Head of State Logistics Operator Zhumadilov on subpar food in the army, shady contractors

The State Logistics Operator (DOT) began its work in December last year. Its main task was to reform the supply of the Armed Forces of Ukraine. Arsen Zhumadilov, the head of the State Logistics Operator, formulated two goals of the reform: the first was to ensure the continuity of quality food supplies, and the second was to ensure public confidence before the first goal was achieved.

The first goal has been difficult to achieve so far. The involvement of retail chains in the supply system, which was much discussed by the DOT leadership, has not materialized. Instead, the DOT has twice failed to hold open tenders in the Prozorro electronic system. The first one was canceled by the court at the suit of one of the suppliers, and the second one was canceled because no market participants showed up.

As a result, the DOT returned to the system of direct contracts and concluded supply agreements manually. Their total value was higher than at the Prozorro auction, and the composition of the suppliers, one of whom was close to the Hrynkevych family, also raised many questions. However, the contracts have finally been signed, and it will soon become clear how well the new suppliers can cope with the massive tasks.

LIGA.net conducted an extensive interview with Arsen Zhumadilov about how the State Logistics Operator is organized now, who it reports to, how the prices for the products purchased by the DOT are set, and how to live with selected suppliers who have an unsavory reputation.

LIGA.net: On April 1, food supplies to the Armed Forces of Ukraine began to be delivered by the companies you have chosen. Now you are both the customer and the controller. What should military units do if they have low-quality products, who they should contact, and who controls you?

Arsen Zhumadilov: All military units that apply for subsistence supplies have a responsible person on our side who communicates with them about their applications and the receipt of food under these applications.

These managers are assigned to military units and work seven days a week to ensure that military units understand exactly who to contact on certain issues. After the military units have submitted an application, representatives of the suppliers communicate with them to agree on the details of the logistics: where, how, and at what time a particular truck is going to be delivered to the military unit so that it can be accepted by the military unit.

But who controls you?

We are controlled by a very wide range of stakeholders: The Ministry of Defense, the Armed Forces of Ukraine. This is a fairly broad list of structural units. They receive regular updates from us: how many products were shipped and received. They compare the data with the data they collect themselves in one way or another, and highlight problematic issues to us. And we, in turn, tell them about the problems we see. This is how we interact.

So there is no specific body that would control you?

Control in the legal field is a function that can be applied to different areas. For example, when it comes to controlling the facts of supply, this is the responsibility of the military unit itself, which draws up a non-conformance report if it is supplied with an incomplete set or if there are complaints about the quality.

The military unit sends this report to us so that we can carry out the relevant claim-related work on its basis. If we are talking about controlling the situation in general, there is a responsible executor of the budget program – the Ministry of Defense. Namely, the Department of Resource Support and the Department of Procurement Policy. Now this program is being transferred entirely to the Procurement Policy Department, as the Resource Support Department will be liquidated.

If we are talking about exercising control over the customer, it is the Armed Forces of Ukraine, namely the Armed Forces Rear, the Central Food Supply Department.

Therefore, when I say that our work is controlled by a wide range of stakeholders, I mean various divisions that are responsible for a particular area.

A question about the reputation of the companies you have chosen to supply products to the Armed Forces of Ukraine. There were a lot of issues with the quality of the products they supplied. The Buskyi Cannery supplied low-quality food to the National Guard, and Foodgrant supplied low-quality food to IDPs from Mariupol. You have recently raised the requirements for the quality of products supplied by companies. How are you going to control these companies to ensure that the products are of high quality?

You have correctly noted that we have changed the product descriptions on our initiative to ensure that the products supplied to the Ukrainian Armed Forces are indeed of much higher quality than they were before. For example, changes were made to the description of the butter item – it really should now be butter, not spread (a mixture of vegetable and milk fats that can be made with fillers – ed.)

Now, let’s talk suppliers. When qualifying suppliers, we applied the same criteria and standard of verification that we usually apply during procedures in the electronic system.

That is, when procedures in the Prozorro electronic system are announced, there is a list of documents that the supplier must provide and a number of requirements that it must meet. This is checked in the manner set out in the tender documentation. For example, by providing either direct documents or a guarantee that such documents will be provided at the time of contract conclusion or during its execution. Having a full package of such documents, we decide whether such a supplier qualifies or not.

In the case of catering contracts, the DOT applied the same requirements and criteria to suppliers as were used when announcing the procedures on Prozorro. Despite the fact that due to the lack of time, we did not use the electronic system and had to enter the procurement with an urgent need without using it.

What is my point? The fact that if, for example, the suppliers you mentioned had participated in our bidding procedure and provided the documents they were supposed to, we would have had no reason to reject their bids. Because even if there is information in open sources about complaints about the suppliers' products, an article in the media cannot be a ground for rejection if the documents provide all the necessary data for their qualification.

My colleagues and I directly visited the production and warehouse facilities of each supplier. We checked, first, the availability of a given warehouse and production facilities. Secondly, we checked their compliance with sanitary and biological requirements, etc.

As of today, the intermediaries who do not produce anything themselves, but only buy products from manufacturers and set their own markup on them, have been removed from the food procurement process.

The companies we have selected now have the financial resources to supply really high-quality products within the framework of the contracts signed with them. We hope that these will be really high-quality products.

The military units, the Central Food Supply Department, the Logistics Forces Command of the Armed Forces of Ukraine, and the Anti-Corruption Council of the Ministry of Defense have no tolerance for low-quality products.

If there is a supply of low-quality products, I am sure that they will not be accepted. Accordingly, such products will be subject to a complaint (a claim made by the buyer to the seller due to a discrepancy in the quality or quantity of the goods supplied under the terms of the contract – ed.)

So it turns out that a military unit may be left without food because it was delivered food today for tomorrow and returned because it was of poor quality?

They have to replace such products within 24 hours.

And if they don't?

If they don't, first of all, we have a responsibility for such actions. If we see that this is a systemic phenomenon, then we will reassign the relevant region or a certain military unit in that region to another supplier.

There is so much attention to food now that I am sure all low-quality products will be returned to the supplier. If such phenomena become systemic, we will simply not place orders for such a supplier.

Are you going to consider reputational risk in the future?

In the future, it will be easier for us to manage these risks by applying the current provisions of the Commercial Code in terms of operational and economic sanctions against suppliers who have not properly fulfilled their obligations under our contracts.

As you know, we had such a requirement in our first procedure. It was on the list of claims challenged in court and upheld by the court. From a legal point of view, the court could have taken our side. But for some reason, it decided to side with the claimant. This requirement is not a violation of the law.

We will not reject bidders in the future if they have delivered low-quality products once or twice before, but replaced them within 24 hours. I don't think there should be such a strict filter.

At the same time, we will be able to disqualify suppliers who have supplied low-quality food and did not correct it. For example, if, after a complaint from a military unit, the supplier did not replace the food, did not pay a fine, and there was a lawsuit. This would definitely comply with both the letter and the spirit of the law.

Let's go back to the tender that was disrupted by Trade Granit Invest. Back then, the procurement amount was UAH 8.1 billion ($205.5 million). Now you have signed contracts for UAH 8.9 billion ($225.8 million). The price has gone up. Why did this happen? Does it mean that prices are rising without the Prozorro procedure?

Because there were no cheaper offers. We contracted the most cost-effective offers for the clusters that we announced.

The total number of sets for which contracts have been signed is 77.7 million ($2 million). The total cost is UAH 8.87 billion ($225 million). If we divide the total cost by the amount of sets, the average price of a set is UAH 114.19 ($2.90). The average cost of a set of food products under contracts concluded through the Prozorro system for the first quarter was UAH 111.47 ($2.83). The cost difference is UAH 2.72 ($0.07). The increase in the cost of food in the second quarter, taking into account the declared food packages, is over UAH 211 million ($5.4 million). Why did DOT receive a price increase instead of a price reduction, since you said you work with producers without intermediaries?

The price of the food packages is indicative, so we should compare not the prices of the packages, but the price catalogs that are used to order food.

For example, buckwheat was supplied in Q1 at UAH 55.5 ($1.41) per kilogram, when it cost an average of UAH 27.97 ($0.71) per kilogram in a supermarket (according to the State Statistics Service).

Under the DOT contracts, buckwheat costs UAH 22.84 ($0.58) per kilogram. Catalogs with prices can be found on Prozorro.

If food has become cheaper, why has the total amount increased? If buckwheat has become cheaper, then something else must have gone up in price?

That's right. The prices are indicative. This means that buckwheat has become cheaper, while potatoes, for example, have risen in price due to seasonal price fluctuations.

The difference between the DOT contracts is that we can initiate a downward revision of prices when we see a reason to do so. Every week, the DOT team monitors the data from the Ministry of Finance and makes sure that our prices are not higher than market prices.

All of the suppliers you selected did not come to the tender, but agreed to direct contracts. Why did this happen?

We asked them. Firstly, they did not believe that they could get around the cartel. Secondly, some of them said that they did not have enough time to prepare and bring themselves to participate in the tender.

But then, when they saw that the tender did not take place and that the suppliers of the Ministry of Defense did not come to the tender, they realized that it was an absolutely open door to enter.

Do you think it will be possible to hold tenders on Prozorro in the third and fourth quarters? What will we do if the situation is the same as it is now?

I really hope it will work out. We will announce these tenders as planned at the end of April, i.e. this month.

Potential participants will have time to prepare all the necessary documentation. They already understand, in particular, those suppliers who have been working for the Ministry of Defense until recently, that there is no point in resorting to the strategies they have been using over the past few months to sabotage these procedures. So I hope that everything will work out.

I understand that you changed the terms after the tender. Why couldn't you have immediately set out more favorable conditions for these suppliers in the tender?

Do you know that these terms were more favorable than their current terms with the Resource Support Department?

When I talk to different suppliers, they tell me this information.

You can compare, because this information is public and posted on Prozorro: the contracts with the Resource Support Department, which were valid until recently, are also signed. And there is a draft contract that we had. If you compare them, you will see that the liability under the contracts they signed with the RSD (Resource Support Department of the Ministry of Defense – ed.) is stricter than that offered under our contracts.

You have signed contracts with five companies. Can any additional agreements be signed with them that will increase the cost? Or do you guarantee that this will not happen?

No, there will be no additional agreements. Everything has to go through the Prozorro electronic system. There is an exhaustive list of cases when additional agreements are allowed, and, for example, additional volume is not included in it.

At a press conference in February, your colleagues said that the DOT would use the list of war sponsors maintained by the National Agency on Corruption Prevention (NACP) to prevent such entities from bidding. Recently, the Cabinet of Ministers closed it. What to do now?

It no longer exists in the public domain. That is, there is nothing to refer to as a reason for rejection. Therefore, even if we wanted to, formally, we would not have such a basis.

From now on, the DOT will be engaged in the supply of tactical medicine to the Armed Forces. There are a lot of complaints among military doctors about low-quality tourniquets in the army. Could there be a situation when companies with cheaper offers but low-quality tactical medicine come to Prozorro? How will you deal with such issues?

Recently, the relevant law of Ukraine was amended to allow the use of TCCC recommendations (Tactical Combat Casualty Care is an American organization that has a committee for testing medical devices or equipment – ed.) We will use it. We will apply the requirement for suppliers to have a TCCC certificate to qualify for our tenders.

There is good news: some Ukrainian producers have applied for a TCCC committee's inspection. Based on its results, I hope they should receive a decision on compliance with the standards applied by our American colleagues.

Are there any problems with the supply of fuel and lubricantsб and clothing for the Ukrainian Armed Forces?

There are problems, but they are different from the problems with food procurement. This is due to the fact that the supply structure in this case is significantly different from that of food. As for food, we are essentially supplying ше to the tactical level. As for the material assets and fuel and lubricants, we supply them to the operational level.

That is, when the purchased items are sent to the brigades and then on, it is the direct responsibility of our colleagues from the Logistics Forces Command. Therefore, there are issues with fuel and lubricants and clothing, but they are not about supply, but about other links in this chain.

Is your brother involved in the work of the Russian company Atlant Service, which operates in Simferopol?

You’d better ask my brother. I in no way decide for him and do not influence what he does while in the temporarily occupied territory.

Has your wife applied to renounce her Russian citizenship, and at what stage is this process?

She is collecting the relevant documents that she needs to have before submitting her application. This is not a quick procedure, given that some of these documents need to be collected in Crimea, a place she does not visit.

Accordingly, the current task is figuring out how to obtain those documents from Crimea.