Price competition was often constrained in defence procurements audited by the National Audit Office

Priit Simson | 11/18/2020 | 12:00 PM

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TALLINN, 18 November 2020 – Restrictive terms and conditions that have weakened price competition have been applied upon carrying out procurement related to defence in Estonia, the National Audit Office found in its audit report “Planning and cost-efficiency of defence procurement” published today. Although the equipment procured for the Estonian Defence Forces generally meets the needs arising from the tasks of the units, a pre-procurement market study has not, in most cases, been conducted or it has not been preserved. This means that the contracting entity may not know whether they are receiving equipment that offers the best quality-price ratio. Changes in the procurement rules create expectations that shortcomings of the procurements will be eliminated in the future. 

The audit analysed 17 defence procurements in five areas. The analysed procurements were carried out over five years from 2014 to 2018. The procurements concerned five areas: personal and combat equipment, armament and ammunition, communication and information technology, vehicles, observation and measuring tools. The analysed procurements were large-scale with a value from one million euros to 75 million euros and having a direct impact on the Estonian military defence capabilities. The purpose of the audit was to assess the transparency of the procurement process and how it is ensured that, as a result of procurement, the Defence Forces obtain the necessary equipment for the best price. The audit did not analyse the development of the total military needs of the Defence Forces and did not assess the compliance of defence procurements with the requirements established by the Public Procurement Act.

The National Audit Office found that the equipment procured for the Defence Forces has generally met the needs arising from the tasks of the units. The compliance and quality of the procured equipment is checked upon the receipt of the equipment. In the case of procurements where the procurement has been carried out but the equipment has not yet been commissioned in its entirety by the Defence Forces, the servicemen are certain that the procured and arriving equipment meets the expectations and allows the units to perform their tasks.

However, the National Audit Office found that there have been several shortcomings of varying extent and impact in carrying out procurement. The main issues were that there were few market surveys preceding the procurement or the documentation concerning them has not been preserved. Poorly justified and restrictive technical specifications often led to the reduction in the number of tenderers. In several cases, there was no price competition whatsoever.

By the time of conducting the audit, only two pre-procurement market studies had survived for the 17 audited procurements, which is why it was not possible to ascertain for all procurements whether and how market studies have been carried out nor what was the quality of information that the study contained. Market studies, however, are an important tool in preparing for each procurement, including in state-to-state transactions (exceptional procurement) where equipment is procured directly from another state without an open procurement, so it is particularly important to know whether the equipment procured offers the best price-quality ratio.  

The lack of an adequate overview of what is offered on the market of equipment for defence purposes may also be the reason why restrictive terms and conditions, which were poorly justified and reduced the number of tenderers in the procurement, were established in the technical specifications serving as a basis for several procurements and led to a situation where there was no price competition.

In some cases, restrictive terms and conditions were justified, for example when interoperability with allies or the tactics of units requires specific equipment. In other cases examined, however, technical conditions that meant procuring equipment from a specific manufacturer were established, even though there were suitable alternatives on the market that could have offered financial savings.

In the opinion of the National Audit Office, technical specifications unreasonably limited the number of tenderers. In 10 of the 17 procurements, there was no price competition.

According to the Public Procurement Act, exceptions are permitted in procurement related to defence, but in the opinion of the National Audit Office, the application of exceptions was not always clearly justified in the analysed procurements. There was often no substantive justification why the specific exception was required. Although the justification complied with the requirements of the procurement rules, the arguments used could essentially justify the decision in favour of an exceptional procurement in each procurement related to defence.

The justifications used have also not always proven to be valid in practice. In some cases, procurement rules without prior publication and requesting a tender from one company was justified with the lack of alternatives on the market or associated technical issues, even though alternatives were available and new equipment would only have necessitated some retraining. Retraining from time to time is not uncommon for units of the Defence Forces, so this justification is not sufficient.

Although the Defence Forces have procured equipment suitable for their tasks, the National Audit Office found that either an insufficient quantity of equipment has been procured in a procurement or a lot more equipment than originally planned in the procurement has been purchased under contracts awarded. This may have meant that the procurement was for a quantity of equipment that does not allow the units of the Defence Forces to perform their tasks in the manner that the Defence Forces has operatively and tactically determined. On the other hand, it may also have meant that a quantity for which tenders were requested was determined before the procurement, but public contracts were subsequently awarded for purchasing a much larger quantity. This approach is not transparent and may not ensure the success of the most advantageous tender.

The National Audit Office found that in some cases quality issues have been discovered in using the equipment procured for the Defence Forces, which has either led to the equipment breaking easier and need for repairs or a higher consumption of ammunition.

Although the life-cycle costs of equipment for defence purposes may constitute a significant share of the total cost of the capabilities being developed in the Defence Forces, it is difficult to verify in the course of the procurement whether tenders submitted in the procurement are realistic in terms of life-cycle costs and ensure that the life-cycle costs agreed upon are met when looking back. The amount of life-cycle costs has been among the selection criteria only in recent years and even then not in all procurements and not with the same share.

In the case of procurements examined in this audit, the audit failed to provide an exhaustive answer as to how the amount of realistic life-cycle costs is determined in the course of the procurement and how it is ensured that the costs remain within the agreed limits and do not bring about additional costs. The procurements show that decisions are instead made on the basis of acquisition cost. In none of the procurements analysed were the life-cycle costs a determining factor in decision-making. The amount of life-cycle costs is also not fixed and the related guarantees are in no way addressed in any of the subsequent framework agreements or public contracts.

In the audit, the National Audit Office also wanted to identify the reasons for the issues in carrying out procurement. The reason is partly the ambiguity concerning the procurement tasks and responsibilities of the Ministry of Defence and the authorities in its area of government in 2014–2019. During this period, the authorities also had no organisation of work that would have been agreed upon, implemented in practice or harmonised to establish how to conduct market surveys, prepare technical specifications or document all the procurement activities.  

To continue with the changes started with the establishment of the Estonian Centre for Defence Investment, procurement reform to be completed in 2023 was launched in 2018. The reform has planned, established and partially implemented several important changes. Once all that is planned has been realised, preconditions have been created to ensure that these shortcomings are no longer present in future procurement and that procurement is more transparent and efficient than before. The audited parties have promised to take into consideration the recommendations the National Audit Office has made in support of the reform.

The National Audit Office is publishing a summary of the audit report “Planning and cost-efficiency of defence procurement”, and the full text of the report as material containing national defence information will remain for internal use.

 

Priit Simson
Head of Communications of the National Audit Office of Estonia
+372 640 0102
+372 5615 0280
priit.simson@riigikontroll.ee
press@riigikontroll.ee
http://www.riigikontroll.ee/

  • Posted: 11/18/2020 12:00 PM
  • Last Update: 11/18/2020 1:19 PM
  • Last Review: 11/18/2020 1:19 PM

Poorly justified and restrictive technical specifications often led to the reduction in the number of tenderers.

Estonian Defence Forces, pildid.mil.ee

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