A working meeting of the Chairman of the Government of the Russian Federation with the Head of FAS

The Head of the Federal Antimonopoly Service (FAS Russia) Igor Artemiev informed the Chairman of the Government of the Russian Federation Dmitry Medvedev on the state of competition in Russian economy and the situation with public procurement.

Dmitry Medvedev: “There are plenty of ways to either get around the competition law and the law on public procurement, or apply a strictly limited norm for a vague number of cases. The issue is not only in enforcement but also in the legislative language. Perhaps it makes sense to clarify statutory wordings so the single supplier model can be used only when it is impossible to do without it”.

The hand-notes of the meeting:

Dmitry Medvedev: Mr. Artemiev, is there competition in Russian economy or only state property remains, as you mentioned, and its size has gone over the crucial red line? What do we need to do today to ensure the competitive framework for the economy?

Igor Artemiev: it seems to me, Mr. Prime-Minister that the Government does a lot to this purpose, I mean support to private business.  The decisions made as part of the “anti-crisis plan” also prove it. The decision on large-scale privatization in spite of, frankly speaking, not a very favourable environment, is worth much. Emergence of private owners as competitors even in the sectors where state-run companies prevail is exceptionally important for efficient economy, because overall competition is pursued not for the sake of competition but for the purpose of efficiency, innovative economy that everybody is thinking about. Speaking freely, the unfavourable environment, including the current international surroundings, however, slightly hampers the process. Therefore FAS as the body responsible for competition happily accepts such decisions.

Dmitry Medvedev: What prevents it? Are there any issues that you would like to discuss?

Igor Artemiev: Talking about some important aspects of competition, for instance, I would like, as usually, to report at the beginning of March on the results in public procurement. The situation when the state can also strongly support private companies, first of all, small and medium business spending many trillions of Rubles from the budget or dozens of billions and millions of Rubles if it concerns state-run companies. I’d like to state that the two years of work of the new law have revealed not only advantages but also serious shortcomings that must be corrected.

Dmitry Medvedev: What kind of disadvantages?

Igor Artemiev: Talking, for instance, about small and medium business, in my opinion, a very important mistake was made. Apart from primary placement of funds through competitive bidding, when a small company comes directly and wins, say, a tender or an auction … Here everything is clear, the company executes a contract either properly or improperly, then the works are accepted, the money without interest in our conditions, at particular loan rates reaches small companies. For some reason they start thinking and such a norm appeared in the law, that when a large or a medium company wins a contract it writes a map of its sub-contractors, where, at a first glance, there are also very many small and medium companies – and statistics traditionally reflects it, and many bodies happily report that those companies receive hundreds of billion Rubles. In reality, however, those firms are either affiliated with the large company or are simply money-laundering garbage holes or fly-by-night firms.

Dmitry Medvedev: So it has nothing to do with small business.

Igor Artemiev: It has nothing to do with small business. Therefore, the figures that are even put in the official reporting, that reach you, are heavily overrated.  A number of very important decisions have been made that small companies must also be marked at electronic sites and only primary placement should be factored in. Nevertheless I can say that today small and medium business receives at least 400 billion RUB of direct public procurement, if the relevant statistical data are cleared of those layers. So hundreds of billions rather than trillions of Rubles. And there should be trillions, and then jobs will be created and so on.

Moreover, water as usually will find a hole. We have analyzed possible ways of getting around competitive procedures because public procurement certainly must be competitive, prices must go down, budget should be saved, and funds should be spent efficiently. In this sense, the adopted norms have truly positive objectives, I mean a possible alternative option of withdrawing from auctions and tenders for the so-called government subsidies. Now the money is effectively taken from the budget, and reach / are given by many governors directly to federal state unitary enterprises while the latter already do not need to work in accord with competitive procedures, they work under their own regulations. And then there are huge capital investments (hundreds of billions Rubles), and even medicinal drugs and solid household waste disposal take place through subsidies rather than competitive procedures.

Dmitry Medvedev: So you think that in reality it is also a way of getting around the law – withdrawing money through subsidies?

Igor Artemiev: The point is that unfortunately the law allows it. Some time ago it was done not to organize auctions for particular unique products and facilities, but in reality it resulted in purchasing medicinal drugs and disposing of solid household waste though subsidies.

Dmitry Medvedev: Which means it is applied to everything.

Igor Artemiev: Yes, to everything. Here we must give a clear definition of subsidies, or simply confirm: only unique items and nothing else. In our opinion it’s better to make the decision in the near future since it comes into effect from 1 January 2017 so all governors will be able to adopt to it.

The same story unfortunately occurs with single suppliers. You are well aware of that, you have requests by sectors, anyone who wishes asks you: make sure exactly this company is appointed the single supplier of everything, and it concerns also the defence sector and completely open tenders. In my view, a critical mass is already reached of what can be given to the single suppliers and the system must be cleaned up. For instance if the single supplier is a natural monopoly, it cannot be otherwise because nobody is going to build up a second pipeline, etc. But when single suppliers appear on the open markets for supplying, for instance, aviation fuel, motor fuel, electric power industry (which are absolutely competitive markets), they are put in the privileged position and it certainly deteriorates the situation with competition and objectivity accordingly.

Dmitry Medvedev: You know I think that we must summarize the issues highlighted as a result of applying the law and, most probably, the law must be adjusted, there is nothing dangerous in it, we have done it repeatedly. I agree that there are many ways to either get around the competition law and the law on public procurement, or apply a strictly limited norm for a vague number of cases.

The issue is not only in enforcement but also in the legislative language. Let’s think, perhaps it makes sense to clarify statutory wordings so the single supplier model can be used only when it is impossible to do without it (or such decisions must be truly exceptional). You are right, and I see it in various documents and reports submitted to me that lately a trend has been developing when decisions on single suppliers are made per standard procedure rather than as an exception. It is substantiated by various considerations such as safety reasons, saving funds, etc., though not always necessary.

I suggest that we with our colleagues in the Government should work out a package of measures on improving the law and present proposals; perhaps, it is worthwhile to already clarify some points.

Igor Artemiev: Thank you very much.