Closing the Feeder Trough
New Laws Could Kick Corruption Out of Public Procurement

Hands Opening Wide Envelope Containing CashPrime Minister Vladimir Putin moved this week to plug the holes in the corruption-ridden federal procurement budget, dealing a fresh blow to state officials long used to feeding at the public trough. Putin approved a raft of changes to government directives regulating the planning and execution of state supply contracts, as the government struggles to fill the gap in its budgetary spending and restore trust in the public procurement system, the Vedomosti business daily reported.

Russia's federal procurement system ­ a multi-billion dollar program that issues about ten million contracts worth five trillion rubles ($167 billion) annually ­ has been criticized for inconsistencies in law and policies which left it open to abuse by canny officials. Under the current system, about 26,000 federal agencies place orders yearly, but all of them operate outside a uniform framework, thereby imposing unnecessary burdens on the private sector, experts say. Critics also said that while major state procurements require competitive bidding, in practice tenders can be awarded either after full-scale open and competitive bidding or after an entirely closed process, where the full tender material is available only to selected bidders.

With the country's budget deficit standing at 4.3 percent of GDP last year, the government is desperate to cut costs and encourage financial sanity going into the 2012 election year. Economic Development Minister Elvira Nabiullina said last month that to plug the gap in the budget, the first priority is to optimize spending, including through public procurement and through the creation of a federal contracting system that should assist executive agencies to streamline guidance for procurement processes.

President Dmitry Medvedev criticized Putin's government last August for allowing graft in the state procurement system, after regional authorities bought CT scanners for as much as four times their factory price. Prosecutors said tenders for state orders are held in such a way that they exclude companies from providing competitive products. As a result of the inspections, Medvedev ordered Putin to formulate an efficient system for monitoring prices of medical equipment, to prepare a proposal for changes to legislation concerning state purchases of medical equipment, to develop a system of technical requirements for the purchase of high-tech medical equipment and to implement it with the state bodies performing the purchases. He said the proposal must be ready by February 1.

Some highly placed state officials have also called attention to the excessive waste in the federal procurement system, saying that it could derail efforts by the president to modernize the economy. Konstantin Chuichenko, the head of the presidential financial oversight administration, said in November that kickbacks in state procurement programs alone account for one trillion rubles ($32.5 billion), the equivalent of 2.9 percent of the country's GDP. "Up to five trillion rubles in budget funds is spent on procurements for federal and municipal needs. The optimization effect can exceed one trillion rubles," Chuichenko said. "In plain Russian, the volume of theft can be reduced by one trillion rubles," President Dmitry Medvedev commented. About ten million state contracts are signed every year, "a significant part of which have in-built kickbacks," he said.

The president's drive for more transparency in the system has helped prosecutors to uncover several instances of abuse of authority on the part of officials exploiting the loophole in the system for their selfish ends. The Moscow City Court in November issued arrest warrants for a group of government officials on suspicion of extorting bribes from companies seeking state contracts, Bloomberg reported. Members of the group, which include a senior official in the Kremlin's control directorate and former Deputy Health Minister Anna Usacheva, were alleged to have targeted Toshiba and other makers of medical equipment. "Several Russian representatives of international medical equipment producers" were also targeted by the group, Bloomberg reported, citing a statement by the Russian Interior Ministry. Officials in the group contacted makers of medical equipment and threatened to put them on a government "black list" if they didn't pay a $1 million bribe, the Interior Ministry said.

Experts say that the lack of proper control over government procurements has also encouraged "poor judgments" on the part of officials in several key government ministries. In August, the Interior Ministry bought a collection of 55 items for 4.4 million rubles, including a cherry bed with a thin layer of 24-karat gold covering the headboard and footboard, Vedomosti reported. Valery Gribakin, the head of the Interior Ministry's press department, said at the time that the furniture was needed for the ministry's guesthouse on Ulitsa Serebryany Bor, where it hosts high-ranking foreign officials. Earlier, the Finance Ministry was forced to cancel a $80,000 tender to supply a gilded negotiating table and chairs, which would have come with a tabletop with a gold embossment perimeter made from pure gold foil, only after reporters from the business daily questioned the purchases.

However, many officials see the latest government measures as part of a general plan to overhaul the laws governing the general requirements for placing orders by state corporations and natural monopolies and establish clear lines of contracting authority and accountability. With the new amendments, all state companies, agencies and services will henceforth have to publish and substantiate information on tenders and direct purchases on the official Russian Federation Procurement portal, a measure analysts say would improve the monitoring procedure including via civil society mechanisms. First Deputy Prime Minister Igor Shuvalov approved some of the changes at a meeting this week, which were contained in a watered-down bill, submitted to the government in 2009, Vedomosti reported on Thursday citing a source in the minister's secretariat.

The new rules also include a penalty for non-performance of state contract by contractors or subcontractors and actions to be taken by state agencies in case of a shortfall in the budgetary allocation for procurement.

A follow-up law, which could be effective from April 1, will regulate all state procurement requirements including the subject, object and scope of state contracts. The government is expected to issue a decree in April that will regulate how government agencies should plan for state purchases and account for them. A separate decree will lay out the framework of monitoring all state contracts and assessing their effectiveness. "Until now, there were no formal rules on planning and monitoring the performance of the federal procurement budget," Olga Anchishkin, an Adviser to the Minister of Economic Development, said. "The new rules are important for the market, which will receive long-term investment signals, and for the state, which can form a coherent procurement policy."

But other officials like Alexander Stroganov, the chief executive of the State Orders Placement Center, have taken issue with the latest amendment. Stroganov believes that the amendments would not achieve much, as the procurement law originally contained mistakes. "Nothing short of a centralized control over government purchases would eradicate overpricing and corruption in the system," he said.


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