SARAJEVO CANTON HEALTH INSURANCE INSTITUTE: Maintenance of a Software System Worth 50 KM Costs 10,000 KM!

The Sarajevo Canton Health Insurance Institute enhanced its operations in 2023 by acquiring a new electronic document management system (DMS), which enables more efficient document and workflow management.

Although the Institute initially estimated that the system would cost over 50,000 KM, it ultimately paid the Sarajevo-based company Orka Ltd. only 50 KM, excluding tax—effectively acquiring a complex software tool almost for free!

Clearly, such a contractual arrangement has no economic justification, as the actual value of a DMS system is significantly higher. However, the collaboration between The Sarajevo Canton Health Insurance Institute and Orka Ltd. did not end there. At the end of 2024, they signed a new contract—this time for the one-year maintenance of the system. The contract is valued at nearly 10,000 KM, excluding VAT.

"EXTREMELY LOW PRICE"

This brief overview, which we will analyse in more detail below, can be interpreted as one of many examples illustrating a similar pattern in public procurement within the IT sector in Bosnia and Herzegovina: an appealing price for the initial delivery of software, while the actual costs are "hidden" in subsequent contracts for maintenance, upgrades, or licensing fees. It is not uncommon for maintenance costs to far exceed the initial value of the delivered software.

There are numerous examples, but let us first return to the tenders of The Sarajevo Canton Health Insurance Institute. The entire story began in December 2022, when a tender was announced with an estimated value of 51,200 KM, excluding VAT, for what was described as the procurement of services for the creation, delivery, and implementation of an electronic document management system (DMS).

Two bids were submitted to the Institute, both slightly below the estimated value. This was followed by a 32-minute e-auction, during which the company Orka Ltd. offered the system for a symbolic 50 KM, while the competing bid from the company CloudIT Ltd. amounted to 4,500 KM, excluding VAT. The management of The Sarajevo Canton Health Insurance Institute, led by director Muamer Kosovac, had no choice but to finalise the contract with Orka for the aforementioned 50 KM.

Such an offer could also be characterised as unnaturally low, so the Institute was asked whether they requested a written explanation. In their response, they highlighted that the initial bids were close to the estimated value and that unnaturally low offers can only be deliberated before the e-auction is scheduled.

"It is evident that this contracting authority, after conducting the e-auction, had no right to discuss the offered price in any way, as it is final and binding for the contracting authority. In this regard, the contracting authority, in line with the previously established and accepted conditions, offered the contract to the most favourable bidder, who accepted the contract terms at what we consider an 'extremely low price,' but without the possibility of exerting any influence while the bidder expressed readiness to fulfil and executed the obligations undertaken," the Institute stated in their response to Žurnal. They concluded by saying that a system has been implemented that is fully functional within the implemented scope.

We also sent an inquiry to the company Orka Ltd., specifically asking about the economic logic, strategy, or calculation they employed when deciding to offer the DMS system for 50 KM.

“The public procurement process of The Sarajevo Canton Health Insurance Institute was conducted through an e-auction (...) In an auction process, if participants wish to offer services, they must adjust their prices downwards. In this particular process, the final value of the procurement was the result of the e-auction process, during which the competing bidder continuously lowered their price, prompting a reaction from Orka,” the company stated, without providing a concrete answer to the question.

For Slobodan Golubović, editor of the portal PratimoTendere, this tender is an example of how bidders exploit loopholes in legal and regulatory frameworks.

“Bidders have clearly and deliberately lowered their prices during the e-auction process to eliminate competition, which is technically referred to as dumping. Although the final offer price is unrealistic, the contracting authority had no choice but to offer the most successful bidder a contract, which was signed. The question remains whether the contract will be honoured and what the bidder’s economic calculation was. Will they unjustifiably recover their losses in another way, such as through maintenance fees?” Golubović wonders.

MAINTENANCE OF THE SOFTWARE SYSTEM

A year and a half after signing the initial contract, The Sarajevo Canton Health Insurance Institute announced a tender for the procurement of one-year maintenance services for the DMS system. They estimated the cost at 10,000 KM, excluding VAT.

Unsurprisingly, only one bid was submitted—by the company Orka Ltd.—and the value of their bid was just four fenings below the estimate. For public procurement monitoring experts, this may indicate that the company was confident there would be no competition for the tender.

We asked Orka Ltd. whether anyone else in Bosnia and Herzegovina could maintain the system they developed, delivered, and implemented for The Sarajevo Canton Health Insurance Institute and whether they had anticipated profiting from providing maintenance services when they initially offered the DMS system for 50 KM.

“Orka is not in a position to assess the capabilities and potential for OWIS programme maintenance services to be provided by third parties (…) We believe your assumptions are unfounded. Specifically, these are separate services that are delivered and evaluated independently. As previously stated, the e-auction and offers from other bidders were exclusively related to the final price of the OWIS licence, with no impact on subsequent maintenance costs, as maintenance services are charged based on clearly defined criteria,” the company responded.

Nevertheless, the fact remains that Orka was the only bidder in this tender, and it will be interesting to follow tenders for the maintenance of the DMS system in the coming years. When asked about the estimated cost of maintaining the system in the future, The Sarajevo Canton Health Insurance Institute responded:

"The contracting authority, through the 'Draft Contract' in the tender documentation, and later through the 'Contract', imposed on the contractor the obligation to deliver the system in accordance with the tender conditions, with the provision that the support (system maintenance) after the warranty period 'will not exceed 20% of the value of the delivered system,' which is in line with global standards and local experience for software maintenance, with an average percentage ranging between 20% and 30% of the market value of the acquired software or purchased licences. In this way, the contracting authority has created conditions to prevent the maintenance costs from growing uncontrollably, and the maintenance costs will remain within realistic boundaries."

The Institute concluded that they had achieved a significant "financial benefit" that would not reach the estimated value of the system even after 3-4 years.

Journal reporters, under the condition of anonymity, consulted experts in the field. They confirmed that the typical price for software maintenance is around 30% of the total value of licences or the initial procurement of the software. However, the issue lies in the fact that the maintenance cost is planned based on the projected value, rather than the acquisition cost of the software.

"If someone acquired the software for 50 KM, as is the case here, then it is not normal for maintenance to cost 10,000 KM. Judging by the procurement price of the software, this was a competition, or rather a battle between two candidates for the job. Naturally, one succeeded, who was either very brave or had more information—they planned to recoup their product's cost over time," they pointed out.

TENDERS WITHOUT COMPETITION

The way maintenance costs can rise and significantly increase over the years is best demonstrated by an example from Elektroprivreda Bosne i Hercegovine (Electric Utility of Bosnia and Herzegovina), where even the BiH Office for the Review of Complaints once warned about tender rigging.

In short, Elektroprivreda BiH purchased the DMS system in 2021 for 250,000 KM, excluding VAT. Only one bid was submitted for the tender – from CloudIT, with whom the contract was concluded. The following year, a tender was announced for the procurement of hosting and maintenance services for the DMS system. Again, only one offer was received – from CloudIT – and a contract worth 270,000 KM, excluding VAT, was signed.

At the beginning of 2024, a new tender for the maintenance of the DMS system was completed. The result was the same – only one offer, from CloudIT, with the value rising to 400,000 KM, excluding VAT! The price of maintaining the DMS system is expected to continue rising, as a new tender was announced at the end of 2024, estimated at 900,000 KM, with the intention of concluding a two-year contract this time.

A previously questionable tender was also the one conducted by the Municipality of Novo Sarajevo for the procurement of a similar software system. Recall that Žurnal published several articles about how the Municipality of Novo Sarajevo was acquiring new software for 300,000 KM, despite having previously purchased a similar system for around 64,000 KM, excluding VAT. Besides the questionable handling of public funds, there were suspicions that the tender was rigged. After months of delays, the tender was eventually concluded with its cancellation.

Even a simple search on the Public Procurement Portal supports the thesis that there is often no competition, let alone fair competition, when it comes to this area. Here are just a few examples from the end of 2024:

- Communications Regulatory Agency of BiH – maintenance services for the centralised DMS system – a contract worth 42,720 KM, excluding VAT, awarded to the only bidder, the Banja Luka-based company Tesla Advisory;

 - Assembly of the Herzegovina-Neretva Canton – procurement of DMS software – a contract worth 67,618 KM, excluding VAT, awarded to the only bidder, the Sarajevo-based company Orka;

 - Pension and Disability Insurance Fund of RS – procurement of maintenance services for the Electronic Document Management System (DMS Origami) – a contract worth 261,480 KM, excluding VAT, awarded to the only bidder, the Banja Luka-based company M&I Systems;

 - Brčko District of BiH – procurement of the integral information system of the Directorate of Finance (DMS, Treasury IS, Tax Administration IS, and lottery software) for the needs of the Directorate of Finance of Brčko District of BiH – a contract worth 5,521,000 KM, excluding VAT, awarded to the only bidder, the Banja Luka-based company Lanaco.

A LOT OF WORK FOR INVESTIGATIVE AUTHORITIES

All the data presented should be of interest to investigative authorities. On the other hand, organisations that monitor public procurement procedures have repeatedly warned about tenders related to the procurement of certain software solutions.

According to Transparency International BiH (TI BiH), software procurements are most often rigged through specific conditions imposed on bidders:

"Here, employees are often required to possess various certificates that, as it turns out, were not even necessary for the job and always ended up the same way – only a few companies in BiH are constantly winning contracts with the same contracting authorities, or the same parties managing those authorities. Unfortunately, this is the case, and such tenders rarely receive many bids."

They also mention the example of Prointer, connected to the family of the President of Republika Srpska, Milorad Dodik, about which Žurnal extensively reported in previous years.

"On average, 2.23 bids are received for tenders in BiH, while for the tenders won by Prointer in 2021 and 2022, only 1.1 bids were received on average. Of the 387 tenders in 2021 and 2022, only 38 received more than one bid. The total value of these tenders was one million KM, while in 304 procedures where only one bid was received, the value was 62.9 million KM. This example alone speaks volumes about the lack of active and fair competition in such procurements," TI BiH stated.

Slobodan Golubović, editor of the PratimoTendere portal, claims that software solution procurements have been very frequent in recent years and are particularly interesting from a financial perspective. However, he argues that the primary problem in monitoring these procurements is that only a small number of people have the relevant knowledge in this area:

"Thus, the circle of people who can and want to contribute to anti-corruption monitoring is narrow. These are procurements that are difficult to measure, and it's hard to determine if their values, deadlines, and quantities are realistic, unlike, for example, car procurements, where, based on the described technical characteristics, we can easily determine through a simple internet search whether a certain bidder or manufacturer was favoured."

TI BiH shares this stance, noting that the likely assumption is that civil society organisations, the media, and other stakeholders do not have the necessary expertise to tackle these issues. However, they highlight that this is only part of the problem:

"On the other hand, even with obvious irregularities, it is very difficult to alert the public and explain how public money is being misappropriated because the issue is complex. People find it much easier to focus on other things, for example, when the tender for a tourist information desk in Sarajevo was being procured, we saw a much stronger public reaction, even though it involved relatively small amounts compared to the tens of millions that, according to estimates from some experts, have been siphoned off through the procurement of certain software that shouldn't have cost that much. These irregularities are most often pointed out by damaged bidders or the media, but there has been very little reaction from the professional public."

Speaking about the experiences of the PratimoTendere portal, Slobodan Golubović mentions several aspects of potential corrupt practices.

"First and foremost, we should start with the purpose of these procurements, whether they are truly necessary, whether all the conditions for implementation are met, and whether some of the software solutions are practically implementable, among other things. Furthermore, there is a pronounced misuse of conditions for qualifying bidders, especially regarding technical and professional abilities, where certifications, licenses, and similar requirements are often imposed solely to limit competition. Also, there is a broad scope for restricting competition in technical specifications. Finally, but not least, market cartels between large IT companies have been recognised," he says.

In conclusion, Žurnal's sources share the opinion that the legal framework must be improved to ensure active and fair competition.

 "As for the institutions, we have definitely not received a helping hand when dealing with such matters. It took us several court rulings to obtain contracts or reports on the implementation of contracts for some projects that finished four or five years ago, when the damage had already occurred and it became extremely difficult to alert the public and point out the harm caused by these projects. Therefore, it is important that amendments to the Public Procurement Law introduce an institution that would act preventively. We have proposed that it should be some kind of inspectorate that could monitor the legality of public procurement. Currently, no institution can enter tender documentation and take action at this stage to protect the public interest. So, if no one complains about a tender, it passes, and in practice, prosecutors either do not act at all or only act when the damage has already been done," they conclude from TI BiH.

(zurnal.info)