Meeting of the State Council on promoting competition (discussion of the measures needed to achieve the goals set forth in the Presidential Executive Order No. 618 of December 21, 2017 on State Competition Policy Guidelines)

 

Head of the Republic of Udmurtia Alexander Brechalov, Head of the Federal Anti-Monopoly Service Igor Artemyev, Minister of Economic Development Maxim Oreshkin and Governor of the Ulyanovsk Region Sergei Morozov presented the main reports.

The meeting participants discussed the measures needed to achieve the goals set forth in the Presidential Executive Order No. 618 of December 21, 2017 on State Competition Policy Guidelines.

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President of Russia Vladimir Putin: Good afternoon, colleagues,

Today we hold the first meeting of the State Council after the presidential election.

You know what ambitious tasks the country has. They require that everyone engages in their solution as effectively as possible: the civil society, businesses and government bodies must work together. And, of course, the efforts of all the Russian regions are needed.

Promoting competition in Russia is the subject of our meeting. First of all, I would like to say that this is a key area of our work. We cannot do anything without solving tasks in this area; we cannot reach any goal.

Let me stress once again that the fundamental importance of the competition is determined by the Russian Constitution. As I have already said, this is one of the most important areas in order to reach the goals I listed in my Address to the Federal Assembly.

Fair and honest competition is a basic condition for economic and technological development as well as for the country to reform and dynamically advance in all fields of life.

Let me begin with regulations in this sphere. In general, they are in line with international standards. Recently we have approved four packages of antimonopoly laws. The main thing is to provide the corresponding legal precedents.

Unfortunately, there still are many cases when the competition law is ignored, especially by local authorities.

Let’s see what we have in practical terms. Of the total number of antimonopoly law infringements in 2017, 1.2 percent falls to federal authorities, and 98.8 percent, to regional and local authorities, which means Russia is not paying enough attention to this. We think this is some kind of nonsense, nothing serious; figuratively speaking, people must care about their companies, state unitary enterprises and municipal unitary enterprises. I will talk about this later.

To be quite frank with you, the damage to Russia’s economy is enormous. We cannot see or feel it, but it is huge.

Currently, the Federal Anti-Monopoly Service is developing the fifth legislative package. But in addition to the legislation, the managerial logic must change, too. I believe the most important task is to introduce pro-competition approaches in government agencies.

However, the approaches based on encouraging competition are very rarely used. The reason lies in a customary and long-standing bureaucratic mindset and the lack of commitment to building an economy of state or municipal procurement that would be beneficial to the region and its residents.

As I said, it is easier to work with local state and municipal unitary enterprises than select efficient contractors in the competition-based market. This practice leads to higher budgetary spending and preserves outdated production and low quality. Eventually, it affects consumers, Russian citizens.

It should be particularly noted that public and state-run companies are occupying the niches that could be taken by small and medium-sized businesses. They are forcing SMEs out of the markets and monopolising these markets. Therefore, cartels are growing in the industries with high competition; entrepreneurial initiative and motivation to open a business get undermined.

People believe they have little chance to succeed in the markets taken up by public and state-run companies; that it is difficult to win a state or municipal order through honest competition. Public and state-run companies have very different opportunities for lobbying and funding. They can access loans much easier. They also have instruments to turn tenders in their favour and we are aware of them.

For your information, in 2017 some 675 court cases on anti-competitive agreements were filed, including 360 cases on cartels. This is eight percent higher than in 2016. For the second year in a row, the construction industry is number one for this kind of violations.

We have discussed these problems many times. We have taken a number of decisions, specifically, those that would expand the access of small businesses and socially-oriented NGOs to state and municipal orders and services. Apparently, this is not enough. I would like to hear about the current state of affairs and what specific measures you plan to take.

It is also necessary to create a single register of state and municipal property with full information on rights to it, encumbrances and designated use and, while this work is in progress, to activate the identification of unrecorded or inefficiently used real estate and plots of land.

This subject has been discussed for a long time, but, unfortunately, there is no real progress here so far. In this regard, I propose to discuss in detail improving the efficiency of management of state and municipal property at one of the State Council meetings.

Since 2015, the regions have started to implement the competition development guidelines, approved by the Government. For a number of Russian regions, this has become a real incentive to support competition. This is so, we can see it. But in general, the country has no systemic changes for the better.

In December last year, an Executive Order was issued, which stipulated competition promotion as a priority for the authorities’ work, while the National Plan for 2018–2020 outlined specific industries and the targets of competition development in them.

I believe that the same subject areas need to be defined for each region – of course, this work should be carried out together with the regions, taking into account their specifics and capabilities. Thus, regional teams will have clear indicators as regards the creation of a competitive environment, as well as obligations to develop private enterprises in priority markets, including new ones, digital ones, and so on.

I would like to point out another important problem – the trend towards the development of so-called regional protectionism. The motives for such actions are clear: the regions try to create favourable conditions for local producers and to simplify their access to the market.

Meanwhile, I would like you all to hear it now: a local producer means a Russian producer, this is extremely important. But we can see regional protectionism even in those regions that are in the forefront and show good development results. This is absolutely unacceptable. I would like to draw your attention to this.

I agree that it is possible and necessary to use regional preferences for supporting business and thus to increase employment and incomes of residents and revenues of the budget. However, it is one thing when benefits are equally available for everyone but it’s another story all together when discriminatory restrictions are created for entrepreneurs from different regions or bans are imposed on the imports of goods.

This directly contradicts the principle of the unity of the country’s economic space. Such overprotection is distorting the competition environment.

I would like to add that having got hold of these artificial advantages such companies, and you understand this full well, will become less effective in the long term and will impose on you low quality goods or services for inflated prices.

I would like to make two important points in this context. First of all, each of our steps aimed at supporting industries, companies, including as part of the import replacement, should encourage the production of modern competitive goods and services that are in demand both on the domestic and international markets.

The second thing I would like to point out is that it is necessary to take a general look at the markets and consider the prospects of the demand to prevent exclusive terms for projects and investors in some regions from having an adverse effect on the development of successful similar companies in other regions of the Russian Federation.

It is necessary to search for and find a balance as well as ensure fair and equal competition. I am quite sure that everyone will have enough work if managers do their job properly.

Let me repeat that for a breakthrough in national development it is critical to ensure economic freedoms and a high level of competition. Very much depends on the state and all levels of the authorities. But, of course, business itself is playing an enormous role in forming the business climate, the ethics of entrepreneurship and the practice of fair competition.

It is clear that profit is the main priority for a business but it should not be gained at any price. You know why I am talking about this today and why responsibility of business to the people and society is so important. Entrepreneurs should work honestly and conscientiously. They should not be timeservers that are only worried about their own prosperity. We have huge tasks and goals lying ahead.

I believe the business community understands just how important its contribution to a breakthrough in national development is. And once again I would like to appeal to every single one of you: we cannot afford to waste any time!

 

Igor Artemiev: Dear Mr. Putin, dear members of the State Council,

Alexander Brechalov outlined three levels of a competition support system that is under construction in Russia. I can just mention that Sub-Clause “o” Clause 3 of No. 618 Order, which laid down the fundamental principles of competition in Russia, requires that measurable parameters to be set for regions and federal bodies.

Thus, the Government of the Russian Federation devised an integrated sectoral programme for developing competition in Russia – these are ministerial programmes to be approved by the Government.

I’d like to report that the programme is submitted to the Government about two weeks ago – ahead of schedule – and it comprises programmes of all ministries, from the Ministry of Energy to the Ministry of Health Care. There have been numerous attempts to formulate such solvable tasks for the regions. In particular, No. 691 Government Decree of 2009 set that goal, No. 2529 Government Decree of 2012, and finally, as Mr.Putin said, No.1738 Government Decree approved the Competition Development Standard in 2015.

As already said, no considerable results have been achieved, unfortunately. Therefore, the main task is to formulate such indicators. I’d like to discuss them in more detail.

First of all, to make sure that governors and local self-government bodies can influence these indicators, we cleared up the relevant methodological approaches from federal companies and natural monopolies systems. These will be the companies that fall under the jurisdiction and capabilities of governors and local self-government bodies.

Also, I’d like to state that the methods that should be applied in accord with the solutions proposed today and give clear formulae for calculating particular indicators are expected to come into effect on 1 January 2019.

The following years, 2019, 2020 and 2021 will be the periods for executing the indicators and the methods of doing so must be approved by the Government by 1 December 2018.

Another pivotal point: that is why out of all indicators, of which 42 are chosen and will remain, one can choose around 80% of indicators. Someone does not have any ports; somebody else cannot work with aquatic culture due to obvious climatic factors, therefore, we have this side play. You yourselves will verify the 80% of indicators that are available for you. 

The indicators are given in my presentation. Let’s start with the social sphere. For the first time, a 10% indicator is proposed for the most serious issues of the social sphere, such as, for instance, the market of social services for the disabled and the elderly. The 10% figure should be achieved. And, perhaps, these work places and financial resources should be given, first of all, to the entities of the so-called third sector, which was already discussed today. 

Everybody is aware that disabled are the best helpers for the disabled, and diabetic patients know best how to help other people suffering from diabetes. It has been commonplace truth for quite a while around the world. In Russia, unfortunately, all this is financed mostly from the budget, bypassing such organizations. Notorious state and municipal unitary enterprises and other entities deal with it.

Or, for example, the market of retail sales of medicinal drugs. FAS conducted a large analytical survey to formulate the appropriate parameters. They are average across regions: in one region the figure can be 90% and in another – 0%. So if 20-30% emerge, like, for instance, in the previous case, it means that we have chosen a rather cautious, protective variant for the regions.

So, we suggest that all regions reach the minimum – I reiterate, the minimum indicator at 60%. Let me repeat, there are regions with 100%, it concerns pharmacies, the pharmaceutical turnover. In some regions 1 or 2 state unitary enterprises or even one state unitary enterprise covers it.

Or take the market of medical services. I would like to draw your attention to a minor amendment. Our documents specify 10% of the mandatory medical insurance market. After additional consultations, however, that we have been conducting until last with our respected governors, it’s worth putting the entire market of medical services rather than the market of mandatory medical insurance. It would be more correct.

The same reforms are in education: an attempt to form the first private pre-school educational institutions, secondary institutions, secondary professional education, universities, and so on in many regions. On the market of leisure and recreation for children it also will be better if such services are provided by private organizations rather than state unitary enterprises, for example on the basis of former pioneer camps, as it is already done in many regions.

Regarding the agro-industrial complex: a lot of decisions have already been passed by the Government on additional efforts to obtain independence, first of all, in terms of the seed fund for Russian agriculture. We are very dependent on huge transnational corporations.

Such services should be developed on the market of livestock breeding – 20 %, the market of relevant laboratory research to issue accompanying veterinary documents, on the market of seed production – everywhere by 20 %. These are the first steps, but we certainly should attend to it.

The construction sector. Here it is very important that approximately 80% of works concerning capital construction facilities will be carried out by private contractors. Most of us live in Moscow so there are a lot of private companies here, while in the regions we see state unitary enterprises again, and it is very wrong in the XXI century.

Talking directly about housing construction, the picture is roughly the same and the figures are also the same 80%. In highway construction - also 80%. In architecture and civil engineering also 80% are proposed, and in cadastral land-use works – the same 80 %.

These indicators are important, but with a reservation. Moscow has a specific feature, I mean the Federal Law “On Renovation” that should be taken into account. The coefficient, therefore, should be estimated disregarding the Law.

The fisheries industry. Our food security is harvesting biological resources. It should be Russian contractors that catch 80% of bioresources in our seas. It is truly of tremendous importance for our national security. We should have 80% of subsequent processing because today the figure is much lower.

Commercial aquatic culture – 80 %.

Next element: use of local-significance mineral resources.  Chippings, sand and other civil construction materials should be given to Russian companies, and there should be 80% of such private companies, which is our proposal.

The housing-and-utilities sector, heat supply: 20 %.

Provision of urban amenities, area garbage, cleaning, etc.: 20 %.

Housing stock maintenance. The wording should be slightly refined, but the figure also should be 20 %.

Household waste: some correction is required, keeping the same indicator though – 20 %.

Electric power supply. Buying-and-selling electric power – 50%, other competitive markets in the electric power industry – 30%. Taking adjacent segment, in the gas supply sector, for instance, providing liquefied gas in balloons for the population that is mainly bought in the rural areas – 50 %.

I’d like to point out that we wanted to put the same coefficient for installing metering devices for the gas transportation equipment: the meters installed at house entry areas. Many governors emphasized to us that cut-ins are made directly to gas pipes. It is a very important thing. If we fail to timely notice that gas pressure in a residential house is growing, it can lead to explosions, so we are concerned with this indicator and suggest omitting it at this stage.

Transport. This segment is of enormous importance for Russia. It is expected that social transportation in cities should have no less than 20 %.

Again the picture is very patchy: somewhere, in many regions private companies already get 30%, 50% or even more and provide carriage under complex contracts, operate in the conditions of snow, rain, mud; and there are not critical situations. At the same time there are regions where only “Passazhiravtotrans” exists covering the entire city or a municipality, and it is obvious how it works. The budget does not have enough funds to support it. Taxi, the relevant services for transportation of passengers and luggage – 70 % and so on.

Industry. After privatization that took place in particular sectors that we looked into, the figures in general will be clear to you: the light industry (70 %), construction, very important – concrete and bricks production (also by 70 %), timber production (the same 70 %). This is the indicator for many regions. Considerable efforts are required to achieve it.

Things are more or less OK in the Internet and information-and-communications technologies, but not everywhere. Thus, 98 % of the broad-band Internet access services, in our opinion, should be provided by private companies.

We believe that even in such complicated matter as ceremonial services – the wording used is “burial” services but it would be more correct to write “ceremonial” – 20% of such services must be rendered by private companies. 

Retail sales of petrochemicals, I emphasize – without federal companies, as I already mentioned, – 90%, the market of outdoor advertising – 100 %. Achieving these indicators, certainly, will lead to significant opportunities for small business and in addition to the measures already specified in the law on public procurement we suggest adding such an important thing as the Register of the types of works that should be given only to small companies.

Only small companies should paint fences in Russia, they probably will be able to do cleaning or unscrew bulbs too, and they can manage perfectly. Today, unfortunately, the situation is very different.

The aforementioned Small Business Fund has done a great job here to support the sector and to form the Register of small companies. We observe, however, that big companies tend to split off trying to catch even these small contracts. 

I’d like to say a couple of words about the authorities that are broadly represented here. First the Presidential Order require all of us to organize our work in such a manner that in three years the number of violations committed by the authorities  in the field of competition reduced twofold. As Mr. Putin has stated today, 98 % and more is the current figure for regional violations. Preventative measures are one of the elements of such efforts.

For example, when relevant federal acts are being drafted, we think that evaluating the regulatory impact, that is performed by the Ministry of the Economy, a question should be asked how a particular regulatory act affects competition so that later there is no need to abolish it, interrupting the workflow and discriminating companies by the authorities.

One of final items – it’s rather new for FAS – the so-called tariff discrimination. Today tariffs in the same region, under comparable technological conditions may differ, for example, for different water and wastewater treatment plants by more than tenfold. The same applies to such sectors as water drainage, electricity and heating supply, and so forth. 

What are the conditions for companies’ operations and people’s life when the tariffs per 1 cubic meter of water or 1 Gcal of heat is ten times higher than in the neighbouring area? The benchmarks are devised to be submitted to the Government in order to level the situation, this work is practically completed. I can say that leveling is taking place, it is essential.

Mr. President, you talked about cartelization. I’d like to state that today it costs roughly 2% GDP. Cartels are really sweeping through our economy. A special anti-cartel plan has been developed following your order, and I think we will get the results.

Summing up, I’d like to point out that the Constitution of the Russian Federation (Articles 8 and 34) and the Presidential Order laid the foundation for developing competition in Russia; 13 Governmental sectored acts, integrated in a single act will be adopted in the near future and effectively will pursue serious industry reforms in each sector concerned.

The new Standards for developing competition and the indicators form a big and ambitious plan that in a good sense is the national plan for developing competition in Russia.

Vladimir Putin: Thank you very much