NAF logistics service for food supply: what the procurement such the result

07.06.2023.

During the financial audit of the annual report of the Ministry of Defence for 2023, the State Audit Office of Latvia assessed whether the planning of new food procurement model, the implementation of procurement and the concluded contract met the requirements of laws and regulations. Unfortunately, the audit concluded that the procurement of logistics services for food supply for the needs of the National Armed Forces (NAF) was organized in violation of the procedures for planning and organizing procurements established by the Ministry of Defence.

BRIEFLY

  • Procurement was “distinguished” from the general regulation for procurement planning and organization established by the Ministry of Defence.
  • The procurement has been conducted and a contract has been concluded for the logistics service for comprehensive food supply for the needs of the National Armed Forces (NAF) during peace and crisis, but the procurement and the contract do not specify requirements for food supply and storage of reserves during a crisis.
  • The requirements set for suppliers are minimal and do not provide confidence in the possibility of actually providing the complicated food supply logistics service required by the NAF.
  • The planned contract sum is up to 220 million euros with an option of increasing it up to 330 million euros was indicated at the conclusion of the procurement for the first time when the Procurement Commission decided to conclude a contract with the winner of the procurement procedure, Zītari LZ Ltd.
  • Zītari LZ Ltd. has been recognized as the winner of procurement and has been granted the right to enter a contract, although it does not meet the requirements for experience in the provision of logistics services set out in the procurement regulations.
  • The winning service provider has been delegated with the contract tasks typical of state officials, as the economic operator conducts price surveys and determines the suppliers who are entitled to supply food to the NAF.
  • When purchasing the logistics service for food supply for the needs of the NAF, the economic benefit of food is not assessed, although the cost of food supply makes up the largest financial part of the contract.
  • Currently, food is supplied to the NAF in violation of the Public Procurement Law and the Law on the Prevention of Squandering of Financial Resources and Property of Public Entities.

The service purchased in the result of procurement is not based on the needs of the NAF and does not meet the interests of the defence department and national security. Although the procurement has been carried out and the contract has been concluded for logistics services for the comprehensive food supply of food for the needs of the NAF in times of peace and crisis, as well as the storage of reserves of certain groups of food products, the procurement and the contract do not specify requirements for food supply and the storage of food reserves during a crisis,” explained Ms Kristīne Jaunzeme, Council Member of the State Audit Office of Latvia.

One should mention that the planned contract price up to 220 million euros with the right to increase it by 50% or 110 million euros, the total maximum contract price is expected to be up to 330 million euros in the five years of the contract, were indicated for the first time only when the Procurement Commission decided to conclude a contract with the winner of procurement procedure, Zītari LZ Ltd. The contract price was determined based on the assumptions of an official of the Procurement Commission and without taking into account the funding provided for in the Centralized Procurement Plan for Food Purchases of 8.02 million euros. According to accounting data, the NAF has received food products for 992,000 euros from Zītari LZ Ltd from 1 January 2023 to 30 April 2023. For the indicated period, the NAF has received an invoice from Zītari LZ Ltd for the administration of the provided service in the amount of 30,000 euros.

The auditors point out that the minimum requirements set for tenderers do not provide confidence in the probability of fulfilling the contract according to the needs of contracting authority. The Procurement Commission did not foresee the requirements for tenderers regarding the industrial capacity for the execution of food supply (availability of premises, equipment, vehicles, staff, and other resources), which would demonstrate the capacity to provide the large-scale logistics service envisaged in the procurement.

Following the concluded contract, food is supplied to the NAF in violation of the Public Procurement Law (PPL) and the Law on the Prevention of Squandering of Financial Resources and Property of Public Entities (LPSFRPPE) currently. Since the costs of the procurement subject attributable to logistics services do not constitute the financially largest part of the contract and are significantly lower than the costs of food supply provided for in the contract, the main subject of the procurement contract is the delivery of food products, not the logistics service. However, the economic benefit of food in the specific procurement has not been assessed.

The Procurement Commission had envisaged the development of an e-platform as part of the logistics service for the purchase of food withing the framework of the NAF procurement. The development of such a digital tool for the purchase of food for the needs of the NAF has not been foreseen in any development planning document of the Ministry of Defence and the NAF and has not been evaluated in the context of the NAF provisions and supply system. Alternatives to create and maintain such a digital tool within the defence department has not been assessed and the risks and benefits related to the development and maintenance of such a digital tool under the control of the economic operator have not been evaluated. Although successful operation of an e-platform is an essential prerequisite for the provision of logistics services for food supply in terms of procurement and the contract, the economic operator engaged by Zītari LZ Ltd for the development of the e-platform is not assessed as a subcontractor in procurement and the rights provided for under the PPL in the procurement contract to determine the legal relationship with a developer of e-platform, thus ensuring that replacing a subcontractor is not possible without NAF approval.

Tasks typical of state officials have been delegated to the winning service provider by contract. Namely, the food supply logistics service provider is granted the right to conduct price surveys to determine those food producers and suppliers that provide the food needs of the NAF. Thus, by the nature of the contract, the service provider has been delegated tasks of state administration typical of state officials and related to procurement, in violation of the law, that is, (1) that the issuance of administrative acts to an individual may be delegated only if it is provided for in an external law or regulation, (2) and despite the fact that the economic operator does not meet the definition of a contracting authority in terms of the PPL. Although the contract stipulates that the service provider seeks as many suppliers as possible, ensuring as much competition as possible to obtain the lowest price, the remuneration for providing the logistics service depends on the value of delivered food products directly.

The auditors have also concluded that Zītari LZ Ltd should have been excluded from further participation in the procurement already in the first round of the tender dialogue, as it did not meet the requirements set out in the tender regulations regarding experience in providing logistics services. In the final round of the tender dialogue, the Procurement Commission did not evaluate whether the tender submitted by Zītari LZ Ltd was unreasonably cheap and therefore rejectable because the administration and food reserve storage fees offered by Zītari LZ Ltd were approximately 40 times lower than those offered by the other tenderer. Despite the aforementioned, the Procurement Commission recognized the economic operator as the winner of tender and has been granted the right to enter into a contract.

During the procurement, there were no defined requirements for food supply during the crisis and the formation of food reserves; such solutions are expected to be sought in cooperation with the economic operator during the execution of the contract by signing an additional agreement. Given that food supply security requirements are related to national security interests directly, special conditions had to be set for such procurements and contracts, but the compliance of tenderers with national security interests was not assessed.

The audit has not detected any justification why the logistics service for food supply for the needs of NAF was purchased by applying the tender dialogue procedure. Innovative solutions and specific knowledge of the participants of the tender dialogue, which would help develop a solution that meets the needs of contracting authority, were not obtained within the framework of the tender dialogue. Complicated issues related to the legal or financial structure of the procurement, which are a prerequisite for the application of the tender dialogue procedure, were also not addressed. “The procurement documentation shows that the procurement requirements were defined before the tender dialogue and the tender dialogue mainly meant explaining the procurement requirements to its tenderers, as well as waiving the requirements that would demonstrate the tenderer’s ability to provide the extensive logistics service envisaged in the procurement,” explained K. Jaunzeme.

Albeit the procurement was strategically important and initiated by the Ministry of Defence, the audit did not find evidence that the responsible officials of the Ministry of Defence followed the progress of the procurement implementation and took timely corrective actions to prevent the conclusion of a contract inconsistent with the law and the interests of national security. The NAF Joint Headquarters, as the executive body of the NAF Commander, also had no obstacles to ensure that the needs of the NAF for food supply complied with laws and regulations during the procurement process and until the contract was concluded, but this was not done. In the assessment of the State Audit Office of Latvia, there is little probability that the leading officials of the Ministry of Defence and NAF did not have information about the logistics solution provided for in the procurement and contract for food supply for the needs of NAF.

Facts about the procurement process

  • The planning of new food procurement model took place in the working groups of the defence department established under the orders of the Minister of Defence of 9 September 2020 and 24 February 2021, whose task was also to elaborate detailed final requirements of the new food procurement model and submit them to the National Defence and Logistics Procurement Centre for the initiation of procurement procedure. Although the regulation in force in the Ministry of Defence at that time provided the Minister of Defence with the right to determine the procedure for organizing the procurement of other material and technical means or services, no requirements were set for the implementation of a specific procurement by distinguishing the procurement from general regulation for planning and organization of procurement established by the Ministry of Defence.
  • Procurement was conducted from 18 October 2021 to 22 November 2022, the NAF Provisions Command signed the contract as the contracting authority on 20 December 2022.
  • According to the information publicly provided by the Ministry of Defence, the documents related to procurement and concluded contract have been submitted to the law enforcement authorities for assessment, the Corruption Prevention and Combating Bureau has initiated criminal proceedings. In connection with NAF food procurement, official inspections have been conducted in the Ministry of Defence, in which several reports have been drafted and the evaluation of officials’ responsibility is ongoing.

The auditors indicate that procurement planning in the defence department in working groups created by the orders of the Minister of Defence is not a common practice. “The result of the procurement is a natural outcome of the non-compliance with the multi-level procurement planning and implementation regulation stipulated for the defence department. It is important to prevent the recurrence of similar cases, therefore the responsibility of the officials involved in procurement planning, implementation and conclusion of the contract must be assessed, as well as the internal control environment of the Ministry of Defence must be improved to take timely corrective actions and prevent the development and continuation of such procurements that do not meet the needs of contracting authority, as well as to make sure that the procurement carried out essentially corresponds to the needs defined by a contracting authority before concluding a contract and what is provided for in the Centralised Procurement Plan,” stated K. Jaunzeme.

State Audit Office recommendations #PēcRevīzijas

The audit provides four recommendations aimed at improving the internal control environment when planning and implementing procurements, as well as compliance with laws regulating procurement when supplying food for the needs of the National Armed Forces.

About the State Audit Office of Latvia

The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General.

100 years of AUDIT STRENGTH

On 16 August 2023, the State Audit Law will turn 100 years old. With the adoption of this Law, the State Audit Office from a formal de facto institution founded on 2 December 1918 became a de jure independent, collegial supreme audit institution of the Republic of Latvia. The State Audit Office is one of the independent state institutions enshrined in the Satversme (Constitution) of Latvia. The Constitution was signed by Roberts Ivanovs as the secretary of the Constitutional Assembly, who was then confirmed as the Auditor General. He worked as the first Auditor General for 12 years. His signature confirmed the text of our Constitution alongside that of Jānis Čakste.

Additional information

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