How reforms are being stalled. The defense story of "Vneshtorgvidav"

How reforms are being stalled. The defense story of "Vneshtorgvidav"

Reforms in Ukraine are not proceeding as quickly as one would like. And the issue isn’t always a lack of political will. Sometimes a few saboteurs in one agency are enough to delay the development of an entire sector.

"Ukrainska Pravda" set out to show how reform brakes operate using the example of the state enterprise "Vneshtorgizdat" – an indispensable participant in all state procurements.

The enterprise’s leadership made money by inventing and creating problems for all participants in the process. They got so practiced at it that for half a year they have been holding off reformers led by the minister of economy.

So far this "clash of civilizations" has proceeded without accounting for official crimes at the enterprise, because no one investigated them. "Ukrainska Pravda" found many instances of corruption in Vneshtorgizdat’s activities, and we hope law enforcement will pay attention.

Even though they themselves are direct participants in the schemes.

The enterprise "Vneshtorgizdat of Ukraine" is state-owned and falls under the management of the Ministry of Economy.

Its monopoly is publishing announcements about state tenders, procurement results, and other related information on the official portal "Public Procurements."

If we talk about simplifying procedures, free access for participants to tenders, transparency, and most importantly – eliminating the corrupt component – Vneshtorgizdat is both the hands of reform and its memory. It manages, for example, the archive of information on state procurements for all past years.

It was the attempt to open that archive that introduced the ministry’s new team to the state enterprise. Until last winter no one had ever touched those reserves.

History of the sabotage

"It was a real shock to me that no one in the country had been concerned about procurement statistics up to now, in principle," Deputy Minister of Economy Maksym Nefedov told a "Ukrainska Pravda" reporter. "Even now we cannot answer, for example: what was the average price paid by budgetary institutions for diesel fuel in 2014 year? We cannot compare who paid more: the Interior Ministry, the Ministry of Defense, or, say, the National Bank."

According to Nefedov, the problem is that all these data, open and accessible de jure, are in fact "available in a format that cannot be analyzed."

Instead of data tables, much of the archive consists of about three terabytes of PDF files – scanned paper documents. Often they are filled out incorrectly.

But to analyze these data, you first had to somehow obtain them. And here Vneshtorgizdat showed the full power of its bureaucratic apparatus.

By means of form responses, maximally delaying the deadlines for fulfilling the minister’s orders, providing only the documents explicitly specified in the orders, and other bureaucratic tricks, the enterprise dragged out transferring the archive for several months and never handed it over in full.

"From a business perspective that’s an immediate and unequivocal black mark for me," says Nefedov, who hadn’t previously worked as an official. "But legally documenting sabotage is quite difficult."

At first the patience of civic organizations ran out; they had volunteered to help analyze the archival data. Transparency International, the Anti-Corruption Center, and "Transparent Procurements" appealed to the minister of economy asking for an inspection of the enterprise.

The order was signed on 27 March this year.

Vneshtorgizdat responded to the second summons in typical fashion: for the first two weeks inspectors could not get into the state company’s building at all.

"135 million hryvnias – losses for each day without procurement reform" is the figure cited on the Prozorro electronic trading site.

After ministry leadership intervened, the inspectors finally began work.

"Documents that are handed over only against signature, only in paper form; if you didn’t explicitly request something, then it’s not there… an approach at the level of total sabotage," describes collaboration with the state enterprise Maksym Nefedov. "In the end we received 15-20 percent of the information actually requested. But even that shallow slice revealed a huge number of violations, which became grounds for terminating the contract with the state enterprise’s director, Oleksandr Kulak."

A copy of the enterprise’s inspection results, obtained by "Ukrainska Pravda," indicates, for example, mass purchases of services from fictitious companies created a month or two before contracts were signed.

Telling too is the list of expense items with identical comments from members of the working group that conducted the inspection: "We could not calculate the economic justification for these expenses."

The story of deliberate harm

The new director of Vneshtorgizdat in March 2014 became former deputy finance director of Interpipe, Oleksandr Nakhod.

The "Ukrainska Pravda" reporter met with Nakhod in his office in the Vneshtorgizdat building.

After walking down a shabby corridor with faded linoleum and unfinished window jambs, past cramped cubicle-like offices in the threadbare style of a neighborhood housing utility, you reach the director whose solid wood desk is sunk into a plush carpet, and whose cabinet contains a secret doorway to a relaxation room with a leather couch and a stereo system. That’s the legacy of the enterprise’s former head, Oleksandr Kulak.

Oleksandr Nakhod demonstrates the entrance to his predecessor’s "secret room." Photo by Matvii Nikitin

"There was a category of people who received personal benefits of various kinds," Mr. Nakhod says diplomatically about the fleeing corrupt officials. "In the system we are beginning to build, those income streams no longer exist, so they didn’t have to be fired — they left on their own."

That’s how the deputy directors left, for example.

But the most interesting thing is how the state enterprise’s system of operation was constructed.

"The enterprise is specialized – about 90% of its funding came from providing paid services," Nakhod explains, "and for many years it was sharpened to a specific business model: people were intent on inventing and creating these paid services any way they could."

Usually that system was built around monopolistic positions and opportunities.

For instance, the enterprise administers the national public procurement portal. No one else can look inside it.

The law requires that all institutions be able to post procurement information for free. In that sense the law is observed – you can indeed register on the portal and post an announcement for free. But only if you are craftier than the portal’s developers.

First you fill out a certain form that has no example entry, no hints, no drop-down lists; no spelling or format checks; no ability to copy and paste, and so on.

After you fill it out at random and click "send," the system verifies the information. At night.

Seriously. The verification is carried out at night, and in the morning you receive a laconic reply like "error, code such-and-such." The next attempt takes another day.

You can escape this nightmare: an alternative service costs only 90 hryvnias a month. And you can post announcements in one day.

Only the portal will publish them three days later. Need it faster?

The paid service "urgent announcement" is at your disposal.

Made a mistake in the announcement? That’s fixable – paid service "correct an error."

Another ingenious service is to print an "extract from the register," that is, information from the site, laminate it, and sell it for 1000 hryvnias. At first glance a completely absurd start-up. But it was popular!

The thing is, finding information on the portal is as difficult as posting it. And when an institution needed to report its procurements to the state treasury, it was easier to pay a third of an average official’s monthly salary and get a paper than to spend half a day with treasury workers struggling with the portal’s search system.

Clever. But not as clever as printing and selling information from Google. Yes, Vneshtorgizdat managed to monetize that too.

When a state institution was visited by a KRU inspection and asked: why did you buy gasoline at this price and not another? — the institution’s specialists would answer: this is the market price.

Then the KRU officers would ask: how will you prove it? And the specialists would produce a document whose header in large letters read: "Ministry of Economic Development and Trade of Ukraine," and below: "market price of gasoline – 20 hryvnias."

Of course the authors of those notes had found the data on Google, but they were paid not for the information itself, but for its persuasiveness: officials to officials.

The tragic part of the situation is that the state enterprise created problems for other budgetary structures — the procurement contracting authorities.

By engaging in sabotage for taxpayers’ money, it compelled other state structures to pay it taxpayers’ money.

That is, it didn’t attract new money to the budget, it merely created artificial expense items to senselessly shift existing funds from one pocket to another.

"Until now the system made money from the contracting authorities. Most contracting authorities are state structures, the same as we are. We essentially parasitized on each other," Oleksandr Nakhod shrugs. "Now we’re moving to procurements being conducted on commercial platforms that will attract as many suppliers as possible. For contracting authorities this will be free. Suppliers, for whom this is a business and an opportunity to win a contract, will pay a token fee to participate. And we will provide maximum user convenience: data verification, links to state registers, and so on."

It would seem the story is over. But that’s not the case.

Dismissed enterprise director Oleksandr Kulak appealed to the court and intends to seek reinstatement.

The thing is, the Ministry of Economy’s reform team apparently does not want to, or is not able to, investigate the facts of corruption at the enterprise. Formally Oleksandr Kulak was dismissed only for inefficient use of funds, which can easily become the subject of a legal dispute.

History of corruption

During the enterprise’s existence its officials were involved in only one criminal case. On 27 December 2013, based on SBU materials, the Shevchenkivskyi District Court found Vneshtorgizdat deputy director Volodymyr Myrutenko guilty of backdating a tender announcement.

The criminal proceeding contained no formulations about criminal conspiracy, corruption, benefit, or the like – Myrutenko was accused of unauthorized access to the system and changing data. That’s all.

In the end he paid a "cosmic" fine of 13 600 hryvnias, and in January 2014 he was reinstated as deputy director under Oleksandr Kulak.

But if you think about it, such actions—hiding information about ongoing tenders or entering tender announcements retroactively—are an integral part of a criminal scheme.

Otherwise it would be extremely difficult for a contracting authority — a state structure — to make a procurement from a "favored" supplier at an inflated price. After all, then other participants would appear with more advantageous offers from the taxpayers’ point of view.

A cluttered archive of data that cannot be analyzed can hide traces of corruption. Also, law enforcement can quite possibly destroy investigation materials if they themselves appear in them as accomplices of corrupt actors.

An SBU investigative team member who studied Vneshtorgizdat’s activities, who wished to remain anonymous, told a "Ukrainska Pravda" reporter that a year ago he and his colleagues received an order from above — destroy all the materials.

That intrigued the "Ukrainska Pravda" reporter even more. Soon we contacted an employee of Vneshtorgizdat (his name is withheld in the interest of his safety) who was documenting blatant violations at his work computer.

He was taking screenshots of the system with tender data that were entered into the database but not published.

They were entered so that on their basis a contracting authority could later obtain an official extract to present to oversight bodies. And they were not published, probably for the reasons described above.

An unpublished bulletin with information on a state procurement totaling 34,3 million hryvnias

Thus "Ukrainska Pravda" obtained data on dozens of such announcements. In many cases the contracting authority was the General Prosecutor’s Office of Ukraine.

To check whether information on tenders was present on the portal, each bulletin had to be searched individually.

The interface convenience was already described above, so there is no need to add that the problem arose even at the registration stage. In fact, one could log into the system using login test@test and password test, which also says a lot about the developers’ level.

The example shown in the illustration can be called provocative: bulletin number 71/4 for 13 July 2012 year is missing on the site, although bulletin numbers 71/3 and 71/5 are present. What was that procurement? One bulletin contained several items: software purchased from LLC "Letograf IT Consulting and Services Ukraine" for 10 million hryvnias; installation of a ventilation system — LLC "L-Style" for 22 million 930 thousand hryvnias; translator services — LLC "Lingo" for 550 thousand hryvnias; and vehicle insurance from NASK "Oranta" for 824 555,16 hryvnias.

In total, non-public tenders worth 34,3 million state funds. And that’s just one bulletin.

Oleksandr Kulak, former director of Vneshtorgizdat, told a "Ukrainska Pravda" reporter that in 2012 he had only just begun working: "After that incident (the criminal case against Myrutenko — ed.) we understood the situation and modernized the portal so that no external changes could be made — we made a mirrored copy of the portal for control."

"There were moments, but in the end they found the guilty parties," Mr. Kulak summed up.

Overall, in responding to criticism from the Ministry of Economy’s new team, Oleksandr Kulak emphasizes the enterprise’s profitability and his team’s high performance: "When I worked at the enterprise, it was profitable; I constantly received letters of thanks from the Ministry of Economy. Now, as I heard, the money they earned is simply being withdrawn and spent, the printing equipment is planned to be sold… time will judge us."

The former general director also stressed that his team automated the system: "In 2012 there were queues on the street to submit paper tender applications. The hardest part was bringing customers online: schools, kindergartens… more than 25 thousand budgetary organizations."

"I have every reason to believe I was illegally dismissed. The dismissal procedure happened in such a way that I still don’t know exactly why I was fired," Oleksandr Kulak says. He "doesn’t yet see" cooperation with the Ministry of Economy’s new team.

Matvii Nikitin, UP