Public procurement and small business since January 1, 2014
Federal Law No. 44-FZ dated April 5, 2013 will enter into force on January 1, 2014 (“the Law”) and will establish not only the general procedure for the procurement of goods, works and services for state and municipal needs, but will also change the specifics of Small Business Entities (“SBE”) participation in the procurement. At the moment, the procurement is effected in the manner prescribed by Article 15 of Federal Law No. 94-FZ dated July 21, 2005.
SBEs will participate in the above procurement in accordance with Art. 7 of Federal Law On the Development of Small and Medium-Sized Business in the Russian Federation No. 209-FZ dated July 24, 2007. However, the new law does not provide for SBEs specific supportive measures, as it is now. Instead of this, a unified system of preferences has been introduced for SBEs and socially oriented non-profit organizations (“SONO”).
In addition, specifics of participation of small and medium-sized businesses (“SMB”) in the procurement of goods, works and services by certain types of legal entities№ will be established as of January 1, 2014. This refers to the natural monopolies and state corporations, state-owned companies and other organizations specified in Part 2 Article 1 of Federal Law On procurement of goods, works and services by certain types of legal entities No. 223-FZ dated July 18, 2011.
Public procurement for state and municipal needs
As of January 01, 2014 the volume to be purchased by the customers from SBEs and SONOs shall be not less than 15% of the total scheduled annual volume of purchases. Now it should be not less than 10% and not more than 20% of the total annual supply of goods, works and services. Thus, the law sets an average, but at the same time a more specific indicator. The exceptions, as before, are procurement for national defense and state security, as well as in the field of nuclear energy. Relevant customers have the right (not necessarily) to make such purchases from SBEs and SONOs.
At the same time, the initial (maximum) contract (lot) price will increase from RUB 15 million to RUB 20 million. Procurement methods will also change: it would be possible to purchase through open competitions, contests with limited participation, two-stage competitions, electronic auctions, requests for quotations, requests for proposals, with SBEs and SONOs acting as the only participants. In this case, the participants are required to declare in applications their appurtenance to these entities.
At the same time, it would be possible to purchase from SBEs and SONOs any goods, not just the goods approved by the Government of the Russian Federation, as it is now. However, their range at the moment is quite wide anyway - from agricultural products and cleaning services, to scientific equipment and news agencies services (see RF Government Regulation No.642 dated November 4, 2006). In addition, the law has an entirely new tool to support small businesses. The customer has the right to indicate in the procurement notice the requirement for the supplier (contractor, performer) to engage subcontractors or co-contractors from among SBEs or SONOs in the contract fulfillment.
“One of the reasons to engage SBE as a co-contractor is to reduce the customer risks resulting from the limited material, financial and human resources of this supplier. At the same time, small businesses acquire an opportunity to gain experience and receive support from the "senior companion”, says Kirill Kuznetsov, the Head of the Center for effective procurement Tendery.ru.
The relevant provision will be included in the contract, along with the provision on the imposition of civil liability for violation of this requirement. In this case, the quantity of goods and scope of work and services, supplied and performed by these subcontractors and/or co-contractors, will be accounted for in the total annual volume of purchase orders placed at SBEs and SONOs.
Also, according to Kirill Kuznetsov, another positive change for SBEs is the possibility to replace the 1.5 times increased security with confirmation of their good faith by reference to the successful fulfillment of contracts entered in the relevant register. This provision will apply if this supplier reduces the price by more than 25% of the initial (maximum) contract price.
Kirill Kuznetsov, the Head of the Center for effective procurement Tendery.ru.
“In fact the Law provides for a number of favourable changes for SBEs, however the priority is given to allocation of quotas and formal execution of the rules, rather than to economic incentives for attracting small businesses. Therefore, the potential involvement of small businesses in public procurement is far from being exhausted”.
Despite this, the new Law as the old one, contains a rather unfavorable requirement allowing to implement the purchase plan from SBE, even if determination of suppliers (contractors, performers) is declared invalid. In this situation, the customer is entitled to make purchases on the usual terms. However, invalid purchases will be recorded in the total annual volume of purchases from SBEs and SONOs. Thus, theoretically, the customer is able to procure from SBEs as scheduled, even if in fact none of these entities receives the contract.
Procurement for the separate legal entities needs
Even more serious changes will become effective on January 1, 2014 and will affect procurement from the SMB by certain types of legal entities. At the moment, the specificity and procedure of such procurement are not spelled out anywhere. However according to Part 8 Article 3 of Federal Law On procurement of goods, works and services by certain types of legal entities No. 223-FZ dated July 18, 2011 the Government of the Russian Federation is entitled to determine specificity of SMBs participation in the procurement. In this regard, a draft resolution developed by the Ministry of Economic Development of the Russian Federation is in the final stage of preparation.
So, according to projections, the volume of purchases from SMBs will be not less than 10%, from January 01, 2015 - not less than 18%, and since January 1, 2018 - not less than 25% of the total annual volume of contracts signed by the customers. In determining the above purchase share, the contracts under which SMBs act as subcontractors or co-contractors will be taken into consideration. Also procurement types that are not included in this volume (for the country's defence needs, use of nuclear energy, procurement of financial services, and etc.) will be determined.
It is anticipated that the procurement from SMBs will be accomplished by:
- tenders, other ways of procurement provided by the regulation on procurement, in which the participants are business entities of any type of business organization or natural persons, including SMBs;
- tenders, other ways of procurement provided by the regulation on procurement, in which the participants are only SMBs;
- tenders, other ways of procurement provided by the regulation on procurement, that require to engage subcontractors (co-contractors) from among SMBs in performing the contract.
If the procurement is done only among SMBs, the customers must approve the list of goods, works and services purchased from these entities. The list will be based on All-Russian Classifier of Types of Economic Activity, Products and Services (OKDP) and will be posted on www.zakupki.gov.ru, as well as on the Customer's website.
In addition, it is expected that by analogy with the contract system for participation in the procurement, which will be held only among the SMBs, it will be necessary to declare the compliance with the conditions established by Art. 4 of Federal Law On the Development of Small and Medium-Sized Business in the Russian Federation No. 209-FZ dated July 24, 2007.
When performing this procurement, a customer, after the application deadline expires, is entitled to purchase on the usual terms, if:
- SMBs have not filed any application for participation in this procurement;
- applications of all participants have been withdrawn or they do not meet the requirements specified in the procurement documentation;
- application filed by the sole procurement participant being an SMB does not meet the requirements specified in the procurement documentation;
- a customer under the procedure prescribed by regulations on procurement, has decided that the contract based on the procurement results will not be concluded.
Also if the SMBs fail or refuse to enter into the contract, as well as if the documents confirming the appurtenance of the participant to the SMB contain false information, the customer is entitled to cancel the decision on the determination of the supplier and to perform procurement on the usual terms.
In this case it is anticipated that the customer will be obliged to make purchases from the SMBs, if the initial (maximum) contract price (lot price) does not exceed RUB 50 million and related goods, works and services are included in the list purchased from the SMBs. If the goods, works and services are included in the list and the price is more than RUB 50 million, but less than RUB 200 million, the customer will be entitled to purchase from the SMBs in its sole discretion.
The security amount of procurement application, with the SMBs being the only participants, may not exceed 2% of the initial (maximum) contract price (lot price). Moreover, this security may be provided by the procurement participant by depositing money to the account or by a bank guarantee. The contract execution security may not exceed 30% of the initial (maximum) contract price (lot price) and the amount of advance specified in the contract.
Concerning placing orders with SMBs by certain types of legal entities, see activity plan (“road map”) Increase in participation of small and medium-sized businesses in procurement made by infrastructure monopolies and state-owned companies
In addition, a customer will be able to approve the partnership program opened to an unlimited number of SMBs that meet certain criteria (absence of tax debts, of the bankruptcy decision, of director's or chief accountant's criminal records, etc.). Moreover, customers will get an opportunity to assert their additional requirements (both the program and the requirements will be posted on the customers' websites).
The purpose of the partnership program is to create a network of qualified and responsible partners from among the SMBs that supply goods (perform works or render services) to the customer according to direct contracts and subcontracts of the 1st level, to get innovative SMBs involved in the customer's activities, as well as to receive from customers the assistance in the development of SMBs, that participate in this programme2.
If the procurement is performed only among the SMBs, the customer (if he participates in the partnership program) may have the following terms entered into a contract to be concluded with the SMBs:
- an advance payment - not less than 30% of the contract amount;
- an opportunity to perform the contract without contract execution security;
- possible assignment of claim concerning payment for goods, works and services according to the contract in favor of a commercial entity.
If the procurement is performed subject to SMBs engagement as a subcontractor (co-contractor), procurement participants will provide a relevant plan as part of the application. It will contain the SMB name and contact details, the scope and the price of the contract to be concluded with the SMB, delivery term of goods (works, services).
The contract with the supplier must contain a prerequisite for the supplier's civil liability imposed if the supplier does not comply with the provision on engaging subcontractors (co-contractors) from among the SMBs in the contract execution. In this case, the supplier may, upon agreement with the customer, replace the SMBs, with which the contract is concluded or was concluded, provided, however, that the contract price will remain unchanged.
It is anticipated that the customers will report on the volume of purchases made from SMBs by analogy with the contract system - until April 1 of the year following the reporting year, placing it on its official website.