Advokátní kancelář Pokorný, Wagner & partneři, s.r.o.

Watchdog: Farcical fines emboldening crooked officials - Czech business weekly

Adéla Vopěnková
State bodies and companies that draw up big-money tenders face such ridiculously low fines for not complying with legal criteria that evading the law in this area has become normal practice, inquiries pursued by CBW confirm. František Dohnal, president of the Supreme Audit Office (NKÚ), is quite blunt when it comes to weighing up how frequently tenders are scarred or warped by such evasion. “A large part of public contracts are not in accordance with legislation. And what is worse, [not conforming with the legislative requirements] has become the standard solution,” he said, adding that the typical excuse of tender compilers who are caught out is that they wanted to fulfill a public order need at a quicker or cheaper rate.
A particularly serious problem has emerged with cases where those awarding state business contracts have sought to completely get around the law, meaning a supplier is chosen without any tender being called at all. “There is usually no one to raise a complaint,” Dohnal said, explaining how those responsible might easily get away with the abuse of process.
Martin Lachman, head of the legal department at anticorruption watchdog Transparency International–Czech Republic (TIC), said many people think twice before protesting against the unfair practices. “They imagine that if they complain they will stand no chance in the next tender,” he said. Most complaints that are actually made come from companies frustrated at being excluded from a tender, with only a small amount from other witnesses to an alleged unlawful practice, such as a secretary dismayed by the actions of superiors.
Fines dwarfed by contract values Last week, the Office for the Protection of Economic Competition (ÚOHS) confirmed a fine imposed on the local government authority of the small town Pec pod Sněžkou, East Bohemia. ÚOHS instructed it to pay Kč 100,000 (€ 3,926) for faults identified in a public order contract for repairs to a local school. The contract was worth Kč 16 million. The authority, said the antimonopoly office, was guilty of wrongly merging two contracts together. The responsible officials said they intend to appeal against the decision.
Eliška Císařová, a TIC project manager specialized in public contracts, has examined whether ÚOHS’ controls and fines are making much of an impact on those who abuse tendering rules. “The role of the ÚOHS itself is in fact very limited as it can examine just the formalities,” she said. “In practice, it only fines sinners, though it has the right to annul the manipulated public contract. However, everything usually ends up with fines that only range to the extent of thousands of crowns. It is a question of whether this can be enough of a deterrent to discourage,” she added.
Time for ‘black books’?
TIC has suggested the government begins to issue “black books” that name those guilty of tender violations. Those listed would be prevented from applying in subsequent tenders. This anti-corruption tool has been introduced in many European countries and its application is recommended by the European Union, the Organization for Economic Cooperation and Development (OECD) and the World Bank. Observers say legal obstacles will likely prevent black books from being realized in this country soon. But TIC is rather optimistic about their prospects. “If a similar system works with the banking relations, why should it not work with public contracts?” Císařová said.
Dohnal noted that officials more typically commit infringements by dividing contracts up into smaller pieces rather than by merging contracts. For instance, the Roads and Highways Directorate (ŘSD) ordered construction works worth Kč 27 million through combining 21 contracts for the renovation of one of its buildings, he said.
TIC, meanwhile, has taken an interest in a case in which the Ministry of Transport drew up a tender for providing it with legal services over a three-year period. The contest was won by four law firms that are to divide up Kč 450 million worth of business. Lachman said the process was moving forward without a fuss, but then somebody complained to TIC. “Immediately on receiving a request to look at the case of this suspicious tender we started asking the ministry for the documentation so we could raise a complaint at ÚOHS,” Lachman added. Unfortunately, he said, the ministry seemed to care little about its reputation and “until now they have not been able to provide us with detailed documentation. “According to our latest investigations, the tender criteria were more than 50 percent subjective and the quality of service was not the main criterion,” Lachman said, adding that TIC is considering suing the ministry for failing to provide it with the requested materials.
Lachman added that of all the requests for investigation that TI receives, those relates to state tenders are among the three most frequent complaints.
Little appetite for the long fight Very few firms that suspect a tender has been manipulated proceed with tougher legal steps than turning to ÚOHS, said Radek Pokorný, senior partner at law firm Pokorný, Wagner & spol. Available legal channels can take a plaintiff all the way to the European Commission, he said. But this involves a long fight with no guarantee of the expected result.
The consensus of experts is that the lack of action is not rooted in legislation, but in the system of control and the insufficient self-confidence of the antimonopoly office. The point is that ÚOHS only starts an investigation on the basis of a concrete impetus, Lachman said, adding that therefore many manipulated tenders are never confronted. The NKÚ said it controlled state property and contracts worth more than Kč 227 billion last year. Its annual report for 2006 noted that “repeated findings prove a controlled person’s insufficient will or ability to resolve a situation.” Dohnal said the amount of money the state is losing from manipulated tenders is uncountable and that the proportion of unfairly chosen tender contractors is in the “dozens of percent.” Lawyers approached by CBW confirmed that the cost must be vast. They also often pointed to how incorrectly drawn-up contracts tend to result in noncreative and low quality delivery.
Complaint limitations Although anybody can raise a complaint to ÚOHS, those raised by entities that did not participate in the tender can be dismissed outright. Those who are participating in the public order contest can demand the annulling of the tender or challenge the eventual contracted deal by registering objections at ÚOHS.
Filip Vrána, an official at the department of external relations at ÚOHS, said there are rare cases in which the entity compiling and calling a tender complains about its own work. “Typically this happens after changes in a ministry’s management, changes at a town hall and so on,” Vrána said, confirming the antimonopoly office resolves “dozens of complaints [about tenders] yearly”.
ÚOHS says it has to follow strict rules in evaluating an individual complaint. “The proceedings of ÚOHS go in two steps. First, a relevant department examines the report. Then, if the participant in the proceeding appeals against the verdict, the complaint is passed to the president of ÚOHS, who resolves the matter according to the recommendation of a committee comprised of independent experts who are not mainly ÚOHS employees,” Vrána explained.
Blind bidding Ivan Doubrava, CEO at forestry and wood processing company CE Wood, said the public order commissioning system is unfair from the word go. “As an applicant, you have to make big deposits and you have to meet a long chain of administrative obligations,” he said. “The tender compiler on the other hand does not give you any specific criteria. Then, logically the tenders are built on speculative or estimated data and no one is able to meet the conditions simply because no one knows what is desired,” Doubrava added, saying that tender winners frequently do not stick to their promised contract fulfillment prices.
CE Wood competes in tenders run by state-owned forest company Lesy České republiky (Lesy ČR). Radek Drahný, a spokesman for Lesy ČR, defended the company’s performance in drawing up contests for public orders. “Since 2005 when we had to accept the status that means we offer public orders, we have been penalized only once by ÚOHS. And since it was a minor fault, the fine was only Kč 1,000,” he said, adding that the law regulating the commissioning of the public contracts is “a holy rule for the company.”
Drahný, however, said the law makes it very difficult for Lesy ČR, since it is not tailored to forest economy. “Woods are living organisms, so you have to respond to unexpected events. For a tender we specify a certain subject and the trees might grow or fall or there may be bark beetle and the quality of the wood is changing. The system, unfortunately, is totally inflexible while our business must be conducted promptly and on time. That is why in certain situations—for example, when a calamity comes and the contractors ponder withdrawing from the contracts—it makes things very complicated,” Drahný said, adding that the regulations were made primarily to give the construction business a legal framework.
Doubrava said the system of tendering Lesy ČR has inherited from its previous management is problematic. “Withdrawing from a contract does not cost anything so some applicant companies present a speculative offer and then they step back. In these cases, Lesy ČR can talk about a calamity in the forests or growing costs,” Doubrava said.
He added that it was rather ironic that ÚOHS has not found anything suspicious in Lesy ČR’s tenders, adding that Lesy ČR practices “a smart policy” that includes regular consultations with the antimonopoly office that in the end ensure it has an alibi. “[So it pays this Kč 1,000 fine] and meanwhile contract applicants are losing millions,” he concluded.
Tender controversies centered on Lesy ČR largely refer to its 257 mid-term public orders for forestry work that run from 2008 to 2010. Drahný said there have been 810 objections and 516 review proposals sent to ÚOHS regarding these tenders. “The antimonopoly office has, however, not released any resolution that states Lesy ČR erred during the commissioning,” Drahný added.
Disappointing lack of action ÚOHS can fine a violator only in a case where the tender contract has already been signed and there is no other way of setting the situation right, Vrána said, adding that when it learns about a problem in good time there are options available that it usually takes up. These include re-entering an unfairly eliminated contract applicant back into a contest or scrapping a tender.
Law firms responded that these courses of action do not occur often. “ÚOHS should do much more to prevent the fulfilling of illegally made public contracts. That means that it should be able to prohibit contracting and … annul the fulfilling of contracted contracts,” Pokorný suggested. Such measures might hurt, but are the reason why ÚOHS exists, he added.
Císařová said it would help if ÚOHS started initiating criminal prosecutions, a proposal that Dohnal agrees with. But according to Císařová, ÚOHS must also improve its awareness of what corruption opportunities arise. These are insufficiently monitored by the current regulation system, it says.

Highest fines for faults found in public order contracts levied
by ÚOHS in a single administrative procedure
Public order drawn up by: year Fine in Kč Legal validity
Moravské naftové doly, s.p. 2007 5,000,000 Yes
Statutární město Zlín 2007 3,000,000 Yes
Hl. město Praha 2002 715,000 Yes
Město Hradec Králové 2005 700,000 Yes
Dopravní společnost Zlín-Otrokovice 2005 500,000 Yes
Ministerstvo práce a sociálních věcí 2006 500,000 Yes
Statutární město Karlovy Vary 2007 500,000 No
Statutární město Brno 2002 480,284 Yes
České dráhy, a.s., Praha 1997 300,000 Yes
Obec Dolní Třebonín 2004 300,000 Yes
Vítkovice Aréna a.s. 2007 300,000 No
Source: ÚOHS


The rates of verdicts at Regional courts reexamining ÚOHS decisions

Plaintiff side succeeded 31%

Others 3%

ÚOHS succeeded 66%

Source: ÚOHS

“The tenders are built on speculative or estimated data and no one is able to meet the conditions simply because no one knows what is desired,” SAID IVAN DOUBRAVA

Foto autor| Jakub Stadler

Foto popis| František Dohnal, NKÚ president.
Foto autor| Martin Siebert
Foto autor| Martin Siebert

Foto popis| Ivan Doubrava, CEO of CE Wood.
Foto autor| Martin Siebert