Jilted giants, victorious unknowns: public tenders in the Czech Republic

Manipulation of qualification criteria is probably the greatest tool for corruption in public tenders. Then there’s the magic of the draw.   

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The global construction company Skanska has come up with an original initiative to deal with the idiosyncrasies of the world of Czech public tenders. The Swedish-based company has established a subsidiary, Skanska kvalifikační, the sole aim of which is to participate in public tenders with unreasonable financial conditions.

A new law has been drafted to tackle all too familiar irregular practices in Czech public tenders. The bill has yet to be put to parliament and may well undergo fundamental changes. In the meantime, Skanska has decided to act on its own initiative. In a nutshell the problem is as follows: typically in a regular, well-organized and successful tender, the more bidders the better and the lowest price offer wins. With Czech public tenders, however, logic often takes a back seat and the number of bidders is limited by qualification criteria or a draw from a hat, making it easier to select the “right” bidder.

“The new draft law on public tenders which has been approved by the government and is waiting to be read in parliament prohibits the use of economic indices ratios, draws and any other measures to limit the number of bidders,” Jana Jabůrková, spokeswoman for the Ministry of Regional Development (MMR), told Czech Position. The new law will only require bidders to demonstrate that their finances are sufficient to assure delivery of the object of the tender.   NERV recommends just two conditions to replace the current system whereby tough and arbitrary conditions can be set practically at will.

In its report of recommendations for fighting corruption, the government’s economic advisory council, NERV, points out how qualification criteria are used to sideline undesirable competition. “Hitherto it’s been a frequent occurrence for issuers to formulate the qualification requirements such as to eliminate competition and enable the bidder selected beforehand to win,” the council states in its report.

Two conditions should suffice

NERV recommends just two conditions to replace the current system whereby tough and arbitrary conditions can be set practically at will. “Firstly, a statutory declaration that the applicant is able to complete and deliver the project; secondly, the applicant must prove that within the prior five years he has successfully carried out a project with similar characteristics, even if on a smaller scale. NERV’s members also recognize that qualification criteria are probably the main instrument for corruption in public.

In theory, qualification assessment should provide the issuer of the tender with guarantees that potential bidders are able both technically and financially to fulfill a given contract. The process should, for example, ensure that the winning bidder is not in danger of bankruptcy. But the problem is that inventive Czech minds often misuse criteria to eliminate competition.

The experts in NERV are convinced that the practice in the Czech Republic of reducing the number of bidders in public tenders is counterproductive. “It only makes sense in countries where tender issuers receive an average of 10 or more applications. When there are such numbers the positive influence of competitive effect can no longer be expected and thus [by reducing the number of bidders] it’s possible to save on transaction costs,” NERV wrote in its anti-corruption recommendations for the government.

Problematic liquidity indices   

Skanska has on a number of occasions come up against unreasonable qualification criteria. The company claims assessments of ratios if economic indicators often defy logic. One such assessment instrument used frequently is liquidity indices, i.e. the ratio of current activities to short-term financial commitments. A large construction conglomerate which has running projects with a value of Kč 1 billion and short-term obligations of Kč 500,000 would qualify with auditors as a healthy firm. In such a case, the liquidity indicator would be 2.

In another hypothetical example, a company with running activities worth Kč 100 and short-term commitments of Kč 2 would receive a liquidity rating of 50. Thus in Czech public tenders, companies with negligible assets and relatively small income can receive considerably better ratings than large corporations.

Flush daughter

For this reason Skanska is planning to apply to participate in tenders through its daughter company Skanska kvalifikační which was created specifically for this purpose. “This company has no financial obligations and we’ve pumped cash into it. I don’t think this is how things should be done, but I don’t see another way to defend ourselves against absurd qualification criteria,” CEO of Skanska, In the Czech Republic issuers of public tenders are not interested in volume indices such as turnover, or client references. Czech Republic, Dan Ťok, told Czech Position.

One tender where financial indicators were decisive and Skanska was not successful was for a contract to build infrastructure on the site of a former army base in Šternberk. The value of the tender issued by the municipal administration of Šternberk was estimated at Kč 75 million. When the tender was announced the administration stated that the number of bidders would be reduced to five by using the financial criteria explained above.

Only applicants who had a liquidity ratio of 1.7 and above, whose debt was not above 50 percent, and who had an Altman Z-score [a model for predicting probability of bankruptcy rating with ratios of indices] of exactly five. Skanska fulfilled only the first criterion and failed on the others. Of the seven firms that submitted expressions of interest in the tender, Skanska ranked last. The construction company complained to the antimonopoly office (ÚOHS), which consequently stated that tender issuers may set tough criteria and that the Šternberk administration acted within the law.

It appears that few people recognize that such criteria are often to the detriment of the largest and most experienced firms operating in the Czech Republic and issuers of public tenders are not interested in volume indices such as turnover, or client references. According to the financial criteria typically applied, companies with turnovers amounting to billions of crowns come out as financially unstable, whereas a limited liability company established specifically for the purpose of bidding in a tender — and which has only three accounting periods to its name — easily fulfills the requirements.                

Don’t shake it!

Then there’s the dubious practice that the currently valid law on public tenders allows of drawing names from a hat to reduce the number of bidders. In April 2010, this method was used to eliminate bidders from a tender for a contract to repair the takeoff and landing runways at Časlav military airfield, Central Bohemia. Folded pieces of paper with the names were placed one by one into a wooden box which was reportedly large enough to enable purposely placing the papers in a specific, distinguishable spots. ‘One side of those papers was longer which rendered those two papers clearly distinguishable from the others’“Skanska’s representative requested the person making the draw to shake the box before pulling out names. He refused on the grounds that the box must not be detached from its base,” Dan Ťok said.

Skanska protested to the ÚOHS about the conduct of the draw and this time the office upheld the company’s complaint. “Having inspected the draw equipment and the draw papers, the [anti-monopoly] office discovered that two of the draw papers, namely numbers 4 and 7, were not properly folded in half like the other papers, but so as that one side of those papers was longer which rendered those two papers clearly distinguishable from the others,” the ÚOHS wrote in its report on the incident.

Nevertheless, the officials from the Ministry of Defense who were responsible for the draw claimed there were no regularities. Skanska has complained about other draws too, but these and the complaint about the MoD’s draw for the Časlav airfield tender were eventually rejected due to lack of evidence.

The fact remains that in tenders were the number of bidders is narrowed by a draw, the final price of the contract is often very close to the initial estimate given by the issuer, whereas in open tenders it is typically driven down considerably. For example, the final price for a contract won by the firm Strabag to build roads in and around the industrial park in Mošnov, Moravia-Silesia, was less than 40 percent of the issuer’s estimate.

Skanka CEO, Dan Ťok, hopes that Skanska kvalifikační will serve as an effective temporary solution and that the new law will make public tenders transparent. “Currently in some tenders the theory of probability doesn’t apply,” Ťok adds.