Russian state procurement makes up quarter of economy

Russian state procurement makes up quarter of economy
By bne IntelliNews March 25, 2016

​Russia may have adopted capitalism but up to a quarter of GDP in value terms is still due to state procurements that are carried out daily by an army over one million bureaucrats.

State procurement systems are in focus at the moment. Arguably the only significant reform Ukraine has made since the Maidan uprising in 2014 has been to set up an electronic system of state procurements that commentators expect will slash millions, if not billions, of dollars off the state purchasing budget as an effective tool to curb corruption.

Much less well reported, Russia already put the same reform into place several years ago and has website advertising all the contracts on offer – except that it is not working very well. However, one of the side-effects of collapsing oil prices has been to focus the government effort on making the system work and at the same time drive more of the spending towards small- and medium-sized enterprises (SMEs) as a way of stimulating growth and employment.

State orders placed with SMEs are central to the plan for bolstering growth, says Igor Artemyev, the head of the Federal Antimonopoly Service (FAS) that oversees the procurements, Vedomosti reported on March 24.

Last year, the total volume of the public procurement market, including the purchase of state-owned corporations, reached an astonishing RUB30 trillion ($437bn), equivalent to 25% of GDP, according to FAS. Given that Finance Minister Anton Siluanov is trying to find cuts of RUB2 trillion to reduce this year's projected federal budget deficit to 3%, state procurements looks like a area ripe for reform.

This federal octopus is staffed with over one million people and rising, according to Deputy Minister of Economic Development Evgeny Elin, was responsible for more than 330,000 state and municipal customers and about 500,000 suppliers last year.

Construction works is one of the biggest spending items and accounted for RUB2.07 trillion in 2015, which is probably responsible for putting the growth of the sector back into the black: construction volumes were shrinking all year, but in February 2016 the volume of objects increased by 1% y/y for the first time since 2013.  

In second place on the state's shopping list is contracts for the purchasing of medical devices and pharmaceuticals, worth RUB486.6bn, or 9% of total purchases. This one is a touchy subject as the Russian constitution guarantees citizens treatment if they get sick, but Russia produces few of the high-tech drugs needed and is forced to import the bulk of it medicine.

In general, the reforms seem to be going backwards slowly. Artemyev complained that the number of single-bidder contracts has increased from 18% in 2014 to 21.7% in 2015. And the lion's share of single-bidder applications are for construction contracts, where there is a plethora of companies, but which is also the largest part of government spending. Clearly the construction sector remains infested with graft.

FAS is the responsible body for checking and approving the single-bid contract applications to ensure there are no irregularities; in 2014, FAS received 84,447 applications for single bidder contracts, falling to 5001 after the rules were changed and FAS approval was no longer required if an e-auction failed to produce a winner. In that case, the local government body offering the contract is free to award it to whomever it pleases.

With the current set up, even if contraction contracts are not a blatant scam – the favourite is to award a municipal contract to a firm owned by the governor's wife – the relations between the contractor and the public bodies are uncomfortably close. "There are no strangers in this business," Artemyev said at a recent conference on procurement.

Still, some progress has been made. The number of contracts that are being closed using the e-purchasing system is now 56.6% and the average number of e-auctions for state contracts has increased from 2.5 to 3 in the last year, according to Artemyev. Part of the system is working.

There have been several attempts to help Russia's SMEs, but to little effect. From the state contracts SMEs received more than RUB490bn, which is 41% more than in 2014, but that is still only 1.6% of total state purchases. The state is proactively trying to do something about this and has imposed an SME 15% quota on government buyers, but it will take time for this target to be hit.

The Ministry of Economic Development and FAS are clearly worried that the system remains badly flawed and Artemyev points to the rise in one-bidder contracts as a major problem. The two bodies are now proposing to audit the previous decisions to award contracts and then revise the rules again to cut out the corruption and increase competition. Artemyev wants to immediately cancel all the single-bidder contracts already approved and set up a commission made up of FAS and Ministry of Economy staff to review them again, and he has submitted a proposal on these lines to the government.

The proposal may be accepted. It was President Vladimir Putin who kicked off this whole process in 2012 when he called the utilities sector, which is a huge consumer of state construction contracts, the "most corrupt in Russia". Putin ordered that no state company could sign a contract where the beneficial owner of the contractor was not known. By the spring of 2013, state companies had cancelled some 60% of their contracts.