern European countries, most o f which have opted for decentralized procurement systems-was considered a necessary measure to tackle the chronic problems o f low compliance and weak enforcement that had undermined the effectiveness o f previous legislation. Despite its modest resources, the Agency i s generally perceived as having had a positive effect on the conduct o f public procurement, establishing itself as a center o f expertise in an area where very little exists in other institutions, and assisting procuring entities to process procurement transactions in a reasonably prompt manner. This system has now been operating in Moldova for approaching five years, so there i s a significant body o f accumulated experience on which to base an analysis o f how well it works. V Moldova CPAR Executive Summarv This first Country Procurement Assessment Report (CPAR) on Moldova comes at a time when the country has publicly committed itself to the signal departure o f acceding to the WTO Agreement on Government Procurement (GPA). It will be the first developing country inEastern Europe to do so. Given this imminent step, the whole issue o f public procurement i s currently receiving considerable attention in Moldova, not just from the Government, but also from the business community, civil society, and the International Financial Institutions (IFIs) that are active inthe country. This CPAR forms an integralpart o f the World Bank's activities inMoldova, as presentedinthe Country Assistance Strategy (CAS) o f June 2000 and the CAS update o f October 2001, and serves a number o f its key themes, particularly: Ensuring reduced and more efficient public spending: Government at all levels spend significant sums on procurement, and increasing the efficiency o f these expenditures i s essential to reducing public spending. Increasing transparency: Improving access to information on bidding opportunities and public contract spending, and reducing public officials' discretion in awarding bids are important measures for increasing transparency. Institutionbuilding:Improving the ability o f public institutions at all levels to spendpublic funds on procurement efficiently and reinforcing the institutions that regulate procurement are imperative institution-building tasks. Fighting corruption: The risks o f corruption are particularly high in the area o f public procurement, and increasing transparency, accountability, and competitiveness in public procurementi s an indispensable part o f combating corruption. Promoting access to the World Trade Organization (WTO): Reform o f procurement legislation i s an essential step in aligning Moldova legislation with the WTO Agreement on Govemment Procurement (GPA). OVERALLASSESSMENT The CPAR's key findings, including risk assessment, the strengths and weaknesses o f the public procurement system currently in place, and the main features o f a proposed action plan are summarized below. Kev Findings& RiskAssessment Moldovaspends a Public procurement represents a substantial element o f the expenditure substantialpart of its side o f the Govemment's budget. Estimates prepared for this budgeton assessment indicate that total expenditure on procurement amounted to public procurement. 1.6 billion lei (MDL) in 2002 or approximately US$118 million. Procurement accounted for 17 percent o f total expenditures by the State government and 42 percent o f expenditure by local governments (see Section (2.5. l), with expenditure at all levels showing substantial increases over past years. Improvingthe Making public procurement more cost effective can make a big efficiencyof that difference in the use o f scarce public resources. Based on the expenditure can experiences o f other countries, governments can realize savings o f as contribute to better much as 20 to 25 percent through competitive public procurement, budgetmanagement. which would hold out the promise o f savings to Moldova inthe region o f MDL400 million (US$29m) annually. vi Moldova CPAR Executive Summary Yet controlof public While Moldova's procurement law is basically sound, the practice of procurement public procurement falls some way short o f the relatively highstandard expendituresin which the law sets. Single Source Procurement, where competition is Moldovais weak completely absent, is used far too often (in 2001, 67 percent of procurement expenditure was done by with method), often in contravention o f the procurement law. The National Agency for Government Procurement (NAGP), whose primary function i s to prevent such departures from the procurement law, is fi-equently subject to political pressure and i s not held accountable for the way in which it performs its regulatory and oversight functions. andthe overall Based on this detailed analysis o f its legislative framework, the procurement effectiveness o f its regulatory functions, the strength o f its enforcement environmentis high- regime, the capacity o f its institutional resources, and the threat o f risk. corruption, the assessment found that the environment for conducting public procurement inMoldova i s one o fhighrisk. StrendhsandWeaknesses LepalFramework: Moldova's current Law on Procurement o f Goods, Works, and Services Whilethe for Public Needs (No. 1166-XII, dated April 30, 1997) is based largely procurementlaw on the UNCITRAL Model Law and provides a reasonably sound basis provides a for public procurement, including a fairly comprehensive range of reasonablysound available procurement methods. However, there are a number of basisfor public specified weaknesses in the law-for example, the provisions on bid procurement, evaluation, which are overly subjective and allow too much discretion to public officials in making contract award decisions-that, if remedied, would help create a better legislative framework for transparent procurement processes. it containssome The law contains a number o f wealmesses that have the effect o f weaknessesthat have reducing transparency in the conduct o f public procurement. Foremost anegativeeffect on among these are bid evaluation methodologies, which are based on the conductof subjective merits points systems, allowing excessive discretion to procurement, public officials inmaking decisions on awarding contracts; and wholly inadequate arrangements for the review o f protests lodged by bidders. andwill needto be An amendment to the public procurement law will be requiredto bring amendedto alignit it into alignment with the WTO Agreement on Government withthe WTO Procurement, a necessary step if Moldova is to realize its stated Agreement on intention o f acceding to that Agreement. This report presents a detailed Government analysis o f the amendments that need to be made to the procurement Procurement. law (See Annex A). It is further Since its enactment in 1997, the application o f the public procurement underminedbythe law has been undermined by the absence o f a comprehensive set of absence of implementing regulations, which would provide procuring entities with implementing detailed instructions on the correct applicationo fthe law. regulations. vii Moldova CPAR Executive Summary Procurement Many aspects o f the way in which procurement is practiced by Practices: procuring entities depart significantly from compliance with law. Procurement Primary among these is the heavy overuse of the Single Source practices are often Procurement method, whereby the procuring entity contracts directly inconsistentwith the with a single supplier, with no competition. Inmany cases, the NAGP procurementlaw, "approves" the use o f the Single Source Procurement method, even when the conditions for its use, as defined inthe procurement law, have not been met and despite the fact that the procurement law does not specifically empower the NAGP to grant such waivers. In 2001, 67 percent o f public expenditures were contracted this way, which indicates that substantial areas o f government expenditure were not opened up to competition. andweaknessesin Equally, there are weaknesses inthe provisions o fthe law that facilitate the law permitother untransparent procurement practices, without their necessarily being badpractices. inconsistent with the law. Examples of these are that the law permitsthe period allowed for bidders to prepare their bids to be as short as 10 days. Inpractice, most tenders observed for this assessment were inthe range o f 20 to 25 days, but even that i s too short to maximize competition. Also, the widespread use o f subjective systems for evaluating bids and selecting the winning bidder reduces the transparency o f this key step inthe procurement process. Organization & The NAGP provides a valued service to procuring entities, helping Resources: them at key points in the procurement process and, through the Whilethe NAGPis concentration o f procurement expertise in the Agency, helping to make seen as providinga up for a general lack o f procurement expertise in the spending valued service to institutions themselves. It has progressively increased the scope o f its procuringentities services, so that it now approves about 60 percent o f transactions (up andis progressively from 40 percent in 2000) and covers all procuring entities at the State extendingits level. coverage, itsreachis limitedat However, its coverage o f local govemment procuring entities is much the localgovernment lower, and that is where enforcement o f the procurement law is level. weakest. However, the Agency The NAGP's position, as a body under a ministry o f the government i s notbeingheld has at times meant that it has been subject to the political pressure in its accountablefor its decision malung and the Agency has not been held accountable when it performanceof its has made decisions and approved transactions which have been in regulatoryand breach o fthe procurement law. oversightfunctions and, becauseit is one An indispensable part o f any well-functioning, national public ofthe bodieswhich procurement system is an effective procedure for undertalung prompt makesthe administrative review of complaints lodged by bidders.This is also an Government's important element o f the GPA, with which Moldova will have to align decisionson itself for accession. While the provisions o fthe procurement law on bid viii Moldova CPAR Executive Summary procurement,it protest are superficially based on the provisions o f the UNCITRAL cannot act Model Law, it grants to the NAGP the function o f administrative independentlywhen review. Because the NAGP therefore plays both an executive and an reviewingbid approving role in public procurement transactions (it issues bidding protests. documents to the bidders and approves Working Parties' evaluation o f bids and contract award decisions), it fails the crucial test o f independence when conducting suchreviews. Procuringentities The staff of procuring entities who serve on Working Groups are lackthe capacityto generally not trained inprocurement. At the State level, most ministries conductprocurement have only one person who works full-time on procurement-an effectively and in inadequate allocation o f human resources, considering the value o f the accordancewiththe expenditures involved. Also, the Government has no means of procurementlaw, providingprocurement training to civil servants. andthere is political The inclusion o f ministers in the Working Groups that make interferencein procurement decisions, including decision on awarding contracts, procurementdecision means that the procurementprocess is subject to political interference. making. Action PlanSummary The current This report recommends that an amendment to the procurement law procurementlaw should be enacted to align it with the GPA, consistent with shouldbeamended, Government's publicly stated intention o f acceding to that agreement. Simultaneous with this amendment, the Government should effect a much-needed overhaul o f the procedures and institutional arrangements for administrative review o f bid protests, which will be required for GPA accession. andthe Government It is also recommended that the Government should enact a should enact a comprehensive series o f implementing regulations inorder to underpin comprehensiveset of the procurement law and to provide procuring entities with detailed implementing instructions on its correct application in key areas. In the short term, regulationsto regulations are required on such matters procurement planning, underpinthe law. assessmento fbidders' qualifications andbidevaluation. The positionof Inorder to address the current weakness of the NAGP and to bolster it ExecutiveDirectorof against political pressure, the position o f Executive Director o f the the NAGPshouldbe Agency, which has been left vacant for several months, should be filled filledimmediately. as soon as possible. The NAGPshouldbe In order to increase the accountability o f the NAGP to the recently heldmore established oversight committee, the Executive Director o f the NAGP accountablefor the should be required to submit a written Monthly Report on the performanceof its Performance o f Public Procurement and the Executive Director should functions. be required to present the report inperson into the full committee. The Executive Director's monthly report should be published. The Annual Report o f the oversight committee to the Government should also be published. ix Moldova CPAR Executive Summaw New institutional Given the NAGP's close and continuing involvement in executing arrangementsshould procurement, it is clear that it can no longer exercise the function of be madefor the administrative review of protests lodged by bidders, who are often independentreview appealing against a decision which the NAGPhas been party to making of bidprotests or has approved. Therefore, an independent commission, comprised of independent experts, should be created to review procurement protests. Itis necessaryto The NAGP should be, and be seen to be, both the key resource center buildpublic sector for public procurement in Moldova and the champion o f good capacityto undertake procurement practice by all institutions. To achieve that goal, the public procurement NAGP should both lead by example, by adhering to the procurement law in its own dealings, and should enhance its ability to develop the capacity o f other institutions by establishing a Training Division. This Division should take the lead in both developing and delivering procurement training materials and training courses for members o f Working Groups and the staff o f procuring entities. The Training Division should also take the lead inthe development o f tools that could help promote good procurement practices, such user manuals and informational booklets, some o f which could, in the future, be website- based. The Training Division should also take the lead in partnering with other public sector training institutions, such as the Public Administration Academy, to develop and deliver regular procurement training courses for civil servants. As a short-term action, given the urgent need to train the dedicated procurement staff o f the 35 recently establish territorial administrative units,the NAGP should conduct training courses inpublic procurement for those unitsby the end o f 2003. X Moldova CPAR Preface A. PREFACE A.l Date andBasesfor the Report This report was completed on June 30, 2003. It is based on the results of interviews with more than 50 organizations, including public institutions, private companies, and NGOs, during ajoint World Bank-EBRD mission that visited Moldova from October 21 to November 1, 2002. The mission held discussions with public sector institutions at national,judet (county), and city levels of administration, as well as with many private sector companies, both local and foreign, that participate in public tenders in Moldova. The assessment i s also based on a detailed analysis o f the laws, documents, and other information collected by the mission, as well as on questionnaires completed by several organizations as part o f the assessment. A draft o f this report was sent to the Govemment for its consideration in April 2003 and a World Bank mission visited Chisinau on June 2-6, 2003 to discuss the draft report with the Govemment. The draft report was discussed at a meeting of the Government's Steering Committee for the assessment, chaired by Mr. Vasile Mamaglia, First Deputy Minister o f Economy, in individual meetings with key institutions (NAGP, Ministryo f Economy, Court o f Accounts, Centre for Combating Economic Crimes and Corruption), as well as at a plenary meeting attended by representatives o f many public entities govemed by the public procurement law. The Ministry o f Economy also provided the Bank with written comments on the draft report, by its letter dated June 2, 2003. This final version o f the CPAR reflects the Govemment's comments and agreements reached between the Government and the Bank. A.2 Acknowledgements The mission members wish to acknowledge the extensive cooperation and assistance received from officials and staff o f the Moldovanpublic organizations, state agencies, NGOs, and private companies interviewed during this assessment. In the World Bank, Mr. Luca Barbone, Country Director, and Ms. Kazuko Ogawa, Senior Country Officer, offered invaluable guidance on the scope and overall direction o f the assessment. The staff o f the Bank`s Chisinau office offered the mission invaluable assistance. Mr. Ranjan Ganguli, Consultant, who led the related Country Financial Accountability Assessment (CFAA), provided essential inputsto the assessment and the report on accountability and auditing issues. Mr. V.S. Krishnakumar, Lead Procurement Specialist (AFTPC); Mr. Neil Parison, Senior Public Sector Management Specialist (ECSPE); and Mr.Lawrence Hannah, Lead Economist (ECSPE) acted as peer reviewers for the report. A.3 ParticipatingGovernment Organizations The assessment was conducted in consultation with counterparts from the National Agency for Government Procurement (NAGP), the Ministry of Economy, the Ministry o f Finance, and the Court o f Accounts. Oversight o f the assessment on the Government's side was provided by a Steering Group, comprising representatives o f the above organizations and chaired by Mr.Vasile Mamaglia, FirstDeputy Ministero f Economy. A.4 WorldBank-EBRDTeam The joint World Bank-EBRD team that worked on this report comprised Mr. Shaun Moss, Lead Procurement Specialist, World Bank (Task Team Leader); Mr.Jan Jackholt, Senior Procurement Manager, EBRD; Mr. Richard Gargrave, Procurement Specialist, World Bank; Ms. Elena Nikulina, Economist, World Bank; Mr. Peter Trepte, Legal Consultant; Mr. Harold McKittrick, Construction Industry Consultant; Mr. Nicolae Esanu, Legal Consultant; and Mr. Laurentiu Ionesii, Researcher. Moldova CPAR Background B. BACKGROUND B.l HistoricalBackground Modem Moldova consists o f the former territory o f Bessarabia, which belonged to Romania for much o f the nineteenth and early twentieth centuries, and the Transdniestr region east o f the Nistru River, which Tsarist Russia claimed in the early nineteenth century. These two regions merged to form the Moldovan Soviet Socialist Republic (SSR) in 1940, following the German- Soviet non-aggression pact, which ceded a substantial tract o f Romanian territory to the Soviet Union. As the Soviet Union tried to eradicate the temtory's historical and cultural links to Romania, russification proceeded apace throughout the remainder o f the twentieth century, with large-scale immigration from Russia and Ukraine into Moldova, the replacement o f the Latin script with Cyrillic, and the change inthe country's official name from Romanianto Moldovan. The policy o f glasnost (openness) introduced by Soviet leader Mikhail Gorbachev from 1986 fostered the emergence in the Moldovan SSR o f independent political groups seelung national and cultural independence. In 1989, Soviet authorities yielded to popular pressure by reintroducing the Latin script and reestablishing Moldovan as the official language, in place o f Russian. In elections to the Supreme Soviet (parliament) in February 1990, deputies with nationalist sympathies began to dominate. Moldova gained full independence on August 27, 1991, soon after the failed coup attempt against Gorbachev inMoscow. The Transdniestr region, with a predominantlyRussian and Ukrainian ethnic population, regarded Moldovan independence as an ominous first step towards reunification with Romania and voted for autonomy from Moldova in September 1990 and for independence in 1991. With the Government in the capital city, Chisinau, refusing to recognize the region's aspirations, civil war broke out in January 1992. By the time a ceasefire was agreed in July 1992, the separatists had gained control over the whole Transdniestr region. Since then, Transdniestr has operated a form o f quasi-independence, pursuing its own policies, electing its own president, adhering to the Cyrillic script, and operating its own currency. The standoffbetween Moldova and the breakaway Transdniestr region has persisted throughout the past decade and, although Transdniestr signed an agreement in mid-2002 to negotiate a settlement based on the concept o f federalization, talks on such an agreement have yet to get under way. The failure to make progress in resolving the split with Transdniestr has stymied Moldova's attempts at economic regeneration, particularly as most o f the country's industrial base remains out o fbounds inTransdniestr. B.2 Country Context Moldova has suffered one o f the deepest post-transformation recessions in the Commonwealth o f Independent States (CIS) and, until 2000, had not registered any economic growth. As a result, it i s now Europe's poorest country, with GDP per capita in 2001 o fjust US$400, about one third o f pre-transition levels. With a population o f 4.28 million, it i s also the second smallest country in the CIS, after Armenia. Although economic growth has been under way since 2000, some 55 per cent o f Moldovans, that i s 2.4 million people, live below the absolute poverty line o f US$2.15 per day. The Government considers poverty reduction to be its major challenge and plans to formulate a PovertyReduction Strategy Paper (PRSP) inFY03. 2 Moldova CPAR Background Both the 1999 Country Assistance Strategy (CAS) and the M a y 2002 Progress Report have focused on three interrelated objectives: macroeconomic stability and growth, private sector development, and public sector reform. These objectives continue to frame the key development challenges for Moldova, under the broad goal o fpoverty reduction. Attracting private capital will require the completion o f the privatization o f important enterprises, the continued restructuring and privatization o f the energy sector, and the creation o f an investor- friendly business environment. Public administration reform and an improved publidprivate interface, including legal and judicial reform, are also essential elements o f a strategy to reduce corruption and strengthen governance. Inthe area o fpublic expenditure management, the Govemment has made commendableprogress, particularly inthe areas o f budget execution, cash management, and debt management. There i s a budget system law, consistent with international standards, and a single treasury system i s operational at the state and local levels. The World Bank has carried out a Public Expenditure Management Review (PEMR), including an analysis o f public expenditures and institutional issues. A sign o f the importance which the Govemment attaches to public financial management and accountability, and allied to its plans to strengthen the audit and accounting functions, the Government has requested the Bank to conduct both a Country Financial Accountability Assessment (CFAA) and this Country Procurement Assessment Report (CPAR) inFY03. B.3 World BankPortfolio inMoldova The May 2002 CAS Progress Report presents total IDA lending o f up to US$lOS million as the base case for FY02-03. Of this, up to US$40 million would take the form o f adjustment lending, with the remaining up to US$68 million beinginvestment lending. The level o f IDA'S assistance to Moldova would be predicated on satisfactory macroeconomic performance, the formulation and implementation o f the PRSP, satisfactory implementation o f the reform program supported by Structural Adjustment Credit (SAC) 111, and the continued satisfactory performance o f the IDA portfolio. The World Bank's portfolio inMoldova currently comprises a single IBRD loan and seven IDA credits totaling US$123.4 million (see Table 1). A total o f 23 loans and credits, totaling US$334 million, have been completed. The current pipeline contains five new projects totaling US$90 million. 36670 Structural Adjustment Credit (SAC) 3 2002 2003 33.3 Total: 8 Projects 123.4 3 Moldova CPAR Backnround B.4 EBRDPortfolioinMoldova EBRD's lending portfolio inMoldova has recently placed increasing emphasis on private sector operations, as public sector projects have beenrestructured or downsized due to the aftereffects o f the 1998 economic crisis in Russia. No new sovereign project has been signed during the last 2 years. However, significant achievements were made in the private sector through new projects, with a total EBRDparticipationo f about EUR40 million. Looking forward, EBRD's objective i s to expand its activities mainly in the private sector, prioritizing SME and micro-enterprises, privatization and post-privatizationsupport, and portfolio management. Information on current EBRD-funded projects inMoldova i s contained inTable 2. Table 2. Moldova: Current Compositionof EBRDPortfolio Private/Public 4 Moldova CPAR Public Sector: Findings C. FINDINGS PUBLIC SECTOR This section reviewsthe mainlegalenactments that currently governpublic procurementin Moldova, records the scope of application of the applicable enactments, and examines the extent to which legal texts are accessible to the public. In a related area of legal operations, the section also examines the arrangementsfor arbitration inMoldova. c.1 Legal and RegulatoryFramework c.1.1 LegalInstrumentsIssuedto Date Moldova's current L a w on Procurement o f Goods, Works, and Services for Public Needs (No. 1166-XII, dated April 30, 1997) i s based largely on the UNCITFUL Model Law and provides a reasonably sound basis for public procurement. It was prepared with assistance from an intemational legal consultant, financed by an Institutional Development Fund (IDF) grant from the World Bank. The Bank reviewed and commentedon the law inits draft form. That said, the law contains a number o f weaknesses, which have the effect o f reducing transparency inthe conduct o f public procurement. Foremost among these are: (i) bid evaluation methodologies that are based on subjective merit point-based systems, rather than on objective criteria; (ii) limited provisions on the procurement o f consultants' services; and (iii) inadequate arrangements for the review o f bid protests. Administrative review o f bidders' appeals i s undertaken by the National Agency for Government Procurement (NAGP). Given the close involvement o f the NAGP in the execution o f public procurement, including both the conduct o f procurement procedures and the approval o f award decisions, the ability of the NAGP to act independently inreviewing bidders' appeals i s clearly open to question. Looking to the future development o f the legal framework and given Moldova's stated aspiration o f acceding to the Agreement on Government Procurement (GPA) o f the World Trade Organization (WTO), part o f this assessment comprises an evaluation o f the compatibility o f the current law with the GPA. The findings o f this assessment are summarized inAnnex A. While the Moldovan procurement law i s compatible with the GPA in many salient respects, there are a number o f provisions, notably those relating to bid protest, that would require amendment in order to enhance compatibility with the GPA. Since its adoption, the application o f the public procurement law has been undermined by the absence o f a comprehensive set o f implementing regulations. While accurate information on sub- legislative enactments often proves difficult to obtain inMoldova, the following acts are the main sub-legislative instruments applicable to public procurement: 0 Government Decree No. 1217 (December 31, 1997) on the National Agency for Government Procurement establishes the NAGP as a state institution established within the Ministry o f Economy, defines its budget, and authorizes it to conduct procurement proceedings "jointly with the Working Groups." This decree also defines the duties, rights, and functions o f the NAGP and its management structure. In addition, the decree defines a number o f categories o f goods, works, and services that the State needs to procure, and defines the main "state beneficiary" or end-user for each category. 5 Moldova CPAR Public Sector: Findings 0 By Government ResolutionNo. 595 (June 25, 1999), the NAGPwas empowered to enact regulations concerning the procurement o f goods and services. As a result, by an Act dated November 17, 1999, the NAGP adopted Regulations on the Procurement Contracts o f Goods and Services for State Beneficiaries. Government Resolution No. 595 itself introduced a provision prohibiting the artificial splitting o f contracts with a view to avoiding the threshold levels contained inthe law. 0 By operation o f Articles 53 and 55 o f the law, any regulatory acts preceding the enactment o f the law are to remain applicable to the extent that they are not incompatible with the law. The Government is, inaddition, requiredto revise all existing and effective legislation to bring it into line with the law. Order No. 173 o f the Department o f Architecture and Construction (December 30, 1996) established Regulations on Contracting o f Public Investments, which were adopted pursuant to Government Decision No. 711 (December 19, 1996). Under the law, these remain in force, provided that they are not incompatible with the law. The Regulations are essentially concerned with contract conditions. 0 Decree No. I l l - d (December 1, 2002) established a "mixed committee" to carry out oversight o f the application o f the public procurement law by the procuring entities and the NAGP. 0 Regulation No. 78 (March 5, 2003) on the Working Groups for the Procurement o f Goods, Works and Services, amplifies the provisions in the procurement law on the operation o f Working Groups and further defines their functions, duties and rights. 0 A new Regulation on the List o f Qualified Suppliers, which was indraft form at the time when the draft CPAR was discussed with the Government in early June 2003, proposes clearer and more detailed guidance on the registrationo f suppliers by the NAGP. 0 A Decree, which had been signed by the Prime Minister but hadnot yet come into effect as of early June 2003, proposes a Regulation on Single Source Public Procurements. This regulation would require all procuring entities to obtain the prior approval o f the NAGP for all uses o f Single Source Procurement but would also exclude from NAGP approval the use o f Singe Source Procurement for the procurement electricity, heating, natural gas, water supply, sewage services, telecommunication services and services for the transportation o f solid waste. While the NAGP has made efforts to make the applicable implementing regulations more comprehensive, often in response to weaknesses in the legislative framework for public procurement identified by key stakeholders, not all developments have been inthe right direction. For example, the recent Regulation on Single Source Public Procurements unnecessarily proposes to exclude the application o f SSP for the procurement utility services from the prior approval o f the NAGP. This would have the effect o f allowing procuring entities to contract directly with a chosen provider by SSP, even in cases where there i s more than one potential supplier. While the use o f SSP for utilities requirements i s often justified, given the high degree o f concentration in the supply market, nonetheless, new, private-sector competitors are opening for business in certain market segments (for example, electricity supply, mobile telephony) and this new regulation runs the risk that these new suppliers would be denied the opportunity to bid for government contracts. Despite the NAGP's energetic efforts to complete the legislative framework, there remain gaps in the secondary legslation inkey areas, notably on procurement planning, pre-qualification and bid evaluation. In the absence o f such instruments, the assessment i s forced to conclude that the legislation framework for procurement remains incomplete. It i s certainly the perception o f 6 Moldova CPAR Public Sector: Findings NAGP's management that the main weakness o f legal framework i s the absence of detailed implementing regulations to underpin the law. A detailed commentary on the current Law on Procurement of Goods, Works, and Services for Public Needs i s provided at Annex B to this report. c.1.2 ScopeofApplicationof CurrentEnactments The scope o f application o f the current law encompasses all procurement carried out for state needs using public funds. The definition o f public funds includes the State budget, budgets o f administrative territorial units, the State social insurance budget, extra-budgetary funds, extra- budgetary funds o f public institutions, and foreign borrowing related to direct or guaranteed public debt. This scope includes defense procurement but excludes state-owned enterprises. The law specifically excludes procurement financed by international agreements where such agreements provide for the application o f other procurement procedures, such as loans from the World Bank. In addition, the law does not apply to low-value contracts, that is, contracts for goods and services below MDL 10,000 (US$700) and for works below MDL 20,000 (US$1,400) invalue. Itwouldnonetheless bepreferable to specify how fundsbelowthese thresholds areto be spent. This could be done inimplementingregulations. C.1.3 PublicAccess to LegalTexts The right o f every natural and legal person to have access to legal texts i s provided for inArticle 76 of the Constitution o f the Republic of Moldova. According to this article, laws are published in the Monitorul OJicial a1 Republicii Moldova (The Official Monitor o f the Republic o f Moldova) and enter into force on the date o f publication, or a specified date subsequent to the publication. This i s also provided for in Law No. 173 of July 6, 1994, on the Publication and Entering into Force o f Official Acts. However, until the adoption o f Constitutional Court Decision no. 32 o f October 29, 1998 on interpreting Article 76 o f the Constitution, there existed many cases where legal texts were not published at all or where the legal act entered into force before its publication. Currently, such problems exist mainly in regard to departmental acts. For example, the Ministry o f Finance adopts instructions on the application o f the fiscal legislation that are not published inthe Official Monitor. The practice o f the courts inrespect o f such acts i s ambivalent: there are cases where the MinistryofFinance's officially unpublishedinstructions are declarednullandvoidbutthere have also been cases inwhich such instructions have been applied by the courts. Inprinciple, therefore, officialtexts ofnormativeactsareaccessible for usersthroughtheOfficial Monitor but there are problems with accessibility. These problems include the fact that the quantity o f published editions o f Official Monitor i s smaller than the number o f potential users and that, with the passage o f time, earlier editions become difficult to obtain. For example, Official Monitor No. 67-68 (October 16, 1997), which contained the procurement law had a print runofonly 3,790 copies and is currently out ofprint. A useful measurement o f the difficulty private enterprises have in obtaining information about laws and regulations o f relevance to their business has been provided by the Business Environment and Enterprise Performance Survey (BEEPS) in 2002. This survey asked 174 Moldovan enterprises the question, "Do you agree with the statement that information on laws and regulations i s easy to obtain?" The responses, reproduced in Figure 1 below, indicate that 7 Moldova CPAR Public Sector: Findings access to information on laws i s a significant concern, as 46 percent o f respondents disagreed with the statement to varying degrees. Figure1:Easeof ObtainingInformationonLaws and Regulations, 2002 Do You Agree With the Statement that Informationon Laws and RegulationsIs Easy to Obtain? 140 35 I 30 ':: 25 ~ I 10 5 0 Fully agree Agree in most Tend to agree Tend to Disagree in Strongly cases disagree most cases disagree C.1.4 Moldova's PlannedAccessionto the WTO Agreementon GovernmentProcurement Moldova i s currently an observer to the GPA and has completed the first step in the accession process, the completion o f the accession questionnaire. It i s currently preparing itself for the next step, which consists o f submission o f the economic "offer" containing the lists o f entities, contracts, and sectors to be covered, together with proposed thresholds and indication o f the value o f the export markets (i.e., the markets o f the current members it intends to exploit) and import markets (i.e., the value o f its own markets which will be open to participationby bidders from the current membership) to be opened up. Given Moldova's current economic circumstances, Moldovan industry i s unlikely to be able to benefit greatly, at least in the short term, by its anticipated right to bid on overseas contracts in current GPA member countries, given their size and sophistication. Interms o f the opening o f its public import markets to bidders from current GPA member countries, those bidders are unlikely to benefit greatly either because, given the paucity o f public funds, very few public contracts fall above the standard GPA thresholds. Those high-value public contracts that are awarded in Moldova are generally funded by International Financial Institutions (IFIs). They are, therefore, governed by the relevant IFI's own procurement guidelines and should be exempted from the application o f the GPA. As Moldova's GPA accession will depend not only on the acceptability o f its offer to the GPA but also on the compatibility o f procurement law with the GPA, it i s anticipated that the incompatibilities between the current law and the GPA, highlighted in Annex A to this report, will have to be resolvedbefore accession. 8 Moldova CPAR Public Sector: Findings C.1.5 Arbitration Inthe caseofcontractual disputes, Moldovahasinplaceprovisionsregulatingarbitration. These are contained both in the Law on Arbitration (1994) and in the Regulations o f the Chamber of Commerce and Industry, which is, effectively, the only body seeking to provide a framework and procedural rules for intemational arbitration. Both sets of provisions are based on the UNCITRAL Arbitration Rules. The Chamber o f Commerce and Industry regulations provide a set of procedural rules that govern international arbitration. The Chamber o f Commerce and Industryhas a permanent panel o f arbitrators, lawyers approved by the Board o f the Chamber o f Commerce and Industry, who constitute its International Commercial Arbitral Tribunal. Parties adopting the arbitration procedure o f the Chamber o f Commerce and Industry, either by way of contractual clause or by way o f an ad hoc appointment, may select arbitrators from this panel, which currently number 34 arbitrators. The main difficulty faced by these arbitrators i s their lack o f experience and training. Their lack o f experience stems in part from a lack of practice, given that arbitration i s little used in the country. Currently, barely 1percent o f economic disputes are resolved by way o f arbitration and no more than 10 arbitrations annually have been commenced at the initiative of foreign parties. 9 Moldova CPAR Public Sector: Procedures, Practices and Application C. 2 Procedures,PracticesandApplication-How Government Buys This sectionprovidesa step-by-step commentaryon the applicationof the procurement law in practice, from planning through tendering to contract administration. It highlights how weaknessesand gaps inthe legislation, as well as the absenceof effective enforcement of the law, translate into diminished levels of transparency, competition, and fairness in the procurementprocess. c.2.1 ProcurementPlanning Procurement planning, particularly as it regards the choice o f procurement method and the packaging o f procurement requirements for tendering, i s one area where there i s a great disparity between what the law prescribes and what happens inpractice. A recent amendment to the procurement law has strengthened the requirement for the annual planning o f procurement expenditures and has introduced a specific requirement that a Working Group must procure its entire annual requirement o f specific goods, works or services in a single contract, except inthe case o f perishable goods such as foodstuffs, where such an approach would be infeasible. The law also contains a related prohibition against breaking down procurement requirements inorder to avoid usingOpen Tendering. Provisions that encourage good practice inprocurement planning can also be found inthe Law on Budget, which requires each procuring entity to prepare an annual cost estimate for all its procurement requirements. Also, the checks and balances applied by the NAGP and the M o F Treasury system look good in practice but frequently break down, for example, because o f excessive use o f waivers by NAGP for the use of Single Source Procurement or by shortfalls in the budget that disruptpayments under procurement contracts. Both the anecdotal evidence collected during interviews and the data obtained by surveying contracts (see Section C.5.2) indicate that good provisions in the law often do not work in practice. For example, the heavy overuse of Single Source Procurement, which accounted for 67 percent o f contracts by value in 2001, starkly illustrates the fact that procuring entities do not pay adequate attention to the planning and packaging o f procurement requirements in order to promote competition. Disruptions to procuring entities' annual budgetary allocations during the financial year also inhibit effective procurement planning, as plannedprocurement actions have to be abandoned or curtailed. As Annex E illustrates, the value o f procurement actually implemented by the State Government regularly falls below the budgeted level: in2001, actual expenditure on procurement reachedjust 71percent o fthe plannedlevel o f expenditure. c.2.2 EligibilityofBiddersto ParticipateinPublicProcurement While the procurement law takes among its objectives both "large-scale participation by bidders inpublic procurement procedures'' and "the development of competition between them," it also contains various provisions that undermine these laudable objectives. Firstly, low-value tenders are restricted to domestic biddersbelow the following thresholds: I O Moldova CPAR Public Sector: Procedures, Practices and Application Table 3. Thresholdsbelowwhich Tenders maybeLimitedto DomesticBidders 450,000 3 1,770 63,550 Services Even above these thresholds, the procurement law gives the NAGP the discretion to limit participation in procurement procedures to domestic bidders when it thinks that such a limitation "is in the interests o f the State." This criterion is both subjective and difficult to define; the only requirement for its application appears to be that the justification for invokmg it must be recorded inthe written report ontheprocurement proceedings. As the survey o f contracts undertaken for this assessment demonstrates, the level o f participation by foreign bidders inpublic tenders is extremely low and tends to happen only when the required goods cannot be supplied from within Moldova (for example, pharmaceuticals not manufactured by local producers) and, inthese cases, the procuring entity often invites specific foreign bidders directly. Even then, there i s seldom more than one foreign bidder for eachrequirement. It must also be recognized that there are other factors at play, extraneous to the public procurement system itself, which make Moldova an unattractive market for foreign bidders. Foremost among these are the remoteness and unfamiliarity o f the Moldovan market, the high risko flate payment andthe general unattractiveness o fthe businessenvironment. C.2.3 Assessmentof Bidders' Qualifications The procurement law has reasonably comprehensive provisions on the assessment o f bidders' qualifications, which may be done at any time during the procurement process, as either pre- or post-qualification. The law requires a bidder to provide documents recording their managerial competence, reputation, professional staff, financial and technical capacity, competence to execute the contract, solvency, regular payment o f taxes and other mandatory payments, and that the bidder has not been subject to any penalty for submission o f false information or failure to perform a contract during the previous five years. The procurement law also establishes the minimum contents o f pre-qualification documents and imposes on the Working Group an obligation to disseminate them to all interested applicants. The law provides further that only those qualification criteria specified in the pre-qualification documents may be applied in the assessment o f applications. Pre-qualification procedures are conducted by the relevant Working Group and are subject to approval by the NAGP. While the legal provisions are reasonably comprehensive, practice does not meet the same standard. A sample o f bidding documents issued by the NAGP, surveyed for this assessment, displays a confused approach to the assessment o f bidders' qualifications. On the one hand, bidding documents require the Working Group to reject a bid "if the bidder does not meet the qualification requirements." On the other hand, however, the bidding documents do not specify any minimum qualification requirements in important areas such as the bidder's financial turnover, liquid assets, and specific experience. Rather, the requirements appear to be limited to a l i s t o f documents the bidder i s required to submit as part o f his bid, plus a request for references, butthe biddingdocuments give no indication as to how these will be assessednor o f qualification criteria or standards. Inthe case o f Rehabilitation Works for the Appeal Court Building, launched inJuly 2002, bidders' qualifications were assessedusinga merit-point system that combined the Moldova CPAR Public Sector: Procedures, Practices and Application bidder's bid price with his qualifications in respect o f experience, personnel, technical methodology, and financial solvency. Again, such an approach exhibits an untransparent approach that mixes the assessment o f the bidder's qualificationswith the evaluation o f his bid. The recent preparation by the NAGP o f a Regulation on the List o f Qualified Suppliers (see Section C.1.1 above) envisages the creation and maintenance by the NAGP o f a register o f suppliers. A preliminary review o f this draft regulation indicates that it will place on suppliers a heavy and expensive bureaucratic burden to submit a large number o f documents, many o f which have to be notarized. Also, it i s not clear how foreign firms would be affected by the requirement to submit several documents which appear to be uniquely Moldovan. While this regulation may have been written ina well-intentioned attempt to reduce the risk o f fnvolous or unqualified firms winning public contracts, there i s a real risk that it could be applied in a discriminatory manner, which might have the undesirable effect o f lessening competition. To avoid arbitrary exclusion, it i s essential that the register should remain open to new applicant companies at all times and that it should be updated at regular intervals. C.2.4 ProcurementMethods As shown inBox 1, the procurement law provides for a fairly comprehensive range o f available procurement methods. While the law establishes Open Tendering as the main method o f public procurement, it also provides a good range o f other methods applicable to different circumstances. These include a Request for Price Quotations method for low-value procurements, a Special Restricted Procedure for defense procurement, and a Single Source Procurement method, which, according to the law, may be used only if specific conditions are met. Inthe range o fprocurement methods it offers, the law follows intemational good practice. Where Moldova's procurement system falls down, however, i s in the fact that some o f these procurement methods are seldom, if ever, used. The CPAR assessment found that Single Source Procurement i s heavily overused-indeed, abused. As Section C.5.2 amply demonstrates, Open Tendering was used for only 30 percent o f contracts by value, in 2002, with 40 percent being procured by Single Source Procurement, and the remaining 30 percent by Request for Price Proposals. Even when procurement methods other than Single Source Procurement are used, the rules applicable to these methods are often not respected. For example, data collected for this assessment demonstrate that the Request for Price Quotations, for which a minimum o f three quotations should be obtained, i s often little more than a surrogate form o f Single Source procurement, with only one quotation being received. C.2.5 FinancialThresholdsApplicableto ProcurementMethods The financial thresholds are not set out at all clearly in the law. In the current text, different thresholds apply for different purposes by operation o f Article 17(2), which deals with the language o f the bidding documents; Article 21, which provides a figure below which goods, works, and services contracts may be awarded by the RestrictedProcedure; and Article 23 which applies the Request for Price Quotations method in the case o f goods and services. The various thresholds applicable to the procurement o f goods, civil works, and services are set out in Table 4. 12 Moldova CPAR Public Sector: Procedures, Practices and Application Procurement Method Works Goods Services I Request for Price Quotations 20,000-1,000,000 10,000-45,000 Restricted Procedure 20,000-225,000 10,000-225,000 Open Tendering >225,000 Procedures Limited to Domestic Bidders 225,000-50,000,000 1O,OOO-450,000 10,000-225,000 International Procedures >900,000 >450,000 >225,000 Procurement law does not apply <20,000 < 10,000 However, given the widespread overuse o f the Single Source Procurement method, these thresholds appear to have little impact on the actual operation o f procurement, as they are seldom applied inpractice. C.2.6 Formsof Communications The procurement law requires that procurement-related communications between the NAGP, Working Groups, and biddershppliers should be in writing or, where verbal communications take place, should immediately be confirmed inwriting. Inrespect o f procurementprocedures for standardized goods, the law also provides that bidders may submit their bids by fax, in accordance with procedures definedby the NAGP, though this was not observed to be a common occurrence. The current law makes no provision for electronic forms o f communication, such as e-procurement, and this practice has not yet started in Moldova. Indeed, the NAGP does not yet have its own website. C.2.7 SolicitationofParticipationinProcurementProceedings The procurement law requires the NAGP to advertise invitations for pre-qualification and invitations to bid in the Public Procurement Bulletin (PPB), which the NAGP publishes in the form o f an advertisement in a national newspaper (the NAGP has yet to start issuing a specific publication dedicated to public procurement). Inpractice, invitations to tender are also frequently broadcast on nationalradio. Working Parties route advertisements through the NAGP, which arranges publication. Advertisements are usually published two to four days after the NAGPreceives them, though the CPAR assessment also noticed cases when this period was much longer, typically when the advertisement had been inaccurately drafted by the Working Party and the NAGP returned it for correctionto bring it into line with the minimumrequirements stipulated in the procurement law, which are fairly comprehensive. In this respect, NAGP plays a useful quality control role and does not seem to add delay to the process. While the law requires that, inthe case o f international tenders, advertisements be published in Russian or English, there was little evidence that this happens in practice. The requirements for advertising are rather unclear, in that they are not linked to a particular procurement method or financial threshold. Therefore, the same advertising requirements seem to apply equally to all procurement methods, even those, such as Request for Price Quotations and Single Source Procurement, which would not normally require advertising inother national procurement regimes. Moldova CPAR Public Sector: Procedures, Practices and Application Box 1:Procuremen Conditionsof Use 14 Moldova CPAR Public Sector: Procedures, Practices and Application C.2.8 TechnicalSpecificationsand Standards A further strength of the procurement law is that it contains a specific requirement that technical descriptions of procurement requirements in bidding documents should be based on objective characteristics and that proprietary terms, trademarks, and brand names should not be employed. Inpractice, technical descriptions used in bidding documents are not very detailed, usually because procuring entities lack the qualified technical staff to prepare high-quality technical needs definitions. In an improved procurement environment where less use i s made o f Single Source Procurement, the needto have sound and impartial technical definitions will become more important. Moldovan technical standards have their origins in GOST standards from the Soviet era. Recently, given the preponderance o f its trade with CIS countries, the Department o f Standards and Metrology has developed a series o f inter-state standards, which are recognized by the country's CIS trading partners. However, the process o f harmonization o f Moldova's national standards with international standards, such as EU standards, i s only just beginning. In that respect, the use o f national standards in describing procurement requirements risks being another barrier to participation inpublic tenders by foreign bidders. C.2.9 BiddingDocuments While the Working Party in the end-user organization is responsible for drafting the bidding documents, using a set o f standard bidding documents developed by the NAGP, in practice the NAGP usually collaborates closely with Working Parties to help them finalize the documents before they are submitted for NAGP's approval. The NAGP issues the'bidding documents to biddersand charges a fee for their sale, the level o f which may not exceed the cost o f production and distribution, and i s generally set around MDL400 (USD$28). The law sets out a comprehensive set o f minimum contents for bidding documents, which must include the qualification requirements, the bid evaluation criteria, and the procedure for their application. The draft form o f contract i s also included inthe biddingdocuments. The assessment team reviewed a sample o f bidding documents actually issued by the NAGP, including documents for the procurement o f goods and works. While these documents contain some o f the elements o f Standard BiddingDocuments (SBDs) issued by organizations such as the World Bank, they also exhibit many gaps. In short, they are redolent o f the disparity, noted throughout this report, between the reasonably sound provisions o f the law and a level o f practice that falls some way short. c.2.10 Time Allowed for Preparationof Bids The deadline for submission o f bids i s set by the procurement law at no less that 10 days and no more than 45 days after the date o f issue o f the bidding documents. Based on a survey o f contracts awarded by the Open Tendering method conducted for this assessment (see Annex C), the observed range was from 13 to 30 days, with most being between 20 and 25 days. The survey found some instances where the period allowed was clearly inadequate for the high value o f the contract, for example, 13 days allowed by Toma Ciorba Hospital for an Open Tender for Medical Equipment (contract price MDL 499,382 / US$35,256) and 20 days allowed by the State Fiscal Department for an Open Tendering procedure for the Printing o f Invoices (contract price MDL 4,332,000 I US$305,839). 15 Moldova CPAR Public Sector: Procedures, Practices and Application It is clear that 10 days is too short a biddingperiod for all but the lowest-value requirements and simplest procurement procedures, and the presence o f such a short biddingperiod in the law i s open to abuse. For example, a procuring entity that wishes to favor a specific bidder could alert that bidder to its procurement requirement well before issuing the bidding documents to other bidders, thus giving its favored bidder ample time to prepare it bids, then issue the bidding documents to all bidders but with a very short period o f time allowed for bidders to prepare and submit their bids.This would have the effect of restricting competition by making it difficult for bidders to submit their bids on time-a difficulty that i s exacerbated for foreign bidders, who need time to transmit their bids to Moldova-and o f making it easier for the favored bidder to win the contract. c.2.11 ClarificationandModificationof BiddingDocuments The law, and the bidding documents reviewed for this assessment, allows bidders to seek clarification o f biddingdocuments duringthe biddingprocess and commits the NAGPto provide a written response to all bidders. The NAGPmay also extend the deadline for submission o f bids, ifnecessary, to enable biddersto reflect any changes inthe biddingdocuments intheir bids. c.2.12 Language The norm i s that all procurement documents @re-qualification documents, invitations to bid, bidding documents, bids, and contracts) are written in Moldovan, the national language. However, the law provides that such documents may also be in Russian or English, where the nature o f the procurement requirement necessitates attracting foreign bidders (pharmaceuticals not manufactured inMoldova i s a pertinent example) or where the estimated value o f the contract i s above the same thresholds below which tenders may be limited to domestic bidders (see Section C.2.2 and Table 3). Russian i s the preferred language for intemational tenders, which i s hardly surprising, as Russian i s widely spoken in Moldova and i s the language used in neighboring countries, such as Russia, Ukraine, and other CIS countries, with which Moldova does much o f its foreign trade; in the first six months o f 2001, CIS countries accounted for 64 percent o f Moldovan exports and 37 percent o f imports. However, the almost exclusive use o f Russian in international tenders i s no doubt having a limiting effect on participation by bidders from outside the CIS, such as the European Union. C.2.13 Bidand ContractPriceand Currency The provisions o f the procurement law on currencies are fairly comprehensive and close to intemational practice. The general rule i s that bids are invited and contracts denominated in lei. However, for intemational tenders, the currency o f another country may be used. The practice i s generally that US dollars or euros are used in such cases. Where the bidding documents pemit bidders to express their bid prices in different currencies, the procurement law requires that the common currency to be used in bid evaluation must be specified in the bidding documents, plus the date and source o f the exchange rates to be used for conversion to that common currency. Again, this i s inline with intemational good practice. 16 Moldova CPAR Public Sector: Procedures, Practices and Application C.2.14 BidSubmissionand Opening The procurement law requires that both the deadline for submission o f bids and the place, date, and time o f bid opening are to be stipulated in the bidding documents. In a further provision, which matches best practice, the bid opening i s required to coincide with the expiry o f the deadline for submission o f bids.However, this high standard i s not met in practice. For example, biddingdocuments issuedby the NAGP on behalf o f the Ministry o f Health on February 6,2002 for the supply o f plastics syringes stipulated a bid submission deadline of 5 PM on February 19 but the public opening o f bids was scheduled for 11 AM the next day, February 20. Retaining bids overnight in this way, under undisclosed conditions, is an undoubted reduction in transparency. Bid opening procedures are conducted by the NAGP, which then passes on the bids to the procuring entity's Worlung Group for evaluation. The law also establishes the right o f bidders to be represented at the bid opening, at which time the name o f each bidder and his bid price i s announced and recorded. The procurement law requires that bids must be inwritten form, signed and submitted in a sealed envelope. However, in some cases, such as where the requirement i s for standardized goods, bidders may submit their bids by facsimile transmission, although this was not observed as being a common practice. The law requires that bids submittedafter the expiry of the deadline should be returned unopened to the bidder. Again, these provisions in the law are in line with international good practice. C.2.15 BidandPerformanceSecurities Bidders are required to submit a bid security with their bids for all procurement procedures for goods and works, where the cost estimate i s less than MDL45,000 (US$3,177), below which the NAGPhas the rightto waive the requirement. The law stipulates that the bid security shall not be more than 3 percent o f the procuring entity's cost estimate for the procurement requirement. While this i s inline with internationalnorms, even this level o f bid security causes severe difficulty for cash-strapped Moldovan bidders, who invariably struggle to provide bid securities. Local commercial banks place onerous requirements on bidders for providing such securities, typically 100 percent cash cover deposited in the bidder's bank account for the entire validity period o f the security, plus hightransaction charges. There i s no doubt that the high cost o f obtaining a bid security i s one o f the greatest barriers preventing local companies from participating inpublic tenders. To the NAGP's credit, it appears that it has already recognized that the expense o f obtaining a bid security i s very onerous on local bidders, as bidding documents reviewed for this assessment mostly call for a bid security o f 1percent o f the bidprice. The same difficulties apply in respect o f contract performance securities, although they are exacerbated by the provisions in the law that these securities should be in the range o f 5 to 15 percent o f the contract price. The CPAR assessment noted a kind o f informal agreement between buyers and sellers not to respect the terms and conditions o f contracts applicable to securities. One the one hand, local contractors do not want to incur the expense o f submittinga performance security when they win a public contract and, on the other, the procuring entity does not want to pay financial penalties for delays incontract implementation which it causes. A practical solution appears to be commonly applied, whereby the procuring entity releases the contractor fi-om the obligation o f submittinga performance security and the contractor does not levy late penalties on I 7 Moldova CPAR Public Sector: Procedures, Practices and Application the procuring entity. By mutually agreeing to informally ignore the terms and conditions o f the contract they have signed, both parties reduce their expenses. C.2.16 ExaminationandEvaluation ofBids The evaluation o f bids i s done by the procuring entity's Working Group but the result o f the evaluation, including the recommendation for award o f contract, i s subject to approval by the NAGP.The procurement law establishes two bases for determining the winningbid: The lowest-priced bid The lowest-evaluated bid, where both price and a number o f non-price criteria (such as service, delivery terms, time for delivery/completion, payment terms, and functional characteristics) are taken into consideration. The procurement law provides for a 10percent domestic price preference margin for domestically produced goods or works performed by domestic contractors. However, given the low level o f participation o f foreign bidders in public tenders inMoldova, this assessment found no evidence o f its use. The general practice i s that, in the evaluation o f bids for the procurement o f goods, the award o f contract i s made to lowest-price bid that meets a basic technical specification and i s otherwise complete, e.g., it contains all o f the long list o f documents that make up the mandatory contents o f the bid. In the evaluation o f bids for the construction o f works, the methodology displayed in Table 5 i s commonly used. Table 5. TypicalBidEvaluationCriteriafor the Procurementof CivilWorks Criteria I Maximum I Score Bidprice 90 I ExDerience I 20 I Personnel 15 IIFinancial Position I 10 I MaximumScore 150 I This evaluation methodologywas usedinthe evaluation ofbids for construction o f a gas pipeline, estimated to cost MDL 10 million (US$706,000). Two bids were submitted: one priced at MDL 8 million (US$564,800), the other at MDL 10 million (US$706,000). The contract was awarded to the bidder whose bid price was MDL 10 million (US$706,000), which means that the winning bidder overcame a 25 percent price disadvantage by virtue o f its better qualifications. This evaluation methodology falls far short o f the standards o f transparency normally demanded in good public procurement practice because it fails to inform bidders inadvance precisely how their bids will be evaluated. Merit point systems o f evaluation are inherently subjective because there are no clear, uniform rules governing how different evaluators should award the 60 points on offer for non-price criteria. The NAGP also recognizes that there are many instances when the Working Groups fail to apply the evaluation criteria stipulated in the bidding documents, when they are evaluating bids. 18 Moldova CPAR Public Sector: Procedures, Practices and Auulication A far more transparent approach, and one which is increasingly followed in well-developed national procurement systems, i s to award the contract to the lowest evaluated bid that i s substantially responsive to the terms and conditions o f the biddingdocuments and i s submittedby a bidder who meets the minimum qualification requirements for the contract in terms of, for example, experience, financial resources, personnel, and equipment capacity. For Moldova to move to this more transparent method o f bidevaluation will require not only an amendment to the law, but also the adoption o f detailed implementing regulations on bid evaluation and for the NAGPto take the leadinchampioning the use o fmore transparent bidevaluation methodologies. C.2.17 Notificationof ContractAward andEntryintoEffect ofthe ProcurementContract Another strength o f the law i s that it prohibits negotiation between either the Working Party or the NAGP and the bidder as part o f the contract award process. Inthis respect, the law adheres to best practice: the winningbidder i s awarded a contract at his original bidprice. Within three days o f the NAGP approving the award decision, the Working Party sends a written notification to the winning bidder, who then has 20 days in which to provide a performance security and sign the contract. Where the winning bidder fails to provide a performance security or sign the contract, the Working Party may, subject to NAGP approval, either award the contract to another bidder (the law does not specifically provide that the award should be to the second- ranked bid) or reject all bids. A Working Group may reject all bids only if there i s no effective competition or if all bids submitted fail to meet the requirements o f the biddingdocuments. Even when these conditions are met, such a rejection i s subject to NAGP approval-a useful safeguard. The law requires the NAGP to notify the losing bidders, within 10 days o f the signature o f the contract, o f the identity o f the bidder to whom the contract was awarded and his bid price. The fact that notification i s sent only after the contract has already been signed undermines the efficacy o f the bid protest mechanism (see Section C.2.21), as losing bidders are deprived o f the opportunity to lodge a protest before the contract i s signed. C.2.18 Payment The law requires that all state contracts must be approved by the NAGP and registered with the State Treasury, absent which a contract i s deemed to be nulland void. Treasury refuses to register any contract not approved by the NAGP. Only after a contract has been registered with State Treasury can a procuring entity submit invoices under that contract to Treasury for payment. All payments are made directly by Treasury to the supplier, rather than by the procuring entities themselves. Treasury performs a number o f valuable checks as part o f the contract registration and payment processes. First, it checks that the value o f a contract does not exceed the line-item budgetary allocation inthe procuring entity's approved annual budget. Second, it checks that the total value o f all invoices submitted for payment against a given contract does not exceed the contract price. Inaddition, it checks each invoice to make sure that it i s in line with the payment terms stipulated in the contract. These requirements establish a useful connection between the authorization o f contracts and the allocation o f the funds to finance them. Where a contract has been neither approved by NAGP nor registered with Treasury, payments cannot be made through the Treasury, an arrangement that should limit the abuse o f public funds. However, this assessment found instances where procuring entities had signed contracts without NAGP approval and, for that reason, were unable to get payments made through Treasury, but subsequently still managed to secure the NAGP's retroactive approval for the contract and, thus, get it paid through Treasury. 19 Moldova CPAR Public Sector: Procedures, Practices and Application There i s a widely held view, voiced by the NAGP and the Court o f Accounts, among others, that the introduction o f the Treasury system has greatly improved the Government's control over the disbursement o f funds under public contracts. While these checks form a valuable barrier against unauthorized payments, they do not ensure that payments under approved and registered contracts are made as contracted. In reality, there i s a chronic problem o f late payments under public contracts, as illustratedby the Treasury data from 2001 and 2002 shown inTable 6. Table 6. Non-Paymentsby State Treasury for Chisinau-basedProcuringEntities,2001-2002 2001 2002 Number o f contracts State awarded 2,394 3,141 Total value o f contracts awarded (MDL) Amount payable per /nAnT ' 289.615.835, , I n3n, "331 304.421.43 1 231,315,308 I , Amount unpaid (deb1 73,106,123 Debt as a % o f Total 24% Source: State Treasury As payments are handled on a monthly basis, Treasury pays what it can afford, as permitted by revenues received each month, and defers the unpaid balance untilthe following month. Treasury officials report that their decision making on which invoices to pay and which not to pay i s based on an informal system o f spreading the burden o f non-payments evenly across all spending institutions. The prevalence o f late payments in the business sector was confirmed by the 2002 Business Environment and Enterprise Performance Survey (BEEPS), in which 53 percent o f 174 firms surveyed reportedhaving had to resolve overdue payments. Payments terms included in public contracts vary widely. For domestic suppliers, standard payments are 100 percent o f the contract price 30 days after delivery o f the goods, with no advance or interim payments. These payment terms, even if they were respected, would be hard for cash-strapped local bidders to bear. For foreign bidders, payment terms are often 100 percent advance payment. While this i s surprising and would not be recommended for any public purchaser under normal conditions, it seems to be a byproduct o f Moldova's unattractive business environment that foreign firms will supply the Government only if they are paid 100 percent in advance. The hardship that unfavorable payment terms and late payments cause to local companies i s illustrated by the experience o f a small, privately owned Chisinau-based bakery, which has for some time enjoyed the reputation o f a reliable supplier o f foodstuffs to public sector institutions, including hospitals, prisons and the armed forces. Of the company's annual turnover o f MDL 5.9 million (US$411,500), 80 percent i s with public sector purchasers. The company reported many problems with late payments: potatoes supplied to the armed services in October, for which payment was not received untilFebruary, despite the usual 30-day payment terms inthe contract. On a contract priced at MDL 130,000 (US$9,700) to supply bread to a local public hospital, the firmreportedmaking a loss ofMDL 7,000 (US$490) because the hospitalpaid three months later than the contract stipulated. As the firm has to pay an annual interest rate o f 26 percent for commercial credit to cover such unpaid debts, it has changed its business strategy to try to reduce its reliance on the public sector and do more business with private-sector clients. 20 Moldova CPAR Public Sector: Procedures, Practices and Application C.2.19 RecordsofProcurement Proceedings The procurement law contains fairly comprehensive requirements for the recording o f procurement procedures by Working Groups and specifies the minimum contents for such reports, which the Working Group must submit to the NAGP within 30 days o f conclusion o f the contract. With regard to the retention o f procurement records, visits to procuring entities undertaken for this assessment revealed that, in the majority o f cases, procurement records and original documents are badly kept. Procurement files are frequently missing important documents or the documents are so badly filed and maintained as to make reference difficult. For the few Working Groups that keep procurement records in electronic form, the quality o f such filing was also found to be poor, making any interrogation o f such databases difficult and unlikely to produce any meaningful information. c.2.20 Procurementof Consultant Services The procurement law has separate, though somewhat sketchy, provisions on the procurement o f consulting services, which foresee inviting proposals only from qualified firms, based either on an open advertisement for expressions o f interest, followed by a "pre-selection" exercise, or on a shortlist drawn up directly by the NAGP. The decision on award o f contract may be either to the lowest-pricedproposal or to the proposal gaining the highest aggregate score usinga combination of price and non-price (technical and qualitative) criteria, although the law provides little detail as to how these criteria should be applied. By contrast with the provisions on goods and works, the law specifically allows contract negotiations with the highest-ranked consulting firm. The law also contains a basic prohibition against conflicts o f interest, in that it prohibits a firm that provides consulting services from supplyinggoods or performing works related to those services. c.2.21 BidProtest While disputes between economic entities (including government entities acting in a commercial capacity) would ordinarily be brought before the economic courts, Moldovan law also has a category o f "administrative disputes" which would be referred to "administrative courts." These courts do not actually exist but administrative disputes are currently heard by specialized panels (of two or three judges) within the ordinary courts, the level o f court depending on the level o f the government entity concerned. Jurisdiction is based on the currently disputed existence o f an "administrative act." The provisions o f the procurement law on bidprotest are superficially based on the provisions o f the UNCITRAL Model Law. This model envisages three levels o f bid protest: first to the procuring entity; second to an administrative body independent o f the procuring entity, and third to the courts. While the Law grants to the NAGP the duties and powers foreseen for the second level o f review, the NAGP is, to all intents and purposes, to be assimilated to the procuring entity itself, as the NAGP issues the biddingdocuments and approves the Working Party's evaluation o f bidsand contract awarddecisions. The review procedure before the NAGP i s one o f negotiation and mediation between the parties, one o f which will almost always be the NAGP itself. Inthe event o f a failure to reach an amicable solution, the NAGP will avail itself o f the powers accorded to it under the Law, i.e., to act as an administrative review body. The defendant, in effect, becomes the judge. While the NAGP expresses its intention to act objectively inthis role, it i s difficult to see how a complainant who Moldova CPAR Public Sector: Procedures, Practices and Application has failed to satisfy the NAGP o f the correctness o f its arguments duringnegotiations could hope to achieve a favorable outcome when the NAGPexercises its administrative powers. Complaints are currently runningat about 60 serious cases a year, most o f which are dealt with by way of negotiation. The main areas o f dispute concern: The use o f subjective technical specifications and, where that i s found to be the case, the NAGPhas ordered a reformulation o fthe specifications The submission o f incomplete tenders, which i s a common occurrence Incorrect evaluation, where the NAGP has apparently agreed with the complainant on several occasions. Appeals against the decisions o f the NAGP are brought before the administrative panel o f the Court o f Appeal. To date, there have been five appeals. This small number i s not surprisinggiven the reluctance o f bidders to bring procuring entities, let alone administrative bodies, before the national courts. It i s believed that all o f these decisions have upheld the decision o f the NAGP. The judgments have been delivered within two to three months, which appears to compare favorably with the time delays faced in cases not relating to procurement (sometimes up to two years). The NAGP states that it has no power to enforce the judgments o f the courts. It i s known that there are currently some 55,000 unenforced court judgments and a recognized absence o f enforcement powers. This i s not likely to be different inthe case o fprocurement. In a purely domestic context, a system in which the review body is the same as the decision maker i s unlikely to inspire bidders with confidence that breaches o f the law will be adequately addressed. At the internationallevel and given Moldova's aspiration o f accession o f the GPA, this i s not a review mechanism that clearly meets the requirements o f the GPA. The GPA requires a challenge either before a court or before an impartial and independent review body with specific powers, which must either operate in a quasi-judicial capacity with appropriate safeguards or whose decisions must be subject to judicial review. Inboth cases, the challenge procedures must, inparticular, betimely, transparent, and effective. Interms ofthe courts andnotwithstandingthe relative speed ofthe few appeals from decisions of the NAGP to the Court o f Appeal, there must be doubts as to the ability o f the courts to meet the GPA criteria. Interms o f timeliness, it i s clear that, inmost cases, there are substantial delays in dealing with cases. The Civil Procedure Code provides for the availability o f injunctive relief, a necessary power in the context o f procurement disputes, and further provides that a decision on suspension should be taken within one month. However, even assuming that the period o f one month were sufficient, the courts appear reluctant to act so quickly inpractice. Further, there are no conditions set for the grant o f suspension (for example, the strength o f the case, balancing the public interest against the interests o f the challenger, availability o f alternative remedies such as damages), which rather begs the question o f how the courts will deal with applications for injunctions in the fairly novel sphere o f the procurement law. Moreover, the availability o f damages i s limited. The creation, therefore, o f a second-tier review body as foreseen inUNCITRAL is, inprinciple, a realistic solution. However, as discussed above, the body entrusted with this authority i s also implicated in the procurement decision-making process itself-the NAGP. This would fail to satisfy the GPA's requirements o f impartiality and independence. Inother respects, the system i s largely compatible with the GPA (given its basis in the UNCITRAL Model), at least in 22 Moldova CPAR Public Sector: Procedures, Practices and Application substantive terms, and does appear to provide timely and effective review, although it does not explicitly provide for judicial-type procedures guaranteeing rights to be heard, etc. Interms o f remedies, the law provides for damages based on wasted costs and leaves to the NAGP the discretion as to what other measures may be appropriate. These measures would, however, be better set out in detail, both for transparency reasons and for reasons connected with probity. In addition, the NAGP has the power to suspend the award procedure and i s permitted to take into account what appear to be appropriate and legitimate considerations in the granting o f such a suspension. While the equivalent to UNCITRAL's first-tier review (i.e., to the procuring entity itself) should be retained and, in the case o f Moldova, this will generally be the NAGP, the appeal fiom the decision o f the procuring entity should be to an independent commission, comprised of independent experts inrelevant disciplines, to review procurement protests. 23 Moldova CPAR Public Sector: Organization and Resources c.3 OrganizationandResources This section looks at how responsibility for the conduct and oversight of public procurement is apportionedto the various institutions at different levels of administration inMoldova,and examinesthe organization and functions of the NAGP and of the Working Groups,which handleprocurementinthe procuringentities. C.3.1 Roleof the NationalAgency for Government Procurement(NAGP) Status and Functions:The NAGPwas establishedbythe procurement law o f April 1997 and its legal status, tasks, functions, and rights were further amplified by Government Decree No. 1217 of December 1997 and its associated Regulations. It i s a state institution, established as a separate legal entity under the Ministryo f Economy, and its staff are civil servants. The procurement law authorizes the NAGP to: Develop statutory acts on procurement Provide assistance to the Working Groups inprocurement matters Develop and publish standard forms o f bidding documents and other forms o f procurement documentation for mandatory use Issue the Government Procurement Bulletin Approve the results o f the pre-qualification procedures conducted by the Worlung Groups Approve bidding documents developed by the Worlung Groups and distribute them to bidders Invite and open bids and transmit them to the appropriate Working Group for evaluation Review and approve reports on procurement procedures submitted by Working Groups 0 Approve procurementcontracts formed by Working Groups with suppliers Review and decide on appeals submittedby bidders Interact with international institutions on issues relating to the operation o f the government procurement system Coordinate the use o f foreign technical assistance for public procurement Draw up and maintain a list o f qualified suppliers, as directed by the Government. The NAGP actually became operational in 1998, the year after the procurement law was enacted. Inthe first year or two after its passage, the level of compliance with the procurement law was very low. The high degree o f centralization designed into the Moldovan public procurement system was deemed necessary to give the NAGP the necessary authority to exert control in an environment where most procuring entities routinely flouted the procurement law. The low level o f enforcement o f the procurement law in its early days led to the widely held perception o f the NAGP as not being particularly successful at boosting enforcement o f the law. However, it i s generally accepted that the NAGP has gradually exerted increasing control over public procurement transactions in Moldova. Also, as described in Section (2.2.18, the establishment o f the Treasury system in the Ministry o f Finance and its recent extension to the local government level has enhanced the NAGP's ability to identify and overturn breaches o f the procurement law. The NAGP's coverage o f procurement transactions has increased during each year o f its operation. Measured by the value o f public contracts approved the Agency, that coverage increased fkom 40 percent in2000 to 60 percent in2002 (see Section C.5.2, Table 7). The Agency calculates that it now has 100percent coverage o f State-level institutions and a steadily increasing 24 Moldova CPAR Public Sector: Organization and Resources level o f coverage among local government institutions. The Agency's current challenge i s to improve the enforcement o f the public procurement law at the local government level. While the NAGP had applied for additional funding to enable it to open regional branches - with the intention that such branches would enable the Agency to perform its functions more effectively for local government entities - that request has been turned down on budget grounds. It i s now the Government's intention to assign responsibility for conducting procurement to one official in the Economic Directorate o f each o f the 35 new local administrative units which have been created by the recent local government reforms. As these new arrangements will come into force from January 1, 2004, there i s clearly a pressing obligation on the NAGP to provide procurement training for those 35 local government officials in the interim. It must be recognized, o f course, that because these officials will be employees o f their respective local governments, rather than o f the NAGP, they will not be empowered to perform the NAGP's oversight functions. To that extent, this new organizational design looks like a second-best option to the NAGP's original plan to open its own regional offices. Increasing the numbers o f procuring entities that route their procurement through the NAGP would increase the level o f enforcement o f the procurement law only when the agency consistently applies the procurement law. As the survey o f contracts undertaken for this report demonstrates (see Section C.5.2), that i s not always the case. Abusive overuse of the Single Source Procurement method illustrates that the Agency i s frequently pressured into approving usages o f SSP that do not meet the conditions stipulated in the procurement law. The seasonal queues outside the Director's office each December, to get SSP transactions approved before the year-end cutoff date for spending o f tardily released budgetary allocations, are further proof- anecdotal, yet incontrovertible-that the Agency i s often pressured into making decisions that are not inthe public interest. Pressure i s applied on the Agency both by procuring entities themselves and by the Agency's parent ministry, the Ministry o f Economy, to which it i s subservient under the procurement law. In summary, it i s clear that the NAGP's lack o f independence undermines its ability to ensure enforcement o f the procurement law. Interms of its funding, the NAGPis financed by the state budget. In2002, its budget was MDL 156,000 (US$ll,OOO) for salaries only; its authorized staffing o f 11people i s also defined in the procurement legislation. The Agency raises roughly MDL 220,000 (US$15,530) more each year from the sale o f bidding documents, which helps to meet operating costs and the cost o f advertisingtenders innewspapers. The Agency i s organized into two main divisions (see Figure 2), each reporting to an Executive Director. However, the position o f Executive Director has been left vacant for the past ten months and, while the Deputy Executive Director has been acting in the position, there i s a strong perception that the prolonged absence o f an Executive Director has weakened the Agency's ability to enforce the procurement law and has left it prone to political pressure. The PublicProcurementDivision carries out the routine procurement operations o f the Agency: reviewing draft bidding documents prepared by the Working Groups, advertising invitations to tender in the newspaper, and checking evaluations and award decisions made by Working Groups. Staff members o f the Public Procurement Division also serve as members o f Working Groups, so the Division clears procurement decisions that its own staff have been a party to making. The Public Procurement Division also drafts the bidding documents on behalf o f some Working Groups, although the procurement law stipulates that it i s the Worlung Group, which i s supposed to do so. This approach appears to be driven by the practical consideration that some procuring entities have little or no procurement capacity, with procurement expertise concentrated inthe NAGP. 25 Moldova CPAR Public Sector: Organization and Resources The Legal Division prepares standard procurement documents, such as bidding documents and forms o f contract for use by public sector procuring entities; drafts amendments to the procurement law; prepares secondary legislation; and reviews individual contracts on behalf o f procuring entities. It also offers expertise in specialist areas o f procurement operations, such as civil works. The NAGP's activities actually span four different functions: 0 A regulatory function 0 An oversight function 0 A procurement function A bidprotest review function. As has been noted throughout this report, these functions are sometimes incompatible with one another, and one o f the key challenges o f the future reform o f public procurement in Moldova will be to unbundle NAGP's functions inan effective way (see Section D.1.3below). Figure 2: NAGPOrganization Chart LIExecutive Director I Deputy Director Accounting Division Division of Legal Information Division of Public and Documentation A recent initiative taken by the Government to increase the accountability o f the NAGP for applying the procurement law correctly has been the creation, by a decree dated December 2002, o f a "mixed committee" to carry out oversight o f the application o f the law by the NAGP and the procuring entities. The committee comprises representatives o f the Ministryo f Economy, NAGP, Ministry of Finance, State Chancellery, Court of Accounts, the Centre for Combating Economic Crimes and Corruption, the President's Office and the Parliament. This new committee i s required to report periodically to the Government on the performance o f the public procurement system. Given that the NAGP has fi-equently been pressurized into clearing actions which are in 26 Moldova CPAR Public Sector: Organization and Resources contravention o f the procurement law, the creation o f this new oversight committee looks like a step in the right direction. Whether this committee delivers improved enforcement o f the procurement law will depend on the demands which it makes on the NAGPmanagement to report regularly to it and on the transparency which surrounds its operation. C.3.2 Organizationof ProcurementinProcuringEntities Procurement operations within procuring entities are carried out by Working Groups, which typically comprise 10to 12 persons. For example, the Ministryo f Health Working Group i s made up of: The Minister Three Deputy Ministers Five Heads o f Department An accountant 0 Alawyer The Ministry's Procurement Officer, who acts as Secretary to the Group. As described in Section C.2, the specific operations that a Worlung Group performs vary from one institution to another. The more experienced ones, such as inthe Ministry o f Health, conduct the full range o f activities definedby the procurement law for Working Groups: Prepare invitations to participation inpre-qualification Carry out pre-qualification 0 Prepare biddingdocuments Examine, compare and evaluate bids 0 Write reports on procurement procedures 0 Conclude procurement contracts with winning suppliers/contractors Manage the performance o f suppliers and contractors under public contracts. One o f the weaknesses o f the operation o f the Working Groups in the past has been a perceived lack o f clarity inthe division of responsibilities between the NAGP and the Working Groups. To address this problem, the Government passed, in March 2003, a "Regulation on the Worlung Groups for the Procurement o f Goods, Works and Services" (see Section C.l.l above), which more clearly defines the functions, duties and rights o f these groups. Working Groups appear to be generally satisfied with the functioning o f their relationships with the NAGP. While it has been the experience o f other countries with a centralized, executive procurement agency (for example, Ghana) that the end-user organizations gradually want to break away from the central organ and assume authority over their own procurement operations, the assessment team saw little sign o f such tensions in Moldova. On the contrary, Working Group members seem to value the expertise and experience in procurement concentrated in the NAGP and rely heavily and willingly on the inputs o f NAGP staff. All the Working Groups interviewed for this assessment expressed the opinion that the NAGP adds value to their procurement operations. However, this i s not necessarily a good sign. Giventhat the survey conducted for this assessment found that the NAGP frequently allows procuring entities to depart from the provisions o f the procurement law (see Section C.5.2 below), it seems that the procuring entities' good relations with the agency are based, at least inpart, on a degree of laxity on the NAGP's part inthe way in which at applies the procurement law. Moldova CPAR Public Sector: Organization and Resources The staff o f procuring entities who serve on Working Groups are generally not well trained in procurement. While the NAGP has conducted occasional procurement training courses for procuring entity personnel, this has usually been done on an ad hoc basis, as the ten staff of the NAGP are already overstretched and do not have the resources to design and deliver the lundo f graduated, regular program o f procurement training that would be necessary to have a significant impact on the capacity o f the procuring entities. Untilvery recently, Moldova has had no source of professional procurement training. The State University o f Moldova, Institute o f Policy Studies and International Relations, has recently launched an undergraduate program that contains procurement as one topic among several business subjects and will produce its first 35 graduates in four years time. However, the syllabus i s under-developed and, because the State University i s independent, its programs are not readily available to serving civil servants. A more feasible long-term optionwould be to develop a programofprocurement training courses to be run by the Academy o f Public Administration, which provides in-service training for civil servants. A newly established Training Division o f the NAGP should explore a collaborative approach with the Academy, whereby the Academy provides the facilities and professional training resources, while the NAGPprovidesthe trainers and training materials. Moldova CPAR Public Sector: Audit & Anti-Corruption Measures c.4 Audit & Anti-Corruption Measures This section reviews internal and external auditing arrangements in Moldova, looks at available measurements of corruption in Moldova and examines the Government's anti- corruption program. The section on auditing draws on the Country Financial Accountability Assessment(CFAA) recently undertakenbythe Word Bank. C.4.1 CurrentAudit Measures C.4.1.1 InternalAuditing Public sector internal auditing in Moldova i s in its infancy, i s fiagmented, and suffers from a weak capacity. It i s limited to ex post verifications and inspections over the execution o f the budget and aims to detect cases o f inappropriate use o f funds. There are no ex ante assessmentso f the control framework o f ministries and other government agencies, which are essential objectives o f modem internal audit functions. The Financial Control and Revision Unit (FCR), a unit accountable to the Minister o f Finance, performs financial control activities and inspections o f central and local budget resources and also conducts control activities regarding the use o f budget allocations to state owned enterprises. It conducts ad hoc inspections based on requests fiom various enforcement and control bodies, such as the Court o f Accounts, the President's Office, and Parliament. The value o f the reports produced by FCR i s limited because they focus on lapses and irregularities in individual transactions, but do not assess issues o f economy and efficiency, systemic weaknesses in financial management, management performance or procedures and internal controls. As the reports are limited to financial and compliance audits and do not make recommendations for the improvement o f systems, the utility o f the FCR as a means to improve public financial management i s limited. C.4.1.2 ExternalAuditing The Constitution invests Parliament with the power to establish the Court o f Accounts (CoA), the Supreme Audit Institution o f the Republic o f Moldova. The CoA, which was established in 1994, operates within a legislative framework that both defines and regulates its activities: the CoA enjoys the fieedom to choose what to audit, how to audit, and when to audit and report. The independence o f the CoA is, therefore, theoretically guaranteed. However, because the CoA i s dependent on the Ministry o f Finance for its budget allocation, the scope o f its activities i s indirectly determined by the MoF. The CoA audits and controls the use o f all public funds and public property and i s also empowered to audit the budget and expenditures o f Parliament, the President, the State Chancellery, the Supreme Justice Court, the Economic Court, the General Prosecutor's Office, specialized public administration authorities, the National Bank o f Moldova, and those commercialbanks inwhich the state has an equity interest. Upon the written request o f at least 20 members o f Parliament, the CoA may be required to perform additional audits without further ratification by Parliament. In addition to its auditing functions, the CoA has been invested with the power to undertake the following control and enforcement activities: 0 Demand that disciplinary action be initiated against those responsible for the misuse of public resources to recover damage caused to the state 29 Moldova CPAR Public Sector: Audit & Anti-Corruption Measures 0 Suspend the bank accounts o f audited organizations and individuals 0 Submit materials to investigative agencies inrespect o f financial offenses 0 Demand the suspension fiom office o f those deemed to have grossly violated or failed to enforce the law. The CoA suffers from too great an emphasis on control, prosecution, and enforcement rather than audit. Also the capacity o f its staff i s weak, as i s its audit methodology. Audits tend to be performed ina rather haphazard manner without reference to risk assessments or evaluation o f the auditees' procedures and control environments. CoA reports do not contain audit opinions on financial statements but, rather, detail lapses and irregularities in individual transactions. Also, they do not provide assessments o f issues such as economy, efficiency, performance, and accounting and internal control systems, which are essential for improving cost-effectiveness o f expenditures on procurement. The Court o f Accounts has recently completed an audit of the National Agency for Govemment Procurement, its report on which was published in the Official Monitor Issue No. 67-69 o f April 11, 2003. The report contains a long and detailed list o f alleged violations o f procurement law, accompanied by an estimate o f the loss caused to the public purse by each violation. However, the report offers no analysis o f the underlying causes o f these violations. In the past, the publication by the CoA o f such audit reports has not ledto the imposition o f any penalties for the identified breaches o f the procurement law. C.4.2 Measuresof CorruptionandAnti-CorruptionProgramsinMoldova C.4.2.1 StateCapture State capture refers to a form o f grand corruption in which firms attempt to influence the formation o f the laws, policies, and regulations o f the state to their own advantage by providing illicit private gains to public officials. Classic examples o f state capture would be bribes to parliamentarians to buy their votes on important pieces o f legislation, bribes to govemment officials to enact favorable regulations, or bribes to judges to influence court decisions. A 2000 survey' o f nearly 4,000 firms in 22 transition countries provided a number o f measurements o f state capture, one o f which was a cross-country index o f state capture based on firms' reporting that their businesses are directly and significantly affected by private payments made to public officials to influence decision-making in the following institutions: Parliament, the executive apparatus, the criminal courts, the civil courts, the central bank, and political parties. The resulting index, shown below inFigure 3, shows Moldova to be one o f the most high-capture economies, ranking second out o f the 22 countries surveyed. High-capture economies are characterized as counties that have made some progress in liberalization and privatization, but have been much slower to enact the complementary institutional reforms to support the emergence o f markets. I "Confronting the Challenge of State Capture inTransition Economies," J. Hellman and D. Kaufmann, in Finance and Development, September 2001, Volume 38. 30 Moldova CPAR Public Sector: Audit & Anti-Corruption Measures Figure3: Measuringof State Capture in22 TransitionCountries, 2000 I Y C.4.2.2 Corruption The 2002 Business Environment and Enterprise Performance Survey (BEEPS) asked 162 Moldovan enterprises how problematic corruption was to the operation and growth o f their businesses. The responses, presented below in Figure 4, indicate that it i s a significant problem, with 26 percent of respondents describing corruption as a major obstacle and 59 percent o f interviewedfirms reporting it to be either a moderate or major obstacle. Figure4: Corruptionas an Obstacle to the Operation and GrowthofBusinesses How Problematic is Corruptionfor the Operation and Growth of Your Business? 35 I 30 25 20 15 10 , 5 No obstacle Minor obstacle Moderate Major Obstacle obstacle 31 Moldova CPAR Public Sector: Audit & Anti-Corruption Measures C.4.2.3 The Government's Anti-CorruptionProgram In2001, the Government establisheda CoordinationCouncil to tackle theproblemofcorruption. The Coordination Council is headedby the President and includes the Speaker o f Parliament, the Prime Minister, the Head o f the Parliamentary National Security Committee, the General Public Prosecutor, the Minister o f Justice, the Minister o f Internal Affairs, the Director o f Information and Security Services, and the Head of the Court o f Accounts. As the activities o f the Coordination Council are not made public, it i s not possible to assess this organization's effectiveness. The Government also recently established the Center for the Struggle against Economic Crime and Corruption. It i s understood that the Center i s headed by a Director who is administratively responsible to the Prime Minister, and that its staff have been hired mostly from the Economic Police, the Financial Guard, and the Ministry o f Finance's Department o f Financial Control and Revision. Because the Center i s very new, it i s also not possible to evaluate its impact. Moldova joined the Stability Pact Anti-Corruption Initiative (SPAI) in 2001. As part o f its activities under the SPAI, Moldova has developed and Action Plan which includes regular exchanges o f information between Government and civil society representatives, a program for reform o f the judiciary system, and the launching o f a public awareness raising campaign on corruption. 32 Moldova CPAR Public Sector: Public Sector Management Performance c.5 Public Sector Management Performance This section attempts to quantify, based on currently available budget data, the financial value of expenditures on public procurement by the various levels of administration and presents a review of public procurement operations in Moldova, including the findings of a survey of contracts undertaken as part of this assessment. C.5.1 Government Expenditure on Procurement The value o fpublic procurement inMoldovahas increased steadily year-on-year and amountedto approximately US$118 million in 2002 (excluding procurement funded by extemal financiers), with the State Govemment accounting for US$44m (38 percent) and combined expenditure by local governments the remaining US$73m (62 percent). Procurement accounts for about 17 percent o f budget expenditures by State-level institutions and 42 percent o f expenditures by local governments. Figure 5: Expenditure on Procurementby State and Local Governments, 2000-2002 (vS$m) 140.0 120.0 100.0 --.O.-E u) 80.0 G i G o v e r n m e n t s o 60.0 HState Government ~ u) 3 40.0 20.0 I 2000 2001 2002 I I Source: CPAR estimates based on Ministry of Finance data. A detailed breakdown o fplannedand actual expenditures onpublic procurement in2000-2002 by State-level institutions i s presented at Annex D. A breakdown o f State and local government expenditure on public procurement duringthe same period i s presented at Annex E. C.5.2 Review of PublicProcurement Operations Inorder to provide an empirical underpinning to the qualitative and anecdotal findings resulting from the interviews and completed questionnaires conducted for the assessment, the NAGP and the Bank agreed to examine and analyze primary data on public procurement, drawing primarily on NAGP files, as well as on files maintained by some 20 procuring entities. The research was undertaken by the Bank's assessment team with the NAGP's full participation inproviding access to files and data. 33 Moldova CPAR Public Sector: Public Sector Management Performance (2.5.2.1Use of ProcurementMethods Analysis o f NAGP data for 2002 indicates that the most widely used procurement methods, measuredby the monetary value o f contracts, were: Single Source Procurement: 42 percent Open Tendering: 29 percent Request for Price Quotations: 29 percent. Although the procurement law provides for six procurement methods (see Box 1) and establishes Open Tendering as the default method o f public procurement, it i s clear that the Single Source method i s much more heavily used. A more comprehensive examination of data over three years of procurement transactions shows that this overuse o f the Single Source method has been even more marked in the past. Table 7 and Figure 6 present the summary information on contracts approved by NAGP in2000-2002. Table 7. Value of ContractsApproved by NAGPbyProcurementMethod,2000-2002 Type of procurement Source: CPAR estimate based on data provided by NAGP and the Ministry of Finance. (a). The figures cover only those contracts that have been approved by the NAGP. Therefore, they do not include procurement transactions covered by the procurement law, which procuring entities have handled directly (not through NAGP), nor low-value procurement transactions (the applicable threshold was set at MDL5,000 throughout 2000-2002butwas raisedto MDL 10,000 inearly 2003), to which the procurement law does not apply. Total expenditures represent the actual expenditures made from the Government consolidated budget, including State budget and local budgets Figure 6 offers a graphical representation o f the use o f procurement methods on contracts handled by NAGP during the period 2000-2002, showing the prevalence of the Single Source procurement method, which was especially overused in2001. 34 ..Moldo\*aCPAR Public Sector: Pitblic Sector i2lanagement Perjormance Figure6: Contracts Approvedby NAGP (broken down by ProcurementMethod) 100% 90% 80% 70% 0Opentenders 60% OCall for price lists 50% Sinale source 40O/o 30% 20% 10% 0% 2000 2001 2002 Source: CPAR estimates based on NAGP data. C.5.2.2 DetailedExaminationof a Sample of 125 Contracts In order to obtain a more in-depth look at the process of procurement and contract implementation, the assessment undertook a detailed examination o f a sample o f 125 contracts, handledby the NAGP during 2001 and the first quarter o f 2002, out o f a total number o f 10,4000 contracts handledby NAGP during that period. The sample was necessarily small because o f the difficulty o f gaining access to information on procurement transactions, the fact that information and documentary records relating to a given contract are often spread among several institutions (NAGP, the procuring entity, MoF Treasury, and the supplier or contractor), and the fact that records are often poorly maintainedor incomplete. The sample o f 125 contracts was composed o f 63 cases of Single Source Procurement (50 percent o f the sample), 51Open Tendering (41 percent), and 11Request for Price Quotations (9 percent). The main purpose o f analyzing the 63 contracts awarded by Single Source Procurement was to try to determine whether the choice o f that procurement method was justified, in terms o f the conditions for use stipulated in the procurement law (see Box 1). In the case o f contracts concluded by Open Tendering and by Request for Price Quotations, the analysis examined the timeliness o f the procurement method and the implementation o f resultant contract. Out o f 62 contracts awarded by Open Tendering or Request for Price Quotations, detailed information on payments was obtained for 50. Of the remaining 12 contracts, 9 were not performed and, for 3 contracts, the information was found to be classified. In order to ensure the representativeness of the sample, contracts were chosen from different categories o f procuring entity (e.g., ministries, departments, universities) and different types o f goods, services, and works (e.g., foodstuffs, furniture, cars, utilities, construction repair works, printingservices). 35 Moldova CPAR Public Sector: Public Sector Management Pei$ormance C.5.2.3 Time Taken for OpenTendering A relevant measure o f efficiency inany procurement operation i s the length o f time it takes from the initiation o f a procurement procedure to the signature o f a contract. Based on a sample o f 51 contracts results from 29 Open Tendering procedures, the average time taken from the Working Group's submission o f the request to tender to the NAGP to signature o f the resultant contract was 56 days or just under 2 months. While this i s a creditable outcome, measured against most public procurement operations, it should be borne in mind that only 4 o f these 29 tenders (14 percent) attracted foreign bids, so most were conducted as domestic tenders. Also, noted in Section (2.2.10, most Open Tenders in Moldova are operated with bidding periods as short as 20 to 25 days, which falls some way short o f the biddingperiodsnormally expected for international tendering. C.5.2.4 Degreeof Competition under Open Tendering The analysis shows that there were, on average, about 4 domestic bidders per tender; o f these 38 percent were successful in obtaining contracts. Participation by foreign bidders was limited: 7 foreign bidders took part inthese 29 tenders, but 6 o f those were awarded contracts. Closer scrutiny reveals that what looks at first to be a reasonably favorable level o f competition turns out to mask an almost total absence o f competition. This i s because, although many bidders bid on the same tender, they eachbid on a different lot within a given multi-lot tender, so they do not actually bid against each other to supply the same goods. For example, inthe case o f a tender for drugs, one bidder bid for several items which it manufactures, while other bidders bid for other items, contained in separate lots, so there was no competition for any o f the lots. The high success rate o f foreign bidders (six out o f seven were awarded contracts) i s explained by the fact that they bidto supply drugs that no domestic bidder can supply and for which they are invariably the only bidder. Of the contracts included in this sample, foreign bidders participated only in high-value tenders conducted by the Ministry o f Health. Several reasons were identifiedfor the low rate o f participation o f foreign bidders: 0 Many tenders are for goods requiring frequent deliveries, such as foodstuffs, and are, therefore, not attractive to foreign bidders who cannot meet the delivery requirements. Several contracts awarded by Open Tendering or Request for Price Quotations require weekly or even daily delivery o f supplies because the goods are perishable (e.g., bread for hospitals) or because the procuring entity lacks storage facilities (e.g., potatoes for prisons). Out o f 62 contracts surveyed, 13 were o f this type. 0 The low value o f many tenders dissuades foreign bidders, for whom the cost o f bidding may outweigh the contract value. 0 Unfavorable payment terms: the standard payment terms for local contracts are 30 days after delivery, which contrasts with standard payment terms o f 90 percent upon shipment inmost international contracts. 0 The highrisk o f payment delays. 0 Legislation requiring licenses for importing certain goods, such as drugs, and the difficulty and cost o f obtaining such licenses. It is interesting to note that, where foreign bidders participate, their prices are often competitive against those offered by local bidders, often because the Moldovanprocuring entity buys directly from the foreign primary manufacturer, thereby avoiding the added cost o f local intermediaries. 36 Moldova CPAR Public Sector: Public Sector Management Performance C.5.2.5 Review of Contracts Awarded by Single Source Procurement Given the prevalent use o f Single Source Procurement inMoldova, the assessment team looked at this issue in some depth, in particular at the justifications given for using the Single Source Procurement method. The following were the reasons most commonly cited by officials interviewed. Market Concentration: The use o f Single Source Procurement i s often necessitated by the existence o f a single supplier o f a given good or service within the purchaser's geographic area. Ina small economy like Moldova, it i s not unusual to find a limitednumber o f suppliers in selected market segments. This is especially the case for utilities (e.g., electricity supply, telephone service) and some infrastructure sub-sectors (e.g., gas pipeline construction). The slow pace o f privatization and market liberalization to date exacerbates the problem. Lack of KnowledgeAmong Procuring Entity Staff of the ProcurementLaw: NAGP staff admit that, despite the fact that they have conducted training courses inprocurement for many public officials involved inprocurement, knowledge o f the requirements o f the procurement law remains low, particularly among local government institutions. As a consequence, procuring entities often conclude contracts by Single Source Procurement without observing the requirements o f the procurement law and without submittingsuch contracts for approval by the NAGP. Invariably, such breaches o f the procurement law surface only at the stage of payment, when the purchaser's application for payment under the contract i s rejected by Treasury.' The solution commonly practiced by the NAGP to resolve such problems i s that they give an ex post approval for the award o f such contracts by Single Source Procurement. NAGP's justification for this approach i s that these contracts are invariably cases in which delivery o f the goods has already taken place and cancellation o f the contract would be impossible. In such cases, it i s commonplace for the NAGP to be subjected to outside pressures to issue such approvals. Government Intervention: Out o f 63 cases o f Single Source Procurement analyzed, in at least 13 instances the background information points to various forms o f influence on the procurement process by the central Government or local authorities to encourage Single Source Procurement from a specific local company. The desire to "support the local producers" was frequently quoted by public officials interviewed as a justification for such interventions. Insome cases, official decisions were taken to sole-source a given supplier for a specific contract but, in most cases, an instruction was handed down by more senior officials. Problems with the Execution of the Government Budget: Chronic budget shortages and the lack o f predictability in cash releases by the Treasury delay the arrival o f allocated amounts until close to the end o f the fiscal year, forcing procuring entities to choose the fastest procurement method possible. This was the experience o f many procuring entities in December 2002 and was directly observed by the assessment team, who witnessed the many visitors to NAGP seeking waivers to use Single Source Procurement for requirements that did IThe Law on State Budget stipulates that contracts exceeding MDL 10,000 (US$700) invalue are nulland void if they are not approved by the NAGP. Examples o f such cases include: the decision o f Chisinau Municipality to declare selected companies (Edilitate, Exdrupo companies) as unique executors o f all lunds o f road repair and maintenance works; a direct instruction from the local authorities to social institutions to procure milk and bread from prescribed producers (Franzeluta bakery in Chisinau, dairy producer Lapte in Chisinau, Incomplac in Balti); Prime Minister's instruction for procurement o f chemical products for the health sector institutions to be made from Chisinau Agurdino company; instructions from the Ministry o f Health to the hospitals to procure drugs only from the Basa Pharm company; the Government's decision to use only state-owned Air Moldova for the official trips and only the Codru Hotel for the official delegations. 37 Moldova CPAR Public Sector: Public Sector Management Performance not meet the conditions for use o f this method specified in the procurement law. The risk o f losing unutilized balances at the end o f the fiscal year creates the incentive for the procuring entities to use Single Source Procurement, where more transparent and competitive procurement methods would not enable contract award by the end o f the year. It i s clear that not all o f these justifications are aligned with the conditions for use o f the Single Source Procurement Method set out in the procurement law (see Box 1). An examination o f a sample o f 899 contracts awarded during the first ten months o f 2002 found that the following were the often quoted bases inthe law for using SSP. Table 8. Justifications Given for Using the Single Source ProcurementMethod Total Value of Legal Basis for Use of SSP Article 24 (a): there i s an urgent demand for acquisition o f works inextraordinary situations 5 225,000 15,734 0.3% Article 24 (b): the works can be executed by a single bidder 802 76,431,562 5,344,864 97.1% Article 24c) the investor intends to acquire from the same supplier not more than 30% the initial 92 acquisition 2,048,507 143,252 2.6% 899 78,705,109 5,503,851 100% A survey o f 899 contracts awarded by SSP shows that 97 percent o f alljustifications are based on the selected supplier being in a monopoly position, a justification recognized under the procurement law. With the monopoly justification, the most often quoted justification for using SSP is that procuring entities need to buy services such as gas, electricity and telephone services, from utilities which are monopolist suppliers, as the utilities sector has not yet been deregulated in Moldova. The following analysis, which i s based on contracts awarded by SSP duringthe first ten months o f 2002, shows that purchases from utilities accounted 63 percent o f public contracts duringthat period. Table 9. Utilities Services as a Percentage of SSP Contracts Type Service MDL US$Equiv. % Electricity 80,000,000 5,594,406 20% Water supply 87,600,000 6,125,874 22% Gas supply 10,700,000 748,252 3% Heating 64,500,000 4,510,490 16% Telephone services (JSC MOLDTELECOM) 10,600,000 741,259 3% Total Value o f Contracts for Utility Services awarded by SSP 253,400,000 17,720,280 Total Value o f All Contracts Awarded by SSP During Same Period 405,000,000 28,321,678 Value o f Utilities Contracts as a Percentage o f all SSP Contracts 63% The assessment then went on to look in detail at a randomly selected sample o f 63 non-utilities contracts awarded by SSP, in order to try to establish if the justifications given by the procuring 38 Moldova CPAR Public Sector: Public Sector Management Performance entity were in line with the conditions for use o f this method inthe procurement law. The results are presentedinAnnex F. While the contract-by-contract summary provided for each contract i s self-explanatory, the overall findings are that there were many instances where the use o f SSP appears unjustified. Several contracts whose value exceeded the threshold o f M S L 225,000 (US$15,700) in the procurement law, above which Open Tendering i s required, were awarded by SSP with no credible justification (e.g., procurement o f fire engines valued at MDL 9,771,000 (US$683,287) by Chisinau Municipality). There were also cases where urgency was given as the reason for using SSP but it looked unjustified as the goods were beingprocured for events that were readily foreseeable by the procuring entity (e.g., procurement o f computer and projector equipment for a medical conference in Chisinau). There were also several cases where contracts for apparently straightforward repair works were awarded by SSP (e.g., Contract for Repair Works valued at MDL 400,000 (US$27,972) awarded by the Hospital for Lung Diseases), despite the fact that there are several works contractors in Moldova qualified to execute such works (See Section C.12: Construction Sector). Another common reason for unjustified use of SSP was that the procuring entity claimed ignorance o fthe restrictions inthe procurement law (e.g., procurement o f office furniture by State Licensing Chamber). Such contracts invariably ran into trouble when the procuring entity tried to make payments: because the contract had not been approved by the NAGP and registered with State Treasury, Treasury refused to make payments to the supplier. In such cases, pressure was brought to bear on the NAGP to give a retroactive approval o f an SSP contract-ressure to which it invariably acquiesced. Furthermore, there were cases where a procuring entity bought goods by SSP from a Moldovan company that was the only local supplier o f the goods, rather than conduct an international Open Tender, as required by the law, giventhe value o f the contract (e.g., procurement o f agricultural equipment valued at MDL 373,270 (US$26,100) by the General Department o f Material Reserves). It was repeatedly observed that procuring entities offered this spurious definition of "the goods only being available from one source" asjustification for buying from a Moldovan company, when the goods were freely available from foreign sources. Finally, a very common reason (though hardly ajustification) for using SSP was the year-end rush to spend budget allocations before they were clawedback by the Treasury. There are many instances o f the use of SSP (procurement o f furniture by Rachmaninov Lyceum) because it was the only procurement method which would allow the funds to be spend in a very short time-in some cases, inas little as five days. The frequency o f apparently unjustified use o f the SSP method, even within this small sample, inevitably leads one to question the appropriateness o f the 37 percent o f SSP contracts (see Table 9 above), which were for goods, works, or services other than utilities services. C.5.2.6 Payment Delays The most significant issue identified through the analysis o f payments and contract execution was the prevalence of payment delays. Out o f 33 contracts that did not require 100 percent prepayment, only 8 (24 percent) did not experience payment delay^.^ The main reason behind the payment delays is difficulty with the Govemment's budget execution process. The Treasury system has to ration cash releases because Payment information was analyzed for 50 contracts, 17 of which provided for 100% pre-payment and another 10provided for partial pre-payment. 39 Moldova CPAR Public Sector: Public Sector Management Performance o f the shortfalls o f inflow to the budget. The procuring entities, however, are required to draw up their expenditures plans based on the approved budgetary allocations derived from the annual budget law. Procuring entities may award contracts upto the monetary limitso fthose allocations. However, procuring entities receive no information on the actual cash budget situation nor on planned budget revisions and expenditure plans are revised only after the annual budget i s officially amended. The assessment also found that payment delays are a major driver o f price increases in contracts. The general practice in Moldova i s that contracts are awarded based on a fixed price, and the NAGP generally does not accept changes inprices without a solidreason. Insome casesreviewed for this assessment, NAGP insisted on re-bidding, rather than agree to a significant increase in an existing contract. Price increases are most frequently found in contracts for civil works, for which cost estimates are based on Soviet-era prices and material and labor usage rates. These rates are subject to change by the Government. In most cases where the rates are increased, the price o f the contract increases as a result. For example, in 2001 the rate for salaries in the construction industry increased 2.5 times. When the rates change, construction contractors submit to NAGP their requests to increase their contract prices. The NAGP invariably approves such requests. However, the longer the delay in the execution o f the works is, the greater is the increase in the contract price. For example, in a contract for the reconstruction o f the Court o f Justice building, the construction company estimated a 20 percent increase in the price o f the contract, driven mainly byprice escalation due to delay. C.5.2.7 ContractImplementation The incidence o f non-performed contracts in the sample was found to be relatively high. Out of 62 contracts, 39 (65 percent) were fully executed, 14 contracts (23 percent) were partially executed and 9 (15 percent) were not executed at all. There are several reasons for this highrate o funperformedcontracts. Problemswith Budget Execution:Eventhough the contracts are signed at a price within the allocated budget, there are many cases when the funds actually released to finance the contract are inadequate due to budget deficits or budget revisions. One example i s a contract for reconstruction o f the Supreme Court o f Justice, valued at MDL 4 million (US$279,000), o f which works valued at only MDL 770,000 (US$53,500 or 19 percent o f contract value) were completed. Failureto Apply Penalties for Non-performance of Contracts: It is a common occurrence that both parties to a contract fail to respect its terms and conditions. On the one hand, the procuring entity may refuse to accept an increase in the contract price, even in cases where that increase i s caused by a delay on the procuring entity's part. On the other hand, the contractor refuses to have financial penalties imposed on it for late or non-performance. Purchaser's Failure to Call Performance Guarantees: A peculiarity in Moldova's Treasury system often results in procuring entities being unable to encash performance guarantees when contractors fail to perform. If a procuring entity wanted to encash a performance guarantee, it would have to transfer the funds into an off-budget bank account and, because procuring entities are not permitted to maintain such off-budget bank accounts, they frequently do not ask suppliershontractors to provide performance guarantees inthe first place or, where such guarantees are given, cannot encash them. 40 Moldova CPAR Public Sector: Performance on Bank-Assisted Projects C. 6 Performance on Bank-Assisted Projects This section reviews the experience to date of the government's performance of procurement in accordance with the World Bank's procurement guidelines on Bank- financed projects and highlights problems affecting procurement. It also reflects on the experience of the decentralization of the Bank's regional decision-making authority over procurement to the Bank's regional office in Hungary office since 2000 (transferred to Ukraine Regional Office in October, 2002) and suggests a series of measures to be taken to tighten fiduciary controls over future procurement operations to be financed by the Bank in Moldova. C.6.1 Development of the World BankPortfolio The Bank's portfolio in Moldova i s necessarily small, given the country's ability to service debt. The first loan was signed in February 1993 and a further 15 loans were signed up until late 1997. From the end o f 1997,these were replaced with IDA credits. The current portfolio consists o f 11 active projects and 6 pipeline projects.. Increasingly, Moldova i s looking for grant assistance either to fully finance projects or to part-finance key activities within projects. This tends to make even the small number o f projects rather complicated to manage-especially where different donors employ their own procurement guidelines, say, in the appointment of consultants-and to disburse. The current portfolio relies heavily on social development projects and the focus will increasingly be on these projects and those directly linked to policy reform. An analysis o f current projects shows that there have been startup delays in almost all cases and that these can be attributed to inexperienced staff in the Project Implementation Units and to the changeable political situation in Moldova, which has led to delays in the ratification o f loan agreements. Procurement is especially vulnerable to both the underdeveloped local public procurement culture and political influence. The implementation o f procurement on Bank-financed projects has historically been handledby PIUs rather than by the line ministries o f the government. Where, previously, line ministries had attempted to handle procurement and project management themselves, long delays led to the belated formation o f PIUs to take over this activity. While this organizational arrangement i s still considered necessary by the government, in order to attract and retain staff with the necessary qualifications and experience to undertake procurement, it i s recognized that rationalization and consolidation o f the functions o f the existing PIUs should be undertaken. The consolidation o f PIU activities for certain ministries has already been accomplished with some success and this will be further expanded to other ministries which implement multiple projects. However, the most recent Country Portfolio Performance Review (CPPR) on Moldova, conducted in October 2002, noted that the long-term objective o f mainstreaming the activities so far handled by PIUs into regular government functions i s hampered by delays in Public Sector Reform. The Government should develop a strategy to build government capacity to a level which would permit line ministries successfully to undertake project preparation, implementation and monitoring from their own resources. 41 Moldova CPAR Public Sector: Performance on Bank-Assisted Projects C.6.2 CommonProcurement Problems The latest Country Project Portfolio Review (CPPR) found that the performance o f procurement on Bank-financed projects was generally satisfactory. In discussions with PIUs as part o f the CPAR preparation, several common procurementproblems were identified. The most common was the difficulty in either hiring trained procurement specialists or in receiving adequate and timely training for those procurement staff already employed on the project. In many cases, although the procurement specialist had received overseas training, this very often had not taken place until a year after effectiveness. This resulted in substandard procedural action and procurement documentation being produced by those units at the critical period following effectiveness. It was notable that the more successful o f the projects had managed to keep the same procurement staff over the life o f the project. Differences in procurement arrangements in projects having a similar end-user base (Social Investment Fund and Health Investment Fundprojects, for instance), were found to have created avoidable confusion. To remedy this problem, procurement arrangements should, as far as possible, be kept comparable between similar projects. Lack o f competition was a fiequent problem, especially on low-value civil works contracts carried out under Minor Works procedures, where it was often difficult to get sufficient quotes from qualified local contractors to achieve a satisfactory competitive procedure. Local firms have difficulty competing inWB funded projects due to the qualification requirements, particularly the minimumfinancial requirements. Onthe Social Investment Fund Project, the PIUhas blacklisted 52 firms for failing to complete work or for performing substandard work and this has further reduced available competition. A problem which has been repeatedly experienced on Bank-financed projects inMoldova is the refusal o f purchasers to accept bids submitted by unincorporated joint ventures (JVs) between firms. Typically, purchasers rejects such bids as non-responsive or, in some cases, require firms which wish to bid together to incorporate their collaboration ina new legal entity. This approach has, in tum, caused difficulties because any such newly established firm is, by definition, a separate legal entity from the companies which formed it and cannot, therefore, rely on its parent firms' qualifications (relevant experience, turnover, liquid assets etc.) for bidding purposes. This assessment examined this issue carefully and reviewed the relevant provisions o f the Civil Code, Article 1339 o f which specifically recognizes that: "By an agreement on civil association, two or more persons are mutually obligated to pursue jointly economic goals or other goals in accordance with obligations specified by the agreement, without being a legal entity, and benefits and losses thereof shall be shared among them." Therefore, the difficulty appears to arise from established local practice in Moldova rather than from any constraint in the law itself. Indeed, when the assessment team asked selected PIUs why they have rejected unincorporated joint venture (JV)bids inthe past, they were unable to point to a legal basis for their action. It i s incumbent on Bank Task Team Leaders and Procurement Specialists, therefore, to communicate this message to Borrower personnel implementing Bank- financed projects-for example, during project launch workshops and as part o f regular supervision-and to ensure that JV bids are not undulyrejected inthe future. 42 Moldova CPAR Public Sector: Performance on Bank-Assisted Projects Disbursement problems, particularly with regard to the BanWBorrower split on certain credit agreements and an ongoing problem with the treatment o f tax-exempt contracts by some credit agreements, complicates payments under contracts awarded to local firms. For instance, the credit agreement has an 80/20 BanWBorrower split for local National Shopping (NS) contracts to take account o f VAT and other taxes. However, as those contracts are already exempt from VAT and other taxes, the Bank percentage could be as high as 100 percent. The tax exemption arrangements also caused problems for contractors on civil works projects where the Borrower, through the Ministry o f Finance, i s supposed to refund the VAT paid by those firms for local materials used on Bank-funded contracts but generally either refuses to pay, offsets payment against taxes due, or delays payment for very long periods. Shortages or untimely availability o f counterpart funds also contributed to difficulties in procurement on some projects, delaying payment to contractors. A particular complaint o f PIUs was that, during project preparation and appraisal, they were not consulted on procurement methods or procurement plans included in credit or grant agreements and that, as a result, these were often impractical; for example, Quality and Cost Based Selection procedure for small-vale contract worth $7,500. They reported that this, in tum, contributed to avoidable delays or ledto such contracts not being implemented. Some political interference was reported, not during evaluation, where many PIUs had a multi- ministerial evaluation panel, but at the time o f contract award, when pressure was exerted to change the evaluation decision. PIUs also reported that local bidders often have difficulty in preparingresponsive bids, particularly on ICB tenders, where bids hadto be inEnglish. C.6.3 And Some Successes Use o f a consolidated PIU for the agricultural sector projects and grants appears to have been successful. The agriculture PIU is grouped together in existing and equipped offices and staffed with trainedprocurement and disbursement staff. Because they are able to use their experience to the benefit o f new projects in their sector startup time i s greatly reduced and the quality o f procurement improved, both o f which have been appreciated by the project managers o f the new projects. Onthe Social Investment FundProject, the PIUhas almost completed all the procurement, a year ahead o f the Closing Date. This can be attributed in part to the fact that the unit includes a competent procurement specialist, who has received Bank training and who was also assisted in the beginning of the project by intemational procurement advisers. The procurement methods are relatively simple and most o f the contracts are small and repetitive, which, although time consuming due to their volume, are not difficult to implement nor to manage. C.6.4 Decentralizationof Procurement Fiduciary Functions Moldova was previously grouped with Hungary, and the World Bank approved the partial delegation of procurement fiduciary functions for four projects to the Country Office in Hungary in 2000. Duringa subsequent reorganization in the Bank, Moldova was grouped together with Ukraine and Belarus in Country Unit 2 (ECCU2). The Bank has now approved the transfer o f delegation to the Ukraine Regional Office, with increasedthresholds. 43 Moldova CPAR Public Sector: Performance on Bank-Assisted Projects Type of Procurement FinancialThreshold (US$ million) Civil Works <15.0 Goods <7.5 Consultant Services <2.0 PIU staff working on projects for which procurement functions had already been decentralized expressed satisfaction with this arrangement, and other project staff interviewed for the CPAR all viewed the possibility o f decentralizing their projects very positively. They particularly remarked that decentralization speeds up the clearance process and improves the Bank's responsiveness. They also viewed delegation to Ukraine as a logical step, considering that both countries have historical links; are members o f the same trading bloc and are in a similar stage o f transition to a market economy, creating a common understanding o f the factors that would affect implementation o f their projects. Nearly all P I U staff interviewed would also welcome a local procurement assistance capability within the Moldova Country Office and inparticipation intraining courses on procurement to be heldinMoldova. C.6.5 ProcurementPostReview To date, the Bank has conducted only a limited number o f post reviews on procurement on projects in Moldova. In June 2001, Bank staff conducted a procurement audit o f five active projects with a sample o f 110 contracts. The audit found some non-compliance with the Bank's procurement guidelines and the followingpoints were highlighted inthe report. 1. Inmany cases, procurement plans were not updated. This issue was reviewed duringthe October 2002 mission and updated procurement plans were obtained from the active projects. Those provided appeared to have been well prepared and updated but it was not possible to determine whether they had been updated simply as a result o f the CPAR request, or as a matter o f course. 2. The PIUs lack in-house procurement capacity. This has been resolved in some o f the longer standing PIUs, which have since either received international training, assistance from international consultants, or both. Due to the lack o f procurement capacity in the country and the centralization o f procurement functions in the NAGP, procurement staff are the only staff outside NAGP with any training; there i s no spare capacity and staff need to be fkeed from projects which are closing to work on new ones. Clearly, it i s not desirable that the staffing o f implementing agencies on Bank-financedprojects should be achieved at the expense o f weakening the NAGPby hiringaway its staff. 3. PIUs have paid inadequate attention to contract management. The audit noted that training was required in this area, as there were problems in contract execution. All PIUs are now more experienced in contract management since the audit was carried out but there appears to have been many cases o f contractors not completing their projects, especially under the HIFproject. This issue will needto be reviewed during future audits. 4. Closer supervision was required on works contracts. This recommendation appears to have been subsequently taken to heart. On the Social Investment Fund Project for instance, 52 firms have been blacklisted for failing to meet contract demands; penalties 44 Moldova CPAR Public Sector: Performance on Bank-AssistedProjects have been levied and retentions imposed. Future audits should look closely at how supervision was carried out and how these retained sums have been accounted for. Post-reviews undertaken inJune 2002 on two projectswere satisfactory. C.6.6 Measures to Strengthen Fiduciary Safeguard on Bank-financed Projects Inorder toreduce further theriskto Bankfunds disbursedonprocurement underBank-financed projects inMoldova, the Bank shouldtake the following steps: At appraisal o f all new projects, the Bank should undertake an assessment o f the institutional capacity o f all agencies involved in the project to implement procurement under Bank guidelines. Where capacity i s found to be weak, a detailed action plan should be put in place to supplement and develop capacity to undertake procurement satisfactorily and particular emphasis should be put on training o f procurement staff at the early stages o f a project. A Project Launch Workshop should be an integral part o f all newprojects. The PIU, in consultation with clients and the Bank, should prepare a detailed procurement plan that i s approved by the Bank at appraisal. Duringsupervision missions, Bank staff should follow up assiduously to make sure that procurement plans are kept up- to-date and, where slippage does occur, that remedial action i s takenpromptly by both the Borrower and the Bank. The disbursement percentages proposed should take into account the local tax situation, especially with regard to possible tax exemptions that may be granted during the life o f the project, to be agreed at appraisal. The composition o f the PIUs should be sufficient to cope with the volume and complexity o f the project, in particular taking account o f the procurement plan. Where Bank-financed projects are implemented by PIUs, Bank Task Team Leaders and procurement staff should make sure that staff appointed to those PIUs are appointed following a competitive process and that they are properly qualified. Bank Task Team Leaders and procurement staff should work closely with the Borrower to ensure that all public officials appointed to serve on evaluation committees are qualified to undertake evaluations, that they dedicate adequate time to the task, and that the committees contain specialists with appropriate technical expertise. In the short term, credit agreements should keep thresholds for prior review relatively low, e.g. >US$lOO,OOO for goods, so that most contracts are subject to prior review by the Bank. During project implementation and subject to satisfactory performance o f procurement, the Bank may raise prior review thresholds on a case-by-case basis. Procurement by less competitive procurement methods, including International Shopping and National Shopping, should be kept to a minimumfor all new projects Bank task teams should ensure that the level o f post reviews conducted i s in accordance with the Credit Agreements. The Regional Procurement Adviser (RPA), the Bank's most senior procurement official for Europe and Central Asia (ECA) Region, should assiduously follow up all procurement-related complaintsby bidders. The Bank's Investigations Unit should investigate all allegations o f procurement-related fraud or corruption. To facilitate the implementation o f procurement, the design o f procurement arrangements and contract packaging should be kept as simple as possible on new projects and, where there i s more than one project in the same sector, their procurement arrangements should be consistent. 45 Moldova CPAR Public Sector: Risk Assessment c.7 RiskAssessment Any assessment o friskina country's nationalpublic procurementsystem shouldbe based on the stage o f development o f its legislative framework, the effectiveness o f its regulatory institutions, the strength o f its enforcement regime, the capacity o f its institutional and human resources, and the threat o f corruption. Moldova's legalframework consists o f a reasonably sound procurement law, which inmany respects i s close to international good practice but, as Section C.2 o f this report clearly demonstrates, i s fundamentally undermined by inadequate enforcement and weak regulation. Even within the law, there are a number o f shortcomings that reduce transparency, notably the evaluation o f bids on the basis of subjective criteria and wholly inadequate arrangements for the administrative review o f bid protests. Furthermore, the procurement law i s undermined by the absence o f implementing regulations, which are normally required in any well-functioning national procurement system to provide procuring entities with detailed guidance on the applicationo f the law. The regulatorv function for public procurement are in Moldova i s vested in the NAGP, which generally does a good job at processing procurement transactions in a timely manner and in helping Working Groups in the procuring entities to implement their procurement programs. However, the Agency i s routinely subjected to political pressure in making its decisions and too often is dragged into fixing breaches o f the procurement law after they have occurred, rather than standing up for its correct application, which should be its primary duty. The Agency's organizational position, as an institution that reports to the Ministry o f Economy, denies it the independence it needs to operate effectively as the country's regulatorybody for public procurement. The enforcement regime that underpins the procurement legislation i s particularly weak in Moldova. Public sector internal auditing i s in its infancy and i s currently limited to ex post verifications and inspections; there i s no ex ante assessment o f the control framework within procuring entities. The Court o f Accounts lacks qualified audit personnel who are trained in financial auditing, computer auditing, and performance auditing, the latter being a particularly important area for procurement operations. With few exceptions, the public sector institutions that conduct procurement are ill- equipped for the task. Most staff who handle procurement have not benefited from training specific to the task. Also, the involvement o f ministers in the Working Groups o f many ministries increases the risk o f political interference inprocurement decisions. Corruption in Moldova is widely recognized as being a real and widespread problem and appends itself particularly to public procurement, given the substantial expenditure all levels o f administrationmake. Measured against all o f these parameters, the environment for conducting public procurement in Moldova i s one o f high risk.In this respect, Moldova rates comparably with other countries in Europe and Central Asia Region that have recently embarked along the road o f public procurement reform and whose procurement environments have also been rated as high risk in recent CPARs, including Albania, Macedonia, Turkey, the Russian Federation, Serbia and Montenegro, and Ukraine. 46 Moldova CPAR Public Sector: Recommended Supervision Plan C.8 RecommendedSupervisionPlan Giving the rating o f Moldova as a high-risk country from a procurement point o f view, the Bank's approach to supervision should be suitably cautious. Specific approaches to supervision should include the following: Bank task teams should make procurement a more integrated part o f the preparation, appraisal and design o f projects. Task Team Leaders should consult with the CPAR team, inorder to be sure that the lessons learned from this assessment are fed into the design of procurement arrangements on new Bank-funded projects. Throughout project implementation, Procurement Accredited Staff should remain assigned to the project, in order to ensure the consistent application o f the Bank's guidelines to the performance of procurement and to facilitate the formation o f strong working relationships between Government procurement staff and Bank procurement specialists. The Bank should conduct procurement capacity assessments on all institutions charged with implementingnewBank-financedprojects. Given the lack o f any regular capacity inMoldova to train the country's own procurement staff, project launch workshops on new Bank projects should be conducted for every project and should contain at least two days o fproject-specific procurement training; For civil works contracts, the appointment o f consultants to carry out design and construction supervision should normally be required. Bids submitted by unincorporated joint ventures between bidders should be considered for evaluation, providedthat all members o f the JV are jointly and severally liable for any resultingcontract. Bank procurement staff should review bid evaluation reports (BERs) with particular diligence and insist on a full and detailed justification o f the recommendation for the award o f contract. In all cases where an implementing agency initially submits a bid evaluation report with insufficient information, it should be returnedto the implementing agency with a requirement that full information be provided to justify the recommendation. The Bank should place an obligation on all implementing agencies, through Credit Agreements andor Sub-credit Agreements, to establish and maintain an asset register for all goods and works financed by Bank funds. Bank Task Team Leaders should make sure that procurement post reviews are conducted by every supervision mission and that the Back-To-Office report o f every supervision mission contains a specific annex dealing with procurement post review, which should be sent promptly to the Regional Procurement Adviser. The Bank's procurement specialists, both those based in Country Offices and those based in headquarters, should play a full role in fulfilling this objective. The Bank should have an independent procurement review conducted in Moldova during the nextyear or two. The Bank should pay special attention to the supervision o f the NCB procurement method and should ensure that the unacceptable features o f the Open Tendering method, as defined in the Moldovan procurement law and identified in Annex G, are not applied to Bank-financedNCB. 47 Moldova CPAR Public Sector: Recommended Supervision Plan Table 11shows the recommended financial thresholds for procurementmethods for Moldova. Table 11.Applicable ThresholdsbyProcurementMethod 1 ProcurementMethod 1 Threshold 1 ICB: Works >US$300,000 i N C B:Works us$100,000 International Shopping: Goods US$50,000; and the first two contracts with individual consultants and every contract >US$25,000. At least one infive contracts that are subject to post review should be post reviewedby the Bank. The Bank's procurement staff should ensure that sufficient post reviews are scheduled and undertaken to achieve this proposedratio as soon as possible. Given the underdeveloped status o f Moldova's consulting industry, shortlists for consulting assignments on Bank-financed projects may comprise entirely national consulting firms only if the assignment i s estimated to cost less than US$lOO,OOO. Bank task teams should make a determination, on a project-by-project basis, that there i s a sufficient number o f qualified firms to provide adequate competition at competitive cost. In cases where Bank funds are on-lent through financial intermediaries in accordance with paragraph 3.12 o f the Bank's Procurement Guidelines, procurement o f contracts for goods and works estimated to cost less than US$200,000 per contract may be undertaken inaccordance with established commercialpractices acceptable to the Bank. Provisions for projects including Community Development will be agreed on a case-by-case basis taking into account previous experience and based on compliance with an agreed Procurement Manual. C.9 UnacceptablePracticeson Bank-financedProjects The following practices, which have been observed in the procurement legislation o f Moldova, should be amended for National Competitive Bidding (NCB) financed by the Bank as follows: Bidding shall not berestrictedto domestic firms. 48 Moldova CPAR Public Sector: RecommendedSupervision Plan Open Tendering shall be followed in all cases. Invitations to bid shall be advertised in at least one widely circulatednational daily newspaper, allowing a minimumo f 30 days for the preparation and submission o f bids. When pre-qualification shall be required for large or complex works, invitations to pre- qualify for bidding shall be advertised in at least one widely circulated national daily newspaper a minimum o f 30 days prior to the deadline for the submission o f pre- qualification applications. Minimum experience, technical and financial requirements shall be explicitly stated inthe pre-qualification documents. Government-ownedenterprises inthe Republic o f Moldova shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law and are not a dependent agency o f the Govemment. Furthermore, they will be subject to the same bid and performance security requirements as other bidders. Participation shall be allowed fiomjoint ventures on the condition that suchjoint venture partners will bejointly and severally liable under the Contract. Procuring entities shall use the appropriate standard bidding documents for the procurement o f goods, works or services, and shall contain draft contract and conditions o f contract, all acceptable to the Bank. BidOpeningand BidEvaluation: o Bids shall be opened inpublic, immediately after the deadline for submission of bids. o Bidsmustbe made inwriting inoriginal, and facsimile copies arenot acceptable. o Evaluation o f bids shall be made in strict adherence to the monetarily quantifiable criteria declared inthe biddingdocuments. o Extension o f bid validity shall be allowed once only for not more than 30 days. N o further extensions should be requested without the prior approval o f the Bank. o Contracts shall be awarded to qualified bidders having submitted the lowest evaluated substantially responsive bid. o Domestic Preference shouldnotbe applied under National Competitive Bidding. Civil works contracts o f long duration (e.g. more than eighteen (18) months) shall contain an appropriate price adjustment clause. All bids shall not be rejected and new bids solicited without the Bank's prior concurrence. All contracts shall be in writing, signed and stamped by authorized signatories o f the Purchaser and the Supplier and contain identical terms and conditions o f contract to those included inthe tender documents. Given the high cost o f bid securities in Moldova and the difficult which most bidders experience in obtaining them, purchasers should consider requiring bid securities in the range o f 1 to 2 percent o f the bid price. Performance Securities should be in the range o f 5 to 10percent o f the contract price. N o advance payments shall be made to Contractors without a suitable Advance Payment security. The wording o f all such securities shall be included into the biddingdocuments and be acceptable to the Bank. A template supplemental letter to future creditfloan agreements, to be signed between Moldova and the Bank, i s appended at Annex G. 49 Moldova CPAR Private Sector PRIVATE SECTOR This section examines the extent to which the private sector in Moldova is able to supply public sector demand, describes commercialpurchasingpractices in the private sector, and provides a view of the country's public procurement system from the perspective of the private sector companies interviewed for the assessment. C.10 The National Framework for Private Sector Operations Over the past decade, Moldova has worked towards improving the legal foundations necessary for the development o f a market economy. It has carried out extensive reforms o f its commercial and financial legal framework. Moldova has taken key steps to implement legislation, which was needed in the reform process, such as laws on commercial companies, banking regulations and related areas. However, an analysis o f key commercial laws that directly contribute to creating a favorable investment climate in Moldova, such as secured transactions and bankruptcy laws, shows that even relatively good laws suffer from being poorly implemented. C.10.1 ForeignDirect Investment Foreign Direct Investment (FDI) inMoldova i s among the lowest levels inthe region. From 1991 to 1997, FDI never exceeded U S 2 5 million annually (less than 2 percent o f GDP), rising to US$60 million (4 percent o f GDP) during 1998-99 and climbing to US$lOO million (11 percent o f GDP) in 2000. Despite this year-on-year growth, FDI into Moldova remains modest by comparison with other transition countries, as the figures from 2000 inTable 12 show. Table 12. FDIPer Capita for Selected Transition Countries, 2000 I US$125 I U S 1 2 8 Russia ranks as the largest investor in Moldova and accounts for just under one-third o f Moldova's total FDI stock, including large energy sector acquisitions by Russian firms, such as Lukoil and Gazprom. Other significant investors are the USA, with US$40 million invested, and Spain, with US$30 million, following Union Fenosa's acquisition of three of Moldova's five electricity distributors in 2000. The modest to low levels o f FDI are limited by Moldova's slow progress inprivatization and restructuringkey industrial sectors, as well as high-profile failures o f privatization sales inthe mid-1990s. C.10.2 Foreign Trade Regime Moldova has established one o f the most open trade regimes among the former Soviet republics and was admitted to the World Trade Organization in May 2001. Grain export quotas were abolished in 1995 and import tariffs have been progressively reduced to an average o f 7.5 percent in2001. The country has habituallyrunhighcurrent account deficits, which averaged 12percent o f GDP during the period 1996-2000, peaking at 19 percent o f GDP in 1998 (see balance o f payments figures inTable 13). 50 Moldova CPAR Private Sector Table 13.BalanceofPayments, Jan-Sep 2001 (US$m) Exports fob 323.4 I 392.9 Imports fob -551.9 -623.9 Tradebalance -228.4 -231.O Servicesemorts 120.8 119.3 Incomedebits -71.9 -90.3 I N e t transfers I 113.8 I 98.2 I C.10.3 Pre-shipmentInspection(PSI) The Government signed an agreement with SociCtC GCnCrale de Surveillance (SGS) in March 2000 for Preshipment Inspection and Modemization Services for the three-year period, with the possibility for extension. PSI i s mandatory for imports exceeding US$3,000 in value, with an inspection fee o f 0.8 percent o fthe CIF price. The factors driving Moldova's introduction o f a mandatory PSI scheme were concerns about weakness and corruption inthe Customs Department, smuggling, under-valuation o f imports and exports, with the resultant loss o f government revenues. An International Monetary Fund(IMF) report4estimated that in 1999, imports into Moldova had been underreported by US$270 million or 66 percent o f the total value o f imports. The introduction o f PSI was supported by IMF technical assistance advice and formed part o f the Government's Memorandum o f Economic and Financial Policies submitted to the IMF inNovember 2000.5 While preliminary evidence indicates that PSIhas helped increase tax collection, the scheme has been severely criticized by importers for imposing additional costs in terms o f time and money, thus further eroding Moldova's competitiveness. The main criticism leveled at the PSI scheme by importers interviewed for this assessment was that import operations, which previously took one week, now take three weeks under PSI. There i s also a widespread perception that it i s not the best use o f resources to check the prices and quality o f legally imported goods, when unchecked illegal imports are the real problem. Moldovan importers also complain that foreign exporters are unwilling to deal with PSI inspections that, they say, have lost them export contracts. The quality and expense o f PSI inspections have also been the subject o f criticism. Importers also report problems with the implementation o f the scheme, alleging that Customs officials view PSI as only playing a consultative role in assessing the value o f imports: Customs officers sometimes impose their own indicative prices on imports, resulting in a higher valuation for imports and, hence, higher import duties. "Republic of Moldova: CustomsAdministrationModemizationandTariffPolicyReform," IMFFiscal Affairs Department,June 2000. Available at www.imf.org/extemallNP/LOI/2000/mda/0 l/INDEX.HTM Moldova CPAR Private Sector C.10.4 Manufacturing The food processing and beverages sector dominates manufacturing, especially as the secession o f Transdniestr has deprived Moldova o f its heavy industrial base. Food and drinks accounted for 50 percent o f total industrial output in 2000, with the main components being wine (18 percent), fmit andvegetables (6 percent), sugar (5 percent), andtobacco. The continued heavy reliance o f the manufacturing sector on exports to Russia has had a destabilizing effect: industrial production slumped by 15 percent in 1998 and a further 14 percent in 1999. The comer appeared to have been tumed in 2000, when industrial output grew by 7 percent, then a further 14percent in2001, along with Russia's economic revival. C.10.5 BankingSector The National Bank o f Moldova (NBM) was established in 1991 as an independent central bank responsible for monetary policy and banking supervision. Since 1995, it has proved relatively effective at combating inflation and ensuring exchange rate stability, with the exception of 1998, when the Russian financial crisis precipitateda boutof currency weakness and higher inflation. The banking system, which consists 19 commercial banks, including 3 foreign bank subsidiaries, is highly concentrated, with the five largest banks accounting for 69 percent of all assets in 2001. The sector has proven relatively robust, surviving the Russian financial crisis o f 1998, rapid currency depreciation, and an acute liquidity shortage. The lending policies o f the commercial banks are highly conservative (MDLlendingrates average around 29 percent in 2001) and act as a severe deterrent to potential borrowers. Local private sector companies face real difficulties in gaining access to commercial credit and are required both to pay high fees and to deposit 100 percent cash cover for all forms o f securities and bank guarantees. This acts as a strong disincentive to local companies fromparticipating inpublic tenders. Empirical evidence o f the difficulty that inadequate access to financing causes Moldovan companies i s provided by the Business Environment and Enterprise Performance Survey (BEEPS) o f 2002, which asked 171 Moldovan enterprises about both access to financing and the costs o f finance as obstacles to their business and found that 51percent o f respondents described access to finance as a moderate or major obstacle, while 71 percent described the cost o f finance as a moderate or major obstacle. Figure 7 shows the responses graphically. Figure7: Access to Finance and Cost of Financeas Obstaclesto Business,2002 How Problematic are these Different Factors for the Operation l and Growth of your Business (2002) I I No obstacle Minor Obstacle Moderate Obstacle Major Obstacle ' O s to Financing W Cost of Financing, I 52 Moldova CPAR Private Sector C.10.6 The Ruleof Law andEnforceability of Contracts In Moldova's legal system, the rule of law has still not taken firm root, thus presenting the country with a major transition challenge. Commercial laws continue to suffer as a result o f not being sufficiently accessible or because o f inadequate administrative and judicial support. This implementation gap both undermines the utility o f specific laws and diminishes the confidence foreign investors and traders have inthe legal system as a whole, and inparticular in its ability to uphold contract rights. This is evidenced by the lack of confidence that many businesses inthe country have inthe legal system's ability to uphold their contract and property rights in business disputes. The 2002 BEEPS survey shows that the business community's faith in the courts' ability to enforce their decisions i s low, with 38 percent o f the 167 firms interviewed believing that the courts enforce their decisions seldom or never (see Figure 8). Figure8: Ability ofthe Court Systemto EnforceitsDecisionsinResolvingBusiness Disputes,2002 How Often is the Court System Able to Enforce its Decisions in Resolving Business Disputes? 35 ' 30 25 20 15 10 5 Regarding the fairness and impartiality o f the court system in resolving business disputes, responses to the same survey indicate that the confidence o f the business community in the fairness and impartiality o f the courts also i s a cause o f concern, with 46 percent o f the 170 respondents expressingthe view that the courts are seldom or never fair and impartial inresolving business disputes (see Figure 9). 53 Moldova CPAR Private Sector Figure9: Fairnessand Impartiality of the Court System in ResolvingBusiness Disputes How Often Do You Associate the Court System as Being Fair and Impartial in Resolving Business Disputes? 45 40 35 30 25 20 15 I: ~ 0 Always Mostly Frequently Sometimes Seldom Never For these and other reasons, foreign investors and companies trading with Moldovan entities are likely to avoid local courts as far as possible. They generally avoid having the merits o f any dispute determinedby the local courts, although the local courts would need to be relied upon to enforce any foreign judgment or arbitral award. O f the companies interviewed during the assessment visit to Moldova, only one company claimed that it would actually bother to use the legal system if in trouble. In fact, they had already done so but the court's decision is not yet known. C.10.7 Selected CommercialLaws Although Moldova's normative laws do not yet approximate international standards and it lacks adequate institutional support to implement these laws, the 2001 EBRD Legal Indicator Survey suggests that the country compares well with other transition countries in the CIS. Specifically, the commercial and financial laws of Moldova were characterized as reasonably good for supporting investment and other commercial activity. Concessions:The Law on Concessions No. 534-XI11 was adopted in Moldova on 13 July 1995. This law sets forth concession grant procedures with respectto natural resourcesexploitation and public monopolies operating in Moldova. Under the law, a concession is a contract between the competent government agency and an investor, pursuant to which the latter, in exchange for revenue payments, is granted the right to engage in certain categories of activities. The contract may be awarded for a period up to 25 years. The investor may be a natural or legal person, domestic or foreign. The Government grants land and natural resources concessions. The Ministry of Privatization and Administration of State Property, together with the competent local authorities, grants concessions of all other property forms. The Law on Concessions contains important environmental provisions. Thus, according to the law, a concessionaire is obliged to comply with prevailing environmental standards, including waste monitoring and disposal. Unless otherwise stipulated by contract, a concessionaire i s responsible for maintaining and, upon 54 Moldova CPAR Private Sector the contract's termination, restoring a concessionaire undertaking site to its original condition. Lawyers who work on concessions in Moldova perceive the Moldavian concession law as adequate. Intellectual Property Rights: Moldova adheres to key international agreements on intellectual property rights. Moldova i s a signatory to the Convention on Establishment o f World Intellectual Property Organization, signed July 14, 1967 in Stockholm. Moldova has also adopted local laws and governmental decrees to protect intellectual property, patents, copyrights, trademarks, and trade secrets. Although many basic policies are in place, there i s no active enforcement or protection. C.10.8: Corporate Governance and Commercial Procurement Practices The EBRD's Guidelines on Corporate Governance (1997) and the OECD's Corporate Governance Principles (1999) set out what can be regarded as broadly acceptable standards for good corporate governance. In accordance with the EBRD Guidelines, private companies' relationships with suppliers must: 0 Have clear and transparent purchasingpolicies 0 Avoid doing business with suppliers who attempt to divert the purchasingprocess to their ownbenefit 0 Maintainan arm's length relationships with suppliers 0 Refrain from transfer pricing arrangements. From the questionnaires distributed as part o f this assessment and subsequent interviews, it i s not possible to draw firm conclusions, but certain trends appear. Most companies inwhich there was a foreign interest had established purchasingpolicies, while, by contrast, entirely local companies appear not to have done so to the same extent. Most companies are involved inbarter trading and as one company reported, "We are looking for companies that owe us and then we ask them to source and supply." Few companies regularly tender for supply and direct contracting i s clearly the prevalent purchasing method. Among the factors driving the use o f direct contractingare: 0 The widespread use o f barter trading. 0 The small size o f the local market. 0 The fact that foreign equipment i s relatively expensive for Moldovan importers. 0 Preference for long-term relationships with known suppliers, often to the exclusion o f new suppliers, as security i s often an important consideration in the formation o f commercial relations betweenprivate sector firms. Sourcing equipment and suppliers using Internet i s not yet a common practice among the Moldovan companies, which i s hardly surprisingas a survey conducted in2000 showed that there were only about 15,000 Internet users in Moldova. There is, on the other hand, surprisingly good information about Moldovan companies on the Internet; for example, the website www.vellowpanes.md has a directory o f 7,667 Moldovan companies, many o f which have their own website. Only a few of the respondents interviewed for this assessment had access to computerized purchasing systems, which supports the perception that Moldova i s still some way from being ready for the use o f electronic public procurement systems. The BEEPS indicates that trade fairs, other public sources o f information, and existing suppliers are perceived as the most important potential sources for information about new suppliers. 55 Moldova CPAR Private Sector c.11 PrivateSector Perspectiveson PublicSector Procurement Of the companies interviewed for this assessment, most were more interested in bidding for public sector contracts financed by International Foreign Institutions (IFI) than on those financed from the Moldovan Government's own budget, a preference which seems to be driven from the greater difficulty o f getting paid on Government-financed contracts. However, there was widespread agreement that the 1997 procurement law had markedly improved public procurement operations in the country and that the NAGP's role in overseeing procurement had further improved the situation. Given the extensive reach o f the black market in Moldova, most bidders worry about participating in open tenders that are not well regulated, as they are wary o f competing against unqualified or so-called "briefcase" companies. For that reason, most companies prefer to bid on tenders conducted by State-level procuring entities, which are operated through the NAGP, rather than tenders issued by local government procuring entities, which are perceivedas being less well regulated. Some firms complained that invitations to tender are not always advertised in the newspapers with the widest circulation but, rather, in small papers which are not widely read. Others complained about technical specifications used inbidding documents issued by public procuring entities, which were often perceived as either being biased towards a certain manufacturer or o f beingout o f date. All bidders citedthe Govemment's recordas a badpayer as their greatest disincentive to bidding on public contracts. c.12 ConstructionSector C.12.1 Sector Size and Structure Before Moldova achieved its independence, all major construction enterprises were state owned. Now, almost all state enterprises have been transformed to joint stock companies (JSCs) and, since 1996, most state procurement o f construction works and services has been through competitive bidding, with contractors indicating that there has been a highlevel o f competition. While the Ministry o f Environment and Construction (MOEC), maintains a list o f 1,200 licensed works contractors, only 400 are practicing contractors, with the remaining 800 apparently inactive companies. Inaddition, Chamber o f Licensing has licensed more than 200 design and engineering firms. According to MOEC, the size o f the construction market i s MDL 1,660 million (US$122 million) annually. Current investment sources are: over 65 percent in the private sector; less than 10 percent from state budget and local government resources; 15 percent foreign, including World Bank and EBRD; and over 10 percent fromother sources o f financing. Building construction, reconstruction, and repair, financed through private investment, are the dominant types o f work that characterize the MoIdovan construction industry. From the contractor's perspective, the industry i s competitive, with a minimum o f three to four bids submitted on every tender. In addition to general contractors, there is a substantial number o f suppliers, equipment rental companies and specialty contractors. There also are specialty general contractors that serve the power and gas industries or only construct water lines. It i s not 56 Moldova CPAR Private Sector surprising to note that the road construction contractors are the least active, since they depend disproportionately on government-funded projects. The construction level o f MDL 1,660 million (US122 million) i s quite small and, by international standards, even the largest domestic contractors have a limited turnover. For example, one o f the largest local works contractors, Monolit, projects a turnover o f US$2.2 million in 2002. One or two others may turnover as much as US$3 million. A range o f US$1-2 million typifies the upper end of activity by local contractors. It is not surprisingthat the capacity of the sector is substantially underutilized, since many o f the contractors who were directly granted a great deal o f work under the Soviet system are now strugglingto win work competitively, especially in a shnnking market. Based on a sampling of the most active contractors, which handle 8 to 10 percent o f the construction volume, only 20 to 30 percent of the capacity o f the sector currently i s utilized. Inthe road construction industry,the utilization level i s closer to 10 percent. This presents yet another problem for road contractors. One o fthe larger road contractors requires a minimumannual turnover o f US$3.5 million to fully utilize and maintain its equipment while that contractor's actual turnover i s US$ 1million. Lower activity levels mean that the costs o f equipment usage and maintenance go unmet. Consequently, over time, the contractors' actual capacity i s decreasing. Most contractors prefer to work for private investors, primarily due to habitual late payment practices of government ministries and departments. This i s reflected somewhat less at local and municipal levels, because contractors are often local businesses that generate localjobs and thus have more leverage on local authorities when it comes to getting paid promptly. At the local government level, some contractors also receive advance payments for their work. The amount o f advance and the extent o f the use of advance payments are uncertain. When working for the central government, contractors are paid interim payments at one-month intervals but sometimes wait up to two months to receive monies. Sometimes they may wait several months, and in extreme cases up to a year or two for final payments. Lack o f access to credit i s a major constraint on Moldova's construction sector. First, long-term commercial credit i s not available from the local banking sector. Short-term interest rates vary widely depending on the borrower's qualifications: individual contractors indicated a wide variance in rates o f borrowing, ranging from a low o f 12 percent to a high o f 35 percent, and averaged in the mid-20s. Rates are not only reflective o f market conditions but the strengths and weaknesses o f the individual businesses as well. Many contractors cannot and do not borrow. However, many use their own assets and deposits as collateral to secure bid securities and performance guarantees. Larger bid securities and larger performance guarantees require and tie up more o f the contractor's liquid assets, which already are limited. This is the reason that performance guarantees that are more than 5 percent o f the contract price essentially prohibit Moldovan contractors from bidding on international contracts, which require higher levels o f guarantee. As a consequence, on internationally financed projects, most Moldovan contractors work only as subcontractors to foreign firms. Because the cost estimating system in use in Moldova (the SNiP system, a hangover from Soviet practice) i s well established and all contractors are familiar with it, contractors may easily calculate the budget price for any given project. The system must be used by all institutions funded by the central government and ministries. However, contractors bidding for privately funded work base their bidprices on current market prices or their individual estimating systems. The consensus among local contractors i s that estimates prepared under the SNiP system are overly conservative and at least 15 to 20 percent higher than market prices. Perhaps the most 57 Moldova CPAR Private Sector convincing proof o f this i s that fact that all contractors interviewed for this assessment stated that they do not use the SNiP system when preparing their prices to bid on privately funded work, because it would render them uncompetitive. The inescapable conclusion, backed up by industry sentiment, i s that prices currently being paid for public works may be 15 to 20 percent above local market prices. Competition for public works contracts is generally high. While the procurement law calls for at least 3 bidsper tender, inmost cases there are 4 to 6 bidders and, in some cases, as many as 12 to 14. To cope with the high level o f competition, Moldovan contractors have developed special constructionmethods or cost-saving devices to gain an edge on the competition. Some contractors indicated they have instituted labor incentives whereby a worker would be rewarded with a premium wage if SNiP indicatedajob shouldbe done in 30 days and the worker did it in 20. In architectural, design, and engineering services, privatization has had less impact. For example, there are no private construction supervision firms in Moldova. While there are a few privately owned architectural practices, most are small, employing fewer then 20 staff and turning over about US$lOO,OOO annually. Market restructuring has also had a telling impact on State-owned design institutes. One such institute, employing 215 staff and with an annual turnover o f MDL 2.5 million (US$185,000), i s entirely self-financed and performs only 20 to 25 percent state works. C.12.2 Barriersto Growthof the ConstructionSector The following are the main obstacles inhibitingthe development o f a construction industry in Moldova: a) Late Payments: Contractors frequently experience payment delays on public contracts averaging two to three months and, in the worst cases, as long as a year. The most often quoted cause o f payment delays i s that public sector clients switch funds allocatedto payments under contracts to pay salaries. b) Under-qualificationof Contractors: Many contractors complain about beingforced to compete against small, unqualified companies on public tenders and that, because o f weahesses in the Government's qualification requirements, public contracts are often won by companies with inadequate resources and experience to execute the contract. c) Performance Guarantee Limits: Contractors typically produce bank guarantee letters for bid securities and performance guarantees. Such guarantees typically have to be backed by 100 percent cash cover. Contractors typically provide 1percent for a bid guarantee and 5 percent for a performance guarantee. All but the largest Moldovan contractors find guarantee requirements o f 10 percent too onerous and even the largest struggle to meet the 10 percent requirement. This effectively eliminates the vast majority o f Moldovan contractors from direct participation in internationallyfinanced projects. d) Perceptions of Favoritism: There are widespread perceptions within the industry that some contractors have more influence with the government than others and get more favorable treatment as a result. There are further suspicions that public contracts are not administered evenly according to the contract, due to government interference. e) Lack of Credit: Lack o f credit is a huge obstacle and is retarding the growth o f the Moldovan construction industry, especially the contractors. Contractors may use their 58 Moldova CPAR Private Sector current assets to start up a project, in some cases investing as much as US$300,000 in a project. Interest rates in the local banking sector are high: commercial interest is now as high as 30 to 35 percent. Long-term commercial credit, vital to building a business in most countries, i s entirely absent. Non-Enforcement of Court Awards: Contractors interviewed for this assessment cited instances where they have taken parties to court for non-payment and the court cases have taken up to three years to conclude. Some contractors who have won court cases for payments have found that the Department o f Justice has not enforced the award. Non-enforcement o f court judgments is a major impediment not only to developing a vibrant construction industry but also to attracting international investors. DecliningInvestments: The shrinkage in the public sector construction market has not yet been made up by growth in private investment. Starting in 1990, there has been a general decline in the level o f capital investment in construction. Government investment, which made up 100 percent o f the market in Soviet times, declined to just 10percent in2002 (see Figure 10). Figure 10: Sourcesof Construction IndustryInvestment inMoldova,2002 0PrivateSector Public Sector HForeian inc. IFls 59 Moldova CPAR RecommendedAction Plan D. RECOMMENDED ACTION PLAN D.l RecommendedActions This section sets out a series o f recommendations designed to address the various weaknesses in the public procurement environment o f Moldova, as identified in the preceding sections. The recommendations are grouped to address the major areas o f focus, including legislative reform, improving procurement procedures and practices, regulatory oversight o fpublic procurement, and organizational reform and capacity building. D.l.l LegislativeReform The factors driving the need for further reform o f Moldova's public procurement legislation are both external and internal. Externally, alignment o f the procurement law with the WTO Agreement on Government Procurement (GPA) i s an essential precursor to acceding to that Agreement, as i s Moldova's stated intention. The summary o f compatibility between the procurement law and he GPA, which i s presented at Annex A to this report, has already been discussed in detail with the NAGP's management team during the assessment visit, so they are fully informed ofthe amendmentswhich will be necessary to achieve alignment. Intemally, the key factor driving legislative reform i s the plethora of weaknesses in current procurement practices, which have their origins inthe procurement law. These are documented in detail in Section C.2 of this report. Some o f these have arisen from long-established incorrect application o f the procurement law (for example, not holding the public bidopening directly after the expiry o f the deadline for submission o f bids); others have their origins inweak provisions in the law (for example, the use bid evaluation systems based on merit points). Weaknesses in the procurement law will have to be rectified by amending the law; where clarification o f the correct application o f existing provisions i s called for, this can be achieved through implementing regulations. Recommendationsfor LegislativeReform: 1. Enact an amendmentto the Law onProcurementof Goods,Works, and Services for Public Needs to align it with the GPA. Among the changes that should be included inthis amendmentis the overhaul of the procedures for administrativereview of bid protests,which will needto be accompaniedby appropriate institutionalreform(see D.1.3below). 2. Completethe set of implementingregulations inorder to underpinthe procurement law, to clarify its correct application and to provide detailed instructions on its application in key areas. Specific regulations should be enacted on procurement planning,pre-qualification andbid evaluation. D.1.2. ProcurementProcedures andPractices The numerous weaknesses in the current procurement law, as identified in Section C.2, should be addressed in drafting an amendment to that law and implementing regulations. The weaknesses and gaps in the current body o f legislation create risks o f abuses and corruption in public procurement that need to be reduced and, where possible, eliminated through a combination o f better legislation, greater capacity in the procuring entities, and more effective enforcement by 60 Moldova CPAR RecommendedAction Plan the NAGP. Some of the most egregious of these risks are described in Box 2 and recommendations are made to address them. Risk Factors Creating / Recommendations to Reduce / Eliminate Risk Increasing Risk Both procuringentitiesand Not all procuringentitieshave . NAGP should re-publishthe procurementlaw, includingall bidders are unaware of or easy access to up-to-date amendmentsto date inthe OMicial Monitor. unclear aboutthe rules informationon procurement , Futureimplementingregulationsapplicableto public procurement governingpublic legislationandregulations. should also bepublishedinthe Official Monitor. procurement. , NAGP should launchits own website, where is should postup-to- date copies of all legislationinMoldovan, Russian,and English. Procuringentities apply Procuringentitiesare unawareof . NAGP should increaseits resourcesandprogramsto deliver restrictiveprocurement restrictionsin procurement law trainingto procuringentities. methodswithout meetingtheir againstusingthese methods. . NAGP should rejectapplicationsfrom procuringentitiesto use conditionsfor use inthe NAGP approvesuse ofrestrictive restrictiveprocurement methods, where their conditionsfor use are procurementlaw. procurementmethods, in not met. contraventionof procurement . WhereNAGP learns of suchbreaches o ftheprocurementlaw, it law. shouldrefer them to the CoA for audit. There is insufficient scrutiny of . TheNAGP should publishall the requestsitreceivesfrom the useof restrictiveprocurement procuringentitiesfor use of restrictiveprocurementmethodsand methods. also publishtheNAGP's decisions on grantingor rejectingsuch . requests. The NAGP should publishan Annual Reporton the performanceo f the country's public procurement system, includingon the value of expenditureby eachprocurement methodand onthe use of procurementmethods by procuringentity. Procuringentitiesrestrict Procuringentitiescannot afford . NAGP shouldpublishall OpenTenderinginvitationsto tender in OpenTenderingto domestic the cost of advertising the PublicProcurementBulletin andon its website bidders, incontraventionof internationally. (www.tender.md)free of chargeto procuringentities, inRussianor the procurementlaw. Procuringentitieswish to favor English. local firms. . NAGP should insiston the use ofOpenTenderingin all cases where it is requiredby the procurement law. , WhereNAGP learns of suchbreaches o fthe procurementlaw, it shouldrefer themto the CoA for audit. Unqualifiedbidders may win Qualificationrequirements are Strengthenthe pre-qualificationprovisionsintheprocurementlaw. public contractswhich they unclearlystatedinthe current .. Separatethe assessmentof the bidder's qualificationsfrom the cannotperformeffectively. procurementlaw. evaluationofhisbid at the bid evaluationstage. Qualificationcriteria are . Expressqualificationrequirements aspadfail criteria. expressedin subjectiveterms. . NAGP should draft new standardpre-qualificationdocuments, for Assessment of bidders' mandatoryuse be all procuringentities. qualificationsis done as partof . NAGP shouldprepare an implementingregulationonthe correct bid evaluation. applicationof the revisedprovisionsinthe law on the assessmentof bidders' qualifications Technicalspecificationsin Procuringentity staff lack . NAGP shouldprovidetraining to procuringentity staff inwriting biddingdocumentsare too capacity to write clear, objective neutral, open technicalspecifications. restrictiveor may favor a specifications. . NAGP should refuseto publishbidding documentsthat contain specific bidder. limitingor biasedspecifications. Time allowedfor bidders to The minimum biddingperiods . The minimum biddingperiodsspecifiedinthe procurementlaw prepareand submit their bids specifiedinthe procurementlaw shouldbe extendedto at least30 days for OpenTendering. may be cut short, thus are too short. reducingcompetitionand favoring selectedbidders unfairly Use of Moldovan and Russian Law allows either Russianor . NAGP shouldpromotethe use ofthe English language, as a major ininternationalOpen Englishfor internationalOpen languageof internationaltrade, in OpenTendering. Tenderingmay limit Tendering. participationby international ProcuringentitiesuseRussiantoo bidders. heavily, thus favoring bidders from CIS countries and disfavoringother foreign bidders 61 Moldova CPAR RecommendedAction Plan Risk Factors Creating / Recommendations to Reduce / Eliminate Risk Increasing Risk Procuringentities may hold a Provisionsinthe procurementlaw . Procurementlaw provisionsshouldbe strengthenedby amendment. public bid opening the day onbid openingmay not be . NAGP should draft an implementingregulationon bid submission after the expiry of the deadline sufficiently clearly expressed. and openingandhaveGovernmentenact it. for submission of bids, thus This badpractice has become . In all cases where NAGP conductspublic bid openings, it should do reducingtransparencyand commonplaceandNAGP has not so immediatelyafter the expiry o f the deadlinefor submissionof increasingthe risk or actedto stop it. bids. appearance of risk that bids maybetamperedwith before the opening. Highcost of bid and Requiredlevelsofbid and 1. Reduce required le\,el for bid security to 1-2% and for performancesecurities may be performancesecurityinthe performance security to 5-10%. limitingparticipationinpublic procurement law are too high, 2. Counteract increasedrisk of bid \vithdra\valor non-performance tenders by local bidders. bj,debarringbidders who submit bids frivolousl),or who repeatedly fail to performpublic contractsfrom hture participationin public procurement. Bidevaluation is subjective, Provisionsin theprocurementlaw . Amend the procurement la\* to requirethat, in the evaluation of opento manipulation. onbid evaluationmethodology goods and works. the evaluationof bids shouldbe basedon and criterialeaveroomfor the use objective, quantifiable criteria, which should, to the fillest extent of subjectiveevaluationsystems, possible, be expressed in monetaryterms. including merit points, andfor . Issuean implementingregulationclarifiing the use of objectivebid mixingthe assessmentofbidders' evaluationcriteria. qualificationswith the evaluation ofbids. The effectivenessofthe bid Provisionsofthe procurementlaw Amend the procurement lawto providefor the announcement ofthe ~~ protest mechanismis providethat the procuringentity winning bidder before signatureofthe contract. underminedby the fact that shouldinform the losing bidders . The revisedappeals procedureshouldbe suspensive, Le., the contract awardnotices are of the identity ofthe winning lodgingof an appealshould suspendthe signingofthe contract publishedonly after the bidders 10days after contract subject to predefinedtime limits for the handlingofbidprotests. contract has beensigned. signature. Poor recordingkeepingby Procurementlaw provisionson NAGP shouldissue a more detailedimplementingregulationon procuringentitiesinhibits recordkeepingare not being how to maintainaccurate procurementrecordsandfiles. intemalandextemalaudit and respectedby procuringentities. obscuresthe "audit trail." The many recommendations for improving procurement practices require a series o f actions, some o f them legislative, such as amendments to the procurement law or the enactment o f new implementingregulations; others inthe form o f actions to be taken by the NAGP. D.1.3 InstitutionalReform While the draft CPAR offered alternatives for institutionalreform, those were discussed with the Government and the proposals presented in this, the final CPAR, represent agreements reached withthe Government. Recommendationsfor InstitutionalReform: 1. Inorder to addressthe currentweaknessof the NAGP,the positionof Executive Directorofthe Agency shouldbefilled as soon as possible. 2. In order to increase the accountability of the NAGP to the recently established oversight committee, the ExecutiveDirector of the NAGP should be requiredto submit a written Monthly Report on the Performance of Public Procurement 62 Moldova CPAR Recommended Action Plan and the ExecutiveDirectorshouldbe requiredto presentthe reportinpersonin to the full committee. 3. The ExecutiveDirector'smonthlyreportshouldbepublished. 4. The Annual Report of the oversight committee to the Government should also bepublished. 5. A Training Division should be established in NAGP should also take the lead inpartnership with other public-sector training institutions, such as the Public Administration Academy, to develop and deliver regular procurement training courses for civil servants. 6. The NAGP should develop and conduct training courses in public procurement for the dedicated procurement staff of the recently establish territorial administrative units o f local government by the end o f 2003. 7. Create an independent commission, comprised of independent experts in relevantdisciplines,to review procurementprotests. D.2 Measuresto be Taken by the Government It is clear that the primary responsibility for implementing the planned procurement reforms lies with the Moldovan authorities at the State and various local government levels. Inparticular, it is incumbent upon the NAGP to draft the proposed amendment to the procurement law and for the State Govemment to approve it and send it to the Parliament. It will also be for the State Government to create an independent administrative body to review procurement appeals. The oversight "mixed committee" should exert vigilant control over the NAGP to ensure that it implements the reforms assigned to it ina timely manner. The responsibilities for implementing these recommendations and their proposed timing are presented inthe Action Plan at Section D.5 below. D.3 Measuresto be Taken by the Bank and Other Financiers The Bank should also remain engaged in assisting the Government o f Moldova to implement this reform program, for example, by commenting on draft amendments to the law and on draft implementing regulations. The Bank will also consider suggestions from the Government to finance assistance to the Government for implementation o f the reforms. D.4 Need for TechnicalAssistance It i s likely that the Govemment, particularly the NAGP, will need Technical Assistance to implement this reform program in a timely and effective manner. There i s likely to be a short- term need to provide the NAGP with expert legal assistance for drafting an amendment to the procurement law and for drafting implementing regulations. It i s also likely that the NAGP will need assistance in developing electronic tools for procurement, including a website, and in developing a procurement training program and drafting training materials. 63 Moldova CPAR RecommendedAction Plan D.5 Action Plan and Timetable The time-bound Action Plan presented below covers the main recommendations made by this report. The Action Plan focuses on a limited number o f key, high-level actions essential to achieve positive change in Moldova's public procurement system. Below that level, a great deal o f detailed work will need to be done to make those reforms successful. The Action Plan i s based on agreements reached between the Government and the Bank during the discussion of the draft CPAR inearly June, 2003. 64 x x X x x x Moldova CPAR RecommendedAction Plan D.6 FundingProcurementReform The cost o f technical assistance required by the Government i s likely to be in the region o f US$300,000. The World Bank will try to assist the Government to identify potential sources o f financial assistance from other I F I s who are interested in furthering public procurement reform in Moldova, such as the EU. In addition, the Bank would consider an application ffom Moldova for a further IDF grant for public procurement, though this should be to help implement institutional and procedural reforms and capacity buildingand not legslative reform, which were financed by the earlier IDF grant to Moldova. It is important to keep inmindthat the Government can implement many o fthe recommendations without incurring significant additional costs. For example, more effective oversight o f the NAGP i s one such reform. D.7 MonitoringandFollow-up Plan The key group for monitoring and ensuring follow-up o f the Action Plan i s the CPAR Steering Committee. Once the report has been presented to the Steering Committee and discussed and agreed with the Government, the Bank will submit the Final CPAR to the Government, which will contain the final, agreed list o f recommendations, actions and their timing. This should form the baseline against which the Steering Committee can measure progress. The Government should consider asking the Steering Committee to continue its work after the final CPAR has been presented, as it contains senior representatives o f all the institutions interested in promoting public procurement reform. It could, for example, continue to meet quarterly to review progress reports prepared by the NAGP detailing progress made inthe previous quarter against the agreed recommendations and approve the NAGP's proposedwork plan for the ensuing quarter. D.8 Disseminationof the CPAR It has been the World Bank's experience, in doing such assessments in other countries in the region, that wide dissemination and discussion o f the CPAR's recommendations i s essential to the successful implementation o f the proposed reforms. Therefore, inline with the Bank's Disclosure o f Information Policy, it i s the Bank's intention to make this report a public document and to disseminate it through the Bank's websites andpublic information centers. 67 0 z 3 Z e, > .3 + P L C E P s Q si 5 s E ." . x a 3 sE8x e $ z 8E , E ij 43 0 3 Z 3 z P+ I S P Q -? ?z 3i J I I Moldova CPAR Annex B ANNEXB: REVIEW OFTHE REPUBLIC OFMOLDOVA'SONPROCUREMENT OF LAW GOODS, WORKS AND SERVICESFOR PUBLICNEEDS (APRIL 2003) Article 4.(2) Rules applying to transactions below MDL20,000/10,000 should be specified inan implementing regulation. Article 5.(4)(1) Provides for the establishment o f a register o f suppliers. This, in turn, suggests two recommendations: (i)theregister isusedto pre-selectbidders inrelationto theRestrictedProcedure, the if register would have to be kept updated and bidders qualifying for larger contracts not excluded from smaller contracts; and (ii) if the register is used in relation to Open Tendering, it cannot be used in lieu of advertising but in addition to advertising, except that for contracts below a certain amount (for example, the future WTO GPA eligibility threshold), the register could be used in lieu o f advertising if all the following conditions are met: instant updating of the registry, yearly publication o f bidding opportunities and the opportunity for a bidderto supplement the information inthe register with details provided inits bid. Article 6.(2)(c) and (d) This article may lead to the rejection o f bidders as a result o f bidders' failure to provide certificates and other statements; it would be preferable that such certificates, statements, etc., could be provided up to the time o f contract award. Article 7 "Pre-selection" should be replaced throughout the Article and elsewhere (Title V, Part 1) in the law with "Prequalification." Article 9.(2) This should also explicitly refer to electronic transmissions. Article 11 See comments on Title VI. Article 15.(1) This article does not specify how corruption shall be established in order to reject a bid on the basis that it gave rise to corrupt behavior. Moldova CPAR Annex B Article 16.(3) The translation into English o f this sub-article i s not very clear: it should specify that technical specifications have to refer to international standards (directly or through domestic standards) and be expressed in terms o f physical characteristics only when performance characteristics are not appropriate. Article 18.(2) Should state that Open Tendering i s the applicable procedure except inthe circumstances (limited list) inthe procurement law. Article 20 The two-stage procedure should be referred to as a form of Open Tendering and not (as it i s implicitly done) as a form o f Restricted Procedure. Article 20.(3) The record o fnegotiation should be kept inwriting. Article 23 Three quotations should be obtained in order for this procedure to be competitive. Hence, when only one potential source o f supply i s identified, another procedure should be used. Article 25 Seems to be redundant (particularly paragraph 3) with some other provisions inthe law. Article 30 (e) Should define "the preferential margin" interms o f the percentage o f the bidprice. (n) Should provide for bid submission by hand or by mail and specify that the deadline for bid submission and bid opening will be the same. Article 34 (1) Should not require bid securities above 45,000 Leis but instead make it optional above that amount. (2) The statement "(unless it comes into conflict with the effective legislation)" shouldbe dropped. (6) A maximum 1!4 or 2 percent would be preferable. Moldova CPAR Annex B Article35 (1) Performance security should not be mandated but required only if absolutely needed for the client's protection. Advance payment securities should be provided for in the law and mandated ifthe advance exceeds 10 percent o f the contract price. (5) The maximumamount for performance securities shouldpreferably be 10percent. Article 38 (3)(d) Does not explain how a "fact of corruption" will have been established prior to the award. (4)& (5) "Best tender" and "tender offering the lowest estimated value" should be replaced with "lowest evaluated responsive tender." (6) Should provide that all bid evaluation criteria be either quantified in monetary terms or else expressed inthe form o fpasdfail criteria inthe tender documents. Articles 41-44 Should be deleted and replaced with a section dealing exclusively with consultant services. For that purpose, Article 42 andportions o f Article 44 (specifically 44.1) could be retained. Article46 2(a) should be deleted since the choice o f procedure i s one o fthe provisions inthe law most often abused by the procuring agency. Article 50 Since currently the NAGP cannot constitute an independent review protest forum, appeal to court could perhaps be used as a second tier independent review mechanism, provided the appellate court i s able to proceed with injunctions, which would allow to suspend procurement proceedings. Article 50 should also provide what i s the basis for damages. Ifthis constitutes a departure form the code o f civil obligations, it should state so. Missing Provisions The law should prescribe the maximum period allowed for the procuring entity to make payments, as well as price adjustment for contracts o f a duration exceeding 12 or 18 months. n - si iI EI i L T 4- m U 0 0 351- .- r 0 .-t Y A= n E 03 x 0 -. W N 0 8 0 P 0 Y I o\ x W 0 0 0. co 0 0 N m r 5 m 2 2 s 0 In W N In N In I r .- E E / E E8 z W v- 0 .-c Y t z W m m 3 t 3 m Ym C E Moldova CPAR Annex G ANNEXG: SUPPLEMENTAL LETTER NATIONAL ON COMPETITIVEBIDDING (NCB) PROCEDURES REPUBLIC OF MOLDOVA [Date] InternationalDevelopment Association 1818 H Street, N.W. Washington, D.C. 20433 United States o f America Re: Credit No. --MOL ( Project) Representations and assurances relating to National Competitive BiddingProcedures Dear Sirs: W e refer to Schedule 3 to the Development Credit Agreement of even date herewith between the Republic o f Moldova and the International Development Association (the Association) for the above-captioned Project. The Republic ofMoldova represents [Wording to be added by the country lawyer] A. Eligibility Biddingshall not berestricted to domestic firms. B. Procedures `Open Tendering' shall be followed inall cases. Invitations to bid shall be advertised inat least one widely circulated national daily newspaper allowing a minimum of 30 days for the preparation and submission o fbids. C. Pre-qualification When pre-qualification shall be required for large or complex works, invitations to pre- qualify for biddingshall be advertised inat least one widely circulated national daily newspaper a minimum o f 30 days prior to the deadline for the submission of pre-qualification applications. Minimumexperience, technical and financial requirements shall be explicitly stated in the pre- qualification documents. Prequalification shall be determined by a `passifail' method and not through use o f a merit point system. D. Participationby Government-ownedenterprises Government-owned enterprises inthe Republic o f Moldova shall be eligible to participate inbiddingonly ifthey canestablish that they are legally andfinancially autonomous, operate Moldova CPAR Annex G under commercial law and are not a dependent agency o f the Government. Furthermore, they will be subject to the same bid and performance security requirementsas other bidders. E. Participationby Joint Ventures Participation shall be allowed from joint ventures on the condition that suchjoint venture partners will bejointly and severally liable under the Contract. F. BiddingDocuments Procuring entities shall use the appropriate standard bidding documents for the procurement o f goods, works or services, and shall contain draft contract and conditions o f contract, all acceptable to the Association. G. BidOpeningandBidEvaluation Bids shall be opened inpublic, immediately after the deadline for submission o fbids. Bidsmust bemade inwriting inoriginal and facsimile copies are not acceptable. Evaluation o f bids shall be made in strict adherence to the monetarily quantifiable criteria declared inthe biddingdocuments and a merit point system shall not be used. Extension o f bid validity shall be allowed once only for not more than 30 days. N o further extensions should be requested without the prior approval o f the Association Contracts shall be awarded to qualified bidders having submitted the lowest evaluated substantially responsive bid. N o preference shall apply under National Competitive Bidding. H. PriceAdjustment Civil works contracts o f long duration (e.g. more than eighteen (18) months) shall contain an appropriate price adjustment clause. I. RejectionofBids All bids shall not be rejected and new bids solicited without the Association's prior concurrence. J Contracts All contracts shall be in writing, signed and stamped by authorized signatories o f the Purchaser and the Supplier and contain identical terms and conditions o f contract to those includedinthe tender documents. K Securities Moldova CPAR Annex G Bid Securities should not exceed 2% (two percent) o f the estimated cost of the contract; Performance Securities not more than 10% (ten percent). No advance payments shall be made to Contractors without a suitable Advance Payment security. The wording of all such securities shall be included into the biddingdocuments and be acceptable to the Association. Very truly yours, The Republic of Moldova By: Authorized Representative