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C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001862 
 
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E.O. 12958: DECL: 07/31/2017 
TAGS: EIND EFIN EINV PGOV UP
SUBJECT: UKRAINE: POLITICAL CLASH HIGHLIGHTS CORRUPTION IN 
GOVERNMENT PROCUREMENT 
 
Classified By: ECONOMIC COUNSELOR DOUGLAS KRAMER, REASONS 1.4 B) AND D) 
 
 ¶1. (SBU) Summary: The GOU attempted to push through a 
controversial amendment to the government procurement law, 
causing indignation among political opponents and spurring 
claims that the Party of Regions was trying to grab public 
funds for their election coffers.  Opposition by President 
Viktor Yushchenko, along with a court ruling against the GOU, 
appears to have blocked the amendment from taking effect. 
The story illustrates the sad state of Ukraine's procurement 
law and the corruption endemic to the system.  Amendments to 
the procurement law in 2006-2007 actually made matters worse, 
introducing murky supervision, nontransparent special 
requirements, and sectoral exemptions.  Foreign companies 
have little opportunity to compete for GOU tenders on an 
equal footing.  Ukraine has committed to cleaning up its 
government procurement system in line with WTO rules, but 
thus far President Yushchenko appears to be the only major 
actor pushing for reform.  End Summary. 
 
Contentious Procurement Law 
--------------------------- 
 
¶2. (U) On June 19, the Rada (parliament) approved a 
controversial bill that excluded all state-owned enterprises 
from requirements to follow government procurement rules, 
such as the announcements of open tenders.  The law also 
stipulated an increase in the threshold requiring government 
procurement to be performed via open tenders (from US$10,000 
to $20,000 for goods and services, from $80,000 to $120,000 
for works).  Because the law was passed after President 
Viktor Yushchenko's decrees dissolving the Rada, the 
President refused to recognize the legitimacy of the law and 
never signed it into force.  First Deputy Prime Minister 
Mykola Azarov announced on July 5 that the GOU intended to 
implement the law regardless.  (Note: If the Cabinet were to 
implement this law, it will be the first passed by the rump 
Rada that the Cabinet had chosen to move forward on.  End 
note.)  A Kyiv Commercial Court ruling on July 6 banned 
official publication of the law, however.  Two heavyweight 
politicians and high-ranking officials of the Tender Chamber 
-- Raisa Bohatyreva, leader of the Party of Regions Rada 
faction and honorary President of the Chamber, and Ksenia 
Lyapina, Our Ukraine MP and Vice President of the Chamber -- 
resigned from the Chamber in protest of Azarov's move. 
 
¶3. (U) President Yushchenko responded on July 12 by issuing a 
decree aimed at managing procurement funds until the new Rada 
is in session.  The President, through the National Security 
and Defense Council, requested law enforcement agencies to 
audit state-owned enterprises to ensure adherence to the 
current law and proper use of government awards.  The 
agencies must submit a report on the results of the 
investigation to Yushchenko by September 1.  (Note:  Post has 
heard anecdotal evidence that in fact some state-owned 
companies (in this case a subsidiary of the state-owned oil 
and gas company NaftoHaz) have not been following 
requirements for open tenders.) 
 
Illegal Campaign Finance? 
------------------------- 
 
¶4. (SBU) Several press reports speculated that the GOU was 
pushing this new procurement law in order to enable state 
funding to be diverted to political campaigns of parties 
loyal to the government in the upcoming election.  Lyapina 
reminded Econoff in a meeting on July 18 that Ukraine had a 
precedent for such a scheme, as the Party of Regions had 
diverted funds from state-owned NaftoHaz to fund its 2004 
electoral campaign.  The man behind that scheme, noted 
Lyapina, was none other than Azarov, making Azarov's motives 
in pushing this recent law very suspicious. 
 
¶5. (C) In a July 27 meeting, Bohatyreva told Ambassador that 
the government procurement process was nontransparent and 
corrupt.  She had tried to put an end to some of the corrupt 
schemes, she maintained, which brought her into conflict with 
a number of ministers.  First Labor Minister Papiyev promoted 
one tender involving disabled people, which Bohatyreva had 
squashed.  Then she had problems with EnergoAtom Head 
Derkach, Energy Minister Boyko, and Health Minister Haidayiv, 
all of whom she placed in Azarov and Klyuyev's circle.  She 
said Azarov pushed for control of the Tender Chamber, and she 
was threatened and subsequently told to resign for the good 
 
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of the party.  Moreover, she was in Vienna for medical 
consultations when statements attacking Azarov were leaked in 
her name.  Bohatyreva argued that the nontransparent 
procedures would continue regardless of who ran the Tender 
Chamber, but with her out of the chamber compromising 
materials about ministers might now be made public. 
 
How the System Operates 
----------------------- 
 
¶6. (U) The law "On Procurement of Goods, Works, and Services 
for Public Funds" of February 22, 2000 established a single 
government procurement system.  According to the law, 
subjected to a succession of amendments, all government 
procurement of goods and services (if valued at more than 
$10,000) and works (if more than $80,000) must be contracted 
via tenders (either open, or open with pre-qualification). 
According to Paul Bermingham, World Bank Director for 
Ukraine, Belarus and Moldova, Ukraine's procurement law 
largely complied with international standards until 
questionable amendments were made in 2006-2007.  March 2006 
amendments to the law "On Procurement" complicated the 
institutional framework, assigned overlapping tasks of 
monitoring public procurement to several bodies, and created 
rules that encourage conflict of interest.  President 
Yushchenko initially vetoed this bill, but the Rada mustered 
enough votes to override. 
 
¶7. (U) The Department of Coordination of State Procurement 
under the Ministry of Economy had been responsible for 
overseeing the procurement system until March 2006.  The 
system was notoriously corrupt under the Ministry of 
Economy's oversight, and this authority was transferred to 
the Anti-Monopoly Committee.  The Anti-Monopoly Committee is 
a strange choice for regulating government procurement, 
however, as it does not have particular competence in this 
area.  The Netherlands is the only other country with such a 
practice. 
 
Tender Chamber - NGO with Governmental Functions 
--------------------------------------------- --- 
 
¶8. (SBU) The 2006 amendments also established the Tender 
Chamber, an NGO, as a major player in the procurement 
process.  The Tender Chamber became responsible for 
maintaining a catalogue of bidders, monitoring transparency, 
and assuring fairness.  Transferring governmental functions 
to the private sector generated more negligence in the 
administration of public money.  For example, the Tender 
Chamber maintains a UAH 7000 ($1400) obligatory fee that 
bidders are forced to pay in order to be registered in the 
catalogue, in conflict with the international practice of 
free listing for all interested bidders.  Lyapina told 
Econoff that, even as the Tender Chamber's Vice President, 
she was unable to determine how the decision to introduce 
this fee was taken. 
 
¶9. (C) The Tender Chamber's membership includes not only 
governmental and parliamentary representatives, but also 
private sector associates.  Press reports have often claimed 
that this situation creates conflict of interests since some 
of the Chamber members exploit their positions financially 
and informatively.  Lyapina told Econoff that intermediaries 
had begun to control access by potential bidders to the 
Chamber.  Of course, these intermediaries were charging fees 
for their "services," thus expanding the scope of corruption. 
 (Comment:  If practice in other areas is any guide, we 
suspect intermediaries in turn may have been kicking back 
part of their fees to members of the Tender Chamber.) 
 
Murky Supervision and Special Requirements 
------------------------------------------ 
 
¶10. (U) The March 2006 amendments scattered policy and 
oversight functions across several bodies, including the 
Anti-Monopoly Committee, the Accounting Chamber (a supreme 
audit body, reporting to the Rada), the State Control and 
Audit Unit (a body for internal audit, under the Ministry of 
Finance), and the Tender Chamber.  Experts argue that such 
fragmentation prevents the bodies from implementing effective 
and sound policy and contributes to a lack of transparency in 
the decision making process. 
 
¶11. (U) The March 2006 provisions also introduced special 
 
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security requirements for websites in order to be eligible 
for tender announcements.  In May 2006, the Security Service 
of Ukraine (SBU) issued its conclusion that none of the 
proposed internet sites complied with the safety measures. 
Subsequently, however, the SBU allowed the European 
Consulting Agency, a Ukrainian private enterprise with links 
to the Tender Chamber, to operate a temporary website 
announcing the tenders.  The European Consulting Agency 
continues to this day to operate a monopoly over tender 
announcements. 
 
Sectoral Carve-Outs 
------------------- 
 
¶12. (U) The March 2007 amendments created a legion of special 
public sectors, such as defense, postal and 
telecommunications services, and railways, for which 
procurement rules do not apply.  While international norms do 
allow strategically important areas like national defense to 
be excluded from the general procurement rules, Ukraine's 
practice of "sectoral preference" is likely problematic in 
terms of compliance with international standards. 
 
Foreigners Left Out 
------------------- 
 
¶13. (U) The law "On Procurement" does not restrict foreign 
enterprises from participating in government procurement. In 
practice, however, foreign companies are rarely able to 
compete on an equal footing.  Unclear rules and requirements, 
secret wheeling and dealing, and corruption result in a low 
 
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level of participation by foreign companies.  According to 
the Anti-Monopoly Committee, foreign companies won tenders 
for only 0.01 percent of government procurement during the 
first six months of 2006. 
 
Moving Toward the WTO 
--------------------- 
 
¶14. (SBU) Ukraine is not currently a signatory to the WTO 
Agreement on Government Procurement (AGP), but will become an 
observer to the AGP at the time of WTO accession (expected 
within 6-12 months), and has promised to begin negotiations 
to accede to the AGP after then.  On December 11, 2006 the 
WTO Government Procurement Committee, which oversees the GPA, 
presented a roadmap for Ukraine's accession to the agreement. 
 President Yushchenko has tasked Valery Pyatnytskiy, Deputy 
Minister of Economy and Ukraine's lead WTO negotiator, to 
prepare a WTO-consistent draft law on procurement by 
September 15, 2007.  A USAID-funded project is working with 
the Ministry of Economy on this draft law. 
 
Comment: A Web of Corruption 
---------------------------- 
 
¶15. (C) Public procurement cuts to the heart of governmental 
corruption, and Ukraine's track record in this area is not 
encouraging.  Since independence, Ukrainian officials have 
used procurement rackets and kickbacks from state-owned 
companies as a handy way to line their pockets.  Observers 
often cite NaftoHaz as a prime example of this kind of 
widespread procurement corruption.  That the procurement 
process has gotten worse in recent years is of particular 
concern.  The recent political infighting over amendments to 
the procurement law served to expose just how many layers of 
corrupt activity exist.  Azarov's move to exempt state-owned 
enterprises from procurement rules, ironically, would 
actually bring Ukrainian practice more in line with WTO 
rules.  However, the vehemence with which he attempted to ram 
through this change made us suspicious that truly substantial 
amounts of money were at stake; we strongly suspect Azarov's 
motive was likely to make it easier to pilfer from the 
companies' budgets.  Azarov faced resistance from a leader 
within his own party (Bohatyreva) and the opposition 
(Lyapina), yet it is hard to believe their motives were any 
more principled.  As members of the Tender Chamber, it is 
logical they would have shared in the apparent flow of 
kickbacks, although we have no hard evidence to this effect. 
It seems that in Ukraine, corruption is one trait that 
crosses party lines. 
Taylor