About 3 billion levs (1.5 billion euro) without VAT - this is the overall value of the contracts which Bulgarian authorities have signed with state or municipally-owned companies in the last three years. These so-called in-house deals permit skipping the bidding procedures when the contracting party and the contractor are related, for example when a municipality hires its own waste management unit to implement a project. This type of procedure is perfectly legal; it can save the municipal or state institutions time, money and effort. But the recent proliferation of this procedure in Bulgaria shows the authorities are using it to circumvent public procurement rules to distribute money to favourites in a totally non-transparent manner.
Take the case of the government's Road Infrastructure Agency (RIA). It has signed three contracts for a total of over 2.7 billion levs without VAT with state-owned highway construction company Avtomagistrali - the most impressive procurement awarded to a single company in the last 30 years. Avtomagistrali is supposed to build about 220 km of the Hemus motorway in northern Bulgaria, as well as work on 74 smaller road projects. The current pace of construction of sections of the highway shows no signs of accelerating but competition in the construction sector has been further reduced to an exclusive list of Bulgarian companies which will work as unofficial subcontractors, evading the public tendering process.
How it works
In countries like Finland, Germany and the UK, in-house public procurement is used successfully, Dr. Irena Georgieva, a lawyer and specialist in the field, explains. The benefits of in-house procurement are that the procedures are faster - there is no waiting for a tender, no appeals are submitted to the competition authority, no demands to lower the price are issued. "If this construct is used legally and adequately, it would lead to efficient spending of budgetary funds, without violating any principle of public procurement," says Ms Georgieva.
However, Bulgaria's environment is slightly different. "The public procurement sector continues to be a reflection of the widespread corruption problems of the government," the Center for the Study of Democracy, a Sofia-based think-tank, wrote in 2016. In 2011, 2014 and 2016, various legislative changes were adopted regarding in-house tenders, fully implementing the respective EU rules. "It should be borne in mind that if the in-house contract meets all the requirements of the EU and national legislation, then the size of the project and the allocated funds, in any case, do not matter," Ms Georgieva explains.
Not for construction? Think twice
Eight years ago, at the introduction of the in-house practice, Tomislav Donchev, then Minister of European Funds, said: "No one is imagining that it is right and beneficial (to the private sector, contracting authority or taxpayer) for municipal and state-owned companies to repair and build roads, railways or anything similar."
This is exactly what is happening now. The first contract for 134 km of the Hemus motorway is valued at an estimated 1.15 billion levs without VAT and the sum may even grow, according to the agreement signed by RIA. It was awarded in December 2018, after the government decided to spend part of the budget surplus faster than a typical tender would allow. The other two incredibly expensive contracts that Avtomagistrali has received are worth respectively 483 million levs and 1.15 billion levs, with the first one for 74 road repair projects and the second for construction of a further 89 km of Hemus.
Capital newspaper asked Mr Donchev, who is now Deputy Prime Minister, whether the current practise has deviated from the initial plans. He replied: "In this respect, the in-house allocation of highway construction contracts follows the spirit of the law, as the company is fully public." In order to award in-house contracts, the contracting authority needs to exercise control of the company in question, be it state-owned or municipal, and make sure that more than 80% of the company's business is formed by activities for the same contracting entity or other entities controlled by it. In this case, Avtomagistrali is under the umbrella of the Regional Development Ministry together with its contracting authority, the Road Infrastructure Agency.
A bad idea
The rationale behind this decision was that northern Bulgaria urgently needs a highway because the region's lack of a modern infrastructure connection to the rest of the country impedes its economic development. Thus, the government went for the easy, but the questionable method - without an open tender procedure, without evaluating offers by a range of companies and without risking any appeals. Part of the reason for this decision lies in the fiscal rules - the government didn't want to delay the spending of the money, because the expenditure would increase the budget deficit just before the expected invitation to Bulgaria to launch its accession to the Eurozone. But nothing prevented Avtomagistrali from tendering the construction in an open way, as many private companies are required for the works.
The progress of the project is actually not that fast. Construction is shockingly slow - within a year of the signing of the first contract, only a 1.6 km-long stretch is being built, according to official construction permits. In comparison, the last completed section of the Hemus motorway, which is 9 km long, was designed and built in a year and a half.
Since there was no tender, it is not clear whether the money is being spent in the most efficient and appropriate way. There is no way to cut the cost through competition and market principles. When open tender procedures were used, the cost of construction of two other stretches of Hemus varied between 7 and 9 million levs per kilometre. In the case of Avtomagistrali's contract, the cost stands at 10 million levs per kilometre but this is not the final price. The funds were allocated from the budget without a clear estimate of how and why it would cost so much.
Secondly, in-house contracts do not allow the use of subcontractors. However, Avtomagistrali is going around the law and occasionally breaking it. It has signed contracts for equipment rentals but in practice, they are subcontractor agreements. Thus, the government-owned firm is functioning as a broker for road construction for billions of levs without any transparency and responsibility taken by the chosen private companies which have been put on an exclusive list through secret arrangements.
Unofficially, many construction companies admit that they are involved in the construction of Hemus, despite denials by Avtomagistrali management.
Third, money is being spent in a non-transparent way. The Road Infrastructure Agency has not even published two of the three contracts it signed with Avtomagistrali, saying that public procurement law doesn't cover in-house contracts.
Moreover, private companies are subject to stricter scrutiny, in theory at least. With a state-owned company, the authorities will need to fine themselves in case of poor quality construction, actually paying for the same thing twice.