Act No. CVIII of 2011 on public procurements (the New Act) was promulgated on 20 July 2011 to replace the former public procurement act that had been in effect since 2003. The New Act enters into force on 1 January 2012. Pursuant to the official interpretation to the New Act, the adoption of the new regulation became necessary due to the complex and non-transparent nature of the former public procurement act. The legislative interpretation also sets out that the New Act better serves the ultimate purposes of public procurements: spending public funds on a best value for money basis, transparency of such spendings and clarity of the relevant competition. Beyond these purposes, the New Act aims to improve the chances of small and medium enterprises (SMEs) to successfully participate in the public procurement procedures and to decrease the go-round debts.
In order to achieve the goal of SMEs obtaining more assignments from public procurements, purchasers may choose to give the right of participation in the procurement procedure only to enterprises whose annual net revenue does not exceed HUF 100 million in the case of a purchase of goods and services, or HUF 1 billion in the case of construction works. This rule may only be applied for construction works and concessions if the purchase does not exceed HUF 500 million. The government may freely prescribe the compulsory application of this rule for state-owned organisations and budgetary agencies governed or supervised by the government.
SMEs are also favoured by another new rule. If the estimated purchase price of goods and services does not reach HUF 25 million, or the estimated value of the construction project does not exceed HUF 150 million, the purchaser may not need to announce an invitation for tender but may instead ask at least three possible SME bidders to make an offer. In such a case, the Public Procurement Arbitration Board, acting as a general supervisory body, need not even be notified.
The rules regarding in-house procurements (procurements between the state or local municipalities and their enterprises) have been simplified. There is no need to conduct public procurement procedures for contracts to be concluded between the state or local municipalities and their own enterprises if at least 80 per cent of the revenue of such enterprises otherwise stems from the owner. Such contracts must be reconsidered only every five years. In practice this may also mean that a state-owned company can avoid the public procurement procedure by giving an assignment or order to its own subsidiary with the procurement.
Grounds for exclusion
Under the new regulation, offshore companies or companies in which a participation of an offshore entity exceeds 25 per cent cannot be bidders in public procurement procedures. Bidders with pending payment obligations to subcontractors related to former public procurement procedures are also disqualified and prohibited from participating. But this rule only applies to contracts concluded after 15 September 2010 in relation to former public procurement procedures. The fact that the debt has been due for more than 15 days must be verified by an enforceable administrative or court decision.
Further grounds for exclusions include: unpaid taxes, customs duties or social security contributions; labour fines; supplying false information in public procurement procedures; if the bidder is under any sort of liquidation procedure; if the bidder has been found guilty of a crime by a final court verdict in connection with its economic or professional conduct, until exonerated from the detrimental consequences of having a criminal record; or if the bidder has been excluded for any period from participating in public procurement procedures.
Under the New Act, the scope of procurements exempted from the public procurement procedure has been widened. For instance, there is no need for a public procurement procedure in cases of prevention of catastrophes. Nor is the provision of legal services subject to a public procurement procedure, even if the value exceeds the EU thresholds for public procurement.
National procedure rules
Procurements below an estimated value of HUF 21 million in the case of the purchase of goods and services, and HUF 263 million in the case of construction works, representing the EU thresholds, may be conducted according to the so-called national procedure rules. In the framework of the national procedure rules, the purchasers are entitled to create and apply their own procedural rules. This may lead to legal uncertainties.
Risks and uncertainties
The New Act is considerably shorter than the former legislation. It is claimed that the new legislation is more transparent, simple and understandable. But several material issues are not regulated in the New Act at all, meaning it is more a framework act than a comprehensive regulation of the public procurement procedure. Detailed rules are promised and anticipated to be laid down in government decrees at later stages.
According to professional organisations, even if the New Act has introduced some favourable changes, it may result in greater risks of corruption, as well as legal and market uncertainties.