Fuel favorites and the illusion of savings: what’s wrong with the tenders of the Kharkov City Council

During the first six months of 2024 in the Kharkov region, government agencies, local authorities and their subordinate enterprises held more than 10 thousand tenders. The Observatory of Democracy analytical center investigated who supplies fuel to Kharkov utility companies, and also analyzed the activities of the Centralized Purchasing Organization of the Kharkov City Council.

The “gold standard” of nepotism

The purchase by the Kharkov Regional Military Administration of timber for the construction of fortifications at inflated prices from suspicious newly created companies once again demonstrated that direct contracts (as opposed to competitive tenders) contribute to overpayments from the budget. However, even procurement with open tenders does not guarantee fair competition and the absence of a corruption component.

Thus, after the launch of the Prozorro e-procurement system (the use of which became mandatory for all government customers in 2016), officials invented several schemes to bypass the system. Soon after this, journalists began writing about the most popular of them. In particular, about “discrimination of participants” (creation of technical specifications for a specific winner), the use of “sparring partners” (companies with which there is an agreement on their fictitious participation in bidding), the victory of fictitious enterprises and selectivity in determining the winner (ignoring violations in “necessary” companies). These methods allow “favorite firms” (officials or people close to them) to receive government orders.

“Favouritism” in public procurement by the Kharkiv City Council is not limited to the construction business and restoration, which was the topic of one of our previous studies. In particular, the use of the above-mentioned “selectivity in determining the winner” and “discrimination of participants” can be seen in the purchase of fuels and lubricants by city utility companies.

An important element of such “programmed” purchases is cash on delivery 2-4-6-12 months after delivery of the goods, which discourages potential participants. However, if this turns out to be not enough, and some company offers more favorable conditions than the “favorite company”, such an offer is rejected in favor of the “needed” one. For this, “selectivity in determining the winner” is useful - the customer finds formal reasons to reject a more advantageous offer, and ignores possible violations on the part of the “favorite”.

During the first 6 months of 2024, the Kharkiv City Council, its divisions and utility companies entered into 18 contracts worth more than UAH 1 million. each for the supply of gasoline and/or diesel. The total price of purchased fuels and lubricants under these contracts was slightly less than UAH 186.5 million. Of these, 116.1 million UAH. under 9 agreements received the limited liability company (LLC) “Golden Standard K”.

The founder and ultimate beneficiary of the “Gold Standard” is Konstantin Leonidovich Batvinov, a man from the circle of the Kharkov mayor Igor Terekhov. The Batvinov family baptized the son of Anna Kuznetsova, ex-deputy director of the Kharkov Izvestia Communist Party and a close friend of Terekhov.

In 2013, Konstantin Batvinov, who was a co-owner of the Spika gas station chain, together with a partner, sold it to the now sanctioned oligarch Kurchenko, but remained to work there. At the end of 2014 he founded “Gold Standard K”. The success of the new business coincided with the election of Terekhov to the post of Kharkov mayor. The company began receiving contracts from city utilities. As a result, in the first half of 2024, “Golden Standard” received 50% of the most expensive contracts for the supply of fuel (more than 1 million UAH) and 62.3% of all funds. But the company failed to win a single tender in other communities in the region.

In addition to Batvinov’s “Gold Standard”, contracts for the supply of gasoline and diesel fuel worth more than 10 million UAH. Kalam LLC and Brent Oil-95 LLC received UAH 28.6 and 28.2 million. respectively. Both companies are associated with the former first deputy of the Kharkov regional administration, Alexander Skakun.

Centralized purchasing organization

The lack of transparency of budget expenditures and the possible corruption of officials are more acutely perceived by the public than ever and are increasingly becoming a resonant reason for criticism of local authorities. Therefore, at the end of February 2023, at an extraordinary session, city deputies voted for the creation of the communal enterprise “Centralized Purchasing Organization of the Kharkov City Council.” As the mayor stated then, the enterprise’s activities are anti-corruption oriented and, through wholesale orders, will allow saving budget funds.

During the first six months of 2024, the Centralized Purchasing Organization announced 120 tenders, of which 69 (57.5%) were concluded with the signing of a contract. Most of the canceled auctions (46 out of 51) did not take place due to lack of offers. In addition, construction soils and enamels worth 8.5 million could not be purchased due to “existing technical errors associated with incorrect data synchronization in the Prozorro system.” Another auction is for rock salt, with a total value of almost 5 million UAH. – canceled due to “no further need for the purchase of goods, works and services.” All proposals in tenders for the purchase of gasoline, diesel and liquefied gas in the amount of UAH 7.3 million. and rock salt for 19 million was rejected by the customer. And the procurement of household waste management services has been at the “submission of proposals” stage for the sixth month.

What categories of goods were still purchased through the “Central Purchasing Organization” and how much it cost the local budget are shown in the infographic below.

The Centralized Purchasing Organization spent the most money on the purchase of electricity (UAH 362.1 million). And despite Igor Terekhov’s assertion that the activities of this utility enterprise should help reduce the level of corruption and increase openness, the reality differs significantly from the words. Of the 18 contracts that were concluded for the supply of electricity, 13 were received by the companies Enera Sumy LLC and El-Energo LLC - 6 and 7, respectively, receiving 152.7 and 162.9 million UAH for this. Accordingly, these two companies divided almost in half 87% of all funds spent by the Central Bank on electricity. They never competed with each other (when Enera Sumy participated in the tender, then El-Energo did not, and vice versa), most tenders had only one participant, and in two cases out of four, when El-Energo ” there were competitors, the company won, despite the higher price. A similar situation has been observed in other purchasing groups. In particular, the above-mentioned “Gold Standard K” received the 4 most expensive contracts for the supply of fuel, although its proposals were more expensive than its competitors. An identical situation arose around motor and transmission oils – the winner of the tenders was JV Yukoil LLC, despite the presence of more advantageous offers.

The words of the mayor about savings as a result of wholesale orders through the newly created CP were not confirmed either. 53 out of 69 (76.8%) tenders that ended in the signing of contracts were carried out by the “Centralized Purchasing Organization” for one utility company. Accordingly, utility companies could conduct more than 3/4 of all organized tenders on their own with good results. A good example is the tender organized by the Central District Office in June 2024 for Kharkov Heating Networks for 5 batteries with a total cost of less than 15 thousand UAH. In March 2024, the CP “Centralized Purchasing Organization of the Kharkiv City Council” entered into an agreement for the purchase of 27,750 packs of A4 office paper for a total amount of UAH 4.1 million. (148.74 UAH/pack). But Southern Railway purchased a smaller amount of paper with similar characteristics at a lower price - 123.8 UAH. That is, the overpayment for the entire order amounted to more than 692 thousand UAH, and this is with a larger order volume and “wholesale prices”.

conclusions

An analysis of the purchases of fuels and lubricants by the Kharkov City Council and its utility companies, as well as auctions organized by the Centralized Purchasing Organization in the first half of 2024, demonstrated that although overpayments from the budget for the third year of a full-scale war are perceived by society extremely acutely, the corruption component in tenders have not disappeared anywhere.

Thus, in a number of purchases of the Kharkov City Council, “favoritism” can be traced – when contracts and orders are awarded to companies owned by representatives of local authorities or those close to them. In particular, 62.3% of the funds for the purchase of gasoline and diesel by utility companies in Kharkov are received by the company “Golden Standard K,” which is owned by a person closely associated with a close person of the mayor.

The foundation of the Centralized Purchasing Organization, which, according to Igor Terekhov, should contribute to cost savings and anti-corruption in public procurement, did not significantly change the situation. Thus, the CZO became one of those CPs that entered into contracts for the supply of fuel with the “Golden Standard” for a total amount of more than 22 million UAH. In addition, signs of “favoritism” and corruption can be seen in other areas, in particular, in the supply of consumables for servicing the public transport fleet and electricity.

One of the arguments in favor of creating a “Centralized Purchasing Organization,” the mayor called the possibility of complex procurement for several enterprises at once, which will allow obtaining more favorable prices through wholesale. However, more than 3/4 of the tenders (53 out of 69) were carried out by the Central Purchase Organization only for one CP; accordingly, there was no benefit from the conclusion of these contracts by the “Centralized Purchasing Organization”. In addition, there is a tendency towards “fragmentation” of tenders. For example, 18 tenders were held for the purchase of electricity, 6 for fuel, 4 each for automobile oil and quartz sand. By combining each of these groups, it would be possible to really save money due to the volume of the order, however, perhaps the main point of creating a central distribution center is de facto ignored.

As a result, the procurement situation of the Kharkov City Council and community utilities in 2024 remains almost unchanged. All those problems and shortcomings that existed before (“favoritism”, corruption and, as a consequence, inflated costs of procurement items) have not gone away. But attempts to solve these problems and save city funds remained only on paper and in statements by the mayor.