Making (procurement) decisions in a highly regulated environment: a case of spending EU grant support

1. Making (procurement) decisions in a highly regulated environment: a case of spending EU grant support Csaba Csáki Budapest University of Technology and Economics & University College Cork

2. Basic problem • Private companies are eligible and apply for EU funding support • it’s a meticulously detailed process requiring lot of administration • Hungary has joined the EU May 1, 2004 which brought major regulatory changes • ‘utility’, energy and postal services sectors are all affected • both group is subject to Public Procurement National Laws • based on EU Directives => private entities meet public regulations IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

3. Research process • literature mining • start-up models (to test and use) • research themes and questions • case studies • events, facts, observations • findings • use the models or modify them (new ones?) IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

4. Literature on regulatory environment and private enterprise after changes implemented inadequacy is realised planned changes Situation the resulting proces the outcome Covered in scientific literature ? ? ? what did we create - how does it influence decisions? did it reach intented result, how does it work? Outcome / recommen-dation(s) need for change (is it time? how?) potential outcome (is this the right way?) IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

5. Influencing Factors of Public Procurement Decision Making execute individual purchasing decisions market pressure (technological and economic reality) high-level and strategic policy goals procuring entity / Decision Maker decision making environment interpretations ofthe law- incl. Court appeal (judicial) decisions expectations from the recipients of services regulatory (legal) framework IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

6. PP Evaluation Methodology • The Hungarian Act on Public Procurement • requires the publication of • suitability requirements • evaluation criteria, weights and utilities • limits the criteria and mode of checking suitability (filtering bidders) • defines the scoring mechanism • Decision Making through a pre-established set of criteria • multiple criteria decision making / MAUT IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

7. Themes and questions • public regulations affecting private enterprise • how (procurement) decision making is affected? • complex (and „alien”) institutional setting • is there a need to „innovate”? • decision making is methodologically restricted by the Law • would they ask for decision support (software or consultant) IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

8. Pilot Case: BorsodChem • „The company spans back with a half century of history and is a major determinate chemical producer as well as the largest producer of suspension PVC resin and isocyanates in Central and Eastern Europe.” • „privatized” in 1991, Stock Exchange in 1994-96 • more than 4,000 employees on a plant site of 448 ha • 4 org. units and 2 product lines under the CEO • 14 subsidiaries (processing, service and trade) • turnover of appr. €600 Million IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

9. EU Grant Application • in 1991 it was discovered that „dichloroethane contaminated the ground water in a limited area on the factory site” • it was investigated and monitored, then eventually in 2000 regional environmental offices ordered the company to clean the spillage up (moratorium) • clean-up plan created in 2002-2003 but the cost was estimated at appr. €2 Million • applied for EU subsidy in 2004 to reduce contamination below acceptable limits • awarded support of full amount (100%) under the Structural Plan of the Environmental Protection program early 2005 IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

10. Research: data collection methods • participant observation • documents • software data • interviews with • members of the consulting team • BorsodChem project leader and team members • winning bidder (project manager and lead engineer) • quality assurance engineer • managing and financial authority representatives • (representative of the intermediary organization) IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

11. European Union development grants (fund/subsidy) • Recipients need to follow Public Procurement rules • Regulatory environment • Funding programs • EU goals and preferences • National development plans and related programs • Governmental regulations and ministerial orders • determine institutions to be involved • determine the process to be followed (contracting, financial execution and control of support programs) • Public Procurement Directives IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

12. Issues at the start • already at the outset the company’s eligibility for EU support was questioned • resulted in uncertainty and time delay • last date of start to meet project deadlines committed to in grant proposal was fast approaching yet support contract was not signed • already spent money on • exploration and plans (needed anyway) • grant application (consultant) • never had anything to do with Public Procurement • needed to contract the work out • needed to contract a quality engineer as well IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

13. Motivation • lack of legal knowledge • unchartered territory • official intermediary organization did not give direct support • uncertainty of unknown supplier(s) • company had its own usual contractors for similar jobs • chemical industry is a high-risk business, where reliability comes first and any delay in delivery is costly, therefore, trust is an essential ingredient of any contractual/supplier relationship • serious time pressure • no room for (EU grant) mistake or (PP) legal challenge IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

14. Start of Procurement Project • decision support and Public Procurement consultant were asked for to help out with the procurement process under the Hungarian PP Act • extra cost for company • clear goals in mind • select reliable supplier • could not go below a certain technical quality • financial resources were limited by grant amount (did not wish to spend more – no budget) • emphasis on warranty (10 years) IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

15. Number of PP processes • mandatory quality assurance engineer • main project was split into two • wells and control software • chemical stripper • in order to be able to start faster without putting too much risk on supplier IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

16. Issues during the PP processes • the intermediary organization (Ministry of Waters and Environmental Protection) gave misleading information about how to proceed (FIDIC) • unnecessary extra work • grant contract was still not signed • PP process timeline is limited by the law • minimum and maximum number of days set • supply contract needed to be signed by a certain date • if contract is not signed, PP process is called off (void) IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

17. Issues during the project • payment schedule was delayed, extended by intermediary organization • nit-picking administration • financial reserve vs. reserved amount • extra expense was not allocated for in the grant application, therefore, could not be claimed even though it was part of the PP call for proposal • technical glitches vs. grant application plan • wells did not supply enough water • water pipes got clucked – iron and lime • there is no room for changes in the case of a grant contract IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

18. Timing and deadlines regulations • joint ministerial order (of Structural Funds) • quarterly report • payment deadline is 60 days • Min. of Finance order • invoice may only be submitted with a report • there are 4 layers of accounts • EU, national, program, components • EU directives • formal, content and financial checkups of reports IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

19. Typical timeline w/ deadline issues individual projects (there are budget deadlines for the national programs as well) grant application deadline grant contract signing deadline supplier contract signing deadline award decision quarterly reports project evaluation delivery deadline (set time or continuous) • importance: • reimbursement may only be claimed at report time • if OK, payment is within 60 days • any change requires contract modif. PP time: min to run / max to sign • applicant decisions: • apply or not • what to commit to • what budget to plan • what deadlines to promise Contract modific-ation halts payment • consequences: • if not met, money could be lost • change requires contract modification consequences: - if contract is not signed by a certain date delivery deadline may not be met for an additional 5 years: - EU may check and in case of irregularities money need to be repaid IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

20. Decisions – and cover stories • change water filter (technology) • financial resistance from Authorities • either don’t claim or „play tricks” • change stripping process • don’t report • indicate that an ‘efficiency issue’ was solved • loan to the supplier • repay? IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

21. View of the DS/S • errors were remembered • did not appreciate • although • goals were reached and • actual supplier turned out to be reliable • as well as • supplier admitted that evaluation criteria system was unusual, tough and directed them to a certain direction IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

22. plan – purchase - execute Grant application related decisions PP DM process project realized Ideal world special PP classic PP less limited classic PP grant application limited classic PP grant application with PP in mind proper, educated, integrated decision making influences outcome IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki

23. Regulatory structure Nat. payment policies Grant application PP Act PP contract EU monitoring corporate policies accepted delivery project industry regulations PP (DM) process Grant Contract Nat. grant program EU Grant directives IFIP WG 8.3 - Case Studies Task Force - Cork - Csáki