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A stacked procurement deck drove me out of my job

In the prior post, I published part of a note from an acquaintance in Belarus who used to work in a medical supply firm. It described a centralized, top-down procurement system susceptible to widespread graft. In this post, he talks about specific buying practices that defeat the rule of law, perpetuate the system, and protect those involved.

His comments that follow are translated (by me) from the original Russian.

*     *     *

Belarus has a law setting out proper procedures when state funds are used to buy any goods. In the medical industry, almost all hospitals, clinics, and supporting labs are owned and controlled by the state through the Ministry of Health. So nearly all procurement is subject to the law specifying the proper procedures.

The procurement law specifies a transparent procedure, using an electronic auction. Sellers anonymously make an offer, bidding online. Whoever has the lowest price wins. The buyer only sees the winner at the end, after the deal is already made. Whoever wins the blind auction is awarded the contract at the quoted price. Changing material terms of the deal, including price, is prohibited.

By itself, this is a good idea, but it works only about 15 percent of the time.

Usually the auctions are not held by the hospitals themselves but rather by what are called “organizers.” Organizers are brokerage firms chartered by the government and whose board of directors are appointed by the ministry. These organizers control all purchases of drugs, medical devices, and chemical agents for the country’s hospitals, clinics, and labs.

In an odd twist, the organizers can decline to make purchases, because they do not have the obligation to do so. When this happens, the hospitals themselves can procure the goods they need. Although they are supposed to do so through transparent and open auctions, they often secretly procure what they need from their favorite importer at an undisclosed price.

The Ministry of Health actually promotes this practice. Last year, my former firm saw an internal memorandum that advised hospitals to procure without an auction, citing “immediate medical necessity” — that’s one of the official exceptions in the procurement law, and is on the same level as earthquakes and floods.

Our firm blew the whistle and went to court to force the ministry to cancel the memorandum. Several courts where we filed actions issued decisions in our favor. But the memorandum had already been sent to hospitals and was being applied everywhere.

If a hospital actually conducted an auction, the effects were minimal, because there were other loopholes. For example, a hospital would issue requirements for the chemicals that only one firm could meet. Ultimately, the auction would only have two bidders — the importer and a shadow corporation. Technically there were two bids and the “proper procedure” had been followed. In reality, the two bids were coordinated. My firm also blew the whistle on this practice. But our actions had no real impact. Nobody was disciplined or punished at the hospitals.

In the rare cases when we were allowed to bid in an auction, even when we won on price, the big hospitals often wouldn’t buy from us. They purchased elsewhere, from whomever they wanted, and we weren’t able to get relief through the courts or otherwise.

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Ilya Zlatkin is a Chicago attorney focusing on business planning, intellectual property, and international entrepreneurship. He’s also a Certified Fraud Examiner. He can be contacted here.

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