Structural funds slosh through Slovakia

By bne IntelliNews May 24, 2011

Tom Nicholson in Bratislava -

European structural fund lore is full of bold frauds. The Italian dentist who bought himself a Ferrari Testarossa and 55 other cars with money earmarked for a fictitious solar panel business; the Spanish mayor who built a brothel out of funds for a riding stable; oh, and the over €100m in staff allowances pocketed by European parliamentarians (MEPs) themselves. And yet little so far has been written about systemic fraud - about how entire operating programmes in EU countries could be hijacked by a small elite.

Zuzana Polackova took over as director of the European Social Fund (ESF) at Slovakia's Labour Ministry only eight months ago. As European Commission inspectors slog through already their second audit of how these ESF structural funds - which the EU says are designed to "promote employment in the EU... [and] help member states make Europe's workforce and companies better equipped to face new, global challenges" - were used at her ministry, she says she knows what they will find. "There was an awful lot of corruption," she tells bne in an exclusive interview.

Lucrative sub-contracts

At Slovakia's division of the ESF, signs of corruption aren't immediately visible. The publicly available list of structural fund recipients - mostly of money for training employees - tells you little. Few have overt political connections, while many have solid reputations in the business and NGO sectors. Moreover, the amounts awarded are small, with all but a few projects getting less than €500,000.

To understand what really happened to the hundreds of millions of euros the ESF has handed out in Slovakia, however, you have to look beneath the surface - not at who officially received the money, but at the professional training companies they chose through tenders to school their staffs, in languages, personal skills, management or computers. "What we know so far is that it [corruption] worked through procurement tenders," Polackova says. "It was very sophisticated and it's difficult to prove."

A month-long bne investigation, in which official Labour Ministry documents on the ESF were made exclusively available to bne, found that many of the training contracts that have been tendered since 2008 were for exorbitant amounts. Trainers regularly demanded €1,400 a day to teach courses on "communications skills" or "managing stress" with fewer than 10 students each. Another company of Bratislava, for example, wanted €2,380 to teach a 16-hour cooking course entitled "modeling chocolate" with one participant. Yet another firm wanted €22,000 for a nine-hour course on "effective communication."

So why were these education costs so high, given that they were tendered? Why was the competition for contracts not sufficient to keep prices down?

Problem #1 - Procurement Law

Until this year, Slovakia's Public Procurement Act regarded education as a "non-priority service," which meant that contracts for training - even those worth millions of euros - could be awarded through a less transparent tender method. Tenders did not have to be widely advertised, for example, or their results published. As a result, it was easier to arrange to have tenders won by a pre-selected firm. With no real competition - and with European taxpayers paying the bill - prices exploded. "Educational services [in Slovakia] were horribly overpriced across the board," says Polackova. "This has been confirmed by audits and is one of the European Commission's most common findings. They often laugh at the money we were approving for personnel costs or training courses."

According to Polackova, the ESF has so far awarded almost 70% of the €1.5bn it has available for "employment and social measures" for the 2007-2013 period. Of the 1,500 funding recipients, about one-third have already tendered out sub-contracts, with the rest soon to follow suit.

Certain companies seem to have cleaned up in the sub-contracting business. While dozens of training firms have won one or two tenders, the following have won 10 or more: Gestus Training House of Bratislava, the VAPC education centre of Kosice in the east of the country, and Anfemata from a small town near Zilina in the north. Centire of Bratislava remains the cash winner with over €5m in at least 15 sub-contracts from 2008 to 2010.

Of course, just because these companies were successful doesn't mean they were corrupt. However, they provide some useful clues as to why public procurement didn't provide cheaper services.

Problem #2 - ties between procurer and bidder

Proving that a tender has been fixed is rarely easy, but there are certainly grounds for investigation when the procurer and the successful bidder are basically the same entity.

The clearest examples of this trend in Slovakia were when a non-profit organization that had been set up by a training company won a grant to train its volunteers - and then awarded the contract to its founder.

For example, the Futura non-profit organisation in Kosice sits at the same address as VAPC, which is not surprising given that it was founded by VAPC owner Jindrich Gazda. Future was awarded €160,000 by the ESF in March 2010, and then handed VAPC a €110,000 contract for training services. While other training companies requested tender documents, only VAPC submitted a bid. Another €240,000 went to the Slovak Chamber of Language Education, which was also staffed by VAPC members and was located at VAPC headquarters. Not surprisingly, VAPC won the €150,000 training contract there as well.

Problem #3 - ties between bidders

The existence of ties between individual bidders for training contracts also creates grounds for further investigation.

Anfemata for example won a €110,000 training contract from the K-7 Canine Rescue Team last year to provide "professional canine rescue instruction." The initial tender K-7 held attracted bids from Anfemata as well as from the Entrepreneurial Information Centre (ICP) and a company called Kompleksa Development. Anfemata won with an offer that was €5,000 cheaper than the others.

That would have been fine, except that Anfemata owner Zoja Zidekova also co-owns Kompleksa along with Peter Batory, chairman of the board of K-7, as well as with Juraj Malik of ICP. Zidekova's Anfemata eventually signed a €112,000 training contract with her business partner Batory as well as a €21,000 contract for "external management" of the deal. Zidekova admits her business relationship with Batory, but said the contract with K-7 had been signed by her son Andrej.

Even where no such obvious business connections existed, many tenders showed signs of previous coordination between bidders. Anfemata won almost €2m through four training contracts signed on a single day - February 8, 2010 - with four different companies within the Central Slovak Energy (SSE) group. In each tender, Anfemata ran against the same two competitors, Eurex Slovakia and Meritum, a fact confirmed by Anfemata. "Your information is correct," Zoja Zidekova of Anfemata confirms to bne .

Problem #4 - Political "background"

Many of the top tender winners show clear political and inside connections. Gestus, for example, won at least 11 tenders worth over €450,000. Among the training experts Gestus listed was Lucia Hutanova, who also served as a project manager in 2008 with the Slovak Implementation Agency, which is in charge of handing out ESF money. "I don't see any conflict of interest there," Hutanova says.

Another Gestus expert was Jan Pataky, a former member of parliament for the ruling SDKU party, who was charged last year with accepting a bribe in the reconstruction of a hospital. Pataky's daughter Adriana Sklibova owns Gestus. Gestus did not return bne's calls.

VAPC's Gazda, meanwhile, is on the management of the Albatros L39 company along with Juraj Hatvany of the Avocat law firm. Avocat has represented Jan Slota of the opposition Slovak National Party, and was a major player in Slovakia's worst eurofunds scandal to date, a €120m tender for advisory and marketing services that was "advertised" on a bulletin board behind a locked ministry door. Between 2007 and 2009, VAPC won almost €3m in training contracts from the Slovak Post Office, where Hatvany was chairman of the supervisory board from 2006 to 2010. For its part, Lenka Takacova of VAPC tells bne: "We have no knowledge of the existence of any relationship between the representatives of our company and the individual you have named [Juraj Hatvany]."

Police investigate

While abuses of structural funds are likely to have occurred at other ministries as well, the Labour Ministry is the first to have come under wider investigation by the Slovak police since a new government came to power following June 2010 elections.

Peter Kovarik, head of the police Anti-Corruption Unit, says he "couldn't disagree" with ESF director Polackova's view that massive corruption had accompanied the use of structural funds. He warned, however, that putting the culprits in jail may prove difficult. "These procurements were generally handled in a highly sophisticated manner through advisory firms, and are now difficult to challenge from a legal point of view," he says. "If one company billed another for a service, and that contract was awarded through a standard tender, I have a serious problem proving that a crime occurred. It's not enough for me to say that it was exceedingly immoral."

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