Where can you find the necessary information?
As of 2014, in Russia there has been a contracting system in effect: specific rules allowing state and municipal organizations, government authorities, and publicly funded institutions to obtain the goods, works, and services they require. Every central and local government procurement is carried out strictly according to the law: Federal Law №44-FЗ “On the contract system in the sphere of goods, works, and services for state and municipal requirements”. All state and municipal buyers draw up their procurement plans and publish them online on a dedicated website, the Unified Information System for Procurement (EIS), which can be found at: www.zakupki.gov.ru. It is right there that anybody who wants to can see all the necessary information on all ordering customers in Russia, easily and free of charge.
How are state procurements carried out?
The next thing is for the purchasing party to execute the purchase. And to do this, they have to invite tenders, or arrange an auction, so that all interested individuals and commercial organizations can put in an offer to supply the requisite goods, works or services at the lowest possible price. This is because the most important objective of all purchasing parties is to save public money when carrying out procurement activities.
Thus, the larger share of procurements take place by way of competitive bidding, generally ONLINE AUCTIONS, or less frequently TENDER APPLICATIONS and INVITATIONS TO TENDER, where the participants compete for the right to the state or municipal contract.
How do online auctions differ from tender applications and invitations to tender?
An ELECTRONIC AUCTION is an auction where the organizer, by posting the details in the EIS, invites bids on dedicated websites (electronic platforms). Information regarding the procurement is not restricted in its access. The participant who offers the lowest price becomes the winner.
TENDER APPLICATIONS are used for orders where it is not only the price which is to be established, but also certain standards, in accordance with several criteria, chosen by the purchasing party. There can be no fewer than two.
Cost criteria include the value of the contract or unit price of goods (the price has to be included), and costs associated with using and maintaining the goods, or using the results of the works carried out.
Nonmonetized criteria include the quality, functionality, and environmental characteristics of what is subject to purchase, the suitability of the participants, their financial resources, right of ownership or legal basis to use the said equipment and resources, their experience in such work as set out in the contract, their business reputation, and the presence of experts of a certain level.
And, finally, the INVITATION TO TENDER. This is the most basic but, with it, quickest way of determining the supplier using 44-FЗ for the simplest procurement requirements. It is one of the so-called “paper” tenders, as it takes place without using electronic trading platforms, and participants don’t need a digital signature. Participating parties fill in a paper proposal and submit it to the purchaser. The winners are announced over the course of one working week.
Who can take part in state procurements?
Russian contract law requires that purchasing parties make procurements accessible to all interested parties. Thus, participants in procurements can be:
– individuals – in such instances as the conditions of the purchase allow for such a possibility (for example, the ordering party is purchasing the services of a guide);
– sole traders and legal entities – in all other instances.
It is very important to make sure that the country of official registration, the form of legal entity, and the origin of capital do not preclude participation in bidding procedures.
What requires especial attention?
First and foremost, that participants in state procurement contracts in Russia cannot be a legal entity registered in an offshore area. States and territories belonging to such areas are entered onto list as set out in subpar.1 para. 3 art. 284 of the Tax Code of the RF.
For other foreign individuals and organizations, the way towards state and municipal contracts is open.
Furthermore, in the opinion of many purchasing parties, winning bids from foreign suppliers bring with them higher standards and a closer observation of the terms of the contract.
To become a supplier for state and municipal requirements in the RF, representatives of small and medium-sized business (including foreign business) need take only these five steps»:
1. Have a knowledge of contract law in the RF, as the procurement process is an extremely complex and convoluted mechanism. This is where qualified lawyers can be of assistance to foreigners. The cost of such services is negotiated on a case-by-case basis, but you should allow for an initial outlay of from 50,000 roubles.
2. Prepare all the necessary documentation: confirmation of state registration as a sole trader or legal entity, confirmation of authorization to participate in auctions, and other details. Everything required is indicated in the Law on the Contract System and in the documents on procurement published by the customer in the EIS (the website is mentioned above).
3. Register with the EIS and have a digital signature to get all the information on procurements of interest to you and to take part in online auctions.
4. Offer the goods, works, and services to state and municipal customers corresponding to their requirements, indicated in the documentation on the given procurement.
You mustn’t forget that the pricing proposal should be competitive, and, if it is a matter of goods of foreign origin, you have to factor in customs clearance, delivery costs, as well as the risks associated with the fluctuations in foreign currency exchange rates.
5. Have funds available, as the contract system stipulates the meeting of obligatory financial conditions for participation in procurement procedures. To take part in bidding processes or online auctions, the payment of a security deposit for your application is required.
How much is to be paid as security?
There are two types of security: “tender security” and “contract performance security”. The first amount is proposed at the time the tender is submitted, and the second in the event of winning the bidding process or auction.
Each ordering customer is obliged to set the amount of security, but at their own discretion, and in the range of 0.5% to 5% of the original (maximum) value of the contract.
For example, the purchasing party needs to acquire office furniture to the value of 1,000,000 RUB.; if the tender security in the same online auction comes to 5%, then the participant is required to put in 50,000 RUB.
Such a requirement extends to all participants without exception. The aim of this is to recoup losses by the state and municipal purchasers should a certain entrepreneur or company submit a tender, win the bidding process, and… not enter into the contract. Then, by way of compensation for such misconduct, the tender security payment is retained by the purchaser.
Also, if the participant was unsuccessful in the bidding process and loses the opportunity to sign the contract with the purchaser, his security deposit is given back.
It is important to know that security deposits are returned in other circumstances too: should the bidding process be cancelled, or a participant withdraw their application, or the procurement committee rejects an application following a review.
The deadlines for returning these security sums are tight: for tenders, it is 5 working days, for online auctions it is 1 working day; and then the participant is free once more to dispose of his funds as he sees fit.
Also, it is set out in law that the supplier has to pay contract performance security. This obligation concerns only the successful bidder granted the right to enter into the contract. The supplier pays the purchaser the security deposit when signing the contract by way of a guarantee that all terms included in it will be respected.
The amounts payable:
– from 5 to 30% of the original (maximum) price of the contract needs to be paid if the value of the contract is equal to or less than 50m RUB.;
– from 10 to 30% of the original (maximum) price of the contract if the value of the contract exceeds 50m RUB.
So, if the contract totals 12,000,000 RUB, and the security deposit comes to 30% of this amount, then the supplier is required to transfer 3,600,000 RUB into the account of the purchasing party.
The contract security deposit is retained by the purchasing party up until the point that all stipulated obligations have been met by the supplier.
The aim of the security payment is to safeguard the interests of the state and municipal customers, and to guarantee compensation of losses incurred in the event of malpractice on the side of the supplier.
Registered currently in the Unified Information System for Procurement (EIS) are already over 330,000 state and municipal customers. The sum total of goods, works, and services purchased for 2015, for example, came to 6.6 trillion roubles.
So, the contract system represents an excellent way of guaranteeing business development.
How is payment for state contracts made?
Moving on, the contract has to be carried out in strict accordance with its conditions. Payment terms can vary, and they are written in to the provision of services agreement. Advance payments, payment in instalments, and 100% post-payment of a government contract are all possible. Advance payments of a contract carry certain restrictions: according to Federal Law 44-FЗ they cannot exceed the amount of the contract performance security deposit. If, according to the terms of the contract, the prepayment exceeds 30% of the contract price, then the amount of contract performance security is set to the same amount of the advance payment.
With staggered payments, the customer transfers funds to the contractor in instalments at the junctures stipulated in the contract.
Post-payment allows for the funds to be paid only after the completion of all works set out in the contract. In any case, the final payment is made only once the customer accepts the goods, results of works, or services provided, and the supplier hasn’t misled the customer over the standards and other parameters specified in the contract.
Is there any need to involve a lawyer in state contracts?
In the current difficult times, being a supplier to meet state and municipal requirements is a very reliable and profitable exercise. But it requires great responsibility and a very good knowledge of contract law in Russia. Therefore, the foreigner should either have on his staff a lawyer experienced in this area of Russian legislation or enlist the services of one.
This is because participating in tenders is not a straightforward business. At play in this area are a great many requirements of both the bidding parties and their paperwork. Everything needs to be faultless in terms of RF statutory regulations.
Also, there are specific rules regarding compiling and submitting tenders. And an experienced lawyer will help in observing them.
But if all the necessary preparations are made properly, then for a business there open up some extremely appealing long-term prospects for developing relations with what is a serious and solvent partner in the Russian state and municipal purchaser.