AZERBAIJAN'S OPAQUE PROCUREMENT SYSTEM

C O N F I D E N T I A L BAKU 000077 SIPDIS SIPDIS DEPT FOR EUR/CARC AND EEB; PLEASE PASS TO USTR E.O. 12958: DECL: 01/23/2028 TAGS: ECON EINV ETRD PGOV KCOR AJ SUBJECT: AZERBAIJAN'S OPAQUE PROCUREMENT SYSTEM Classified By: Ambassador Anne E. Derse per 1.4 (b,d). ¶1. (C) Summary: Although Azerbaijan is in the midst of a massive public investment program to overhaul its physical and social infrastructure, the GOAJ does not have a transparent tendering system to administer this program. Formal tendering -- done by the State Procurement Agency -- usually is completed only after the relevant GOAJ line ministries have conducted extensive negotiations with prospective partners, thus making it difficult for other companies to compete and raising obvious corruption concerns. USAID is working with the GOAJ to promote public procurement law reform but, until these key changes are made and widely implemented, Azerbaijan's public investment will remain inefficient, fueling inflation and corruption, and U.S. companies seeking to gain a share of Azerbaijan's planned USD 13.3 billion dollars in public investment projects will face an uneven playing field. We believe that procurement reform should be an important element of our upcoming Economic Partnership Commission agenda. End summary. THE CURRENT SYSTEM -------------- ¶2. (SBU) Under Azerbaijani law, line Ministries have a great deal of leeway in administering public procurements. According to State Procurement Agency official Vagif Nasirov, the State Procurement Agency does not initiate any tender or public procurement actions; that role is reserved for the relevant line ministries. According to Nasirov, the State Procurement Agency's role is simply to monitor the public procurement process and its legislative compliance and, if asked, to provide advice to government agencies on public procurements. Although according to Azerbaijani law the Procurement Agency has unified regulatory oversight of the public procurement process, there is no transparent and adequately enforced appeals process in place and the Agency lacks both the staff and resources - including political capital - to tackle one of the most politically charged issues in Azerbaijan. ¶3. (SBU) Under Azerbaijani law, line ministries are required to issue a tender for any public procurement over 50,000 Azerbaijani manat (roughly USD 59,000). However, recent discussions with the Ministry of Emergency Situations (MES) indicate that at least one Ministry is not following the 
procurement law. According to MES staff, the newly created Ministry has a list of items it needs to purchase and "wants to find the best." MES staff have been traveling all over the world to view and purchase emergency response equipment. Based on our discussions with MES staff, the Ministry completes procurement paperwork after it has identified vendors and agreed on the prices and terms of sales. Anecdotal evidence indicates that this model is applied in all other GOAJ ministries, resulting in widespread price differentials for similar goods and services under different projects, as well as a pervasive sense of a lack of accountability in the current public procurement regime. In theory, some of these problems sQuld be addressed by the GOAJ's new plans for an e-procurement system, but working-level contacts at the State Procurement Agency have indicated that the new e-procurement system likely will not be applied to big-ticket GOAJ purchases. ¶4. (C) During a January 22 meeting with the Ambassador and visiting Special Representative for Commercial and Business Affairs Frank Mermoud, Deputy Minister of Economic Development Mikayil Jabbarov said that the GOAJ procured products and services based on "certain needs and criteria" for the proposed projects, hinting that the procurement system was not uniform and varied from project to project and from ministry to ministry. Jabbarov said that if U.S. companies wanted to participate in the GOAJ's procurement process, it was important for the companies to be on the ground in Azerbaijan and "be visible in Azerbaijan." Jabbarov said that the important keys for the Ministry of Economic Development in procurement were speed and quality, adding that the origin of the product was irrelevant. ¶5. (C) According to a Baku-based partner in a major international law firm that specializes in commercial deals, all of this translates into a complete lack of a transparent tendering process for major GOAJ procurements. "All of the big-ticket deals," he explained, "are made well before the State Procurement Agency issues its tender" on behalf of the relevant line ministries. The only tenders issued by the State Procurement Agency and implemented in any way approaching Western standards are "peanuts, small time projects -- paper clips," he wryly added. "If companies are waiting for a tender to be issued, they are too late." ¶6. (C) According to this lawyer, the GOAJ tends to approach major corporations -- both international and domestic -- with an initial idea of the sector it wishes to develop, such as power plants, roads, or new port facilities, to name just a few of the major deals in the works. The GOAJ views these initial discussions as part of a "normal fact-finding and research process," identifying through pre-tender discussions the firms with which it seeks to work. The lawyer cited the GOAJ's ongoing discussions with several international corporations to design and build new three new power plants as a classic example. The GOAJ, he said, has yet to issue a tender for these big-ticket projects (although it did recently issue a tender for consultants to help develop the terms of reference for the project) but is well on its way to clinching a deal with a major South Korean company to construct the new power plant at Alat. President Aliyev, the lawyer noted, often plays a key part in the decisions; his support for particular firms sometimes can be driven by a political desire to strengthen relations with certain countries. The lawyer acknowledged that in any Western country, these tendering practices would be illegal and open to challenge in the courts. In Azerbaijan, however, these practices are seen as a normal part of doing business. The absence of specific tender documents, the lawyer noted, often makes it hard to interest U.S. firms in doing business in Azerbaijan. THE POLICY PRESCRIPTION -------------- ¶7. (SBU) USAID advisors are working with the GOAJ to develop a new legal and regulatory framework to improve the transparency and clarity of Azerbaijan's procurement process. These reforms are important from both a WTO General Procurement Agreement (GPA) and UNCITRAL compliance perspective, and for the GOAJ's anti-corruption efforts. Priority procedural reforms include: - Incorporation of more rigorous procedures for price estimation prior to initiation of procurement action (to avoid the wide price disparities often characterizing procurements for standardized goods/services); - Tightening procedures for the submission and opening of bids (to limit the scope for discretionary manipulation of competitive processes); - Limiting the application of bid-security requirements (in order to promote broader participation of small and medium-enterprises in public procurement actions); - Strengthening code of conduct provisions for both public and private sector officials involved in procurement proceedings; - Formalizing through consolidated operating procedures the issuance of standardized bidding documents and contractual conditions; - Clarifying that the scope of application of the law will expressly include mega-projects such as the infrastructure projects outlined in the 2008-2011 public investment program; - Eliminating current provisions limiting appeal rights; - Expressly affirming the applicability of international government/donor agency procurement procedures for procurement actions involving external funding; and - Including comprehensive provisions facilitating and regulating the use of an official single-portal website for public procurement and promoting the effective integration and public procurement and financial management systems. ¶8. (SBU) On the institutional development side, priority recommendations include: - Specifically elaborating the central policy and regulatory responsibilities and authorities of the State Procurement Agency, and mandating that the agency report directly to the Parliament; - Promulgating establishment of professional procurement units in line ministries/agencies and a strengthened cadre of professional procurement specialists in the State Procurement Agency; - Requiring the State Procurement Agency to maintain and publicly disseminate on a regular basis a systematic data base on procurement actions and contracts, including pricing information; and - Requiring the State Procurement Agency to collect and disseminate systematic information on subcontracting practices. ¶9. (SBU) These reforms are needed to: promote greater professionalism and institutional independence with regard to procurement planning and execution procedures/functions; centralize within the public procurement agency regulatory and data collection/collation functions which are currently fragmented; build greater transparency into public procurement processes; and create greater public/NGO awareness of and capacity to engage the government on apparent anomalies in procurement outcomes. These recommendations are included in draft revisions to the procurement law which have been coordinated with the World Bank and provided to the GOAJ. Through our bilateral discussions, including the upcoming Economic Partnership Commission, we should urge the GOAJ to submit these revisions to Parliament for consideration in the current session. COMMENT -------------- ¶10. (C) Public procurement reform is critically important, as the GOAJ has begun a rapid expansion of its public investment program and is dramatically increasing its overall budget expenditures. The public procurement system is widely recognized as one of the primary sources of corruption -- and political influence -- in Azerbaijan. Although the GOAJ has highlighted public procurement reform as a key area in its new anti-corruption plan, GOAJ performance to-date in this area has been disappointing and implementation of new anti-corruption measures are likely to be complicated by key ministers' significant business interests, often in the same areas they are responsible for regulating. Azerbaijan's WTO aspirations could be an important incentive to promote reform, as a significant overhaul of the existing system will be needed to bring Azerbaijan into full compliance with the WTO GPA. ¶11. (SBU) We believe procurement reform should be a priority area of focus in the next Economic Partnership Commission (EPC) meeting, scheduled for April. By focusing on procurement reform in the EPC, we will reinforce in our economic policy dialogue reforms underway with the support of our USAID technical support efforts. Until widescale procurement reform is adopted and implemented, Azerbaijan's public investment spending will be inefficient and fuel inflation and corruption; it also will be extremely difficult for U.S. companies to compete on an even playing field for Azerbaijan's planned USD 13 billion in new public investment projects. The best way for U.S. companies to try to even this playing field is by establishing a presence on the ground, something most companies are reluctant to do without concrete project proposals issued as part of a transparent tendering process. Procurement reforms are therefore vitally important for U.S. commercial interests in this rapidly growing market. DERSE