Disparate and flawed practices in dealing with subcontractors in public procurements of Adjara Region - საერთაშორისო გამჭვირვალობა - საქართველო

Disparate and flawed practices in dealing with subcontractors in public procurements of Adjara Region

11 August, 2022

Disparate and flawed practices in subcontracting companies remain one of the most serious problems within the public procurement system. The issue of subcontracting is not regulated under the effective legislation, which increases the risks of corruption in the public procurement system and encourages harmful practices in managing public finances. Approaches adopted by procuring organizations of the government of the Autonomous Republic of Adjara as well as the regional municipalities are not an exception to the rule. 

For years, Transparency International Georgia has been emphasizing the need to eliminate the above-mentioned shortcomings: in the process of association with the European Union, Georgia committed itself to bring the public procurement system in line with the EU directives. The process of such harmonization is to be carried out in four phases and be accomplished in 2022; however, the rule of subcontracting was to be introduced in 2019. In particular, that rule would entitle central, municipal and other budget organizations to require that main suppliers provide information about volumes of work to be performed by subcontractors, financial sustainability of subcontractors and in the absence of such sustainability, the ability of main suppliers to replace them.

Transparency International Georgia studied public procurement contracts with a value exceeding GEL 100,000, that were awarded in 2020-2021 by 14 budget entities operating in Adjara. They include contracts awarded by four ministries of the region’s government, five municipalities, two subordinated units (Adjara Roads Department of Adjara Tourism and Resorts Department), a legal entity in the public law of the Finance and Economy Ministry of Adjara (Batumi Boulevard), a limited liability company of the Autonomous Republic of Adjara (Adjara Project Management Company) and a large municipal non-entrepreneurial (non-commercial) legal entity (Batumi Civil Infrastructure and Amenity Department).

The study revealed a disparity in approaches. This disparity broadens the possibilities of misspending public finances.

It is commendable that almost all entities require that suppliers of goods/services under tenders agree on the issue of subcontracting companies with the procuring entities. 

  • The only public entity that does not require from a supplier a subcontracting agreement is the N(N)LE Batumi Civil Infrastructure and Amenity Department. It only requires that it be notified about subcontracting at least five days prior to starting the works.

  • According to provided information, the Adjara Roads Department fined several suppliers for their failure to agree to subcontract;

  • The Audit Office revealed two instances where the companies have won in two tenders announced by the Finance and Economy Ministry of Adjara signed agreements with subcontractors without even informing the Ministry about that: one was the company Mardi, the winner in the tender to arrange the territory adjacent to Green Lake, which subcontracted the company Dida; while another was the company Alligator, the winner in the tender for arranging spots for picnics in Keda and Shuakhevi.

None of the public entities uploaded agreements concluded by suppliers with subcontractors to the webpage of the State Procurement Agency. Although the legislation does not require that, it is an important factor for ensuring transparency of the process.

  • It is worth noting that only three public entities: N(N)LE Civil Infrastructure and Amenity Department of Batumi Municipality, Adjara Roads Department, and Batumi Boulevard, provided TI Georgia with subcontracting agreements;

  • Other procuring entities did not send such agreements because according to their explanation they did not have them;

  • The Kobuleti Municipality cited the aforementioned as the reason for not sending the subcontracting agreements concluded by suppliers in 2020-2021; however, the Audit Office report on the performance of Kobuleti Municipality in 2019-2020, when analyzing a tender announced in 2020 to install street lights in Kobuleti, shows an agreement concluded with a subcontractor. We assume that since the Audit Office has the aforementioned contract, the Kobuleti Municipality must have it too and that the municipality provided incorrect information to TI Georgia. 

Public entities adopt different approaches to set an upper limit of works to be performed by subcontractors:

  • The Ministry of Education alone sets the upper limit of 30% of the works to be performed by subcontractors;

  • The Adjara Roads Department, in the majority of cases, sets 40% as the upper limit of the works to be performed by subcontractors. In five out of six tenders announced by the Department, the winning companies signed agreements with subcontractors on the aforementioned condition. The upper limit was increased to 60% only in one case;

  • The Ministry of Agriculture of Adjara has adopted a totally unsystematic approach: in some cases, this entity permits suppliers to subcontract companies (without setting the upper limit of works) while in other cases prohibits subcontracting;

  • N(N)LE Civil Infrastructure and Amenity Department of Batumi Municipality does not set any upper limit of works for subcontractors. The companies won in the tenders announced by this Department concluded 16 agreements with subcontractors and in 10 of them, subcontractors performed over 90% of the works envisaged in the tenders. It appears that the companies winning tenders merely acts as intermediaries between the procuring entities and subcontractors; that they sell their experience and get from 10% to 15% of the amount envisaged by the tender, while less experienced companies perform the work.

Winners in tenders announced by (N)LE Civil Infrastructure and Amenity Department, that subcontracted the works

  • GEL 1,090,000, in total, was contributed to the Georgian Dream and Salome Zourabichvili by 16 persons (shareholders, directors) related to nine companies that were awarded the contracts under the above-listed tenders.

Procuring public entities do not scrutinize whether the companies participate in tenders in good faith.

  • After winning a tender (NAT200005053) announced by the Adjara Roads Department, the company, New Power, subcontracted the company Gza, another bidder in the same tender. The contract of GEL 741,000 was awarded to the winner who, for its part, concluded a GEL 284,981 worth subcontracting agreement with Gza; 

  • The tender for street lights in Kobuleti, announced in 2020, had two bidders: one of them, Meokhi LLC, which emerged as the winner in the tender, subcontracted Zoma LLC, another bidder in the same tender. Such behaviour raised suspicions, according to a conclusion of the State Audit Office, about the two companies, Meokhi and Zoma, colluding to participate in the tender together in order to gain higher benefits;

  • Alligator, a company that won a tender for arranging picnic spots in Keda and Shuakhevi, subcontracted around 95% of the works specified in the agreement to a company, Alligator Provider Georgia. The State Audit Office notes that the subcontractor lacked a relevant experience for the works envisaged under the tender; however, later, Alligator Provider Georgia indicated the works performed for Alligator as its own experience when bidding for a tender announced by the Education Ministry of Adjara for partial rehabilitation of the existing building of Public School №6 in Batumi and construction of an additional building for the same school.  

Conclusion and recommendations

The study conducted by TI Georgia in the Adjara region has revealed that the practice adopted by public procuring entities in relation to subcontractors is disparate, harmful and riddled with risks of corruption.

Procuring organizations operating in Adjara mainly follow their own initiatives and ways of doing things, which need to be urgently regulated and a uniform standard established. The same need can be seen in the State Audit Office report of the current year on the results of the study into public procurements of ministries of the Autonomous Republic of Georgia. 

It is difficult to understand why the ministries and municipalities do not inquire about agreements concluded with subcontractors, when these entities announce public procurements for expensive projects and given the volume of works, suppliers do objectively need to subcontract other companies. We might be dealing here with an improper approach to issues related to subcontracting. The mechanisms of inquiry and oversight must be applied effectively by the Supreme Council of Adjara to the regional government and by local city councils to the municipal units.

Of particular interest is the practice adopted in the Batumi Civil Infrastructure and Amenity Department, whereby winners in tenders, which mainly comprise the companies that make contributions to the Georgian Dream, actually perform the role of intermediary between procuring entities and subcontractors. 

It is not clear why the works that are actually carried out by subcontractors should be regarded as the experience of, and fulfilment of tender terms by, a company which is the main supplier according to the contract, but, in reality, acts as an intermediary and gets between 10% and 15% of the total tender amount for that intermediation, according to official documents.