Centralization of procurement in Russia is fictitious

The possibility of centralized procurement for the needs of federal, regional and local customers by the decision of the highest executive bodies of the corresponding public law entities was envisaged by law before. The law “On the contract system in the procurement of goods, works and services for state and municipal needs" from 05.04.2013 № 44-FZ retained this right for regions and municipalities, but forbade to give any other authority to the central purchasing body except for determining (selecting) the provider.

Analysis of regional legislation shows that the degree of procurement centralization in Russian regions is very high. A decentralized model is adopted in three regions only. In the vast majority of regions, the authorized body at least makes purchases through tenders and e-auctions (sometimes, threshold requirements for the initial contract price are applied, below which the right to sel ect the supplier is retained by the customer). In 19 regions, all procurement methods other than purchasing fr om a single supplier are centralized.

This degree of centralization is economically meaningless, since centralization as such is only possible provided that the central purchasing authority gets the function to determine the requirements for the purchased production and its initial price. As for competitive procurement, the central purchasing authority should also be in a position to determine the requirements for suppliers and criteria for assessing applications. Obviously, it is not possible to select a single supplier for several customers provided that they establish different requirements to the object of purchase or the initial price. Therefore, in reality, under the guise of centralization, the customer is simply denied the right to determine the supplier. According to our estimates, in 2014, the share of purchases for the needs of a single customer amounted to 96.2% of the total number of purchases made by regional procurement authorities. This fictitious centralization does not give any positive effect and at the same time:

• extends the procurement cycle;
• leads to a duplication of transaction costs, as the customer keeps most authority in planning and doing purchases and hence the need for maintaining their own contract service.

However, some experts see anti-corruption effect in such fictitious centralization: allegedly, one procurement organ is easier to trace than a variety of customers. But monopolization of procurement functions can not only reduce but also increase corruption risks: for those suppliers wishing to conspire, it is easier to negotiate with a single customer than with a set of them. With a large number of customers, it is likely that some of the purchases will not be covered by corruption, while this probability is greatly reduced when the purchasing body has a monopoly. In addition, procurement centralization increases the risks that regulatory bodies and heads of executive authorities will be included into collusion, as it is also more convenient for them to deal with a single “counterparty”. It could be that regional authorities’ tendency towards centralization is partly due to this.

Meanwhile, the sense of the centralization is to combine purchases of similar products for the needs of many customers, which can help to save money due to the scale of procurement and reduce costs of keeping many procurement services. In this regard, it seems reasonable to switch to the model most common in the developed world, in which centralization is limited by the nomenclature of standardized production. Then, in the process of procurement, customers’ individual preferences don’t need to be taken into account (e.g., if we speak about office equipment, furniture, vehicles, drugs, security and cleaning services, etc.). The central procurement body specifies the requirements for the purchased products and concludes framework agreements with suppliers for purchase at a fixed price per unit. Customers join framework agreements (i.e., file applications for a certain volume of purchased products) on a voluntary or mandatory basis. For example, in the UK, Denmark and France, they do it voluntarily, while in the USA, Italy and Portugal, they do it mandatorily¹.

Anna Zolotareva – PhD in legal studies, Director of the Center for Legal Studies at the Gaidar Institute, Head of the Laboratory of Legislation Examination at RANEPA

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1OECD (2011), “Centralised Purchasing Systems in the European Union”, SIGMA Papers, No. 47, OECD Publishing http://dx.doi.org/10.1787/5kgkgqv703xw-en; Federal Acquisition Regulation (FAR) http://www.acquisition.gov/far; The Comparative Survey on the National Public Procurement Systems across the PPN (edited by T. Bianchi and V. Guidi). Roma – December 2010 http://www.publicprocurementnetwork.org/docs/italianpresidency/comparative%20survey%20on%20pp%20systems%20across%20ppn.pdf