GEO

Persons Convicted of Corruption and Fraud should be Restricted from Participating in Public Procurement

19 November, 2018

 

Despite many important and positive features of Georgia’s public procurement, the system still requires further improvement. One of the main shortcomings of the existing system is a soft policy against dishonest companies. Nowadays, blacklisting remains the only way of preventing such problems. The blacklisted companies are not allowed to participate in public procurement for a year. However, blacklisted companies are allowed to establish other companies and participate in public procurement. Other companies who are not blacklisted can also subcontract them. Bad subcontracting practice is another problem for Georgia’s public procurement that was earlier highlighted by Transparency International Georgia.

Unlike good international practice, persons convicted of corruption and fraud are no restricted from participating in Georgia’s public procurement, even in case of breaking procurement legislation.  This article concerns the mentioned issue.

Problem Analysis

The Anti-Corruption Network for Eastern Europe and Central Asia, which was created under the OSCE, in its 2017 report recommends Georgia to restrict companies and their management who were convicted of corruption and fraud from participating in Georgia’s public procurement.

Moreover, the Council of Europe recommends to prolong one year term of blacklisting and restrict not only companies but also their owners in order to avoid their participation in public procurement through other companies.

The EU-Georgian Association Agenda does not require the above-mentioned restrictions from Georgia. However, in 2015 the EU adopted a directive, which restricted the participation of persons and companies in public procurement who was convicted of corruption. In future there is a high probability that Georgia will be requested to harmonize its legislation with the mentioned directive.

In addition to the mentioned recommendations, the necessity of such regulations stems from Georgian public procurement practice. We discuss three cases, where such companies participated in public procurement the owners of which were convicted of corruption, including for violating procurement legislation.

Unfortunately, Georgia does not have even a minimum standard, which could restrict at least those persons and companies from participation in public procurement who were convicted of violating public procurement regulations.

Geo-Group LLC

In October 2014, the Investigation Service of the Ministry of Finance of Georgia arrested Gela Kochaladze, a chief specialist of Khulo Municipality administration, for taking a bribe. According to the investigation, he took a bribe of GEL 500 from one of the companies participating in an electronic tender and promised to help.

In April 2017, Gela Kochaladze founded Geo-Group LLC. He is a director and holder of 60% of shares of this company. In three months from founding, this company won three tenders valued at GEL 546 000. All three tenders were announced by the Department of Automobile Highways and Melioration Systems Management of the Autonomous Republic of Adjara. Geo-Group did not have any competitor in these tenders. In January 2018, Geo-Group won GEL 631 700 tenders of Khelvachauri Municipality. In September of the same year, this company won GEL 180 880 tenders of Keda Municipality. In the first instance Geo-Group had only one competitor and in the second one, there was no competition. Since its establishment up to November 1, 2018, Geo-Group signed public procurement contracts valued in total at GEL 1 358 580.

 

Green Service LLC

In December 2013, the Investigation Service of the Ministry of Finance of Georgia arrested Lasha Phurtskhvanidze, a former head of Old Tbilisi District and Koba Kharshiladze, Phurtskhvanidze’s former deputy. According to the investigation, Phurtskvanidze and his deputy formally founded Green Service LLC on their friends’ name. However, since its founding, Phurtskhvanidze and his deputies were real owners and directors of the company. The main goal of this company was to participate in and win all gardening works tenders announced by the Old Tbilisi District while Phurtskhvanidze and Kharshiladze were members of the tender commission. These persons announced purchasing of such plants that have been already bought by Green Service. During their tenure, this company won five gardening works tenders announced by Tbilisi City Hall. [6]

On November 16, 2010, after Phurtskhvanidze and Kharshiladze left their offices, they substituted formal founders of Green Service and evenly split 100% of shares of the company. Until 2013 Green Service has won public contracts valued in total at GEL 8 million, including GEL 407 000 through simplified procurement. 

One year after the conviction Phurtskhvanidze admitted his fault and was released after paying a fine. As for Kharshiladze, he was sentenced for 2 years and had to pay a fine.

In 2010, Phurtskhvanidze and Kharshiladze founded another company Green Service+ LLC. This company has been participating in public procurement since January 2013 and up to November 1, 2018, it won tenders valued at GEL 21 million. It also got simplified public procurement contracts valued at GEL 95 000. This company is also very active now. For instance, in August-September, 2018, it won public tenders valued at GEL 1 million. At present, both Phurtskhvanidze and Kharshiladze own 33-33% of the company shares. 

Ibolia LLC

In April 2016, Ioseb Makrakhidze, a Georgian Dream member of parliament elected in Gori single-mandate district, was accused of fraud in public procurement. Ibolia LLC, Makrakhidze’s company, several times violated contract terms signed with Gori Municipality. According to the court decision, Makrakhidze put incorrect information in delivery and receipt note and tried to illegally obtain public money. In June 2016, Makrakhidze was pardoned. Later he was nominated by the Georgian Dreamin in Gori single-mandate district.

Ioseb Makrakhidze still owns 40% of Ibolia LLC. Only in January-October 2018, this company won public tenders valued at GEL 8 million.

Conclusion and Recommendations

In Georgia companies (for instance, Green Service, Geo-Group and Ibolia) linked with former or acting public officials convicted of corruption in public procurement receive millions of GEL. This contradicts with good international (including European) practice in regulating public procurement and recommendations of international organizations.

The Anti-Corruption Network for Eastern Europe and Central Asia, which was created under the OSCE, in its 2017 report recommends Georgia to restrict companies and their management who were convicted of corruption and fraud from participating in Georgia’s public procurement.

Nowadays, blacklisting remains the only way of preventing such problems. The blacklisted companies are not allowed to participate in public procurement for a year. However, this time is too short. Moreover, blacklisted companies are allowed to establish other companies and participate in public procurement. Other companies who are not blacklisted can also subcontract them.

Recommendations:

  • It is necessary to amend Georgia’s public procurement legislation which will restrict the participation of those companies in public procurement, owners of which were convicted of fraud or corruption in public procurement. This restriction should last for at least the period when a status of conviction is active;
  • Public contractors should be prohibited to sign subcontracts with such companies the owners of which were convicted of fraud or corruption.