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Analysis of the Public Procurement System in Russia and Development of Recommendations on its Improvement

2009

In the early 2000s the growth rate of public procurement considerably exceeded the growth rate of Russian economy, and this was in the context of ineffective regulation mechanisms in this sphere. The law at the time was based on international standards, but sanctions for its enforcement didn’t work in practice. As a result, corruption in the public procurement system grew considerably, as did the government’s concern in relation to this problem.

The federal law of 2005 #94-FZ was a response to those problems. But instead of focusing on the development and improvement of law enforcement mechanisms (as, for example, the World Bank recommended in its report of 2006), an attempt was made to totally exclude any official’s influence (and, accordingly, the public customer) over the result of the bidding. The main innovation introduced by law #94-FZ (which had no precedents in international law) was the principle of total rejection to take into account the qualification and reputation of suppliers (the pre-qualification ban). As a result, the Russian law became the only one in the world prohibiting pre-qualification in the process of purchasing not only, for example, crushed stone for construction (in this case pre-qualification is unnecessary), but also for scientific R&D or goods, the inadequate quality of which could lead to anthropogenic disasters, damage to people’s health etc. That’s why a complex analysis of the state procurement system and  recommendations on its improvement are necessary.

Within the research carried out as part of the project, an institutional analysis of the application of the current law on public procurement was carried out, the international experience of  of public procurement organization was studied, including theoretical and empirical works on this topic. The following data was used in the study:

  • Survey data, which was obtained through selective polls among public purchasers and suppliers.
  • Data on the basis of inspections of companies which were involved in public supply.
  • Data from the results of the interviews which were carried out during 2009 with some representatives of Russian federal bodies which outlined examples of the most important problems in the public procurement system.
  • Materials which were received from topical seminars on public procurement  with participation of federal officials and experts.
  • Results of the monitoring of the effectiveness of regional websites on public procurement.
  • Data or arbitrary practices on the application of Law #94-FZ.
  • Media publications on conflicts and disputes related to public procurement.
  • Official websites which provide information on the process of public orders and the bidding results related to public procurement in Russia (including www.zakupki.gov.ru).
  • Rosstat statistics on the quantity and pricing of public procurement at federal and local levels for 2006-2008
  • Laws of EU member countries, UNCITRAL (United Nations Commission on International Trade Law), World Bank requirements for national laws on public procurement.
  • EU guidelines on the coordination of procedures on public contracts for works, supplies and services.

During the work the following hypotheses were formulated:

1. The introduction of 94-FZ promoted competition in the sphere of public procurement.

2. The expected expansion of access of small and medium-sized businesses to the system of public procurement did not happen due to the highly complicated procedures for participating in the tenders.

3. The new law also did not promote the selection of the most effective and competitive companies for public supplies.

4. In addition to this, the new regulation system (with its focus on the pricing factor and ignoring the factors of suppliers’ reputation and the quality of the supplied goods) has considerably increased the opportunities for manipulation of the tenders’ results by dishonest participants, particularly in relation to complex purchases.

5. As a result, Law 94-FZ has lead to a considerable increase in risks of non-fulfillment of public contracts and failures of supplies for public needs and encouraged even honest purchasers to collude with suppliers.

6. Despite its declared anti-corruption focus, 94-FZ did not facilitate a decrease in corruption in public procurement.

The key results of the work are:

  • Analysis of the mechanisms of public procurement in the Russian economy;
  • Explanation of the classification of goods, works and services applied to public procurement;
  • Explanation of the need for various mechanisms of prucurement depending on the characteristics of goods, works and services purchased for public needs;
  • Theoretical explanation and description of the influence of the new mechanisms of public procurement on the development of Russian markets.

Practical results of the research are the recommendations on the changes in the current law related to:

  • Introduction of the customer’s right to define the method of selecting the winner, taking into account the object of the purchase and evaluating the most economically feasible offer with the use of some formalized evaluation methods;
  • Expansion of the list of possible procurement methods for complicated equipment and unique goods and services;
  • Formalization of qualification requirements for the participants as selection and evaluation criteria;
  • Definition of the pricing formula for contracts with a long production cycle and/or in the case of change of some essential conditions which influence the fulfillment of the contract;
  • Opportunities to change the terms of the requirement specification, the terms of contracts related to complicated equipment and unique goods and services, especially for contracts with long production cycles
  • Opportunities to break the contract on the part of the customer if it is dishonestly fulfilled;
  • Clarification of the control functions of federal governmental bodies.