Czech Senate agrees to ‘strip firms naked’: feeble attempt or cure for corruption?

Questions surround two proposed changes to the amendment to the Czech Public Procurement Act approved by the Senate

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At the end of last year the upper house of parliament (the Senate) returned the closely monitored Public Procurement Act to the lower house (Chamber of Deputies) with two proposed changes that have provoked controversy among the interested parties.

The first change makes it obligatory for the winners of public tenders to disclose their ownership structure. The second allows bidders to include information with their bid subject to trade secrecy in a special appendix. It is the first change in particular, i.e. the obligation to reveal the shareholder structure, that has been subjected to fierce criticism by specialists.

One of the most vocal of these critics is lawyer Daniel Weinhold, a recepient of the AmCham Wings Award for helping push MPs to make public procurement more transparent. He regards the proposal as “desperate, not only by virtue of its circumstances but unfortunately also its contents” and calls it a “legislative runt.”

Petr Čech of the law firm Glatzová & Co, who was involved in the drafting of the Senate’s proposal, disagrees. “Just before being submitted in the Senate changes were made over which we had no control. This means that the final wording does not completely correspond to our original idea and text. Even so, we don’t believe that the legislative or legal quality of the wording approved was so poor,” he told Czech Position.

The proposed changes, which require of companies that they strip down to the nude, so to speak, were originally the work of the initiative titled An End to Corruption, a joint project run by the Endowment Fund Against Corruption (NFPK) and the Society Against Corruption (VPK) association. The proposal was submitted to the Chamber of Deputies by the MPs Petr Gazdík and Stanislav Polčák (TOP 09). However, the Chamber rejected the proposal. The modified version of the proposal was later submitted to the Senate by Jiří Dienstbier Jr. (Social Democrats, ČSSD).

The ownership structure disclosure proposal involves the following:

  • Winners of public tenders must submit the tenderer a list of any anonymous shareholders, silent partners, or parties who share in the company profits without figuring in the company.
  • Companies must submit a list of anonymous shareholders or people who have a share in profits for the accounts period in which the company submitted the bid in a public tender.
  • If the winner is not able to ascertain the identity of all shareholders, it must corroborate at least 95% of the ownership structure. To this end, it submits an affidavit that those parties whose ownership structure is not transparent do not have a share in profits greater than five percent. Such a bidder will also have to corroborate which parties it paid profits to for a period of three years of implementing the contract.
  • A party that wins several public tenders in a year, the total value of which is in excess of Kč 20 million, must also corroborate its ownership structure and that of its subcontractors.
A step in the right direction ... ?

Is the proposed amendment obliging bidders to disclose fully their shareholder structure a good thing or not? Lawyers are of two minds. On the one side are people associated with the NFPK who drew up the proposal. Opposed to them is the Platform for Transparent Public Contracts (PTPP), which itself called for an amendment to the Public Procurement Act. The Platform is concerned above all that an amendment obliging bidders to disclose fully their shareholders structure would create excessive bureaucratic demands which many firms would not in practice be able to meet.

Daniel Weinhold, who participated in preparations of the amendment to the Public Procurement Act as part of the Platform for Transparent Contracts, told Czech Position that many firms would not be able to obtain documents on their entire shareholder structure. He cited a case in which it would be absurd for the foreign manufacture of auto components or a supplier of sand to reveal the whole of its ownership structure because of the construction of a school to which it supplied materials. Some claim that the proposed amendment contains basic flaws that could lead to unclear interpretation

Weinhold believes that the requirement that 95% of final shareholders “to the level of individuals” be corroborated would be impossible to satisfy even for the Big Four (i.e. the advisory firms PricewaterhouseCoopers (PwC), KPMG, Deloitte, and Ernst & Young). Jiří Moser, a managing partner with PwC, confirmed this to Czech Position: “The amendment to the Public Procurement Act could genuinely prevent the participation of many companies, not only advisory firms, in public tenders. This would include PwC.”

However, Petr Čech of Glatzová & Co disagrees. He believes the amendment is a step in the right direction, even if the final version does not correspond totally to the ideas of the Edowment Fund Against Corruption (NFPK), and adds: “We do not deny that it increases the administrative burden on successful bidders in public tenders. However, we believe that this burden is acceptable and above all essential given the overriding public interest in transparency. We regard the requirements made by the amendment as reasonable.”

The NFPK counters Weinhold’s reservations thus: “The draft initiative titled An End to Corruption is prepared in such a way that every firm can demonstrate its ownership structure. The amendment requires only electronic statements, which are usually free. In the case of smaller firms the expenses will be in the order of zero to a few dozen crowns, and in the case of larger companies with many foreign owners they may be higher, in the order of a few hundred or a thousand crowns. The level of expenses for corroborating the ownership structure is a mere bagatelle in light of possible savings in the order of billions.”

... or a legislative runt?

The main problem may lie elsewhere. Several specialists draw attention to the fact that the proposed amendment contains fundamental flaws which could lead to an unclear interpretation. As Radka Pavlišová from Transparency International said, there was insufficient time to discuss the proposal, which has meant that it contains many unclearly defined terms.

Weinhold concurs, adding that paragraphs in the draft are at odds with each other. “For instance, in one paragraph the limit for revealing subcontractors is Kč 500,000, while in another the same limit is given as Kč 250,000. There are references to non-existent paragraphs: for instance, one of the provisions states that if in the case of parties stipulated in Section 81 Paragraph 2b) the accuracy of information cannot be verified from the documents submitted, payment is to be suspended and the money later forfeited which the tenderer is supposed to pay for the contract. And yet Section 81 Paragraph 2b) does not even exist!”

The other side believes that the wording as accepted does not contain any crucial defects which could not be overcome through interpretation

Three senate committees participated on “clarification” of the draft (the term used by Senator Miroslav Antl (unaffiliated) when he spoke about how the Senate committees had made improvements on this text). However, did senators actually know what they were approving? Several of them claimed that they had not sufficiently familiarized themselves with the proposal because they received its final form shortly before the debate took place. This was because the constitutional-legal committee only approved the final version on the morning of the day on which the Senate met.

Despite this criticism, the amendment’s advocates do not believe that their work has been in vain. Petr Čech claims that the wording passed (despite certain problems) does not contain any fatal errors which could not be overcome through interpretation, with consideration for the meaning and purpose of individual provisions. “We are convinced that the amendment is fully functional regarding the question of the transparency of the selected bidder and its shareholders,” Čech says in defense of the amendment.

Provision of information

The second amendment approved by the Senators deals with the provision of information. A new Paragraph 146c was inserted by the expert Oldřich Kužílea. As Kužílek told Czech Position, he wanted to change the original paragraph from the government version, which he believed was non-constitutional. The original version allowed for the contents of bids submitted by bidders for public contracts to be completely concealed from public scrutiny. The new proposal would mitigate against this. Information regarding a bid would remain public, expect for cases in which the provision of this information would threaten the principle of equal opportunities or the ban on discrimination.

However, both Weinhold and Pavlišová of the anti-corruption watchdog Transparency International see a potential problem is this formulation. Both specialists are concerned that the contents of bids submitted to public tenders could still be concealed from the public under the guise of a threat to the ban on discrimination or equal opportunities.

It is surprising that the Senate has not attempted to return utility tenderers to the amendment to the Public Procurement Act

The problem also has a practical side, says Weinhold. “I have no idea how a supplier is supposed to proceed in accordance with this provision. For instance, a supplier has to specify its know-how, registered trademarks or patents in the draft contract (which is part of a bid) in order to specify the subject of its implementation. And yet Paragraph 146c Paragraph 1 forbids the mention of something like this, and Paragraph 2 requires that the subcontractor create a kind of special appendix – but only containing information supposedly necessary for evaluation purposes,” he said.

It is also startling that the Senate did not attempt to return utility tenderers to the amendment to the Public Procurement Act. These were removed from the original draft during the debate in the Chamber of Deputies. And so most of the improvements aimed at increasing transparency in public tenders will not relate to companies such as ČEZ, E.ON or Czech Railways (ČD), this despite the fact that most experts are agreed on the need to include utilities in the amendment.