Public Procurement Law in the Russian Federation: Shortcomings and Development Prospects (A. Kamalyan, журнал "Kutafin University Law Review", N 2 (Volume 2), October 2015)

Public Procurement Law in the Russian Federation: Shortcomings and Development Prospects

A. Kamalyan (Russia),

Post-qraduate student, Kutafin Moscow State Law University

Журнал "Kutafin University Law Review", N 4, October-December 2015, р. 351-359.

The present article focuses on shortcomings and development prospects of the public procurement legislation of the Russian Federation relying on the heated discussion that took place at the V St. Petersburg International Legal Forum. The article covers the key aspects of the positions presented by the representative of the Federal Antimonopoly Service of the Russian Federation, the representative of the Eurasian Economic Commission, and the representative of the legal firm 'LexarIn addition, the article gives a brief overview on the regulation of the public procurement in the European Union and shows how the more than 40-years' experience of the European Union may be useful in the course of development of public procurement law in Russia and in the Eurasian Economic Union. Finally, the article provides for a roadmap on the necessary steps in order to improve the supranational public procurement legislation in the Eurasian Economic Union.

Table of contents

I. Introduction

II. Current legislation on public procurement in Russia

III. Public procurement regulation in the Eurasian Economic Union

IV. Conclusion

I. Introduction

The modern world is constantly facing challenges: political, economic, social and cultural. At the same time, those challenges do not come alone; they are usually accompanied by legal challenges. The St. Petersburg International Legal Forum, which focuses on the modern legal issues, has marked the jubilee in May 2015 by holding its 5th session. Dozens of newsworthy debates took place; however, a special attention was given to the heated discussion on the public procurement law in the Russian Federation. That can be explained by several reasons. First, the Russian legislation on the public procurement has undergone a relatively recent reform, which was inspired by the European Union public procurement law, and nowadays, it is possible to estimate the firstlings. Secondly, public procurement is the area of great economic interest for states as well as for supranational organisations. Thirdly, the establishment of the Eurasian Economic Union and the development of economical processes require the openness of the public procurement market to other Member States, which in practice may generate numerous problems while new laws are drafted and then enacted and applied. Finally, the new European public procurement directives were adopted last year, which would inspire the changes in the Russian legislation in the nearest future.

II. Current legislation on public procurement in Russia

The current public procurement law in Russia is formed by two groups of acts: national legislation (particularly, Federal Law N 44-FZ 'On the contract system in state and municipal procurement of goods, works and services' and Federal Law N 223-FZ 'On purchase of goods, works and services by special types of legal entities') and supranational law (Article 88 of the Treaty on the Eurasian Economic Union and Annex 25 thereto).

All the participants of the International Legal Forum round table on the public procurement in Russia have unanimously agreed that the current national and supranational legislation needs to be reformed. Moreover, most of them claimed that the experience of the European Union should be taken into consideration.

For instance, Deputy Head of Federal Antimonopoly Service of the Russian Federation, Stats-Secretary Andrey Tsarikovskiy highlighted the following problems of the current Russian public procurement legislation. First, state and municipal unitary enterprises escape from the regulation of Federal Law N 44 thanks to the state aid in form of subsidies. Secondly, subjective criteria are playing more and more important role in the procurement procedures. Thirdly, contracting authorities often apply open procedure for construction work contracts instead of using the auction, which is much cheaper and would make it possible to build dozens of additional schools and hospitals due to price difference. Next, it is common for contracting authorities to establish the selective standard-setting while applying restricted procedure. What's more, it is impossible to supervise the participation of small and medium enterprises. Finally, there is a legislative lacuna, concerning the requirements for experts and the procedure of carrying out expert examination.

It is a well-known fact, that the domain of public procurement is one of the most corrupted not only in the Russian Federation, but in the European Union as well. Since the market economy, which is prevailing nowadays in the world, provides for a limited State's intervention in the market process, the public procurement may be regarded as a tool for such intervention. Moreover, sometimes public procurement is used in order to cloak the state aid, which is prohibited under a general rule.

Several key conditions have to be met simultaneously for a measure to be state aid. First, there must be an intervention by the State or through State resources. Secondly, it must confer an advantage on the recipient. Thirdly, the measure must be selective and not general one. Finally, it must distort or threaten to distort competition. As for the European Union, an additional condition is required - the intervention can likely affect trade between Member States.

An intervention by the State or through State resources does not necessarily mean that there is a transfer of resources. The State aid takes place when the State has received less than a company owes (e.g. levies). At the same time, it should be taken into consideration that the notion 'State' in this case includes not only central or regional government, but also municipal government and organizations created or controlled by the State.

The advantage for the beneficiary of the state aid is assumed when a company is exempted from payments which it would have paid in the course of normal economic activity. However, the measure needs to be selective, being applicable only to one or several undertakings and thus, putting them in a better position in relation to the competitors.

The key criteria for determining state aid are not the form, but essence. Thus, not only direct subsidies, preference interest rate, tax exemptions, or favourable loan guarantees are considered to be state aid, but also favourable tender conditions.

In some situations state aid may be granted through the public procurement procedures. First, the tender is not needed at all, but it is used to cloak the transfer of money. Secondly, the tender is justified, but the award criterion has no link with the subject matter of the contract. Thirdly, the contract price is abnormally high and does not ensure the purchase at the market price. Finally, goods, services and works are purchased for the benefit of the third party. It is also quiet common when the tender requirements favour one undertaking that submits abnormally low tender thanks to the stated aid granted.

According to Mr Tsarikoskiy, the corruption within the public procurement, as well as other shortcomings of the current legislation, may be eliminated by adopting the following measures. Federal Law N 44 should stipulate clearly and unambiguously that state and municipal unitary entities are bound by its provisions. Furthermore, as to the construction works contracts, the contracting authorities should be obliged to apply the auction and not the open procedure regardless the contract price. Moreover, the open procedures should be held electronically. That would guarantee the anonymity and lower level of potential conspiracy and of adopting subjective decisions since it would be impossible to influence the content of the tender and the procedure of its submission.

As regards Federal Law N 223-FZ, the legal experts have observed its imperfection. However, there was no consensus on what the shortcomings are and how to overcome them. Mr Tsarikovskiy emphasized four main weak spots of Federal Law N 223-FZ: insufficient regulation of the procurement process, absence of regulation for the electronic procedures, inefficient mechanism of supervision and control (in particular, the absence of scheduled and unscheduled inspections), and no unification of the procurement procedures.

At the present moment a bill drafted by the Ministry of Economic Development of the Russian Federation and approved by the Federal Antimonopoly Service has been introduced to the State Duma. It provides for the following amendments. First, it determines the exhaustive list of procurement procedures. Secondly, it solves the problem on the number of e-procurement platforms. Thirdly, the unique requirements for imports phase-out are stipulated. What's more, the procurement procedures are optimised and the level of responsibility is increased. Finally, it provides for a more extensive practice of e-procurement.

A rather different perspective was presented by Artur Rokhlin from JSC Lexar. In his opinion, different procurement rules shall be established depending on three key elements: subject matter of the contract, contract being tendered, and tenderers. In other words, purchase of goods shall be subject to rules different from those for purchase services (it is quiet inadequate, for example, to purchase legal services according to the lowest price criterion). Moreover, the purchase of technically sophisticated goods with after-sales services being provided by the exclusive undertaking shall also be regulated in a specific manner. As for the tenderers, Mr Rokhlin suggests that those who have successfully passed the program of tenderers' development should be given preferential terms.

Furthermore, Mr Rokhlin submitted the amendments to Federal Law N 223, different from those proposed by the Federal Antimonopoly Service. First, the minimum time limits for sending contract notices are to be established. Secondly, the application of negotiated procedure shall be restricted and justified. Thirdly, a certain list of information to be recorded in the procurement protocols has to be set.

It is worth mentioning that some preferences may be given to certain tenderers due to their position, for instance, to small and medium enterprises. Unfortunately, those undertakings are often excluded from the participants' list as the contracting authority requires a high level of annual turnover. However, this issue has been solved in the European Union through adopting new public procurement Directive 2014/24/EU, which will be applicable from April 2016 (until that time Directive 2004/18/EC shall be applied). Under recital 83 ofthe Directive preamble, the annual turnover requirement must be proportionate and linked to the subject matter of the contract, and thus, the requirement should not exceed more than twice the estimated contract value. Moreover, in order to facilitate the access of small and medium enterprises to the tenders with great contract price, the Directive encourages the contracting authorities to divide such contracts into two or more so that small and medium enterprises could have more chance to win. The contracting authority is not obliged to make such a division, though in this case justifications must be submitted.

III. Public procurement regulation in the Eurasian Economic Union

As far as the supranational public procurement law is concerned, it has to be said that Treaty on the Eurasian Economic Union, unlike Treaty on the functioning of the European Union, sets forth provisions relating to the public procurement. However, the Eurasian Economic Union public procurement law is not adequate to the role of gravity centre that is presented on the level of the Member States and reflected in their national legislation. The current situation in the Eurasian Economic Union public procurement law resembles a lot the position of the European Union in the 70s of the last century when the first steps for opening public procurement markets were made. Having established only the guiding principles, the Eurasian Economic Union has no supranational rules that would regulate the public procurement. Sergey Maximov, who represented the Eurasian Economic Union at the International Legal Forum, constantly appealed to the objective of growing trade turnover between Member States, but no concrete steps were proposed in relation to public procurement. Taking into consideration the huge experience of the European Union in regulating public procurement (the first Directive on this issue was made in 1971), the following roadmap could be considered to improve the Eurasian Economic Union public procurement law.

The first step is to distinguish national and supranational regulation. The EU Directives on public procurement set forth the de minimis rule: if the price of the contract in question is higher than an established threshold, the procurement falls within the scope of the Directive. Otherwise, it is governed by the national law. The current thresholds under the Directive 2014/24/EU ares 186 000 euros (instead of 6 242 000 euros under 2004/18/EC Directive) for labour contracts; 162 000 euros (134 000 euros set by the 2004 Directive) for supply and service contracts awarded by central government authorities, and 249 000 euros (207 000 euros as stipulated in 2004 Directive) for supply and service contracts awarded by other contracting authorities.

The second step should concern the creation of supranational procurement procedures, equally applicable in all Member States, since the supranational regulation has been distinguished. On the European Union level there are four procurement procedures: open procedure, restricted procedure, competitive dialogue and negotiated procedure. Under general rule, open procedure and restricted procedure are preferable, while competitive dialogue and negotiated procedure can be applied only in exceptional cases. The Eurasian Economic Union can use the aforementioned procedures or elaborate its own procedures, taking into consideration common elements of the Member States' national legislation.

The third step is about various regulations on work, supply and service contracts, as it was partially proposed by Mr Rokhlin. The European Union public procurement law has not always been consolidated as it is nowadays. From 1970s to 2004 public work contracts and public supply contracts were regulated by different directives, with the first public service contract being adopted only in 1992. As the Eurasian Economic Union does not have its own experience in regulating public procurement, it seems that the transition directly to the consolidated legislation may cause difficulties and problems. It would be better to have different legislation for 7-10 years, when sufficient results are obtained, and then decide whether to consolidate it or not.

The fourth step may sound bizarre, but it is the creation of the unique website for the whole Eurasian Economic Union, where all the information concerning the procurement in every Member State will be published, as it already exists in the European Union. At the present day, a potential tenderer, for instance, from Kazakhstan, needs to follow websites on public procurement of each Member State, which is rather inconvenient. Definitely, the number of Member States in the European Union and in the Eurasian Economic Union differs significantly (28 vs 5). However, such a website would contribute a lot to both tenderers and contracting authorities as it would enable to save time and money.

Finally, the last and probably the most crucial step could be to confer real powers on the Eurasian Economic Commission in relation to the supervision of compliance with the supranational public procurement and competition law. Unfortunately, under the Treaty on the Eurasian Economic Union the Eurasian Economic Commission has no such a power that would guarantee the efficiency of the Union corresponding to the idea of its creation. Like the European commission, the Eurasian Economic Commission must have the right to start its own investigation in case of violation of the Eurasian public procurement and competition law and to refer to the cases resolved by the Eurasian Economic Court. It is vital to ensure justice and bringing to responsibility those who violate the principles of public procurement.

IV. Conclusion

Therefore, the public procurement law in the Russian Federation is undergoing a very interesting and at the same time very important period of changes. The attempt to harmonise the national legislation with the European one, the accession to the WTO in 2012 and the creation of the Eurasian Economic Union have a great impact on the development of Russian procurement legislation. It is safe to assume that the reforms will continue to be made, especially taking into account the recent changes in the European Union public procurement law, which will definitely inspire the respective amendments to Russian Federal laws N 44 and N 223.