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Igor Artemiev: There is a danger of cartel agreement on the construction market

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Igor Artemiev: There is a danger of cartel agreement on the construction market

Why the Federal Anti-Monopoly Service is sure that the existing contract system in Russia requires another reset

The Federal Anti-Monopoly Service’s extended session (http://www.regionfas.ru/42/95090) has taken place in Moscow. The issues of the Russian economy’s efficiency increase and the aims and tasks of the regulatory establishment for the coming year were discussed.   

 

Keeping a close eye on things  

After the session, Igor Artemiev, the Head of FAS, held a press conference. Our special correspondent asked Artemiev to assess the degree of monopoly control on the Russian construction market.

— We deal both with the construction and the construction materials markets, said Mr Artemiev. — We have managed to create amendments to the law, “On Subsurface Resources”. It is no longer possible to outsource sand or chippings delivery to a company which has the largest share of the market. FAS will not give consent, as there are strict restrictions. We are closely following all events there.  

As far as the construction industry itself is concerned, if monopoly abuse is going on, there are only certain segments where it is happening: cosmodromes and military objects construction, Igor Artemiev remarked, answering our journal’s question. According to him, this issue merits serious consideration.  

There are a number of far-away regions (Chukotka, Sakhalin, etc.) where there are some companies dominating construction. But concerning the largest construction areas of the country, Moscow and Saint-Petersburg, there is no monopoly abuse, the Head of FAS assured us.

— There is no domination on the capital housing construction market, and prices form demand and supply, Mr Artemiev explained, and came to the following conclusions: 

 — We should firstly keep an eye on the prevention of monopolies forming in construction materials extraction and production, especially in the regions. There, governors grant licenses for extraction, and they like to choose the same companies.  

As for the construction market, there is a danger of cartel agreements between construction companies.

— To agree on a price is almost the only way in Moscow to break honest competition, the Head of FAS said. — But due to the secondary housing market, the cartel agreements will not bring the expected results. The secondary market is 100 times bigger than the primary one, so we are not apprehensive about monopolies in this sphere, Mr Artemiev concluded.

 

Leaving one river to step into another

A significant part of the press conference was dedicated to one of the most important issues of the construction complex: state procurement. Igor Artemiev was denied the opportunity to come back to the notorious 94-FL. According to him, it should not be done and it needn’t be done, as you can’t step into the same river twice. 

44-FL has a number of advantages, the Head of FAS thinks. For example, it defines the procedure for state procurement planning, absent in the previous documentation. But that does not mean that nothing should be changed in the existing legislation.

More's the pity that fate dictated that, during the development and adoption of 44-FL, lobbyists managed to amend some efficient by-passes, Mr Artemiev stated. This allowed them to withdraw more than half of all state procurement to the “grey zone”, where it used to be.

Still, the Head of FAS assumes that the law’s authors were ruled by good intentions. They wanted to correct the drawbacks of 94-FL, but as a result, new loopholes appeared.  Thus, according to 44-FL, a government contract may be tendered or auctioned, but a subsidy may be also given to a friendly SUE (state unitary enterprise).

For example, a school construction contract is being conducted. What does a governor do? Instead of organizing a tender, regional authorities subsidize a SUE. It is not subject to nor governed by 44-FL, but by 223-FL (on procurement), which allows the SUE to act as they want.  

What is the result? Budget money is not spent on tender procedures but is directed to a SUE, which, in turn, concludes a contract with a construction company they like. Thus, instead of struggling for the efficient use of state money and an increase in service quality, the contract is awarded without any contest. This phenomenon is now widespread in Russia, Igor Artemiev said: in many regions, up to 40% of government contracts are distributed this way.

 

Whats the score?

94-FL used to be criticized for the procedure of when an official is to assess a company’s experience.  It was stated that an organization may take part in a tender only in the case of having constructed at least one object in Russia over the previous five years similar to that under tender. Such a company was assumed to have the necessary competence: staff, equipment, technology for carrying out the work, etc.

According to 94-FL, the committee members could evaluate the reputation and the competence of each tender participant within 20 grades corresponding to the percentage from the claimed cost of the contract. To win, one had to get 51 grades.

The rate (from 0 to 20) itself did not kill competitiveness, as even those who got 0 had a chance to win by offering more attractive conditions. It resulted in an actual decrease in contract costs.

And what else did it result in? The difference in allowing subjective assessments of a company’s reputation and competence by the committee members was up to 40% of grades in the construction industry. In some other industries it was even bigger – up to 80%.

— From a logical point of view it makes no sense!, the Head of FAS thinks, and asks indignantly: — What do we need such assessments for, if a “pass score” is 51 grades?

Say that the initial cost of an object’s construction is 100 bln roubles. If one company was given 40 grades, and another got 0, to win a tender the latter must decrease the cost three-fold, at least. This won’t help either, as according to 44-FL, such an organization will be caught by an antidumping probe, and is likely to be eliminated on the assumption of dishonest rivalry.  

Besides, the law provides for the unilateral dissolution of the contract. If, according the committee’s opinion, a wronged participant may cancel the contract, without any court procedure, at his own wish.

94-FL was criticized for its being in favour of business, but then a company could prove its right via the FAS or in court, Igor Artemiev reminded us, and resumed:

— There was no predetermined result then, but there is now.

When 94-FL was active, many people were indignant that it worked badly. But if they were right, it was not because of the wrong competition procedures, the Head of FAS is sure.

Now, as 44-FL is in operation, everybody keeps silent, including officials. It is not surprising when they hold a tender and they know the result beforehand.

— That is, business is not protected in any way, and this means that state procurement has turned into a profanation! Mr Artemiev is not shy in his definitions.

 

Black or white

Of course, there are responsible customers which give companies real grades, but as experience shows, in 85% of cases either maximal or minimal assessments are given. When this became a widely spread phenomenon, FAS sounded the alarm.  

— From our standpoint, it is not right, Igor Aretmiev says. — That’s why we want to adopt a new law, and the process has already started.

FAS and the RF Ministry of Economic Development have prepared and sent to the State Duma two bill drafts with amendments to 44-FL and 223-FL. They have already been adopted in first readings. According to the innovations, all tenders will be carried out in digital formats. Besides this, the number of compulsory procedures has been reduced: currently, according to 223-FL, there are more than 3,000, and only 10 will remain as a result, all of them transparent.  

However, monopolists do not give way easily. According to Artemiev, all the bill drafts were blocked by natural monopolies at the end of 2015, and only after having been included in the agenda of the meeting headed by Vice-President Igor Shuvalov were the documents set going.  

But even their final adoption by the State Duma is a palliative treatment of the illness and no more, Igor Artemiev is sure. That is why the economy in the sphere of state procurement is so small. Formerly, the difference in price might be some hundred billions of roubles, and currently there are no such figures. 10-12 companies might lay claim to one lot, but now this can occur only with small lots, less than 300,000 roubles, in the small business niche.   

All the good stuff in 44-FL must be retained, and the new law should be edited, resumes Igor Artemiev.

The construction industry is a special sphere, and, as was stated many times, constructors badly need a separate law for the contract system. But it seems like a long time coming…

 

Vladimir GURVICH

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