Conflict of interest in public procurement Preventing and mitigating risks in high-risk areas Janos Bertok Head of Public Sector Integrity Division

Highly centralised public procurement system Representing 16% of GDP, purchasing procurement in Hungary is highly centralised, with the central government carrying out almost 70% of the public procurement spend. Share of public procurement in terms of GDP (2015)

Where market structure also shows high concentration In terms of contracts awarded by CPBs, through which most strategic centralisation takes place, large enterprises in Hungary dominate more strongly high-value contracts. Share of contracts awarded to SMEs by CPBs (2016) Share of direct cross-border procurement (in number) (2009-2015) In terms of the activities carried out by CPBs, which represent an increasing trend of aggregating demands in the OECD countries, the share of the contracts awarded to SMEs by Hungarian CPB shows high discrepancy between in terms of number and value. While cross-border procurement represents less than 2% of the public procurement procedures in Hungary, this discrepancy implies potential dominance of large firms over high-value contracts. Second figure source: EC (2017). Measurement of impact of cross-border penetration in public procurement Source; 2017 OECD Survey on strategic use of public procurement to support SMEs

The procurement landscape called for a robust framework on conflict of interest Public procurement is recognised as an area with conflict of interest risks. In line with the OECD practices, Hungary also has developed specific conflict of interest policies and rules for at-risk officials, including public procurement officials. #dark blue indicates where HUN represents one of the countries having developed specific CoI policies/rules.

Further reinforced recently Additionally, the measures to manage conflict of interest in public procurement has recently been reinforced through revision of the public procurement law Private interests disclosure and public availability (2014) Actions taken after receiving the information (2014)

Corruption risks evolve throughout the project Influence Spend Design Construction Client Consultant Partner Construction Partner Suppliers Examples of flags/risks: Insufficient or unrealistic needs assessment and planning Too narrow technical specifications Abuse of non-competitive procedures Relevant information is not shared consistently to all bidders Restrictions in time to respond Supplier delivering poorer quality, higher price and different specifications than what which were stated in the contract Collusion between corrupt company and corrupt supervising official, leading to price increases Subcontractors are not selected in a transparent manner False accounting, cost misallocations and false invoicing

Yet the entire procurement cycle could be exposed to such a risk Pre-tendering Exceptionally large tenders Design of the qualification criteria indicating a preferred supplier Tendering Time-to-bid not in conformity to the legal provisions Artificial bids Connections between bidders that undermine competition Not all bidders informed of the award and its reasons Not all award contract and selection documents are made public Complaints from non-winning bidders Post-tendering New bid specifications included in the awarded contract Substantial changes in project scope/costs after award Inconsistencies in reported turnover/number of staff These red flags could signal potential conflict of interest risks in public procurement. In particular, conflict of interests identified in the pre-tendering stage, or when the decision on public procurement is made, could undermine not only sound governance but delivering value for the taxpayers’ money. Hungary has recently included the following legal provision to address the issue: Act CXLIII of 2015 on Public Procurement : (195. §) Any person having personal or financial interest in any of the entities concerned by the procedure shall not participate in the implementation or preparation of the procedure of the minister competent in public procurements under paragraph (7). The person concerned by such conflict of interest shall notify the the minister competent in public procurements without delay thereof and immediately cease participation in the ongoing procedure or in the preparation of the procedure. (This paragraph entered into force on 1 January 2017.) Managing Fraud Risks of ESIF programmes in the Slovak Republic (2018)

e-Procurement system for increased transparency and deterring risks The use of e-procurement system in Hungary is mainly to communicate public procurement information. Expanding the use of e-procurement system to cover the whole public procurement cycle could help Hungary to better manage conflict of interest while delivering value for money by; Reducing face-to-face interactions between public procurement officials and suppliers (e.g. E-submission of bids and invoices; e-ordering) Better management of the supplier information (through automated data collection and supplier registry) Increasing transparency at the post-tendering stage -At the same time, Hungary needs to ensure a sound level of competition among suppliers and proportionate control measures for public procurement procedures that are not published; “In Hungary, the proportion of public procurement procedures without prior notification – which means that these procedures are not based on open competition – are really high. It amounts to around 13 percent of all public procurements,”; the proportion of such public procurements is more than double the EU average of 5 percent. (https://budapestbeacon.com/over-40-of-public-procurements-in-hungary-may-involve-single-bidder-says-tis-gabriella-nagy/) Another issue is the high proportion of single-bid procurements in Hungary, which is about 40 percent of all procedures, double the EU average.  Efforts are needed to ensure access of all firms to Hungary’s public procurement opportunities , and that they are treated in an equal manner

However, procurement intelligence requires state-of-the-art e-Procurement The OECD accompanied the Slovak Republic to carry out a gap analysis and define an e-Procurement strategy not only to meet EU obligations but also to unveil the power of procurement data

Effectively managing conflict of interest require skills Example: capacity building in Slovakia, Bulgaria, Greece with the support of the OECD in a 3 year comprehensive programme for the procurement workforce, including managing conflict of interests Managing Fraud Risks of ESIF programmes in the Slovak Republic (2018)

OECD Work www.oecd.org/gov/public-procurement